‘The Agency Mess’: Consumer Group Calls for Improvement of Disclosure Laws

Consumer Group Calls for Improvement of Disclosure Laws

Consumer Federation of America is also urging all states to ban dual agency due to widespread confusion among home buyers and sellers.

Describing a system that is “rife with conflicts of interest,” the Consumer Federation of America (CFA)  on Monday issued a report maintaining that consumers are harmed by the confusion over real estate representation.

They claim the situation is exacerbated by consumer-facing sites such as Zillow.com, creating an increasingly common scenario in which prospective buyers find home listings online and initiate contact with a listing agent.

In early January, CFA secret shoppers contacted 30 listing agents, selected randomly in eight local markets. Only seven agents informed the purported buyers that they could not represent them.

“In sum, more than three-quarters of the agents called addressed the representation issue inadequately,” said the CFA in its report. “Moreover, several of the agents asked us what we were willing to spend on a house,” which would have put a consumer in a weak negotiating position in real life.

Steve Murray, president of REAL Trends, says that it is time to review the patchwork of state disclosure laws. “The lack of real supervision is an underlying cause of the structure of our industry,” he said, “with hundreds of agents in an office who have one supervising broker.”

Even though all states have laws that require real estate professionals to disclose their relationship to their consumer clients, these laws are often ineffective, according to Stephen Brobeck, a senior fellow at CFA, a national consortium of 250 nonprofit consumer groups.

The laws define agent roles—agent, subagent, transactional agent, designated agent, dual agent—that most consumers, according to the national survey, say they don’t understand.

What’s more, these roles often do not serve the interests of home buyers or sellers, says the consumer group. “For example, a subagent working with a buyer owes fiduciary allegiance to the seller.  And the term dual agent is an oxymoron.  No one agent can represent the fiduciary interests of both buyer and seller.”

The ineffectiveness of the disclosure laws has harmed many consumers, asserts CFA, describing several scenarios. For instance, both buyers and sellers may think their agents are fiduciaries and mistakenly assume that their agent is seeking, respectively, the lowest or highest house price, when the agent is in reality merely trying to close a transaction. Home buyers who think subagents are working for them often have disclosed information about their finances and house price ceilings that the subagents are legally required to share with sellers.

Home sellers working with fiduciary agents may face pressure to allow dual agency when buyers are interested in working directly with those agents.  They may not understand that, under dual agency, their fiduciary interests are no longer being represented.

The CFA report urges reforms that it says would greatly improve the content and timing of disclosures to home buyers and sellers.  For example, it recommends:

  • Dual agency should be prohibited, as it is in eight states.
  • There should be a clear written and verbal communication from agent to consumer at the first substantive contact about whether the agent will function as a fiduciary agent, a subagent, or transaction agent/facilitator.
  • State real estate commissions should work both with consumer and industry representatives to develop an effective disclosure document then enforce its use.  If they refuse, state attorneys general should take on this responsibility.
  • These commissions should also develop rules to minimize conflicts of interest when the same real estate firm represents both a seller and a buyer.

“These reforms would benefit both consumers and real estate agents,” noted CFA’s Brobeck.  “More informed home buyers and sellers will make better decisions.  They will have a higher regard for and complain less about, real estate agents.  And agents will not face the risks and ethical dilemmas of dual agency and undisclosed subagency,” he added.

The report also includes advice to home buyers and sellers about dealing with a real estate agent.  At the outset, both should ask the agent whether that agent will be representing their fiduciary interests, those of the other party in the transaction, or those of neither party (as a transactional agent/facilitator). If their agent is not representing their financial interests, buyers and sellers should consider employing the services of an attorney, says the CFA.