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This article was published on: 01/01/2006

LAW: Consumer Rebates

BY MARIWYN EVANS

Share the wealth
Your business plan is to offer gift cards for a home-improvement retailer or commission rebates. Yet, depending on the jurisdiction, you may be prohibited from or limited in the offers you can make to consumers, finds a new study from the Worldwide Employee Relocation Council Coalition and the Association of Real Estate License Law Officials.

Fee Splitting, Rebates, and Other Incentives found that while most state statutes don’t specifically prohibit fee splitting with principals in a transaction, wording designed to forbid sharing fees with anyone who doesn’t hold a real estate license often keeps licensees in some states from offering fee rebates to consumers. Fee splitting is generally characterized as a return of a portion of a licensee’s agreed-upon fee, often at the closing.

In most jurisdictions, the intent of such statutes wasn’t to prevent consumers from receiving benefits but to prevent kickbacks in real estate transactions, says Sandy Taraszki, executive director of the Worldwide ERC Coalition. Prohibitions on fee splitting and rebates don’t limit a consumer’s right to negotiate the commission rate or fee.

Other states specifically oppose rebates. Craig Cheatham, CEO of ARELLO, notes, “Beyond kickbacks, part of the traditional view was to prevent homebuyers from having to resist the siren song of inducements.”

According to the survey, 12 states—Alaska, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Dakota, Oklahoma, Oregon, South Carolina, Tennessee, and West Virginia—prohibit fee sharing with unlicensed individuals or gifts as inducements to consumers. (The situation in Kentucky has changed since publication of the survey as a result of a tentative agreement between the Kentucky Real Estate Commission and the U.S. Department of Justice to allow rebates.)

Forty-one states and territories and the District of Columbia permit some form of fee splitting with consumers, although some place limits on the amount of the rebate. Many of the states that permit fee splitting require that any rebates be disclosed to all parties to the transaction.

Even if disclosure isn’t required by state law, it’s a good practice, says Taraszki. If a buyer is getting 100 percent or higher financing, a rebate may affect the loan-to-value ratio and inadvertently create mortgage fraud unless the lender is informed. In addition, full disclosure may help prevent later disputes or charges of misrepresentation among the parties. The commission rebate should also appear in the U.S. Department of Housing and Urban Development Settlement Statement, says Taraszki.

Using rebates legally

One of the challenges facing licensees interested in developing fee rebate programs is that state laws often aren’t clear about exactly what’s permitted. “You can get 10 different opinions from 10 different attorneys,” Taraszki says.

She points to the Alabama entry in the study as a model of clarity. This statute first differentiates between incentives, which are given before or at closing, and rebates, which it defines as kickbacks given after closing. Incentives are permitted, but rebates aren’t. The published version of the survey results also gives specific examples of payments that are permitted and then lists illegal activities.

Alabama once had a law prohibiting incentives, says Charles Sowell, general counsel of the Alabama Real Estate Commission. But it was challenged by the Coldwell Banker franchise (C.B. Graben Real Estate and C.B. Residential Affiliates v. Alabama Real Estate Commission, 1986) and declared unconstitutional in a consent decree. The company, then owned by Sears, had wanted to offer buyers discount coupons for furniture from Sears. Yet, in 1997, neighboring Mississippi won a similar case in federal district court and upheld its regulations prohibiting inducements.

A more recent action on the issue was the U.S. Department of Justice’s complaint against the Kentucky Real Estate Commission for creating regulations that prohibited any rebates or other inducements to real estate customers or prospects. The DOJ believed there was no statutory basis for the rule and that it restricted competition.

Now, the state has agreed to permit all gifts and rebates, provided that the practice is disclosed in writing, says Lee Harris, general counsel for the Kentucky Real Estate Commission.

Both the DOJ and the Kentucky Real Estate Commission have the same goal: incentivizing real estate licensees to give consumers the best possible services at the best possible price, says John Read, chief of litigation III at the DOJ. Read says the DOJ initiated the suit because it felt that the real estate licensees’ ability to compete on price, not just service, was “one of the core antitrust issues.”

The limitation on rebates and fee splitting is particularly acute for buyer brokers, who often don’t know what commission they’ll receive until a customer selects a house. So they may find it hard to offer a particular commission reduction amount to customers, says Read. Offering commission rebates provides a way for these brokers to compete on price.

Cheatham believes that rebates and gifts will become more widespread if the real estate market slows and sales associates have to work harder for customers. Taraszki also notes that inducements such as coupons for related services are widely used in other industries.

Before you embrace a program of fee splitting, check with your state real estate commission to see what’s permitted. Because there’s variation in state laws, even among states that permit fee splitting, it’s also advisable to check with an attorney before launching a marketing program based on consumer rebates. In addition, keep in mind that even where they’re permitted, rebates and fee splitting are limited to the participants in the transaction, notes Taraszki.

To read more case summaries, click here.
To access Letter of the Law, click here.


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