Broker Responsibility Course (Corr.) #31450

Transcription

1 Broker Responsibility Course (Corr.) #31450 THE REAL ESTATE B U S I N E S S S C H O O L Get Your License. Learn to Use it. The Real Estate Business School fka Austin Institute of Real Estate 8828 Research Blvd., Austin, TX info@buildmyrebusiness.com Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner.

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3 Broker Responsibility Edition 3.0 Texas Real Estate Commission January 2017

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5 NOTICE TO STUDENTS Included in your course materials are the Instructor s Notes. As this course is designed for not only lecture but discussion, we felt it would be beneficial for you to be able to review the notes provided to the instructor of the course for clarity and answers to some of the discussion questions. And of course, if you need the assistance of an instructor, we ask that you your question(s) to us at info@buidmyrebusiness.com and we will contact an experienced instructor who will be able to assist you. Thank you for your business. We hope that you continue having great success in real estate.the best business in the world! The Real Estate Business School

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7 Acknowledgments Real Estate Center Staff Gary Maler, Director David Jones, Communications Director Robert Beals II, Art Director Denise Whisenant, Education Coordinator Real Estate Center Advisory Committee Russell Cain, Chairman Douglas Jennings, Vice Chairman Mario Arriaga Jacquelyn Hawkins Walter Ted Nelson Stephen Doug Roberts Kimberly Shambley Ronald Wakefield Clark Welder Bill Jones, ex-officio Texas Real Estate Commission Avis Wukasch, Chair Bill Jones, Vice Chair Thomas TJ Turner Troy Alley, Jr. Adrian Arriaga Bob Leonard Weston Martinez Rayito Stephens Chart Westcott CE Writing Group Joanne Justice Kerri Lewis Ron Walker Denise Whisenant Avis Wukasch

8 Foreword In cooperation with the Texas Estate Commission, the Real Estate Center at Texas A&M University developed this real estate broker responsibility curriculum with the assistance of a content writing group using information from publications, presentations and general research. The information is believed to be reliable, but it cannot be guaranteed insofar as it is applied to any particular individual or situation. Laws and rules discussed in the textbook have been excerpted, summarized or abbreviated. For a complete understanding and discussion, consult a full version of any pertinent law. Information in this textbook can change periodically and is presented with the understanding that the authors and instructors are not engaged in rendering legal, accounting or other professional advice. The services of a competent professional with suitable expertise should be sought. The authors, presenters, advisory committees, Real Estate Center and Texas Real Estate Commission disclaim any liability, loss or risk personal or otherwise, incurred as a consequence, directly or indirectly, from the use and application of any of the information contained in these materials or the teaching lectures and media presentations given in connection with these materials. When using this textbook for the Broker Responsibility course, as required by the Texas Real Estate Commission, the textbook must be reproduced and used in its entirety, without omission or alteration.

9 Broker Responsibility, Edition 3.0 January 2017 Instructor Supplement Chapter Objectives 1 Introduction Understand purpose of course Recall testing requirements Recall sources for broker regulations and standards Outline TREC Rules Broker Responsibility 2 Scope of Activities and Authorization Create written scope of authorized activities for sponsored salespersons Assure sponsored salespersons are competent to conduct authorized activities Describe independent contractor status 3 Fiduciary Responsibility / Agency Summarize general and specific fiduciary duties Recall grounds for suspension or revocation of a license Use new IABS and Consumer Notice correctly 4 Trust Funds Recall definitions for trust money and trust account Describe correct procedure for acceptance of trust money Explain new monthly accounting of money requirement 5 Property Management Differentiate leasing agent and property management responsibilities Paraphrase landlord requirements under property code Analyze TREC sanctions for violation of property management requirements 6 Delegated Licensed Supervisor Compare responsibility of licensed supervisor to sponsoring broker Demonstrate understanding of teams and supervision rules Explain how to use relationship management tool 7 Advertising / Assumed Names Define advertisement Apply advertising rules to current practice Interpret 7 advertising violations Review advertising PowerPoint 8 Record Keeping Recall categories of records to be maintained for 4 years Distinguish personal information for record keeping purposes Appraise current policy to ensure it meets requirements discussed in chapter

10 Written Policies Additional Broker Duties Business Entity Requirements Recall written policies and procedures required by TREC rules Create a written policy that complies with TREC rules Select optional policies that might enhance the broker s policies based on that broker s specific practice Recall TREC sanctions for violation of broker responsibility Recognize importance of responding to clients and sponsored agents in a timely manner Recall minimun services requirements Assure that sponsored salespersons are performing at least minimum services to clients Define designated broker and business entity Choose correctly who can be a designated broker for a business entity Recall TREC rules for using assumed names Explain when E&O insurance is required Complaints Recall types of complaints handled by TREC Summarize (using Appendix E) types and number of TREC complaints

11 Contents Chapter 1: Introduction 1 * Purpose 1 * Who Must Take This Course? 1 * Standard Test for Course Now Required 1 * Regulations for Brokers 1 Chapter 2: Scope of Activities and Authorization 5 * Authority and Competency 5 * Independent Contractor Status 7 * Independent Contractor Challenges 7 Chapter 3: Fiduciary Responsibility/Agency 9 * Representation 9 * New IABS and Consumer Notice 11 * Negligence or Dishonesty? 13 Chapter 4: Trust Funds 15 * Monthly Accounting of Money Required New Rule 16 * Who Can Sign a Check? 17 Chapter 5: Property Management 19 * Leasing Agent Responsibilities 19 * Property Management Responsibilities 19 * Property Management Q&A 21 Chapter 6: Delegated Licensed Supervisor 23 * Relationship Management Tool (Appendix D) 23 * Relationship Management Tool (RMT) Highlights 23 Chapter 7: Advertising/Assumed Names 25 * Safe Harbor Policy 26 * Top 7 Advertising Violations 26 Chapter 8: Record Keeping 29 * Maintaining Records 29 * Personal Information 29 Chapter 9: Written Policies 31 * Receiving Compensation 31 * Compensation from a Service Provider 31 * Compensation from a Residential Service Company 31 * License Holders Buying or Selling Their Own Property 32 * Sharing Fees with Attorneys 32 * Text and Negotiations 32 * Showing Agent App Policy 32 * Unlicensed Assistants 33 * Background Checks 33 * Sudden Cessation or Termination of Sponsoring Broker or Designated Broker of a Licensed Business Entity 33

12 * Safety 33 * Disaster Plan 33 * Privacy of Personal Information 33 * Federal Regulations and Other State Laws 33 * TREC Sanctions for Violation of Broker Responsibility 34 Chapter 10: Additional Broker Duties 35 * Informing and Responding to Clients 35 * Minimum Services Requirements 35 Chapter 11: Business Entity Requirements 37 * Selection of an Appropriate Entity 37 * Assumed Name 37 Chapter 12: Complaints 39 * Do s and Dont s If You Are Named in a Complaint 39 Appendix A: Information About Brokerage Services (IABS) and Consumer Protection Notice Appendix B: Using Showing Agent Apps Appendix C: Qualifying Real Estate Course Approval Form Appendix D: TREC Relationship Management Tool (RMT) Appendix E: TREC Complaints Appendix F: Talking About Value Appendix G: Use of Standard Contract Forms Broker Price Opinion or Comparative Market Analysis Consumer Information Information About Brokerage Services Registration and Use of Alternate, Team and Assumed Business Names Used in Advertisements Advertisements

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14 Chapter 1 Introduction Purpose The purpose of this course is to address the regulatory aspects of the management, operation and supervision of a real estate brokerage firm in Texas. The course provides an understanding and working knowledge of a broker s responsibilities and obligations under 22 TAC This rule sets out specific requirements and best practices for brokers. Who Must Take This Course? Section of the Texas Real Estate Commission (TREC, the Commission) Rules requires a broker or a designated broker of a business entity who sponsors sales agents, and a license holder who is a delegated supervisor of one or more license holders (for six months or more during the supervisor s current license period), to complete this six-hour broker responsibility course to renew a license. Any license holder may take this course, which counts for six hours of CE elective credit. Additionally, a sponsoring broker may, by policy, require certain license holders and employees to take this course. Standard Test for Course Now Required TREC amended two rules that now require a standard test developed by TREC be given to all instructors and students of this course. Instructors must pass the test with a grade of 80 percent or higher to be able to teach the course [ (b)(2)(c)]. Students who take the course through a distance education delivery method must pass the test with a grade of 70 percent or higher to receive credit for the course. A student may retake the test one time before being required to repeat the course. Students in a classroom setting will be given the test as part of class instruction with the correct answers being reviewed by the instructor. Students in a classroom setting will not be graded [535.72(i)(1)]. Regulations for Brokers There are a number of regulations and standards with which brokers may need to comply; some of the more notable include: 1 Chapter 1 * Chapter 1101 of the Texas Occupations Code (TRELA, Act) * Title 22 Texas Administrative Code, Chapters (TREC Rules, Rules) * Texas Property Code, Chapters 91 & 92 (Landlord and Tenant) * National Association of Realtors (NAR) Code of Ethics * Texas Department of Insurance, Procedural Rule 53 * Real Estate Settlement Procedures Act (RESPA) * Truth in Lending Act (TILA) * Consumer Financial Protection Bureau rules (currently proposed) * Can-Spam Act & Federal Trade Commission Telemarketing Sales Rules (Do Not Call- -Fax) TREC RULES Broker Responsibility (a) A broker is required to notify a sponsored salesperson in writing of the scope of the salesperson s authorized activities under the Act. Unless such scope is limited or revoked in writing, a broker is responsible for the authorized acts of the broker s salespersons, but the broker is not required to supervise the salespersons directly. If a broker permits a sponsored salesperson to conduct activities beyond the scope explicitly authorized by the broker, those are acts for which the broker is responsible. (b) A broker owes the highest fiduciary obligation to the principal and is obliged to convey to the

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16 (c) (d) (e) (f) (g) (h) (i) principal all information known to the agent which may affect the principal s decision unless prohibited by other law. A broker is responsible for the proper handling of trust funds placed with the broker and must comply with of this title. A broker is responsible for any property management activity by the broker s sponsored salesperson that requires a real estate license. A broker may delegate to another license holder the responsibility to assist in administering compliance with the Act and Rules, but the broker may not relinquish overall responsibility for the supervision of license holders sponsored by the broker. Any such delegation must be in writing. A broker shall provide the name of each delegated supervisor to the Commission on a form or through the online process approved by the Commission within 30 days of any such delegation that has lasted or is anticipated to last more than six months. Listings and other agreements for real estate brokerage services must be solicited and accepted in a broker s name. A broker is responsible to ensure that a sponsored salesperson s advertising complies with of this title. Except for records destroyed by an Act of God such as a natural disaster or fire not intentionally caused by the broker, the broker must, at a minimum, maintain the following records in a format that is readily available to the Commission for at least four years from the date of closing, termination of the contract, or end of a real estate transaction: (1) disclosures; (2) commission agreements such as listing agreements, buyer representation agreements, or other written agreements relied upon to claim compensation; (3) work files; (4) contracts and related addenda; (5) receipts and disbursements of compensation for services subject to the Act; (6) property management contracts; (7) appraisals, broker price opinions, and comparative market analyses; and (8) sponsorship agreements between the broker and sponsored salespersons. A broker who sponsors salespersons or is a designated broker for a business entity shall maintain, on a current basis, written policies and procedures to ensure that: (1) Each sponsored salesperson is advised of the scope of the salesperson s authorized activities subject to the Act and is competent to conduct such activities. (2) Each sponsored salesperson maintains their license in active status at all times while they are engaging in activities subject to the Act. (3) Any and all compensation paid to a sponsored salesperson for acts or services subject to the Act is paid by, through, or with the written consent of the sponsoring broker. (4) Each sponsored salesperson is provided on a timely basis, before the effective date of the change, notice of any change to the Act, Rules, or Commission promulgated contract forms. (5) In addition to completing statutory minimum continuing education requirements, each sponsored salesperson receives such additional educational instruction the broker may deem necessary to obtain and maintain, on a current basis, competency in the scope of the sponsored salesperson s practice subject to the Act. (6) Each sponsored salesperson complies with the Commission s advertising rules. (7) All trust accounts, including but not limited to property management trust accounts, and other funds received from consumers are maintained by the broker with appropriate controls in compliance with (8) Records are properly maintained pursuant to Subsection (h). (j) A broker or supervisor delegated under Subsection (e) must respond to sponsored salespersons, clients, and license holders representing other parties in real estate transactions within three calendar days. (k) A sponsoring broker or supervisor delegated under Subsection (e) shall deliver mail and other correspondence from the Commission to their sponsored salespersons within 10 calendar days after receipt. (l) When the broker is a business entity, the designated broker is the person responsible for the broker responsibilities under this section. (m) This section is not meant to create or require an employer/employee relationship between a broker and a sponsored salesperson. 2 Chapter 1

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18 TREC Case Study 1 Unknown Tenants Move In, Nero Fiddles Broker Nero entered into a property management agreement (PMA) with owner Cleopatra to lease and manage a rental home. The PMA required Nero to advertise the property in one or more multiple listing services. Nero did not do so. When Cleopatra regularly checked with Nero regarding the status of leasing, Nero told her that there was no tenant yet. Four months later, Cleopatra received a Notice of Nuisance from the property s HOA, requesting that she evict her tenants due to complaints from other residents about exotic dancers and pimping activities. The next month, the police called Cleopatra and informed her of reports of an unruly tenant living in the property. Cleopatra called Nero who sent someone by the property who reported that no one was there. Later, Cleopatra went to check on what she thought was her vacant property and found someone living there. Nero s explanation was that someone in his office must have leased the property and provided the tenant with the keys. If they did so, it was without his knowledge. DISCUSSION What TREC laws or rules did Nero Violate? Control Freak Broker Conrad, a broker, is conducting a recruiting interview with newly licensed Nora. Controlling Conrad: Nice to meet you Nora. I m looking forward to visiting with you about your new career in selling homes to families! Naïve Nora: Thank you. Controlling Conrad: Tell me, Nora, did you have a chance to review the 375-page policy manual that I left at the front for you on Monday? Nora: I must admit I ve only skimmed the surface of the binder, and yet, I want to ask you some questions. Controlling Conrad: Well, of course! Naïve Nora: What I really want to do is sell commercial real estate. I ve been driving around, writing down numbers and names off signs in front of office buildings, and I know there is BIG Money to be made in commercial. Controlling Conrad: That s nice, Nora. I must have misunderstood. I thought you just got your license Naïve Nora (interrupting): Oh I did just passed the test yesterday! Controlling Conrad: I noticed that you don t have your policy binder with you, so I ll just show you here on page 254. These are the competency requirements for you to list and sell commercial property for our company. You ll need to take 12 hours of commercial real estate classes and then 20 hours in the specialty that you choose to begin with. Then you ll have to work under Carlos Cortez, who is our commercial specialist. He s been in commercial real estate for 20 years. After Carlos has helped you in 27 commercial transactions then Carlos and I will decide if you can handle it on your own. Naïve Nora: Well, what if I just want to list my mom s house? Controlling Conrad: Great! That s on page 117 of the policy manual. You ll need to complete our new agent training curriculum which begins Friday. It s from 9 to 3, 5 days a week, and lasts 3 weeks. Then you ll have a mentor who will hold your hand, and for only 50 percent of your earnings, will mentor you through the first 7 residential transactions. Naïve Nora: Is this sort of training and experience required at every brokerage? This seems like a lot of extra work. Controlling Conrad: I can only speak for our company, but I m responsible for you and everything you do. Naïve Nora: Oh my cell phone is vibrating I have to go my uh husband needs me home right now. DISCUSSION What do you think about Conrad and his policies? Is this typical? What is the right balance to achieve competency? 3 Chapter 1

19 Instructor s Notes TREC Case Study 1 What TREC laws or rules did Nero violate? The broker violated (b)(1) and by * acting negligently or incompetently for failing to advertise or inspect the property on a regular basis [ (b)(1)] * failing to clearly identify a trust account [ (c)(1)] * failing to maintain records of the transaction for four years [ (e)] Cleopatra and Nero settled a civil suit for $13,000. TREC and Nero entered into an Agreed Order that placed Nero on a probated suspension for one year and assessed an administrative penalty of $2,500. Control Freak Broker This scenario highlights many of the items that will be explored throughout the course. One of the main points to be highlighted is how do you ensure that new agents are competent to perform the scope of work you have authorized them to do. The balance between the line of employee and independent contractor also comes into play here. Instructor

20 Chapter 2 Scope of Activities and Authorization (a) (i) TREC Rules A broker is required to notify a sponsored salesperson in writing of the scope of the salesperson s authorized activities under the Act. Unless such scope is limited or revoked in writing, a broker is responsible for the authorized acts of the broker s salespersons, but the broker is not required to supervise the salespersons directly. If a broker permits a sponsored salesperson to conduct activities beyond the scope explicitly authorized by the broker, those are acts for which the broker is responsible. A broker shall maintain, on a current basis, written policies and procedures to ensure that: (1) Each sponsored salesperson is advised of the scope of the salesperson s authorized activities subject to the Act and is competent to conduct such activities. Authority and Competency TRELA defines the following: Person An individual, partnership, corporation, limited liability company, or other legal entity, including a state agency or governmental subdivision Business Entity (Entity) Any entity as defined by Business Organizations Code 1.002, Business Organizations Code (corporation, LLC, partnership, etc.) Real Estate Any interest in real property, including a leasehold, located inside or outside Texas Sales Agent A person who is associated with a licensed broker for the purpose of performing real estate brokerage Real Estate Broker A person who, for another person and for a fee, commission, or other valuable consideration, or with the expectation of receiving a commission or other valuable consideration from another person * sells, exchanges, purchases, or leases real estate; * offers to sell, exchange, purchase, or lease real estate; * negotiates or attempts to negotiate the listing, sale, exchange, purchase, or lease of real estate; * lists or offers, attempts, or agrees to list real estate for sale, lease, or exchange; * auctions or offers, attempts or agrees to auction real estate; * deals in options on real estate, including buying, selling, or offering to buy or sell options on real estate; * aids, offers or attempts to aid in locating or obtaining real estate for purchase or lease; * procures or assists in procuring a prospect to effect the sale, exchange or lease of real estate; * controls the acceptance or deposit of rent from a resident of a single family residential real property unit, or * provides a written analysis, opinion, or conclusion relating to the estimated price of real property if the analysis, opinion, or conclusion» is not referred to as an appraisal;» is provided in the ordinary course of the person s business, and is related to the actual or potential management, acquisition, disposition, or encumbrance of an interest in real property. Real Estate Broker also includes a person who is employed by or for an owner of real estate to sell any portion of the real estate or is engaged in the business of charging an advance fee or contracting to collect a fee under a contract that requires the person primarily to promote the sale of real estate by * listing the real estate in a publication primarily used for listing real estate, or * referring information about the real estate to brokers. 5 Chapter 2

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22 A broker is required not only to explicitly tell a sales agent which brokerage activities a sales agent can perform while under the broker s supervision, but the broker must also have policies and procedures in place to ensure that the sales agent is competent to conduct any such authorized acts [TREC Rules (a) & (i)]. What is an authorized act? Almost any act related to buying, selling, or leasing real estate by a license holder, when performed for another, and for or in expectation of receiving valuable consideration, constitutes the practice of brokerage [Tx. Occ. Code ]. TREC may discipline brokers who fail to define the scope of authorized acts or fail to properly train their sales agents before authorizing them to conduct such acts. If an act is performed for the license holder s own account, that action does not fall under the definition of brokerage. However, TREC may discipline license holders who buy, sell or lease property for their own account under certain circumstances [Tx. Occ. Code (a-1)(1) and TREC Rules ]. Specifically, a license holder may not engage in fraud, deceit, or misrepresentation when buying, selling, or leasing property on his or her own account. TREC Case Study 2 A Tale of Two Repairs Sales agent Merlin wholly owned a repair company, Merlin s Magic Repairs. Merlin listed and repaired a mansion for owner Arthur. Arthur received a detailed invoice from Merlin s Magic Repairs and a detailed list of all repairs made. A year later, Merlin listed owner Arthur s cottage. Merlin and Arthur determined repairs were needed in order to sell the property, including updating the kitchen. There was no written document between the parties setting out the scope of the repairs. Merlin, acting as Merlin s Magic Repairs, purchased materials and made repairs. Arthur reimbursed some initial costs. Neither Merlin s Magic Repairs nor Merlin provided Arthur with an invoice for repairs or provided detail as to which repairs were made. DISCUSSION 1. Regarding the mansion, are there any violations of TREC laws and rules in connection with the Merlin s dealings with Arthur? 2. Regarding the cottage, are there any violations of TREC laws and rules in connection with the Merlin s dealings with Arthur? 3. Is it permissible for a broker or Merlin to file a lien against a client or former client s property for a commission earned under a terminated listing agreement? The cottage was listed for a year and did not sell, so Arthur terminated the listing and listed it with another broker. Merlin s broker agreed to terminate the listing agreement, but a dispute arose with Merlin regarding money owed for repairs made to the cottage. After a contract on the cottage was received under the new listing broker, Merlin dba Merlin s Magic Repairs, Inc. filed a mechanic s lien against the property claiming that $30,000 became due and payable upon completion of services for complete kitchen remodel and make ready of entire home. The sale closed, but $30,000 was put in escrow as a result of the lien. A lawsuit between the parties was pending when the complaint was filed with TREC. 4. Is it permissible for a broker or Merlin to file a lien against a client or former client s property for repair work done to the property? 5. Should a broker have a policy that sponsored agents disclose outside employment or businesses related to real estate? 6. What can the broker do if the broker discovers a sponsored sales agent is engaged in a business that could conflict with the agent s fiduciary duty? 6 Chapter 2

23 Instructor s Notes TREC Case Study 2 1. Regarding the mansion, are there any violations of TREC laws and rules in connection with the Merlin s dealings with Arthur? It appears that Merlin maintained a clear distinction between his role as a real estate agent and his role as a home repair contractor as he kept a detailed accounting and invoiced under the name of his repair corporation only. Any dispute between the parties would be a civil matter. 2. Regarding the cottage, are there any violations of TREC laws and rules in connection with the Merlin s dealings with Arthur? An Agreed Order was entered into with TREC finding that Merlin acted negligently or incompetently, while acting as a sales agent for failing to clearly distinguish between work performed for real estate brokerage purposes and work done for other purposes. The Agreed Order gave Merlin a reprimand, assessed a $1,000 administrative penalty, and required completion of a 30-hour qualifying course in Law of Agency. Salient factors creating this confusion of roles included * no written agreement between Merlin s Magic Repairs, Inc. and Arthur setting out the scope of repairs; * no accounting of repairs made, money expended by Merlin/Merlin s Magic Repairs, or money paid by Arthur for materials; * listing Merlin s name individually dba Merlin s Magic Repairs, Inc. instead of listing the only the corporate name; * not identifying to Arthur which role he was acting under when Merlin discussed the cottage sale and repairs; * potential breach of fiduciary duty by Merlin for putting his own personal interests above Arthur s when he filed the lien. 3. Is it permissible for a broker or Merlin to file a lien against a client or former client s property for a commission earned under a terminated listing agreement? No. There is no statute that authorizes a broker to place a lien on an owner s home to protect a right to a terminated listing fee. The broker would have to sue to collect any commission deemed due. Note that only the broker has the right to sue under a listing agreement because it is the broker, not Merlin, who is the party to the listing agreement. If a lien was filed, TREC would consider this a violation of the broker s fiduciary duty for putting the broker s interest ahead of the client s. 4. Is it permissible for a broker or Merlin to file a lien against a client or former client s property for repair work done to the property? Possibly. But only if there are written documents that clearly distinguish between the roles of repair services and brokerage services. Further, all oral communications should make clear which hat the agent is wearing and there should be separate accounting for money spent and due for each role. This is very difficult to do correctly and will likely end up with the same result as in this case discipline by TREC and a civil lawsuit. 5. Should a broker have a policy that sponsored agents disclose outside employment or businesses related to real estate? Yes. 6. What can the broker do if the broker discovers a sponsored sales agent is engaged in a business that could conflict with the agent s fiduciary duty? Although the broker cannot forbid a sponsored sales agent from engaging in such outside businesses, the broker can choose to stop sponsoring someone whose outside activities could create a liability for the broker. The broker can also train and counsel a sales agent about how to clearly distinguish between the different roles if it is a business that can be done in a way to avoid a conflict. Note Under certain circumstances a lien can be filed for a commission in commercial transactions. See your attorney. Additional Discussion Questions 1. A new sales agent is educated to the level of minimum competency. What does that mean to you? (Brokers should understand that to raise the standard, they need to know that minimum competency is the standard.) 2. How does a broker determine when a salesperson is competent to perform certain activities? Which education experiences could be incorporated into a policy standard to ensure competency? (This could include specific courses through local associations, real estate schools, or brokerages, and may include mentoring programs.) 3. What supervision is necessary to know what a sales agent is doing? 4. How does the broker limit or revoke an authorized activity? (The broker should limit or revoke in writing.) Instructor

24 Independent Contractor Status TREC Rule (m) This section is not meant to create or require an employer/employee relationship between a broker and a sponsored salesperson. Texas Labor Code Service As a Real Estate Broker In this subtitle, employment does not include: (1) service performed by an individual as a real estate broker or salesperson if: (A) the individual engages in activity described by the definition of broker in Section , Occupations Code; (B) the individual is licensed as a broker or salesperson by the Texas Real Estate Commission; (C) substantially all remuneration for the service, whether in cash or other form of payment, is directly related to sales or other output, including the performance of the service, and not to the number of hours worked; and (D) the service is performed under a written contract between the individual and the person for whom the service is performed, and the contract provides that the individual is not treated as an employee with respect to the service for federal tax purposes; or (2) service performed by an individual as an instructor of a person licensed or seeking a license as a real estate broker or salesperson if: (A) the individual instructs in an educational program or course approved by the Texas Real Estate Commission; and (B) the service is performed under a written contract between the individual and the person for whom the service is performed and the contract provides that the individual is not treated as an employee with respect to the service for federal tax purposes. Independent Contractor Challenges The Independent Contractor status has been challenged in the courts of Massachusetts and California in the last few years. Although this is an IRS issue and not necessarily a TREC issue, it is important that brokers be sure they understand the choices and ramifications. Brokers may choose for their license holders to be employees or independent contractors. TREC recommends seeking advice of competent legal counsel and competent CPA when making these choices. Brokers who use the independent contractor status for federal tax purposes need be certain they have obtained a written independent contractor agreement and a memorandum of understanding for every license holder associated with their brokerage. These documents should be drawn by an attorney (the state trade association in Texas also has forms.) The memorandum of understanding should be renewed annually and retained in the broker s records. Failure to procure these documents could cause the broker to be liable for federal taxes on commissions paid to license holders. The Federal Government in the Affordable Care Act has recognized that qualified real estate agents will be statutory non-employees under the IRS code and thus non-employees for the purposes of the Shared Responsibility for Employers. This seems to imply that the federal government acknowledges the independent contractor relationship between sponsoring brokers and their license holders. In the Massachusetts case Monell et al.v. Boston Pads, the plaintiffs alleged that their former broker misclassified them as independent contractors rather than employees, thereby violating the Massachusetts independent contractor statute. Plaintiffs alleged that, among other things, the defendants required plaintiffs to own day planners, pay desk fees each month, have cell phones with a 617 area code, complete office duty in some cases, and were subject to disciplinary action if productivity goals were not met. The court denied the plaintiff s motion for summary judgment, which argued that the defendants could not establish the plaintiffs as independent contractors under Massachusetts s independent contractor statute. Instead, the court ordered summary judgment in favor of the defendants, finding that the Massachusetts real estate statute required the broker to exercise some degree of supervision over the plaintiffs in order to comply with real estate license laws and acknowledging that it was impossible to read the real estate statute and the independent contractor statute in harmony. The Massachusetts independent contractor statute contains a presumption that an individual is an employee unless three specific factors are met, which is commonly referred to as the ABC test. However, given the real estate statute s supervision requirement, it would be difficult, if not impossible for brokers to meet the independent contractor statute s three-factor test. Recognizing the inherent conflict, the court turned to the rules of statutory construction, under which the court determined the real estate statute, as the more specific statute, must control. The plaintiffs appealed the trial 7 Chapter 2

25 Instructor s Notes 5. A real estate license gives a person the authority to sell and list anywhere in the state. Which limitations on the sales agent s authority, if any, should the broker invoke? Include a discussion regarding geographic boundaries. 6. What about the sale of international property? How could the broker establish agent competency in this area? 7. What specialized knowledge or training could the broker require of a sales agent who wants to focus on short sales, foreclosure sales, or sales by relocation companies? 8. Consider the sale of a high rise office building in a downtown area. What skills and knowledge are needed to practice real estate in this specialization of real estate? 9. How could a sponsoring broker assist a new sales agent in completing residential contracts? 10. How could a broker ensure that a sales agent has understanding of cash crops and mineral rights before the sales agent participates in a farm and ranch sale? Instructor

26 court s decision, and the Massachusetts Supreme Court granted direct review of the case. In a positive win for the real estate industry, the Massachusetts Supreme Court affirmed the lower court s ruling, holding that the Massachusetts independent contractor statute does not apply to real estate salespersons. In reaching its decision, the court noted that despite the level of supervision and control brokers are required to exercise over their salespeople under the real estate license laws, the real estate statute expressly permits a broker to classify their salespeople as employees or independent contractors. The court observed that compliance with the various controls set forth in the real estate licensing statute make it difficult for a real estate salesperson to meet the ABC Test in the independent contractor statute, but that it could not have been the legislature s intent to exclude real estate salespersons from independent contractor status. In construing both the independent contractor statute and the real estate licensing laws together, and taking into consideration the legislative purpose behind these laws, the court determined that the real state licensing laws control. This decision preserves Massachusetts brokers longstanding practice and ability to continue to choose to classify their salespeople as independent contractors. In a California lawsuit, Bararsani v. Coldwell Banker, the plaintiff filed a class action lawsuit against Coldwell Banker Residential Brokerage ( Coldwell Banker ) alleging that Coldwell Banker improperly classified affiliated sales associates as independent contractors when they were actually employees of the broker. In addition, the plaintiff alleged that Coldwell Banker violated the California Labor Code by failing to reimburse certain business expenses and maintaining proper records. In July 2013, the defendants filed a Demurrer seeking to dismiss the plaintiffs amended complaint, asserting that the amended complaint was without basis because the California Business & Professions Code Section ( Code ) sets out the relevant three-part test for classification of real estate professionals as independent contractors, which defendants alleged were satisfied. Plaintiffs filed an opposition to the defendants Demurrer. While the language in the Code cited by defendants expressly permits real estate professionals to be treated as independent contractors or as employees, the Code does not require that real estate professionals be treated as independent contractors. The court denied defendants Demurrer, asserting that California law permits a worker to be classified as an independent contractor for some purposes, but not all, and stating that the court would apply a multi-factor common law test to determine whether plaintiffs were properly classified as independent contractors for purposes of this case. The parties later entered into settlement discussions, and on January 13, 2016, the court granted final approval of a class action settlement and entry of order and judgment in the case. The settlement order contained no finding or admission of wrongdoing by Coldwell Banker; however, likely due to the considerable expense and time it takes to defend a class action lawsuit, Coldwell Banker agreed to pay the sum of $4.5 million, which was distributed among the certified class members. The settlement order certified the class for settlement purposes, which Coldwell Banker was able to successfully limit to only those agents who had not signed an agreement to arbitrate. In another California case, Cruz et. al. v. Redfin, the plaintiffs alleged that Redfin s field agents were misclassified as independent contractors when in reality the field agents were employees. Plaintiffs alleged this misclassification denied them various wages and benefits they were otherwise entitled to as employees. The plaintiffs also alleged that in addition to requiring them to obtain a smartphone, laptop and GPS, Redfin maintained complete control over the plaintiffs and provided the plaintiffs with training and supervision as to how they were to perform their duties. Similar facts are alleged in another case filed against Redfin Corporation, Galen v. Redfin Corporation. In this case, the plaintiff alleged that he was also improperly classified as an independent contractor rather than as an employee. While Galen attempted to pursue this action in state court, Galen had signed an independent contractor agreement with Redfin, which contained a mandatory arbitration clause. While the trial court denied the defendant s motion to compel arbitration, the Court of Appeals reversed the ruling, holding that the parties had entered into an independent contractor agreement containing a mandatory arbitration clause, whereby the parties agreed that any claims not settled by mediation would be resolved by binding arbitration. The plaintiff appealed, and the Supreme Court of California granted review of the Court of Appeals decision in order to determine, in part, whether the plaintiff s statutory misclassification claims are covered by the mandatory arbitration clause in the independent contractor agreement. Excerpted and edited from a white paper report Independent Contractor Status in Real Estate by Lesley Walker, Associate Counsel for the National Association of REALTORS. Reprinted with permission. 8 Chapter 2

27 Instructor s Notes Instructor

28 Chapter 3 Fiduciary Responsibility/Agency TREC Rules (b) A broker owes the highest fiduciary obligation to the principal and is obliged to convey to the principal all information known to the agent which may affect the principal s decision, unless prohibited by other law. Representation Commonly, a real estate broker will enter into an agreement to represent a buyer, seller, landlord or tenant. While it is prudent for the broker and the client to have the agreement in writing, the agreement to represent another party may also be established by an oral agreement or by implication from the parties actions. Once an agreement to represent a party exists, an agency relationship is created and the broker has fiduciary obligations to the client. General Fiduciary Duties In Texas, the general fiduciary duties a broker owes to his or her client are loyalty, good faith, honesty, refraining from self-dealing, integrity, fair and honest dealing, and disclosure. Specific Duties The specific duties a broker owes to his or her client, which are described in TRELA or the TREC Rules, may be summarized in the following categories. * The broker must represent the interest of the client as his or her primary duty. The broker is to be faithful to the client and be observant (mindful) of the duty of trust. The broker may not place his or her personal interest above the client s interest. * The broker must disclose to his or her client any conflict of interest or any matter that would affect the client s decision in a transaction. * The broker must be clear to all parties in a transaction whom the broker represents. * When performing brokerage duties, the broker is to» act meticulously and scrupulously;» exercise integrity;» employ prudence and caution to avoid any misrepresentation; 9 Chapter 3» exercise judgment and skill; and» not act negligently, in an untrustworthy or dishonest manner, or in bad faith. * The broker is to keep informed about his or her practice, the market and developments in the industry. * The broker must keep the client informed of material information related to a transaction, including but not limited to the receipt of any offer. * The broker must be available to answer the client s questions. * The broker must give the client a proper accounting of all funds received in the transaction. The broker may not commingle any funds held for another with the broker s own funds. TRELA and the TREC Rules also specify duties the broker has to other persons who may or may not be the broker s clients. For example, the broker must disclose to a buyer all known material defects of a property, regardless of whether the buyer is the broker s client. Additionally, a broker may not publish advertisements that are misleading or that fail to include the required statutory disclosures. These obligations are more commonly known as compliance obligations and are not necessarily fiduciary in nature. If a dissatisfied client is successful in establishing a breach of a fiduciary duty in court, the remedies may include, but are not limited to * actual damages resulting from the breach (outof-pocket losses or lost profits), as well as mental anguish damages foreseeable as a result of the breach;

29 Instructor s Notes Instructor

30 * fee forfeiture; and * exemplary damage when the breach is intentional or done willfully with no regard for the interest of the client. 10 Chapter 3 TREC Case Study 3 Unfaithful! Broker Venus had a listing agreement with the Spartans for the sale of a property in which she agreed to pay the buyer s agent a 3 percent commission and reduced her commission to one percent, for a total of 4 percent commission upon the sale of the property. Venus negotiated a contract with a buyer and told the Spartans that the buyer s agent, Apollo, would not agree to the terms of the sale unless Venus commission was increased to 2 percent. The parties entered into a contract for the property for $990,000. The executed contract contained the following provision in paragraph 11, Special Provisions: Sellers pay 3% commission to buyer s agent and 2% commission to seller s agent. The Spartans subsequently contacted Apollo, who stated he did not make a request to increase Venus commission. The Spartans disputed the increased commission to Venus based on their listing agreement and offered to escrow the disputed amount in order to close. Venus refused to escrow the disputed amount stating that the contract superseded the listing agreement. The Spartans paid the 2 percent commission to proceed with the closing. DISCUSSION 1. Are there any violations of TREC laws and rules in connection with Venus actions regarding payment of commission? 2. Can a buyer s agent choose not to show a home that meets all of his client s requirements to the client just because the commission split advertised is less than the standard 3 percent? 3. What should a buyer s agent do in this situation? What policies-training should a broker have in place for agents regarding commission and fiduciary duty to clients? Section Grounds for Suspension or Revocation of License Section (b) of the Act lists the types of violations for which TREC may suspend, revoke or take other disciplinary action against a license holder. (b) The commission may suspend or revoke a license issued under this chapter or take other disciplinary action authorized by this chapter if the license holder, while acting as a broker or salesperson: (1) acts negligently or incompetently; (2) engages in conduct that is dishonest or in bad faith or that demonstrates untrustworthiness; (3) makes a material misrepresentation to a potential buyer concerning a significant defect, including a latent structural defect, known to the license holder that would be a significant factor to a reasonable and prudent buyer in making a decision to purchase real property; (4) fails to disclose to a potential buyer a defect described by Subdivision (3) that is known to the license holder; (5) makes a false promise that is likely to influence a person to enter into an agreement when the license holder is unable or does not intend to keep the promise; (6) pursues a continued and flagrant course of misrepresentation or makes false promises through an agent or salesperson, through advertising, or otherwise; (7) fails to make clear to all parties to a real estate transaction the party for whom the license holder is acting; (8) receives compensation from more than one party to a real estate transaction without the full knowledge and consent of all parties to the transaction; (9) fails within a reasonable time to properly account for or remit money that is received by the license holder and that belongs to another person; (10) commingles money that belongs to another person with the license holder s own money; (11) pays a commission or a fee to or divides a commission or a fee with a person other than a license holder or a real estate broker or salesperson licensed in another state for compensation for services as a real estate agent; (12) fails to specify a definite termination date that is not subject to prior notice in a contract, other than a contract to perform property management services, in which the license holder agrees to perform services for which a license is required under this chapter; (13) accepts, receives, or charges an undisclosed

31 Instructor s Notes TREC Case Study 3 1. Are there any violations of TREC laws and rules in connection with Venus actions regarding payment of commission? Yes, Venus failed to place the interests of her client above her own interest. An Agreed Order was entered into with TREC that gave Venus a three-year probated suspension of her license, assessed an administrative penalty of $1,000, required commission reimbursement of $9,900 to the Spartans, and required completion of a 30-hour course on agency. 3. What should a buyer s agent do in this situation? What policies/training should a broker have in place for agents regarding commission and fiduciary duty to clients? Have a general discussion. Draw on students experience. 2. Can a buyer s agent choose not to show a home that meets all of his client s requirements to the client just because the commission split advertised is less than the standard 3 percent? This would also be considered placing the interest of the agent above the principal, which is a violation of fiduciary duty. Instructor

32 commission, rebate, or direct profit on an expenditure made for a principal; (14) solicits, sells, or offers for sale real property by means of a lottery; (15) solicits, sells, or offers for sale real property by means of a deceptive practice; (16) acts in a dual capacity as broker and undisclosed principal in a real estate transaction; (17) guarantees or authorizes or permits a person to guarantee that future profits will result from a resale of real property; (18) places a sign on real property offering the real property for sale or lease without obtaining the written consent of the owner of the real property or the owner s authorized agent; (19) offers to sell or lease real property without the knowledge and consent of the owner of the real property or the owner s authorized agent; (20) offers to sell or lease real property on terms other than those authorized by the owner of the real property or the owner s authorized agent; (21) induces or attempts to induce a party to a contract of sale or lease to break the contract for the purpose of substituting a new contract; (22) negotiates or attempts to negotiate the sale, exchange, or lease of real property with an owner, landlord, buyer, or tenant with knowledge that that person is a party to an outstanding written contract that grants exclusive agency to another broker in connection with the transaction; (23) publishes or causes to be published an advertisement, including an advertisement by newspaper, radio, television, the Internet, or display, that misleads or is likely to deceive the public, tends to create a misleading impression, or fails to identify the person causing the advertisement to be published as a licensed broker or agent; (24) withholds from or inserts into a statement of account or invoice a statement that the license holder knows makes the statement of account or invoice inaccurate in a material way; (25) publishes or circulates an unjustified or unwarranted threat of a legal proceeding or other action; (26) establishes an association by employment or otherwise with a person other than a license holder if the person is expected or required to act as a license holder; (27) aids, abets, or conspires with another person to circumvent this chapter; (28) fails or refuses to provide, on request, a copy of a document relating to a real estate transaction to a person who signed the document; (29) fails to advise a buyer in writing before the closing of a real estate transaction that the buyer should: 11 Chapter 3 (A) (B) have the abstract covering the real estate that is the subject of the contract examined by an attorney chosen by the buyer; or be provided with or obtain a title insurance policy; (30) fails to deposit, within a reasonable time, money the license holder receives as escrow agent in a real estate transaction: (A) (B) in trust with a title company authorized to do business in this state; or in a custodial, trust, or escrow account maintained for that purpose in a banking institution authorized to do business in this state; (31) disburses money deposited in a custodial, trust, or escrow account, as provided in Subdivision (30), before the completion or termination of the real estate transaction; (32) discriminates against an owner, potential buyer, landlord, or potential tenant on the basis of race, color, religion, sex, disability, familial status, national origin, or ancestry, including directing a prospective buyer or tenant interested in equivalent properties to a different area based on the race, color, religion, sex, disability, familial status, national origin, or ancestry of the potential owner or tenant; or (33) disregards or violates this chapter. New IABS and Consumer Notice Beginning February 1, 2016, TREC mandated the use of new Consumer Notice for Consumer Protection and Information About Brokerage Services (IABS) forms. The new rules regarding posting and delivery of these forms are below. Copies of the forms and helpful hints to stay in compliance with the rules are set out in Appendix A. Please note that the statutory requirement to deliver the IABS form at the first substantive communication with a party about a specific property remains the same. Acceptable ways to deliver the IABS are outlined in the new rule. (a) (b) RULE Consumer Information The Commission adopts by reference Consumer Protection Notice TREC No. CN 1-2. This document is published by and available from the Texas Real Estate Commission, P.O. Box 12188, Austin, Texas , Each active real estate broker shall provide the notice adopted under subsection (a) by: (1) displaying it in a readily noticeable location in each place of business the broker maintains; and (2) providing a link to it labeled Texas Real Estate Commission Consumer Protection Notice, in at least a 10 point font, in a readily noticeable

33 CHAPTER 531 CANONS OF PROFESSIONAL ETHICS AND CONDUCT Consumer Information (a) The Commission adopts by reference the Consumer Protection Notice TREC No. CN 1-2. This document is published by and available from the Texas Real Estate Commission, P.O. Box 12188, Austin, Texas , (b) Each active real estate broker and sales agent shall provide the notice adopted under subsection (a) by: (1) displaying it in a readily noticeable location in each place of business the broker maintains; and (2) providing a link to it in a readily noticeable place on the homepage of each business website, labeled: (A) "Texas Real Estate Commission Consumer Protection Notice", in at least 10 point font; or (B) "TREC Consumer Protection Notice", in at least 12 point font. (c) For purposes of this section, business website means a website on the internet that: (1) is accessible to the public; (2) contains information about a license holder's real estate brokerage services; and (3) the content of the website is controlled by the license holder. (d) For purposes of providing the link required under subsection (b)(2) on a social media platform, the link may be located on: (1) the account holder profile; or (2) a separate page or website through a direct link from the social media platform or account holder profile. Place on the homepage of the business website of the broker and sponsored sales agents. RULE Information About Brokerage Services (a) The Commission adopts by reference Information About Brokerage Services Form, TREC No. IABS 1-0 (IABS Form). The IABS Form is published by and available from the Texas Real Estate Commis-sion, P.O. Box 12188, Austin, Texas , (b) Each active real estate broker and sales agent shall provide: (1) a link to a completed IABS Notice in a readily noticeable place on the homepage of each business website, labeled:(a) "Texas Real Estate Commission Information About Brokerage Services", in at least 10 point font; or(b) "TREC Information About Brokerage Services", in at least 12 point font; and (2) the completed IABS Notice at the first substantive communication as required under , Texas Occupations Code. (c) For purposes of , Texas Occupations Code, the IABS Form can be provided: (1) by personal delivery by the broker or sales agent; (2) by first class mail or overnight common carrier delivery service; Page 1 of 1

34 (3) in the body of an ; or (4) as an attachment to an , or a link within the body of an , with a specific reference (1) The link to a completed IABS Notice may not be in a footnote or signature block in an (2) For purposes of this section, business website means a website on the internet that: (1) is accessible to the public; (2) contains information about a license holder's real estate brokerage services; and (3) the content of the website is controlled by the license holder. (F)For purposes of providing the link required under subsection (b)(1) on a social media platform, the link may be located on: (1) the account holder profile; or (2) a separate page or website through a direct link from the social media platform or account holder profile (g) License holders may reproduce the IABS Notice published by the Commission, provided that the text of the IABS Notice is copied verbatim and the spacing, borders and placement of text on the page must appear to be identical to that in the published version of the IABS Notice, except that the Broker Contact Information section may be prefilled. DISSCUSSION May I put my own logo on the Consumer Notice or IABS That constitutes a business website At the first substitutive communication with a party, may I just refer them to my business website for the IABS? Am I required to have a link to the IABS in every I send out? Triplet App-rehensive Agent Sanjay is congratulating agent Harry on Harry s selling success. The two shake hands. Sanjay: Hey, Harry, I saw you got top selling agent for your brokerage last month. Way to go! I bet you re busy. Harry: Man, you don t know the half of it. My referrals have really taken off. I m having a hard time balancing my clients schedules and my kids activities. You know, we have triplets, and they re into everything. This week, Monique has a piano recital, Boutique has a dance recital, and Unique has a tuba recital. Sanjay: (Shakes his head): Can t please anybody that way. I think I have an app that can help you get it all done. (Pulls cell phone from pocket) Harry: I m listening. Sanjay: (Points to app icon on cell phone screen) Have you heard of Fast Show? It s an app that lets another agent meet your buyers just to show them the property. That way, you don t have to miss your family stuff. Harry: How does it work? Sanjay: (Opens app and shows Harry the screen) It s easy. You only pay through the app when you use it. Let s say you have a buyer who can only see a certain property at 5 p.m. tomorrow. You want to go to your daughters recitals, but they start at 5 p.m. tomorrow and run through the evening. So what you do is get on the app and submit that time and property for bid by other agents to show the property to your buyers. You pick whichever agent you want that bids on the showing. You pay the app company the showing agent s fee plus a service fee for using the app. The app company pays the showing agent. Harry: (Pulls out phone) Oh man, that s a great app! What s it called, again? DISCUSSION Break into small groups and discuss the pros and cons of using a showing app. Discuss from the following perspectives: the agent, the broker and the client. Could using it violate TREC s statute or rules? What about civil liability issues? 12 Chapter 3

35 Negligence or Dishonesty? For each of the following, discuss whether the license holder violated (b)(1) or (b)(2). Discuss factors you considered in making your choice. TREC Case Study 4 The Cajun Contingency Odette represented Marie in the purchase of a commercial property in east Texas. The contract provided for closing 60 days after execution. Marie paid $5,000 in earnest money, and the contract terms stated that she would pay $1 million with $100,000 cash at closing and financing of $900,000. Marie told Odette that she intended to finance the whole transaction through two loans: the first for $900,000 secured by the property and the second for $100,000 from refinancing Marie s residential property. A Commercial Contract Financing Addendum was executed that included a contingency that Marie could terminate if she could not obtain approval of the full $1 million in loans 25 days after the execution date. The lender did not give written approval of the loans by the contingency deadline. The parties verbally agreed to a short contract closing extension; however, no written approval of either loan was ever received from the lender. After the extension date passed, Jean-Louis, the seller, notified Marie that she was in default, terminated the contract, and demanded Marie sign a release of earnest money. Marie contacted an attorney to dispute the release of the earnest money. Odette informed TREC that she had oral confirmation from the lender that the first loan was approved by the contingency date and that she was not responsible for issues relating to the funding of the residential equity loan, which was being handled by the same lender. TREC Case Study 5 Filching Filbert Filbert was the listing agent for a property. He also obtained a signed Buyer s Representation Agreement from Inocencia when he came to represent her as the buyer. When Filbert drafted the sales contract he listed himself as the seller, although he did not have record title or an executory interest in the property. Filbert indicated to Inocencia that he was acting as an intermediary on the contract. Filbert inserted into the contract a $10,000 option fee that would not be credited to Inocencia at closing. He represented to Inocencia that this money was for repairs and that it was appropriate for Inocencia to pay for repairs before owning the property. The contract did not close. Filbert later drafted a second contract and told Inocencia an additional $1,000 in option money was needed, and Inocencia paid $1,000. The second contract did not close. Filbert refunded Inocencia $5,000 of the $11,000 she paid to him, but he did not pay her the remaining $6,000 despite numerous promises that he would. 13 Chapter 3

36 CHAPTER 531 CANONS OF PROFESSIONAL ETHICS AND CONDUCT Information About Brokerage Services (a) The Commission adopts by reference the Information About Brokerage Services Notice, TREC No. IABS 1-0 (IABS Notice). The IABS Notice is published by and available from the Texas Real Estate Commission, P.O. Box 12188, Austin, Texas , (b) Each active real estate broker and sales agent shall provide: (1) a link to a completed IABS Notice in a readily noticeable place on the homepage of each business website, labeled: (A) "Texas Real Estate Commission Information About Brokerage Services", in at least 10 point font; or (B) "TREC Information About Brokerage Services", in at least 12 point font; and (2) the completed IABS Notice at the first substantive communication as required under , Texas Occupations Code. (c) For purposes of , Texas Occupations Code, the completed IABS Notice can be provided: (1) by personal delivery by the broker or sales agent; (2) by first class mail or overnight common carrier delivery service; (3) in the body of an ; or (4) as an attachment to an , or a link within the body of an , with a specific reference to the IABS Notice in the body of the . (d) The link to a completed IABS Notice may not be in a footnote or signature block in an . (e) For purposes of this section, business website means a website on the internet that: (1) is accessible to the public; (2) contains information about a license holder's real estate brokerage services; and (3) the content of the website is controlled by the license holder. (f) For purposes of providing the link required under subsection (b)(1) on a social media platform, the link may be located on: (1) the account holder profile; or (2) a separate page or website through a direct link from the social media platform or account holder profile. (g) License holders may reproduce the IABS Notice published by the Commission, provided that the text of the IABS Notice is copied verbatim and the spacing, borders and placement of text on the page must appear to be identical to that in the published version of the IABS Notice, except that the Broker Contact Information section may be prefilled. Page 1 of 1

37 Instructor s Notes TREC Case Study 4 The broker violated (b)(1), acting negligently, by * incorrectly listing second loan as a cash down payment; and * failing to advise her client how the financing contingency worked and what the client s options were if she did not receive written evidence of loan approval by the contingency deadline date. Specifically, the client could» terminate the contract and request the return of the earnest money;» request seller to execute an amendment extending financing contingency and closing deadlines; or» proceed but risk losing the earnest money if the loans do not fund by the closing date. TREC and Odette entered into an Agreed Order assessed a $1,000 administrative penalty and required that she complete a 30-hour course on agency. TREC Case Study 5 The broker violated (b)(2), engages in conduct that is dishonest or in bad faith or that demonstrates untrustworthiness by * acting as the seller of the property without record title to the property or an equitable title or right acquired by contract with the record title owner; * acting, or attempting to act, as a principal in a transaction, while acting as an intermediary * being dishonest or acting in bad faith by mischaracterizing an option fee as money for repairs; * demonstrating untrustworthiness by leading the buyer to believe it is in the buyer s best interest to pay for repairs before owning a property. TREC and Filbert entered into an Agreed Order that placed Filbert on suspension until he refunds the buyer the $6,000 and gave him an additional 3-year probated suspension, assessed a $2,000 administrative penalty, and required that he complete a 30-hour course on contracts. Instructor

38 TREC Case Study 6 To Thine Client Be True Claudius was the designated broker of a business entity broker that he wholly owned. The business entity broker entered into a listing agreement on September 8th with Hamlet Family Living Trust to sell a home. The listing agreement required Claudius to market the property for $579,900 and to file with one or more Multiple Listing Services within five days after execution of the listing agreement. Claudius knew a couple, the Shakespeares, who might be interested in the property. Claudius did not market the property outside his own firm nor enter it into MLS promptly. On September 20th, Claudius showed the property to the Shakespeares and represented them in making an offer of $579,000. Claudius presented the offer to the trustee for Hamlet Family Living Trust, stating that he was acting as intermediary for both buyers and sellers. On September 24th, the parties entered into a sales contract. On October 13th, Claudius listed the property in MLS with a price of $579,000. On October 13th, the trustee expressed concern that Claudius was representing both buyers and seller, so Claudius appointed a broker associate with the entity broker to act as agent for the Shakespeares, and he remained as agent for Hamlet Family Living Trust. At closing, the trustee stated that Claudius commission should be reduced because he did not represent Hamlet Family Living Trust properly. Claudius refused, and the commission was put into escrow until Claudius and Hamlet Family Living Trust could come to an agreement. Hamlet Family Living Trust filed a complaint with TREC. 14 Chapter 3

39 Instructor s Notes TREC Case Study 6 The broker violated (b)(1), acting negligently, by * using a limited exposure marketing method known as a pocket listing without first obtaining the seller s clear and unambiguous consent and by failing to inform the seller as to the potentially negative effect of limited exposure to the market; * listing the wrong price on a property; * acting as intermediary between parties to a real estate transaction without first obtaining written consent from the buyers; * failing to obtain written consent of the parties authorizing the broker to make an intermediary appointment; and * appointing himself as intermediary agent when he should have appointed another license holder associated with the broker. TREC and the broker entered into an Agreed Order reprimanding the designated broker, assessed a $5,000 administrative penalty, and required that he complete a 30-hour course on agency. Instructor

40 Chapter 4 Trust Funds TREC Rules (c) Trust Funds A broker is responsible for the proper handling of trust funds placed with the broker and must comply with of this title. TREC Rules Maintaining Trust Money (a) Definitions. In this section: (1) Trust money means client s money, earnest money, rent, unearned fees, security deposits, or any money held on behalf of another person. (2) Trust account means an account managed by one party for the benefit of another in a banking institution authorized to do business in Texas. (b) Acceptance of Trust Money. (1) Any trust money accepted by a broker is held in a fiduciary capacity and must be maintained in a designated trust account maintained by the broker or delivered to an escrow agent authorized in Texas in accordance with the agreement of the principals of the transaction. (2) A salesperson shall not maintain a trust account. Any trust money received by a salesperson must be immediately delivered to the salesperson s sponsoring broker. (3) Unless a different time to deposit trust money is expressly agreed upon in writing by the principals to the transaction, any trust money received by the broker must be deposited in 15 Chapter 4 (c) a trust account or delivered to an authorized escrow agent within a reasonable time, which the Commission has determined to be not later than the close of business of the second working day after the date the broker receives the trust money. (4) The broker shall not: (A) commingle trust money with the broker s personal money or other non-trust money; or (B) deposit or maintain trust money in a personal account or any kind of business account. (5) The following is prima facie evidence of commingling trust money with the broker s own money: (A) placing trust money in a broker s personal or operating account; or (B) paying operating expenses or making withdrawals from a trust account for any purpose other than proper disbursement of trust money. Trust account requirements. (1) The trust account must be clearly identified as a trust account. (2) The broker may, but is not required to, maintain separate trust accounts for each client or type of trust money maintained by the broker, such as earnest money deposits or security deposits received for the management of rental property. (3) If trust money held by a broker is deposited in an interest bearing account: (A) the money must be available for disbursal at the appropriate time; and (B) unless otherwise provided for by an agreement signed by the party depositing the money with the broker, any interest earned on the money must be distributed to any parties to whom the money is disbursed. (4) A broker may deposit and maintain a reasonable amount of money in the trust account to cover bank service fees, including fees charged for insufficient funds. Detailed records must be kept for any funds deposited under this exception. (5) If a broker acquires ownership of trust money held in a trust account, including entitlement to compensation, such money must be removed from the trust account not later the

41 Instructor s Notes Instructor

42 30th day after the date the broker acquires ownership of the money. (6) The broker must retain a documentary record of each deposit or withdrawal from the trust account and provide an accounting to each beneficiary of trust money at least monthly if there has been any activity in the account. (7) A broker may only authorize another license holder to withdraw or transfer money from any trust account but the broker remains responsible and accountable for all trust money received by that broker and all deposits to or disbursements from the trust account. (8) If a broker deposits trust money in the form of a check in a trust account and the check is dishonored by the financial institution on which it was drawn, the broker shall immediately notify all parties to the transaction in writing. (d) Disbursement of trust money. (1) A broker may only disburse money from the broker s trust account in accordance with the agreement under which the money was received. (2) If any or all of the parties to a real estate transaction make a written demand for payment of trust money, the broker must pay the trust money to the party or parties entitled to the money within (e) a reasonable time, which the Commission has determined to be not later than the 30th day after the date the demand is made. (3) If by a subsequent written agreement, all parties to a real estate transaction authorize the broker maintaining trust money to disburse the trust money in a manner not in accordance with the agreement under which the money was received, the broker must pay the trust money to the party or parties entitled to the money under the subsequent written agreement within a reasonable time, which the Commission has determined to be not later than the 30th day after the date the broker receives the subsequent written agreement. (4) The broker must immediately notify all parties in writing of any disbursement of trust money under subsections (d)(2) or (3). (5) If the broker cannot reasonably determine to which party or parties the trust money should be paid, the broker may pay the trust money into the registry of a court and interplead the parties. Records. A broker must maintain all documentation regarding a trust account for four years from the date the document is received or created by the broker. Monthly Accounting of Money Required New Rule effective January 1, 2016 Effective January 1, 2016, TREC Rule (c)(6) requires all brokers to provide accountings, at least monthly, to each beneficiary of trust money being held by the broker. Any time a broker is holding money in trust and there is any activity in the trust account, the broker is now required to provide an accounting for that money at least monthly. For brokers managing property, it is not enough to just send the money to the owner. Brokers are now required to provide a written accounting along with the money. Brokers must keep a documentary record as evidence of compliance with this rule. This rule applies to: * a broker who holds earnest money; * a broker who holds property management money (rent, security deposits, etc.); * a broker who holds unearned fees; * any other money a broker holds on behalf of another person in a trust account. 16 Chapter 4

43 Instructor s Notes New , Maintaining Trust Money, was adopted by TREC in August 2014 following a comprehensive rule review of Chapter 535. This new rule combines and replaces former rules , , and The new rule better reflects current TREC policies and simplifies and clarifies the requirements. Instructors should ensure that students particularly review subsection (c), which sets out the requirements brokers must follow if they have a trust account. In November 2015, the rule was amended to require that a written accounting be sent at least monthly if there was any activity in the trust account. Instructor

44 WHO CAN SIGN A CHECK? Who can sign checks for trust and operating accounts? The broker? A sales agent? An unlicensed assistant? A trust account is used to hold trust funds. TREC Rule defines trust funds as money that a license holder accepts belonging to others that is held in a fiduciary capacity. And while a sales agent may not have his or her own trust account remember only a broker can hold a trust account a broker may designate a sales agent as an authorized signatory on the broker s trust account. However, the broker remains fully responsible for all activity regarding the account [TREC Rule 535.2(c)]. Because a broker can only designate another license holder as a signatory on a trust account, an unlicensed assistant may not sign checks for a trust account. An operating account differs from a trust account because an operating account typically involves money that belongs to the business itself or the business s owner and does not include money, belonging to another person, that is held in a fiduciary capacity. Take, for example, the bank account from which office expenses are paid: rent, utility bills, or employee salaries. An unlicensed person may be a signatory on an operating account, and a sales agent may also be a signatory on an operating account. DISCUSSION 1. Is a broker required to have a trust account? 2. May a sales agent have a trust account? 3. If a real estate broker has a trust account, may the broker keep any interest that is earned on the money on deposit? 4. Is a special name required for a trust account? 5. As a broker, am I the only person who can sign a check written on my trust account? 6. Does TREC require a trust record to be maintained for a specific period of time? 17 Chapter 4

45 Instructor s Notes Discussion Questions 1. Is a broker required to have a trust account? No, not unless the broker agrees to hold money belonging to others or to act as an escrow agent [TREC Rule (b)(1)]. 2. May a sales agent have a trust account? No. TREC Rule (b)(2) prohibits a sales agent from having a trust account. The sales agent must turn over all money received to the sales agent s sponsoring broker. 3. If a real estate broker has a trust account, may the broker keep any interest that is earned on the money on deposit? Not unless the person depositing the money has signed an agreement authorizing the broker to keep the interest. Otherwise, the interest must be treated in the same manner as the deposited money. The broker is responsible for accounting for the interest and disbursing it to the person whose money is held by the broker [TREC Rule (c)(3)]. 4. Is a special name required for a trust account? Yes. If a broker maintains a trust account, it must be clearly identified as a trust account [TREC Rule (c)(1)]. 5. As a broker, am I the only person who may sign a check written on my trust account? No. A broker may authorize another license holder to withdraw or transfer money from a trust account. The broker, however, remains responsible and accountable for the trust account and for the proper handling of trust money received by the broker [TREC Rules 535.2(c), (c)(7)]. 6. Does TREC require a trust record to be maintained for a specific period of time? Yes, for four years from the date a trust document is received or created by the broker [TREC Rule (e)]. Instructor

46 Chapter 5 Property Management TREC Rules (d) A broker is responsible for any property management activity by the broker s sponsored salespersons that requires a real estate license. Leasing Agent Responsibilities Many brokers list homes for lease without the intention of providing property management services. Even when the lease form states the broker won t be providing property management services, landlords and tenants are often confused about the role the leasing agent plays. Simply put, the duty of the broker and the sponsored salesperson ends when the lease is signed between the landlord and the tenant. Situations arising after the lease is signed, such as rekeying the home, tenant walk through, and problems occurring during the leasing period are considered property management services and fall outside the scope of the services that a leasing agent provides. Some leasing agents will sometimes perform duties that cross the line into property management services, because they want to be helpful. However, providing property management services without a written agreement to do so can result in undesired consequences and should be avoided. Property Management Responsibilities Different responsibilities arise if a broker is acting as a manager of real estate, rather than simply as a broker in a sales transaction. In addition to leasing activities, duties to owners and third parties in this situation relate to service contracts for services to be performed on a particular project, as well as to properly maintaining the property, so no one suffers an injury caused by the broker s negligence in maintaining the property. Property management complaints have been on the rise at TREC in recent years. Most of these cases involve misappropriation, commingling, failure to properly account for rents or security of deposits received or negligence in the performance of property management duties. These pointers will assist brokers and salespersons when engaging in property management: * CLARIFY AUTHORITY/RESPONSIBILITY. A salesperson may not perform property management 19 Chapter 5 activity that requires a license except through that salesperson s sponsoring broker [TRELA (c)]. Although a salesperson may own a property management firm, the business must be conducted through the salesperson s sponsoring broker. A broker is responsible for any property management activity, which requires a real estate license, and that is conducted by the broker s sponsored salespersons [TREC Rules 535.2(d)]. If a broker does not authorize salespersons to manage property, the broker must make clear in writing that limitation on the scope of their authorized activities [TREC Rules 535.2(a)]. * KNOW YOUR AUTHORITY/DUTIES UNDER YOUR AGREEMENT. The property management agreement sets out what a broker is authorized to do for the owner and what the broker is expected to do. Although TREC does not have jurisdiction over disputes regarding contract terms, if the broker exceeds the authorization or fails to fulfill the broker s duties, TREC could consider that to be negligence and the broker could be subject to discipline. For example, did the property management agreement allow the broker to execute the lease on behalf of the landlord? Were periodic written accountings provided as required by property management agreement? Did the broker obtain permission to pay for a repair that was over the stated limit in the agreement?

47 Instructor s Notes Instructor

48 * UNDERSTAND LANDLORD REQUIREMENTS UNDER THE PROPERTY CODE. Under most property management agreements, the duties of and requirements placed on the landlord under the Property Code become the responsibility of the property manager as the landlord s agent. TREC can look at the property manager s conduct to see if what the manager did or did not do hurt the property owner s interest. For example, once a tenant vacates a leased property, failure to provide a written accounting within 30 days could subject the property owner to a number of monetary penalties. The manager should also keep documentation to prove that any deductions taken from the security deposit are reasonable (see Property Code ). Brokers engaged in property management or leasing residential properties should become familiar with Texas Property Code Chapter 92. Brokers in commercial property management and leasing should be familiar with Chapter 91, as well as TREC rules. * USE A BROKER S TRUST ACCOUNT. Any money received on behalf of a landlord must always be deposited into a broker s trust account. A sales agent may not operate a trust account. A broker is prohibited from commingling trust account funds with the broker s own funds [TRELA (b) (10)]. Paying operating expenses or making withdrawals from a broker s trust account for any purpose other than proper disbursement of money held in trust is evidence of commingling [TREC Rule (b)(5)]. If there is activity in a client s trust account, the broker must provide an accounting to the client at least monthly [TREC Rule (c)(5)]. * RESPOND AND REMIT TIMELY. [TRELA (b)(9)] Remember, a broker must now provide a written account at least monthly if there is any activity in the trust account [TREC Rule (c)(6)]. * KEEP GOOD RECORDS. Keeping accurate records is required [TREC Rule 535.2(h)], and it just makes good business sense. In many cases, good documentation helps prove that the broker did not violate the Act or TREC Rules. Documents that should be kept include»» property management agreements,»» lease application forms,»» executed leases,»» move-in property condition forms,»» written move-out notice from tenants,»» tenants written notice to manager of forwarding addresses,»» written accounting of security deposit provided by property managers, and»» copies of checks. TREC Sanctions for Violation of Property Management Requirements Below are a sample of sanctions against brokers for failing to comply with the requirements for property management under the Texas law. Sanctions are shown only for the broker. Any sales agents involved received separate sanctions. Review these case summaries and discuss the questions that follow. 1. A broker failed to timely remit a security deposit to tenants on behalf of an owner. The broker acted negligently by failing to pay a repair invoice on behalf of an owner, which resulted in litigation. The broker failed to timely remit a security deposit to an owner after the termination of the property management agreement, resulting in litigation. Agreed four-year probated suspension of broker license and administrative penalty of $2, Through the unsupervised leasing activities of his sponsored sales agent, the broker negotiated and executed a lease with tenants for a property that was in the foreclosure process, accepting a security and pet deposit and the first and last month of rent. Although the broker promised to make repairs to the property, they were not made. The tenants were unable to move into the property. The broker failed to refund or counsel his sales agent to refund the deposit and rent. Agreed revocation of broker license and agreed not to file an application to obtain any license or certificate issued by TREC until October 23, The broker sponsored a sales agent who failed to conduct property management through the broker and failed to use a proper trust account. The broker is responsible for the property management of that sales agent. Agreed administrative penalty of $500. DISCUSSION 1. How can a broker ensure that the broker and sponsored sales agents are competent to perform property management? 2. How can a broker ensure that a sponsored sales agent does not perform property management activity? 3. If you refer a client to another broker for property management services, how do you make sure the broker is competent? 4. Do you have contingent liability if you refer to a broker who is not competent in property management services? 20 Chapter 5

49 Instructor s Notes Discussion Questions 1. How can a broker ensure that the broker and sponsored sales agents are competent to perform property management? Proper property management is difficult without specific, detailed training. There are many laws and regulations that a property manager has to know and apply when acting as an agent for the property owner in a landlord tenant situation. Review the subject matters covered in the new TREC guidelines for the optional 30-hour qualifying Property Management Course and see how many brokers or managers themselves feel competent to perform property management for clients. See Appendix C. 2. How can a broker ensure that a sponsored sales agent does not perform property management activity? Make sure that property management is excluded from the written authorization regarding scope of the sales agent s authorized activities. If the written authorization excludes property management, and the broker s actions do not otherwise condone property management activity (for example, knows about it but does not do anything or accepts fees from that activity), then the broker would not be held in violation by TREC if the sales agent performs property management activities. 3 & 4. If you refer a client to another broker for property management services, how do you make sure the broker is competent? Do you have contingent liability if you refer to a broker who is not competent in property management services? Draw on experience or opinions of students. Goal is how best to reduce risk of being held liable in a civil action. Instructor

50 Property Management Q&A 1. Do all property managers have to be licensed? It depends on what the property manager is doing for the property owner. If the duties include showing or leasing the property for the owner for which the manager gets paid, a license is required. A license is also required for any person who controls the acceptance or deposit of rent from a resident of a single-family residential real property unit [TRELA (1)(A)(x) and TREC Rule 535.4(g)]. 2. May a sales agent be the owner of a property management company? Yes. A sales agent may own the firm but the business must be conducted through the sales agent s sponsoring broker. 3. I have a property management company and engage in leasing activity. May I have some of my unlicensed employees solicit business for me? No. A rental agent who solicits a prospect by phone must be licensed. 4. May an unlicensed assistant show a property to a broker s client if all the assistant does is open the door and walk silently through the house with the clients? No. Rule 535.4(c) states that a person must be licensed as a broker or sales agent to show a broker s listings. A license holder s unlicensed assistant cannot perform any activities that require a license, and therefore, cannot show a property. The rules do not define what show a property means, so TREC must interpret what that means. Generally, in rule interpretation, one should look at the plain language meaning of the word and then put it into context. Merriam Webster Dictionary defines to show as to cause or permit to be seen. Taking the plain language meaning then, unlocking a house is causing or permitting the home to be seen. So, if an unlicensed assistant opens the house for a buyer, that constitutes showing a house. Further, reading the rule in the context of the law s purpose of consumer protection, to allow an unlicensed person to open and enter a house for sale would effectively bypass the legislative requirement of requiring fingerprint-based criminal history background checks for all license holders before granting or renewing a real estate license. This requirement is in place to ensure that a person with an inappropriate criminal background will not receive a license that would allow him or her to open and enter homes for sale. This is a change from a previous interpretation that was contained in an old article regarding unlicensed assistants. After the criminal background check requirement became law, that interpretation became outdated and was no longer correct. So, an unlicensed assistant cannot show the property for a license holder; this applies to both homes for sale and for lease. 21 Chapter 5

51 Instructor s Notes Property Management Q&A 4. Revisions to and were proposed at TREC s August meeting. These revisions clarify when and if unlicensed assistants may show properties and consumers may have unescorted entry into vacant properties. Unlicensed assistants will no longer be allowed to host an open house. Keep abreast of adoption and effective date of this proposal to share with students. Instructor

52 Chapter 6 Delegated Licensed Supervisor TREC Rules (e) A broker may delegate to another license holder the responsibility to assist in administering compliance with the Act and Rules, but the broker may not relinquish overall responsibility for the supervision of license holders sponsored by the broker. Any such delegation must be in writing. A broker shall provide the name of each delegated supervisor to the commission on a form or through the online process approved by the Commission written 30 days of any such delegation that has lasted or is anticipated to last more than six months. Relationship Management Tool The TREC website includes a relationship management tool (RMT), which can be used to manage broker/salesperson relationships. The RMT is located on TREC s My License Online Services, which can be accessed from TREC s website. License holders need to log on to their account and access the RMT by clicking the drop-down menu under Update License Information and select Manage My Sponsorship for salespeople, and Manage My Salesperson Sponsorship for brokers. Relationship Management Tool (RMT) Highlights * The RMT can be used for all sponsorship requests, termination requests, and designation of supervisory or inactive status. Beginning January 1, 2016, this includes all new agents after they are issued their inactive sales agent license. * License holders are required to have a current address on file with the agency to use it. * Both sales and broker license holders can initiate, accept and decline sponsorship requests. * Invitations are not sent to recipient until the fee is paid by the initiator. * As soon as the requested party accepts the invitation, sponsorship is effective immediately. * License holders will receive a copy of their new license within 24 hours. * Status of sponsorship will be reflected in the license holder look up within 24 hours. * Fees are not refundable, even when the invitation is not accepted. See Appendix D for the complete RMT user guide. Teams and Supervision Break into small groups and discuss the following questions. The questions presume all the license holders are sponsored by a single broker. Each member of the team needs to be supervised to the same extent as any other license holder, for example, training, competency, record keeping, and document retention. 1. Is a leader of a team a supervisor? 2. Should you require by policy that your leaders of teams be delegated supervisors, which by law will require them to take the Broker Responsibility course? 3. If a team has a marketing services agreement with a vendor, how does that impact the vendor? 4. How does a broker s advertising policy differ for teams and groups? 5. Are you certain your teams do not allow non-licensed persons to perform brokerage activities? How do you oversee this? 6. How do you remind teams to exercise caution not to violate the independent contractor status? 23 Chapter 6

53 Instructor s Notes Who else in your office should take this class? Delegation should be made in writing. TREC must be notified of the designation by using the RMT. Duties delegated should be specifically named and might include supervision of other agents, trust account management, contract review, client relations, education and training, etc. Teams and Supervision Questions 1. Is a leader of a team a supervisor? Most likely 2. Should you require by policy that your leaders of teams be delegated supervisors, which by law will require them to take the Broker Responsibility course? Yes, they could be answering questions or giving brokerage advice to other license holders. 3. If a team has a marketing services agreement with a vendor, how does that impact the vendor? Let brokers discuss their experiences. It would be a best practice to create a policy for teams and their relationships with vendors. 4. How does a broker s advertising policy differ for teams and groups? TREC rules require the broker to review all advertising. This would include teams and groups. The broker is responsible to TREC and the public for any misleading advertising. 5. Are you certain your teams do not allow non-licensed persons to perform brokerage activities? How do you oversee this? You have a policy about what a non-licensed person can and cannot do, and you periodically verify compliance with the policy. 6. How do you remind teams to exercise caution not to violate the independent contractor status? Periodic education and reminders for all team members. Instructor

54 Chapter 7 Advertising/Assumed Names 25 Chapter 7 TREC Rules (g) A broker is responsible to ensure that a sponsored salesperson s advertising complies with of this title. TREC Rules (a) (b) For the purposes of this section, an advertisement is a written or oral statement or communication by or on behalf of a license holder which induces or attempts to induce a member of the public to use the services of the license holder or service provider. The term advertisement includes, but is not limited to, all publications, radio or television broadcasts, all electronic media including , text messages, social networking websites, and the Internet, business stationery, business cards, signs and billboards. The provisions of this section apply to all advertisements by or on behalf of a license holder unless the context of a particular provision indicates that it is intended to apply to a specific form of advertisement. The following information is not considered an advertisement or advertising: (1) a communication from a license holder to a member of the public after the member of the public agreed for the license holder to provide services, provided the first communication from the license holder contains the information required by this section; or (c) (d) (e) (2) real estate information, including listings, available to the public on a license holder s website, extranet or similar site that is behind a firewall or similar filtering software which requires a password or registration to access that information. An advertisement must clearly and conspicuously contain the name of the broker, either a business entity or an individual. For purposes of this section, the broker, or a salesperson sponsored by the broker, may use the broker s assumed name instead of the name in which the broker is licensed, if the assumed name is registered with the commission under subsection (e) of this section. An advertisement may not contain an assumed name unless a broker has registered that assumed name with the commission. If the broker s name or its assumed name includes a salesperson s name, the advertisement must include another assumed name of the broker that does not include a salesperson s name, or the designated agent s name. For purposes of this section and (b)(23) of the Act, deceptive or misleading advertising includes, but is not limited to, the following: (1) advertising that is inaccurate in any material fact or in any way misrepresents any property, terms, values, services, or policies; (2) advertising a property that is subject to an exclusive listing agreement without the permission of the listing broker and without disclosing the name of the listing broker unless the listing broker has expressly agreed to waive disclosure; (3) failing to remove an advertisement about a listed property within a reasonable time after closing or termination of a listing agreement, unless the status is included in the advertisement; (4) an advertisement by a salesperson which identifies the salesperson as a broker; or (5) advertising a property in a manner that creates a reasonable likelihood of confusion regarding the permitted use of the property. A broker, individually or as the designated officer, manager or partner of a business entity licensed

55 Instructor s Notes In this chapter, instructors might consider obtaining copies of a real estate advertising magazine, instruct the class to use their computers, tablets or smart phones to go to TREC s website. From TREC s home page, show them how to determine if the person advertising is licensed and whether the broker or brokerage name or appropriate dba is on the ad. Remind students that it is important to know how to conduct these searches in order to make sure the cooperative agent in a transaction has a current active license. Instructor

56 (f) (g) (h) (i) (j) (k) (l) as a broker shall notify the commission in writing within 30 days after the broker, or a salesperson sponsored by the broker, starts or stops using an assumed name in business other than the name in which the person is licensed. An advertisement placed by a license holder must include a designation such as agent, broker or a trade association name that serves clearly to identify the advertiser as a real estate agent. A broker or salesperson may not place an advertisement that in any way: (1) implies that a salesperson is the person responsible for the operation of a real estate brokerage business; or (2) causes a member of the public to believe that a person not authorized to conduct real estate brokerage is personally engaged in real estate brokerage. Except as provided by subsections (c) and (g) of this section, a business entity licensed as a real estate broker may do business in the name in which it was chartered or registered by the Office of the Secretary of State. A license holder may not utilize a copyrighted trade name unless the license holder has legal authority to use the name. A real estate license holder placing an advertisement on the Internet, electronic bulletin board or the like must include on each page on which the license holder s advertisement appears any information required by this section and (b) (23) of the Act. For purposes of this subsection, page means each HTML document of a website, which may include several screens of information that are viewed by scrolling down to the end of the document. A real estate license holder placing an advertisement by using an electronic communication, including but not limited to and discussion groups, text messages, and social networking websites must include in the communication and in any attachment which is an advertisement, the information required by this section and (b)(23) of the Act. For purposes of advertising on social networking websites that limit the number of characters in a communication and the required information would consume more than 10% of the available character limit, a license holder may include a direct hyperlink containing the words TREC DISCLO- SURE which links to the information required by this section and (b)(23) of the Act. An advertisement placed where it is likely to attract the attention of passing motorists or pedestrians must contain language that clearly and conspicuously identifies the person publishing the 26 Chapter 7 advertisement as a real estate broker or agent. This subsection does not apply to signs placed on or providing directions to real property listed for sale, rental or lease with the broker who has placed the sign, provided the signs otherwise comply with this section and the Act. (m) An advertisement containing an offer to rebate a portion of a license holder s commission must disclose that payment of the rebate is subject to the consent of the party the license holder represents in the transaction. If payment of the rebate is contingent upon a party s use of a selected service provider, the advertisement also must contain a disclosure that payment of the rebate is subject to restrictions. (n) If an advertisement offers, recommends or promotes the use of services of a real estate service provider other than the license holder and the license holder expects to receive compensation if a party uses those services, the advertisement must contain a disclosure that the license holder may receive compensation from the service provider. (o) A license holder may not advertise information regarding service providers that ranks such providers unless the ranking is based on disclosed objective criteria. (p) A license holder may not advertise that such license holder offers, sponsors, or conducts commission approved courses in conjunction with an approved school or other approved organization unless the license holder is approved by the commission to offer such courses. Safe Harbor Policy TREC has adopted a safe harbor policy for staff and enforcement to use in directing license holders as to what might be considered clear and conspicuous in advertising. On a sign or other advertising media, the broker s name or assumed name must be at least 50 percent of the size of the largest item of contact information. TOP 7 ADVERTISING VIOLATIONS 1. Failure to register or notify TREC of an assumed business or alternate name, such as a nickname. [TREC Rules (c) & (e)]. 2. Failure to include a broker s name on an advertisement, or not including it in a clear and conspicuous manner [TREC Rule (c)]. 3. Failure to include a designation such as agent, broker, or a trade association name that clearly identifies the advertiser as a real estate agent [TREC Rules (f)].

57 Instructor s Notes Go through Advertising Power Point provided by TREC. Instructor

58 (Advertising Violations cont.) 4. Causing a member of the public to believe that a sales agent is in charge of the brokerage business or that an unlicensed person is personally engaged in real estate brokerage. For example, a sales agent referring to himself or herself as the owner, CEO, President, or Partner of a real estate brokerage; or not distinguishing clearly in pictures of brokerage staff on a website who is licensed and who is not [TREC Rules (g) (1) & (2)]. 5. Using inaccurate descriptions on a listing service. For example, being inaccurate or misleading in describing the features of the property, such as huge back yard when the adjacent empty lot is not part of the property; huge trees when the trees are on the adjacent property or fully remodeled when not all was remodeled/replaced, granite countertops when it is not really granite, etc. [TREC Rule (d)(1)]. 6. Failure to timely remove an advertisement about a listed property after the listing agreement is terminated [TREC Rules (d)(3)]. 7. Advertising a property subject to an exclusive listing without permission from the listing broker and without disclosing listing broker. (Or not including the items required by that same broker when permission is given) [TREC Rule (d)(2)]. 8. Bonus Tip: Yes, Craigslist is advertising if you placed the ad! 27 Chapter 7

59 Instructor s Notes Instructor

60 Chapter 8 Record Keeping TREC Rules (h) Except for records destroyed by an Act of God such as a natural disaster or fire not intentionally caused by the broker, the broker must, at a minimum, maintain the following records in a format that is readily available to the Commission for at least four years from the date of closing, termination of the contract, or end of a real estate transaction: (1) disclosures; (2) commission agreements such as listing agreements, buyer representation agreements, or other written agreements relied upon to claim compensation; (3) work files; (4) contracts and related addenda; (5) receipts and disbursements of compensation for services subject to the Act; (6) property management contracts; (7) appraisals, broker price opinions, and comparative market analyses; and (8) sponsorship agreements between the broker and sponsored salespersons. Maintaining Records The importance of properly maintaining records in current and past transactions is well established. The above rule lists only those records that TREC requires of brokers. There are other laws and purposes that suggest or require a broker to develop a more comprehensive records retention and destruction policy for longer than four years. For example, brokers should consider laws governing taxes, corporate structures and operations, privacy policies, and financial accountability (to name a few). Additionally, consideration should be given to other benefits of such a policy, such as the development of historical databases, risk reduction and responses to possible litigation. All these reasons encourage brokers to maintain organized records and adhere to well-drafted records retention and destruction policies. Personal Information Chapter 521 of the Texas Business and Commerce Code requires a business to have procedures to protect against the unlawful use or disclosure of sensitive personal information received in the regular course of business. It requires the business to destroy such records that are not required or needed for business operations. Sensitive personal information includes an individual s first name or first initial and last name in combination with any one or more of the following: * Social Security number; * driver s license number or government-issued identification number; * account number or credit or debit card number in combination with any required security code, access code, or password that would permit access to an individual s financial account; or * information that identifies an individual and relates to the physical or mental health or condition of the individual, the provision of health care to the individual, or payment for the provision of health care to the individual. 29 Chapter 8

61 Instructor s Notes Instructor

62 DISCUSSION The TREC rule states that brokers should maintain their files for a period of at least four years, but other professionals and agencies have recommended different periods for certain types of records. 1. What is a reasonable record retention period for the following? * Closing statements * Contracts * Leases * Lease Applications * Inspections * Financial Records for the license holder s operations * Financial Records for the license holder s clients * Seller s Disclosure Notices * Notes within the transaction file * and other correspondence * Other Items 2. What type of personal information does a brokerage operation typically receive? Property management operation? 3. After answering Question 2, how should a broker maintain, if at all, the personal information and what procedures should be in place to keep that information secure? 4. How does a broker safeguard personal information received by one of the broker s agents (via , text or otherwise) and the agent maintains a copy of that information in the agent s personal files? 5. What is best way to destroy files? Paper? Electronic? (consider all back-ups and copies). 6. How long should a license holder maintain archived s on the server? 7. When an agent takes a listing, what type of inquiry should the agent make about whether the brokerage firm or any other agents in the firm have files or information about the property? Does the answer change if the agent represents the buyer? 8. What kind of record should the broker or license hold maintain regarding files that have been destroyed? 30 Chapter 8

63 Instructor s Notes Discussion Questions 1. What is a reasonable record retention period for the following? * Closing statements * Contracts * Leases * Lease Applications * Inspections * Financial Records for the license holder s operations * Financial Records for the license holder s clients * Seller s Disclosure Notices * Notes within the transaction file * and other correspondence * Other Items The answers to these questions may vary from one person s experience to another s experience. The purpose is to generate conversation and discuss the advantages and disadvantages based on the experience of those in attendance. 2. What type of personal information does a brokerage operation typically receive? Property management operation? Typical responses may include social security numbers, account numbers, maiden names, passwords, key codes, loan application forms, lease application forms, and other identifying or sensitive information. 3. After answering question 2, how should a broker maintain, if at all, the personal information and what procedures should be in place to keep that information secure? Brokers and agents who receive personal or sensitive information may have a duty to safeguard the information and possibly dispose of the information. Safeguards should be discussed with respect to the different formats. Correct answers will discuss reasonable safeguards. Develop a policy on how your office will deal with personal information as part of your overall records retention and destruction policy. 4. How does a broker safeguard personal information that was received by the broker s agent (via , text or otherwise) if the agent maintains a copy of that information in the agent s personal files? The purpose of this question is to pose the concern about training sales agents with regard to the files that they may maintain on their own computers or in their own properties. While these files are not under the direct control of the broker, the broker may have liability if the sales agent fails to reasonably safeguard the personal or sensitive information. The broker may need to show that education was provided to the sales agent and reasonable policies were in place. 5. What is best way to destroy files? Paper? Electronic? (consider all backups and copies). Discuss the best document destruction alternatives that may be available. Also, discuss places that the broker might overlook with respect to where documents could be located. 6. How long should a license holder maintain archived s on the server? With increased burdens related to discovery requests in lawsuits, many entities have shortened retention on the company s primary server. The purpose of this discussion is to discuss the benefits of keeping archived s on a company s server as opposed to deleting the . The discussion will also lead to a discussion about how to archive a specific that the agent or broker may wish to hold beyond the period by which the server automatically deletes s. 7. When an agent takes a listing, what type of inquiry should the agent make about whether the brokerage or any of its agents have files or information about the property? Does the answer change if the agent represents the buyer? The purpose of this question is to pose the possibility that one agent may be unaware that another agent in the same firm has material information related to the property s condition or situation. In some lawsuits, it was discovered that other agents in the same firm had material information that was not disclosed to the plaintiff. 8. What kind of record should the broker or license holder maintain regarding files that have been destroyed? Most document destruction policies suggest maintaining a log of which files were destroyed. Discuss examples of such logs. Instructor

64 Chapter 9 Written Policies TREC Rules (i) A broker who sponsors salespersons or is a designated broker for a business entity shall maintain, on a current basis, written policies and procedures to ensure that: (1) Each sponsored salesperson is advised of the scope of the salesperson s authorized activities subject to the Act and is competent to conduct such activities. (2) Each sponsored salesperson maintains their license in active status at all times while they are engaging in activities subject to the Act. (3) Any and all compensation paid to a sponsored salesperson for acts or services subject to the Act is paid by, through, or with the written consent of the sponsoring broker. (4) Each sponsored salesperson is provided on a timely basis, before the effective date of the change, notice of any change to the Act, Rules, or Commission promulgated contract forms. (5) In addition to completing statutory minimum continuing education requirements, each sponsored salesperson receives such additional educational instruction the broker may deem necessary to obtain and maintain, on a current basis, competency in the scope of the sponsored salesperson s practice subject to the Act. (6) Each sponsored salesperson complies with the Commission s advertising rules. (7) All trust accounts, including but not limited to property management trust accounts, and other funds received from consumers are maintained by the broker with appropriate controls in compliance with (8) Records are properly maintained pursuant to Subsection (h). Additional Policy Topics The following topics are additional areas for which a broker might need a written policy. Receiving Compensation Under TREC Rules , a license holder may not receive compensation from someone other than the person whom the license holder represents unless the 31 Chapter 9 license holder obtains the client s consent. This does not apply to referral fees between license holders. Compensation from a Service Provider If a license holder intends to accept compensation from a service provider for referring a non-client to the service provider, the license holder must also obtain the consent of that person (non-client). As used in this rule, the term service provider is not limited to Settlement Service Providers as defined by RESPA. It includes any person who provides a service to a consumer. A license holder may not enter into a contract with a service provider to provide services on behalf of the service provider in a transaction if the contract is exclusive (prohibits the license holder from offering similar services on behalf of other service providers). For example, if a broker agrees to perform compensable services for a home warranty company (that does not otherwise violate RESPA), the agreement should not be exclusive so as to prohibit the broker from offering those same services to other home warranty companies. A license holder may not accept compensation from a service provider if the license holder provides a service on behalf of the service provider and the compensation is contingent on a party in the transaction purchasing a contract or service from the service provider. Compensation from a Residential Service Company A license holder must use Form RSC-1, Disclosure of Relationship with Residential Service Company if

65 Instructor s Notes Instructor

66 the license holder (or the brokerage firm) will receive compensation from the residential service company. The compensation to the broker or sales agent may be in any form, such as a one-time payment or a periodic payment, under a contract between the broker and the residential service company. Policy Activity Break into small groups. Each group should create a model policy which would cause a broker or brokerage firm to be compliant with item 4, Each sponsored salesperson is provided on a timely basis, before the effective date of the change, notice of any change to the Act, Rule or Commission promulgated contract forms. License Holders Buying or Selling Their Own Property Tx. Occ. Code (a-1)(1) and TREC Rules A broker should maintain a policy related to transactions in which a license holder is involved in buying or selling his or her own property. Items to consider when developing such a policy include * a determination from the broker s E&O provider on coverage in such transactions, * how much property is advertised, * disclosure of the license status in or contemporaneous with the contract, * whether the license holder must be represented by another license holder in the firm when listing property owned by the license holder. Sharing Fees with Attorneys The Texas Real Estate License Act prohibits brokers from sharing fees received for services as a real estate agent with anyone not licensed as a real estate broker or salesperson in Texas or any other state. With such seemingly clear statutory prohibitions, why is this still an issue with many brokers? Text and Negotiations Under TREC s rules ( 535.2), brokers and sales agents need to maintain business records including transaction files. These records must be kept in a retrievable format, whether paper or electronic. Communications between clients or customers may be considered to be part of negotiations and may be important records in a transaction. Therefore, brokers and sales agents should develop protocols for how these communications are retained as part of the business record. Additionally, brokers and sales agents need to exercise care to avoid any statements in these communications that may be later construed as misrepresentations of any type, including but not limited to misrepresentations about the intentions of the client(s) with respect to making or accepting offers. The agent s statements in an need to avoid giving the impression that a deal is done or that a party accepts an offer or counteroffer unless that is clearly the intention of the client and is supported with documentation such as the proper signatures or initials on the written contracts. With few exceptions, agents do not have the authority to bind their clients, but they communicate for their clients regarding negotiations. That difference needs to be clearly understood by all those involved in the negotiations. Showing Agent App Policy Brokers should consider the ramifications of allowing their sponsored license holder to take advantage of the use of showing agent apps when the showing agent is a license holder under another broker. Among the items brokers should consider are the fiduciary relationships and compensation. A Broker s Tale Confusion in Verona! Broker Romeo has a listing in Verona. Broker Tybalt s agent (Benvolio) has a buyer for that listing, and the buyer has signed a buyer representation agreement with Broker Tybalt. Saturday afternoon Broker Tybalt is out of town, and Benvolio is at the lake on a boat fishing when the buyer wants to see Broker Romeo s listing. Benvolio quickly goes to the showing app and finds an agent (Juliet) with Broker Mercutio who will show this house for Benvolio. Juliet has agreed to show the house for Benvolio for $150. DISCUSSION 1. What happens if the buyer likes Juliet more than Benvolio? 2. What happens if Juliet tells the buyer something that is not quite accurate? 3. What happens if there is litigation later on? Whose E&O Insurance will cover this? 4. Can Benvolio just write Juliet a check? 5. Does Juliet need to have written permission from her broker to receive this fee? 6. Can you think of anything that can go wrong? 32 Chapter 9

67 Instructor s Notes Policy Activity Allow minutes for groups to develop policies, and then have each group report on what they decided. Encourage class to evaluate policies as they are discussed. Elements in the policies might include broker * subscribes to and reads the TREC Advisor, * provides the TREC Advisor to all license holders, * includes a TREC update on a sales meeting agenda * provides classes on contract form changes, * reviews commonly asked questions on forms and rules, or * ensures contract software provider makes timely updates to forms. Discussion Questions 1. What happens if the buyer likes Juliet more than Benvolio? If the buyer wants to start working with Juliet going forward, will Broker Tybalt release the buyer from the buyer s representation agreement? Will Juliet be held to be interfering with an existing agency relationship? Is the buyer then going to be responsible for an additional commission when purchasing a property? What is fair to the buyers? This situation could result is civil litigation. 2. What happens if Juliet tells the buyer something that is not quite accurate? Answering questions or giving information about the property could expose the agent and her broker to liability if that information is not accurate, even if the buyer is not the broker s client. 3. What happens if there is litigation later on? Whose E&O insurance will cover this? Ultimately, the specific fact situation will determine who is liable, but all parties might be included in a claim, and the brokers would have to expend time and expense to settle the matter. Depending on the facts, it may be difficult to assess blame to just one party. Brokers should weigh the risk/reward of allowing their agents to use showing apps, especially if the apps allow transactions outside of their own brokerage. 4. Can Benvolio just write Juliet a check? Showing a property is a brokerage activity. Benvolio cannot pay valuable consideration for that activity to Juliet (or anyone else) except with the written permission of his broker. 5. Does Juliet have written permission from her broker to receive this fee? Showing a property is a brokerage activity. Juliet cannot receive valuable consideration for that activity from Benvolio (or anyone else) except with the written permission of her broker. 6. What else can you think of that could go wrong? Discussions should touch on the following: * Whom does the showing agent represent, and what disclosure obligations about that representation does the showing agent have? Agents must make it clear to a party in a transaction whom they represent. * Is the showing agent a sub-agent for the buyer or the seller? What do the listing and buyer s representative agreements provide? If sub-agent for the seller (this has generally been the default position in Texas), does the listing agreement allow for access by sub-agents? * If the showing agent is a sub-agent for the buyer (this is set out in the buyer s representative agreement) what happens if the listing broker is also the broker for the temporary showing agent? Is there a conflict of interest issue? Is there an intermediary situation? If so, have the buyer and seller consented to it in accordance with TREC laws and rules? * What if the agent just agrees to open the door and escort and not answer questions of the buyer? Was the buyer informed that this would be how the property would be shown to him? Should this be addressed in a buyer s representative agreement if the brokerage plans to use showing apps? Are either the hiring agent or the showing agent in violation of not performing the minimum duty of answering a client s questions? * What happens if Juliet knows of a material defect with the property that was shown? She is obligated by law to disclose it to the buyer. Instructor

68 Unlicensed Assistants Real estate license holders often use unlicensed personnel for assistance in conducting their real estate brokerage activities. A prudent broker will have a written policy regarding the use of unlicensed assistants. Care must be taken to ensure that the unlicensed person does not conduct any of the activities for which real estate licensure is required. TRELA (a) and establish that it is a crime for an unlicensed person to engage in activity for which a real estate license is required. In addition, TREC may take disciplinary action against a license holder who pays or associates with an unlicensed person who engages in activities that require a real estate license. Authority for this disciplinary action is set out in TRELA (b) (11) and (26). For these reasons, it is important to distinguish between those activities that require a real estate license and those that do not. TRELA (1)(a) lists activities requiring licensure. The real estate brokerage activities must be for another person or entity. The activities must also be for a fee or something of value, or with the intention of collecting a fee or something of value. Note TREC Rule 535.4&5. Background Checks A sponsoring broker may find it prudent to require a background check policy for all unlicensed employees with access to the office, both employees of the sponsoring broker and any employees of the broker s sales agents. A broker may wish to consult with an attorney on the implementation of such a requirement, including but not limited to the creation of the proper authorization to obtain background checks, the type of service that will perform any background checks, the interpretation of any background reports, and the criteria to use when basing decisions on information in the background reports. Sudden Cessation or Termination of Sponsoring Broker or Designated Broker of a Licensed Business Entity What happens when a sponsoring broker passes away or becomes incapacitated due to sudden illness? It is prudent for the sponsoring broker or brokerage firm to have a written policy that addresses the sudden cessation or break of sponsorship due to illness or death. Under the TREC Rules, a business entity broker license is automatically placed on inactive status upon the death of the designated broker. The licenses of salespersons sponsored by the business entity are also placed on inactive status. A written policy addressing this type of emergency situation may help alleviate any client concerns and meet regulatory requirements during the 33 Chapter 9 transition so that the firm can continue to conduct business without a break in service. Safety Each year one hears of reports of a real estate agent being assaulted, threatened, or harmed while showing property or working with prospects. Different sources place the number of personal attacks involving both residential and commercial agents near ten each year, some of which result in death or serious injury. Personal safety is not unique to the real estate industry, but the real estate agent is, many times, placed in situations and in locations that require heightened scrutiny for safety. Several groups have developed suggestions, tips, and educational materials to assist brokers and agents to reduce the risk of being a victim. One can find information from the National Association of Realtors, several state associations of Realtors, the Real Estate Safety Council, other real estate organizations, and law enforcement organizations. Brokers and real estate agents may wish to gather information to review safety precautions and procedures regarding safety * in the broker s offices, * in the agent s vehicles, * while showing properties to prospects, * while hosting open houses, * when meeting prospective clients for the first time, and * at the agent s home. Disaster Plan A prudent broker will have a written policy in place in the event of a major disaster. Are the broker s records safeguarded in case of a fire, flood or other natural disaster? Privacy of Personal Information Confidentiality of information while performing as a fiduciary does not have a termination date unless this duty is released in writing, such as in a conventional listing or buyer representation agreement. Federal Regulations and Other State Laws A broker may find it helpful to create and maintain a written policy for compliance with all federal regulations including but not limited to RESPA, Truth in Lending, Do-Not-Call, Do-Not-Fax, Rules being established by the Consumer Financial Protection Bureau, as well as state laws, such as the Texas Department of Insurance Procedural Rule 53.

69 Instructor s Notes Instructor

70 TREC Sanctions for Violation of Broker Responsibility Below are a sample of sanctions against brokers for failing to comply with broker responsibility requirements. Sanctions are shown only for the sponsoring broker. The sales agents involved received separate sanctions. Review these case summaries and discuss how each could have been avoided with proper written policies, training or monitoring procedures. Broker A - Agreed reprimand and administrative penalty of $4,000. * Broker failed to properly supervise sales agent. Sponsored sales agent approached elderly convalescing property owner about possibly listing property, possible entering a development partnership, 34 Chapter 9 Cold Call Realty Gus: Good morning everyone. This afternoon from 1 to 4, we re going to do some calling into neighborhoods we specialize in and see if we can get some more listings! We ll have prizes for appointments made! AND we ll have happy hour in the training room when we re done! I have lists of numbers I ll be giving to each of you (pretend to hand out papers). Woodrow: (raises his hand) Have these phone numbers been checked through the do-notcall list? Gus: Oh, they don t care about our little real estate company. Just call them and be nice. Woodrow: Well, I heard the fines are pretty big, like $16,000 per call. Gus: Do you know anyone who s paid that? Woodrow: No, but it s also breaking the law. Gus, do we have a policy about cold calling and how to check the numbers on the do-not-call list? Gus: I ve been meaning to read the policy manual I bought at the convention. It might be in there. Woodrow: Gus, I can t do this unless I know the numbers have been checked. I don t have the money to pay the fine, and I don t want to do something wrong. It makes people mad when you call, and they re on the list. Gus: Woodrow, you do whatever you like. Just don t come crying to me when you don t win any prizes! or purchasing the property outright as a principal. Sales agent failed to provide a broker price opinion or comparative market analysis. Sales agent purchased property as principal. Broker was listed as broker on the sales contract. Contract indicated all commission agreements were in a separate document but there was no separate document. Contract indicated intermediary status but that was not the case and the parties had improperly signed an Intermediary Relationship Notice. A commission was charged by the broker even though there was no listing agreement. Broker had appointed a supervisor for sales agent who was actually sponsored by broker s designated broker. Broker B (Business entity broker) - Agreed reprimand and administrative penalty of $2,500; Designated broker - Agreed reprimand of designated broker and administrative penalty of $1,000. * Business entity broker and designated broker did not have written policies and procedures to ensure that rebates of commissions to buyers were not promised and then paid outside closing. The lender filed a complaint regarding rebates that were paid to a buyer outside of the closings. Broker C - Agreed reprimand and administrative penalty of $600. * Broker C failed to notify the TREC in writing within 30 days after a sponsored sales agent started using an assumed name in business other than the name in which the sales agent was licensed and failed to properly supervise that sponsored sales agent. Broker D - Agreed reprimand and administrative penalty of $700. * Although Broker D had written policies and procedures, Broker D failed to ensure that a sponsored sales agent completed her continuing education so that her license would remain active. Sales agent worked with a buyer and was advertised on Broker D s website at a time when sales agent s license was inactive. Broker E - Agreed Reprimand and $500 administrative penalty. * Broker E failed to ensure that a sponsored sales agent s advertising complies with TREC rules. Broker F - Agreed administrative penalty of $750. * Broker F s sponsored sales agent violated TRELA by acting as intermediary without first obtaining written consent from a party in the transaction. Broker F failed to maintain, on a current basis, written policies and procedures to ensure that each sponsored real estate sales agent is competent to conduct authorized activities and comply with all provisions of TRELA and TREC rules.

71 Instructor s Notes Use Cold Call Realty script and sanctions to discuss need for having policies and procedures and following them. If time allows, break into groups to write bullet points for sample policies. Instructor

72 Chapter 10 Additional Broker Duties (f) (j) (k) 35 Chapter 10 TREC Rules Listings and other agreements for real estate brokerage services must be solicited and accepted in a broker s name. A broker or supervisor delegated under Subsection (e) must respond to sponsored salespersons, clients, and license holders representing other parties in real estate transactions within three calendar days. A sponsoring broker or supervisor delegated under Subsection (e) shall deliver mail and other correspondence from the Commission to their sponsored salespersons within 10 calendar days after receipt. Informing and Responding to Clients Duty to Respond A supervising broker, perhaps more so than other license holders, has a duty to respond to parties in a transaction. A sponsoring broker must also promptly respond to a sponsored salesperson. Promptness will be judged on the nature of the request, the time of day and the type of transaction. A supervising broker should be reasonably available to supervised salespersons to provide needed advice and counsel. Being responsible for the supervised salesperson, the supervising broker should be available during all normal business hours of the brokerage to provide experienced, informed advice and counsel to assist the salespersons and the brokerage s clients. The supervising broker should monitor transactions handled by salespersons. Minimum Services Requirements TRELA ACTING AS AGENT; REGULA- TION OF CERTAIN TRANSACTIONS (a) (b) (c) A broker who represents a party in a real estate transaction or who lists real estate for sale under an exclusive agreement for a party is that party s agent. A broker described by Subsection (a): (1) may not instruct another broker to directly or indirectly violate Section (b)(22); (2) must inform the party if the broker receives material information related to a transaction to list, buy, sell, or lease the party s real estate, including the receipt of an offer by the broker; and (3) shall, at a minimum, answer the party s questions and present any offer to or from the party. For the purposes of this section: (1) a license holder who has the authority to bind a party to a lease or sale under a power of attorney or a property management agreement is also a party to the lease or sale; (2) an inquiry to a person described by Section (6) about contract terms or forms required by the person s employer does not violate Section (b)(22) if the person does not have the authority to bind the employer to the contract; and (3) the sole delivery of an offer to a party does not violate Section (b)(22) if: (A) the party s broker consents to the delivery; (B) a copy of the offer is sent to the party s broker, unless a governmental agency using a sealed bid process does not allow a copy to be sent; and (C) the person delivering the offer does not engage in another activity that directly or indirectly violates Section (b)(22).

73 Instructor s Notes Instructor

74 DISCUSSION 1. The term minimum services broker is confusing to me. How is it defined? Is there something between a minimum service broker and a full service broker? 2. I encountered a sales agent in a transaction a few months ago. This agent had no clue what he was doing and did not seem to want to work the transaction. I felt as though I should step in and just deal with his clients directly. It would have been more efficient. What is the best way to handle this situation and are there concerns under the Real Estate License Act? 3. A broker told me to contact his seller directly to submit an offer, I am not sure I can do that. How should I proceed? 4. A seller has his property listed for sale with another brokerage firm. I showed the property. The seller told me that he was not satisfied with the listing broker and that I should communicate with him directly if my client was interested. How should I proceed? TREC Case Study 7 Hold On to Your Wallet! A national company, licensed as an entity broker in Texas, maintained a national website and solicited Texas homeowners to join their program for a future referral to list property for sale. The website advertised You [Homeowners] pay 0 and other information that was not accurate. Homeowners got a debit card with up to $2,000 for signing up. The company s agreement failed to include a definite termination date and included a homeowner s obligation to pay the company if the homeowner opted to terminate the agreement. The company also engaged a marketing company that hired unlicensed subcontractors to go door-to-door to market the program to homeowners. Although a few cooperating Texas real estate brokers unilaterally terminated their cooperating real estate broker referral agreements with the company, the company did not remove these brokers from their website s list of cooperating real estate brokers viewed by consumers. 36 Chapter 10

75 Instructor s Notes Discussion Questions 1. The term minimum services broker is confusing to me. How is it defined? Is there something between a minimum service broker and a full service broker? The purpose of this question is to have the students engage in a conversation relating to the various level of services that a broker or agent may offer. How is the consumer to know the level of different services? Minimum services are set out in the statute at the beginning of the chapter. 2. I encountered a sales agent in a transaction a few months ago. This agent had no clue what he was doing and did not seem to want to work the transaction. I felt as though I should step in and just deal with his clients directly. It would have been more efficient. What is the best way to handle this situation, and are there concerns under TRELA? This question poses the common question of the less than efficient agent. The concern is balancing several issues such as the best interest of one s own client, fairness to the other party, prohibitions against dealing with another s client, and moving the transaction along in a manner that the agent believes is most efficient. A good place to start is to contact the agent s broker and describe the problems you are having. 3. A broker told me to contact his seller directly to submit an offer, I am not sure I can do that. How should I proceed? The listing broker needs to be made aware that the agent may only deliver the offer to the seller directly if a copy is also delivered to the broker. See (c)(3). The listing broker must be available to answer any questions the seller may have about the offer. 4. I showed a property listed with another brokerage firm. The seller told me that he was not satisfied with the listing broker and that I should communicate with him directly if my client was interested. How should I proceed? The agent should inform the seller that the agent must respect the agency relationship that the seller s broker maintains with the seller. The agent should suggest that the seller speak with the listing broker. The agent should also advise the listing broker of the discussion. TREC Case Study 7 TREC entered into an Agreed Order with the entity broker and its designated broker for acting negligently or incompetently while acting as a broker [ (b)(1)] and for failing to specify a definite termination date in a contract for brokerage services [ (b)(12)]. Both were also cited for failing to timely respond to TREC s request for information and documents [ (a)(4)]. The company agreed to suspend active marketing of the program in Texas until they could make it compliant with Texas law. The entity broker and the designated broker were each assessed an administrative penalty of $2,500. Instructor

76 Chapter 11 Business Entity Requirements TREC Rules 535.2(i) When the broker is a business entity, the designated broker is the person responsible for the broker responsibilities under this section. TRELA The Act defines business entity as any entity as defined by Business Organizations Code 1.002, Business Organizations Code (corporation, LLC, partnership, etc.). Selection of an Appropriate Entity Many license holders utilize business entities for their practices. The primary benefits of business entities commonly selected by license holders are liability protection of the individual license holder and passthrough tax status (no double taxation). The selection of the appropriate entity for a particular license holder should be made after careful consideration and consultation with legal and accounting advisors. If a license holder establishes a business entity, the entity must be licensed in order to be paid commissions. The legal entity must designate an individual broker who will be responsible for the actions of the licensed business entity. The designated broker must be * an officer of the corporation, * a manager of the limited liability company, or * a general partner of the partnership. If the designated broker owns less that 10 percent of the business entity, the business entity must obtain and maintain E&O insurance of at least $1 million. Assumed Name A business entity may have one legal name and do business under another assumed name. If a business entity elects to conduct business under an assumed name, the assumed name should be filed with the Secretary of State and the local county clerk. Rules require license holders using an assumed name to notify TREC in writing within 30 days of starting to use the assumed name. A license holder may use form TREC DBA-2 Notice of DBA or Assumed Name for a Broker s License to notify TREC. DISCUSSION 1. I have decided to incorporate my brokerage business, what should I do to avoid any licensing problems at TREC? Are the steps the same if I operate under an LLC or a partnership as opposed to a corporation? 2. What is a designated officer? 3. What happens if the broker who was the designated officer for a business entity, stops serving (for any reason)? What about the sales agents licenses who the business entity sponsors? 4. Is it true that E&O insurance is required for entities that hold a broker license? What are the E&O requirements for such entities? 37 Chapter 11

77 Instructor s Notes Discussion Questions 1. I have decided to incorporate my brokerage business, what should I do to avoid any licensing problems at TREC? Are the steps the same if I operate under an LLC or a partnership as opposed to a corporation? Students should recognize that all business entities need to apply for a business entity broker license with TREC if brokerage activity is conducted in the name of or through the entity. The license holder should review the application form for obtaining a business entity license and, if necessary, seek other information from TREC s website or TREC staff. To be eligible to obtain a license, one of the officers of the business entity will need to be a licensed broker. The business entity will need to designate the officer who holds a broker license as the designated officer. If more than one of the officers holds a broker license, only one is named as the designated officer. 2. What is a designated officer? A designated officer is an officer of the business entity, as shown on the records of the Secretary of State, who holds a broker license and is named to be responsible to TREC for all brokerage operations conducted by or through the business entity. The designated officer is responsible for all necessary filings, renewals, and communications with TREC including, but not limited to, responding to any complaints. The designated officer should be knowledgeable of the operations and business conducted by or through the business entity. 3. What happens if the broker, who was the designated officer for a business entity, stops serving (for any reason)? What about the sales agents licenses who the business entity sponsors? The business entity s license is inactive until another eligible broker is named as the designated officer. The sales agents licenses are also held inactive. The sales agents will need to individually reactivate once a new designated officer is named or get sponsored by another broker. One should not presume that previous licenses are automatically reactivated. 4. Is it true that E&O insurance is required for entities that hold a broker license? What are the E&O requirements for such entities? E&O Insurance is not mandatory except in one situation: if the designated officer owns less than 10 percent of the business entity, then the business entity will need to maintain $1 million in E&O insurance. For license renewal purposes, TREC will ask the designated officer for certain documentation to verify ownership of the business entity to determine if E&O insurance is required. This may require some time to obtain and provide the required insurance certificates or ownership documentation. Therefore, business entities should renew their licenses well in advance of the license expiration date. Instructor

78 (Discussion cont.) 5. Can a broker serve as the designated officer for more than one business entity? Is it prudent or not to serve in such a capacity for more than one business entities? What are some of the risks? 6. I hold a sales agent license and I have consulted with my broker about starting a side business in which I will manage properties for rent. My broker is willing to let me do this, but he does not want anything to do with the management business, what steps do I need to take? 7. I hold a sales agent license. My accountant suggested that I incorporate for tax purposes? Do any licensing requirements apply? 8. My corporation holds a business entity license. We have decided to change our name, but want to keep the old name as well. Can we simply file for an assumed name? Where should I file for an assumed name for my corporation? What type of notices should I give and to whom? 38 Chapter 11

79 Instructor s Notes 5. Can a broker serve as the designated officer for more than one business entity? Is it prudent or not to serve in such a capacity for more than one business entities? What are some of the risks? Yes, a broker may serve as a designated officer for more than one business entity. The question concerning prudence and risks associated with acting as a designated broker for multiple entities is a discussion question. The level of risk depends on the operations and the specific situations. 6. I hold a sales agent license and I have consulted with my broker about starting a side business in which I will manage properties for rent. My broker is willing to let me do this, but he does not want anything to do with the management business, what steps do I need to take? Because the person in this question is a sales agent, the sales agent will not be able to work for or operate a separate property management business. The answer would be different if the associate held a broker license. However, other questions of risks and proper separation would be open for discussion. 7. I hold a sales agent license. My accountant suggested that I incorporate for tax purposes? Do any licensing requirements apply? Yes, the sales agent will need to obtain a business entity license. Obtaining such a license will not be possible unless the sales agent is able to find a broker who is willing to serve as an officer of the entity and be the designated officer. The E&O insurance requirements will also apply. 8. My corporation holds a business entity license. We have decided to change our name, but want to keep the old name as well. Can we simply file for an assumed name? Where should I file for an assumed name for my corporation? What type of notices should I give and to whom? Yes, a corporation may file an assumed name. The corporation should file the assumed name with the Secretary of State as well as file in each county in which the entity conducts business. The entity should notify TREC of the filing of the assumed name by submitting the proper TREC form. Instructor

80 Chapter 12 Complaints A person may file a complaint with TREC against a real estate license holder if the person believes the license holder violated TRELA or TREC rules. If TREC has jurisdiction over the complaint, it will typically investigate the allegations by interviewing the parties and witnesses and gathering relevant information (See Appendix E for details on complaint process). What is your home worth? What is the value of your home? Be careful! Words do matter in this case. One area that could result in a complaint from both TREC and TALCB (Texas Appraiser Licensing and Certification Board) is how a broker or agent advertises performing a CMA or BPO on a property. Refer to the TREC article in Appendix F and discuss other alternatives to telling consumers the value of their property. Do s and Don ts If You Are Named in a Complaint * Do read the complaint. Determine what TREC is asking you to respond to and what information it needs. Gather all applicable records and requested documents, and try to recall as much as possible about the transaction related to the claim. * Do cooperate. A TREC complaint process can take anywhere from one month to two years. Promptly returning your thorough response, answering investigators questions, and being honest can keep the process on track and help those investigating your case understand your perspective. * Do notify TREC if you hire an attorney. If you hire an attorney, you need to let TREC know as soon as possible. TREC attorneys have a legal obligation to work with your attorney once you have hired one. * Do keep your contact information current. Your address on record with TREC is the address required for legal service. Always keep your and mailing address up to date with TREC. If TREC files a disciplinary action against you based on a complaint, a default order may be rendered against you even if you did not receive notification. * Don t panic. Just because you have a complaint filed against you does not mean that TREC has concluded that you are guilty of anything. TREC is just trying to gather information at the initial contact. * Don t assume you will lose your license. There are many complaints that are closed as no violation, which means that TREC examined the evidence and determined the license holder had not committed a violation. Some complaints fall under insufficient evidence, which means there is not enough evidence for TREC to determine a violation occurred. Other complaints can sometimes be resolved in an alternative dispute resolution process, and there are other levels of discipline available to TREC other than revocation of a license. * Don t procrastinate or fail to respond. This can result in additional administrative penalties and suspension of your license. * Don t make misrepresentations. It won t help your case. Excerpted and edited from Do s and Don ts If You Are Named in a TREC Complaint, Texas Realtor, May 2012, Texas Association of Realtors; Kerri Lewis, Texas Real Estate Commission, Used with permission. 39 Chapter 12

81 Instructor s Notes Be prepared to discuss Appendix E. Instructor

82

83 Appendix A Tips for posting the new TREC Information About Brokerage Services (IABS) and Consumer Protection Notice Ideal way to post IABS and Consumer Notice to comply with our rules: 1. Post a link to a completely filled out TREC IABS form, labeled Texas Real Estate Commission Information About Brokerage Services, on your business website homepage, in a readily noticeable place in at least 10 point font. 2. Post a link to the Consumer Protection Notice, labeled Texas Real Estate Commission Consumer Protection Notice on your business website homepage, in a readily noticeable place in at least 10 point font. Acceptable alternate ways to post your IABS and Consumer Notice: 1. Post an image of the completed IABS form, or the Consumer Protection Notice and label the image Texas Real Estate Commission Information About Brokerage Services or Texas Real Estate Commission Consumer Protection Notice. * You can save a PDF as a.jpg and post it as an image on Facebook, Twitter and Traditional Websites *On Facebook, make the image a Favorite image so the completed form stays at the top of your images 2. Post a link to the blank IABS form from the TREC website, labeled Texas Real Estate Commission Information about Brokerage Services on your business website homepage, in a readily noticeable place in at least 10 point font AND provide all applicable contact information required by the IABS form on the same web page as the link, labeled License Holder Contact Information, all in at least 10 point font. 3. If your business website s platform limits the length of text you can use in a link, you may abbreviate the links to, TREC Information and TREC Consumer Notice Remember: The TREC IABS form must also be provided to consumers at the time of your first substantive communication by personal delivery, mail or ! Appendix A 41

84 Information about the new TREC IABS and Consumer Protection Notice The new IABS and Consumer Protection Notice are statutorily required forms for consumer information to help ensure that consumers of Real Estate Services better understand how a broker or agent can represent them and where to find help if they need it. Information about Brokerage Services (IABS) Facts: The form should be filled out completely when it is linked to your website as well as when it is provided during the first substantive communication. The only change that can be made to the appearance of the mandatory form is that the contact information may be prefilled. Do not change text, font size, style or add your business logo. Business website means a website used to attract or conduct real estate brokerage activity, that includes a business Facebook page. For example: a website listed on a business card, yard sign or advertisements is a business website. If you have more than one business website then a link to the notice must be provided on the homepage of each business website. The link to the IABS must read, Texas Real Estate Commission Information About Brokerage Services and be in at least 10 point font in a readily noticeable place on your homepage. The IABS form linked to a broker s business homepage only needs to contain information about the broker, including designated broker if an entity. If it is on the sales agent s or associate s homepage then the form should be filled out with the agent s or associate s information as well. If some contact information blanks do not apply, simply fill in N/A. If you are a broker associate, your name goes on the Sales agent/associate line and the contact information for the brokerage you are associated with goes on the broker line. If you are providing the IABS through a link in an , the link and a specific reference to the IABS must be in the body of the and look like the rest of the text in the body of the (not smaller or a lighter color). Consumer Protection Notice Facts: The Consumer Protection Notice is required to be posted at your place of business AND on your website. This includes a business Facebook page. The Consumer Protection Notice cannot be altered in any way. Do not change the font or add your logo to the notice. The link to the Consumer Notice must read, Texas Real Estate Commission Consumer Protection Notice, and be in at least 10 point font in a readily noticeable place on your homepage. 42 Appendix A

85 Information About Brokerage Services Texas law requires all real estate license holders to give the following information about brokerage services to prospective buyers, tenants, sellers and landlords TYPES OF REAL ESTATE LICENSE HOLDERS:. A BROKER is responsible for all brokerage activities, including acts performed by sales agents sponsored by the broker. A SALES AGENT must be sponsored by a broker and works with clients on behalf of the broker. A BROKER S MINIMUM DUTIES REQUIRED BY LAW (A client is the person or party that the broker represents): Put the interests of the client above all others, including the broker s own interests; Inform the client of any material information about the property or transaction received by the broker; Answer the client s questions and present any offer to or counter-offer from the client; and Treat all parties to a real estate transaction honestly and fairly. A LICENSE HOLDER CAN REPRESENT A PARTY IN A REAL ESTATE TRANSACTION: AS AGENT FOR OWNER (SELLER/LANDLORD): The broker becomes the property owner's agent through an agreement with the owner, usually in a written listing to sell or property management agreement. An owner's agent must perform the broker s minimum duties above and must inform the owner of any material information about the property or transaction known by the agent, including information disclosed to the agent or subagent by the buyer or buyer s agent. AS AGENT FOR BUYER/TENANT: The broker becomes the buyer/tenant's agent by agreeing to represent the buyer, usually through a written representation agreement. A buyer's agent must perform the broker s minimum duties above and must inform the buyer of any material information about the property or transaction known by the agent, including information disclosed to the agent by the seller or seller s agent. AS AGENT FOR BOTH - INTERMEDIARY: To act as an intermediary between the parties the broker must first obtain the written agreement of each party to the transaction. The written agreement must state who will pay the broker and, in conspicuous bold or underlined print, set forth the broker's obligations as an intermediary. A broker who acts as an intermediary: Must treat all parties to the transaction impartially and fairly; May, with the parties' written consent, appoint a different license holder associated with the broker to each party (owner and buyer) to communicate with, provide opinions and advice to, and carry out the instructions of each party to the transaction. Must not, unless specifically authorized in writing to do so by the party, disclose: ᴑ that the owner will accept a price less than the written asking price; ᴑ ᴑ that the buyer/tenant will pay a price greater than the price submitted in a written offer; and any confidential information or any other information that a party specifically instructs the broker in writing not to disclose, unless required to do so by law. AS SUBAGENT: A license holder acts as a subagent when aiding a buyer in a transaction without an agreement to represent the buyer. A subagent can assist the buyer but does not represent the buyer and must place the interests of the owner first. TO AVOID DISPUTES, ALL AGREEMENTS BETWEEN YOU AND A BROKER SHOULD BE IN WRITING AND CLEARLY ESTABLISH: The broker s duties and responsibilities to you, and your obligations under the representation agreement. Who will pay the broker for services provided to you, when payment will be made and how the payment will be calculated. LICENSE HOLDER CONTACT INFORMATION: This notice is being provided for information purposes. It does not create an obligation for you to use the broker s services. Please acknowledge receipt of this notice below and retain a copy for your records. Licensed Broker /Broker Firm Name or Primary Assumed Business Name License No. Phone Designated Broker of Firm License No. Phone Licensed Supervisor of Sales Agent/ Associate License No. Phone Sales Agent/Associate s Name License No. Phone Buyer/Tenant/Seller/Landlord Initials Regulated by the Texas Real Estate Commission Date Information available at IABS 1-0 Appendix A 43

86 THE TEXAS REAL ESTATE COMMISSION (TREC) REGULATES REAL ESTATE BROKERS AND SALES AGENTS, REAL ESTATE INSPECTORS, HOME WARRANTY COMPANIES, EASEMENT AND RIGHT-OF-WAY AGENTS AND TIMESHARE INTEREST PROVIDERS YOU CAN FIND MORE INFORMATION AND CHECK THE STATUS OF A LICENSE HOLDER AT YOU CAN SEND A COMPLAINT AGAINST A LICENSE HOLDER TO TREC A COMPLAINT FORM IS AVAILABLE ON THE TREC WEBSITE TREC ADMINISTERS TWO RECOVERY FUNDS WHICH MAY BE USED TO SATISFY A CIVIL COURT JUDGMENT AGAINST A BROKER, SALES AGENT, REAL ESTATE INSPECTOR, OR EASEMENT OR RIGHT-OF-WAY AGENT, IF CERTAIN REQUIREMENTS ARE MET IF YOU HAVE QUESTIONS OR ISSUES ABOUT THE ACTIVITIES OF A LICENSE HOLDER, THE COMPLAINT PROCESS OR THE RECOVERY FUNDS, PLEASE VISIT THE WEBSITE OR CONTACT TREC AT TEXAS REAL ESTATE COMMISSION P.O. BOX AUSTIN, TEXAS (512) Appendix A

87 Sally Sales Agent s Sample Website Buy These Houses Rent These Houses About Me Call me, I can help you sell or buy a home: Texas Real Estate Commission Information About Brokerage Services Texas Real Estate Commission Consumer Protection Notice Font must be at least 10 point in size and in a readily noticeable place on the homepage License holder Contact Information: Licensed Broker: Better Brokerage Inc info@betterbrokerage.com TREC Lic. # Designated Broker of Firm: Bob Broker Bob@bobbroker.com TREC Lic. # Licensed Supervisor: Stuart Supervisor Stuart@stuartsupervisor.com TREC Lic. # Sales Agent: Sally Sales Agent Sally@salesagent.com TREC Lic. # Appendix A 45

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89 Appendix B Compensation Issues Using An App to Hire a Temporary Showing Agent? Beware! You can land you in hot water with TREC if you don t know what you are doing. Mobile apps used to hire another license holder to show your buyer a property are popping up everywhere. But will you be violating TREC s rules if you use the app? Since showing a property is an activity that requires a license, an agent may not receive or pay valuable consideration for that activity except through their sponsoring broker or with written consent from their sponsoring broker. Do you have written consent from your broker to pay and/or receive money through the app? Representation and Disclosure Issues Keep in mind that in Texas there is no recognized license classification of showing agent. An agent either represents the buyer or the seller (or both as intermediary with clients consent). So who do you represent when you are a temporarily hired showing agent? If you work for the same brokerage as the agent who hired you, it might not be an issue since the buyer is represented by the broker and both agents are sponsored by the same broker. Still, when hired as a showing agent you must make it clear to the client who you represent. But what if the showing agent is not from the same brokerage as the hiring agent? Under current Texas law, if an agent aids a buyer in a transaction without an agreement to represent the buyer, that agent is a sub-agent of the seller and must put the interests of the seller first. Has this been disclosed to the buyer prior to their consent to another agent showing them the property? Has the seller consented to this arrangement? Practice Tip: Limit use of a showing app to agents within the same brokerage when broker has a written policy and consents to payments. Appendix B 47

90 What about other disclosures? An IABS notice is required to be given at the first substantive communication about a specific property UNLESS the showing agent knows for certain that the buyer is already represented by the hiring agent - but how do you know the buyer is actually represented by the hiring agent? Another complication - what if the agent showing the house is from the same brokerage firm as the listing agent? Do intermediary disclosures have to be given? Whose responsibility is that the hiring agent or the showing agent? Figuring out who the showing agent represents and giving all appropriate disclosures to the buyer is a paramount duty for the showing agent in this temporary situation. More Questions than Answers Other questions arise about the temporary showing agent s function and duties in regards to the buyer. Are you going to answer any questions about the property? If not, has the hiring agent made it clear to the buyer that they are going to be shown a property but no questions will be answered at that time? Has the buyer consented to being merely escorted with no information available to them during the showing? Is the hiring agent or the showing agent violating the agent s minimum duty to answer the buyer s questions? If you do answer questions, how does that affect your role and liability for the transaction? Is the showing agent obligated to disclose known defects with the property when showing it? What if the buyer decides they like the showing agent better and want to work with the showing agent going forward? What if the buyer does not like the house after the showing and the temporary showing agent knows of another house nearby the buyer might really like? Can the showing agent take them to see it? Who is representing the buyer then? Who earns the commission if the buyer buys that second house? Be Careful! Keep in mind that license holders have a special fiduciary duty to their clients and a duty to treat all parties to a transaction fairly. Representation is not a service that can just be parceled out at will by one agent to another. If all appropriate consents and disclosures are not given and received from all necessary parties, this time-saving showing app may end up costing the agent and their broker both time and money dealing with an administrative action or a civil lawsuit. 48 Appendix B

91 Appendix C Texas Real Estate Commission P.O. Box Austin, TX QUALIFYING REAL ESTATE COURSE APPROVAL FORM REAL ESTATE PROPERTY MANAGEMENT (30 hour course) Provider Name Title of Course Name of Text or Workbook and Author Length of Course 30 hours Professional Property Management Role of a Property Manager Suggested Length of Unit(min.) Development of the Property Management Profession 10 Role of the Property Manager (responsibility, laws to be followed) 50 Importance of the Property Codes 20 Growth of Professionalism in Property Management 20 Classification of and Specialized Opportunities in Real Property 20 SUBTOTAL 120 On Page # included FOR TREC USE ONLY Not included Comments Feasibility of Property Management Operational guidelines; Leases; Reports The General Business Economy 20 The Real Estate Economy 20 Introduction to The Management Plan 10 Market Analysis 20 Property Analysis 20 SUBTOTAL 90 Marketing Plan Role of a property manager Marketing Principles 20 Marketing Activities and Methods 20 Advertising Campaign Strategy 20 SUBTOTAL 60 PROPM-0 (06/20/2016) Appendix C 49

92 Real Estate Property Management - Qualifying Real Estate Approval Form Management Operations Operational guidelines; Leases; Maintenance; Reports Establishing the Management Office Suggested Length of Unit(min.) 10 On Page # included Not included FOR TREC USE ONLY Comments Staffing the Management Office/Working with Staff Policy and Procedures Trust Accounts Budgeting and Management Fees Financial Reports and Software Reports for Tax Purposes Operating Reports SUBTOTAL 130 Owner Relations Leases; Reports; Landlord Policies Nature of the Relationship 20 Analysis of the Owner's Objectives 20 The Management Contract 30 Change of Management Procedures 15 Determining Property Profitability 20 Continuing Owner-Manager Relations 15 SUBTOTAL 120 Market Analysis and Management of Housing Role of a property manager; Landlord policies; Leases; Lease negotiations; Tenant relations; Fair Housing Act Single Family Residential 1-4 Apartments Cooperatives Condominium Projects Planned Unit Developments (PUD's) Subsidized Housing Manufactured Home Parks Housing for the Elderly Leases Leases; Fair Housing Act Leasehold Estates SUBTOTAL Provisions of a Valid Lease 40 Types of Leases/Lease Formats 10 Qualifying a Tenant 20 Negotiating the Terms 15 Executing the Agreement 5 SUBTOTAL 100 PROPM-0 (06/20/2016) 50 Appendix C

93 Real Estate Property Management - Qualifying Real Estate Approval Form Tenant Relations Landlord policies; Tenant relations; Maintenance; Fair Housing Act; Habitability laws Establishing Landlord-Tenant Communications Managing Tenant Relations Rent Collection and Late Payments Lease Renewals Changes in Rental Rates Termination of Tenancy Legal Procedures for Termination of Tenancy Alternatives to Litigation Federal, State and Local Laws Role of a property manager; Landlord policies; Leases; Tenant relations; Reports; Habitability laws; Fair Housing Act Fair Housing Laws Americans with Disabilities Act (ADA) Equal Credit Opportunity Act SUBTOTAL Suggested Length of Unit (min.) Antitrust Laws 10 Fair Credit Reporting Act (FCRA) Megan's Law Sexual Harrassment/Domestic Violence Lead-Based Paint Hazard Reduction Act (LBPHRA) Uniform Residential Landlord and Tenant Act TREC Advertising Rules and Laws Chapter 91, 92 and 93 Texas Property Code 60 TREC Laws and Rules on Trust Accounts Uniform Electronic Transmissions Act/SPAM 10 Service Member Civil Relief Act SUBTOTAL On Page # included Not included FOR TREC USE ONLY Comments Maintenance and Construction Maintenance; Reports; Habitability laws Maintenance Procedures Managing Energy Efficiency The Property Manager and Maintenance Personnel Preventative Maintenance Management Contracting for New Construction Complying with the Americans with Disabilities Act SUBTOTAL PROPM-0 (06/20/2016) Appendix C 51

94 Real Estate Property Management - Qualifying Real Estate Approval Form Commercial Property Management Suggested Length of Unit (min.) On Page # Not included included FOR TREC USE ONLY Comments Different Protection Under the Law Market Analysis and Management Qualifying a Tenant Marketing Available Space Negotiating the Lease Maintenance and Staffing Management, Administration and Accounting Types of Lease Payments Types of Commercial Properties Offices Retail Industrial SUBTOTAL Risk and Environmental Issues Habitability laws; Operational guidelines; Role of a Property Manager Risk Management 20 Insurance 20 Cost of Risk Management 20 Federal, State and Local Environmental Legislation 30 Common Hazardous Substances 10 Managing Hazard Control 10 SUBTOTAL 110 Safety and Security Issues for Property Managers and Staff Operational guidelines; Maintenance Safety and Security Equipment Emergency Equipment and Technology Emergency Procedures Preventative Criminal Activity Procedures Open and Concealed Carry Requirements and Signage SUBTOTAL TOTAL MINUTES 1500 PROPM-0 (06/20/2016) 52 Appendix C

95 Appendix D TREC Relationship Management Tool (RMT) Welcome to the TREC Relationship Management Tool User Guide. This new tool allows both brokers and salespersons to easily manage their relationships. STEP 1 REGISTRATION Are you a current license holder and registered with My License Online Services? If yes, go to Step 2. If no, you will need to register. Go to TREC s home page and click the yellow oval at the top My license online services. The Welcome to My License Online Services page appears. Scroll to the bottom and click the yellow oval My license online services. The Online Services Login and Registration page appears. At the bottom of the page, click the link REGISTER HERE to get a User ID The User Registration page appears. Enter your details and click Next. The Preview Registration page appears. Click Edit to make changes. Click Save to continue. The User Registration Temporary Password Issued page appears. Check the address you registered with to retrieve your temporary password. Password will be sent from Its@trec.texas.gov. Note: this could take a few minutes. Be sure to check your spam folder! Click the link in your ( to return to the Online Services Login and Registration page. Enter your User ID and temporary password. The Update Default Registration Information page appears. Enter required password information and click Save. Appendix D 53

96 STEP 2 LOGGING IN If this is your first time logging in, you will need to add your license to your account. The system will guide you through a three-step process to help find your license information. After you confirm your license information, you will access the Quick Start Menu. If you have already registered and added your license to your account, you will access the Quick Start Menu automatically upon logging in. Go to TREC s home page and click the yellow oval at the top My license online services. The Welcome to My License Online Services page appears. Scroll to the bottom and click the yellow oval My license online services. STEP 3 QUICK START MENU Welcome to the TREC/TALCB Online Services Quick Start menu. Please take a moment to familiarize yourself with its available features. * User Profile update your user ID and password; add an existing license to your account * Contact Us send an to TREC (please include your license number) * License Information View information TREC/TALCB has on record for your license * Change your license information drop-down menu with options for managing relationships including sending and receiving sponsorship invitations * Start a new application shows all the applications available to you (new license, not renewals) * Incomplete Application appears when you have begun an application but have not completed it NOTE: It s time to renew! will appear on your main menu within 90 days of your license s expiration date. If your license is not within this 90-day renewal period, this option will not appear. 54 Appendix D

97 STEP 4 SENDING AN INVITATION On the Quick Start Menu page under the Change Your License Information drop-down menu, select Change your license information. Select your license option. Click Next. The Manage My Sponsorship Introduction page appears. Read the page information and click Next. The Manage My Sponsorship Manage My List page appears. You can access a list of your current or requested sponsorships and send new sponsorship requests. To request a new sponsor, click Request Sponsorship. The Request Sponsorship page appears. Enter your search information and click Search. Appendix D 55

98 The Request Sponsorship page appears. Select your broker or salesperson. Click Invite. The Request Sponsorship page displays the selected broker or salesperson. An invitation message may be entered in the Compose Request box. When finished, click Request. STEP 5 MAKING A PAYMENT The Manage My Sponsorship page appears. Click Next to make payment. Note: Invitation(s) will not be sent until payment is received. The Application Summary page appears. Review this page and click Submit. 56 Appendix D

99 The Manage My Sponsorship Attestation page appears. Read the attestation and if in agreement, click the Yes button. Click Next. After you have submitted your payment, an application summary page appears and can be printed for your records. STEP 6 MANAGING INVITATIONS AND RELATIONSHIPS After payment is made and an invitation is sent to the requested license holder, he or she can log in and select Manage My Relationships to access your invitation. The license holder can view, accept, or decline an invitation in the same location. The options are available under the Actions column of the menu. After a sponsoring broker establishes a relationship with a salesperson, the sponsoring broker can use the tool to easily filter sponsorees or search for sponsorees by license number. Brokers can also designate supervisory status for their salespersons by clicking the box next to their name in the DesgSpvr column. Both brokers and salespersons have the option to terminate their current relationship at any time by choosing to do so under the Actions column of the menu. Thank you for using the Relationship Management Tool. The tool is designed to help license holders manage their businesses easily. If you have additional questions, please contact TREC at information@trec.texas.gov or call Appendix D 57

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101 Appendix E Complaint Process Complaint Received Complaint File Opened Complaint Returned: Lack of Reasonable Cause/ Signature ADR: Informal Mediation Investigation Conducted Additional Information Requested Settle Don t Settle Info Received Info Not Received Closed Attorney Reviews Investigation Closed Determination of Violations Closed No Jurisdiction No Violation Insufficient Evidence Settled Withdrawn Agreed Order Notice of Alleged Violation Advisory Letter Closed Closed Default/Consent Final Order SOAH Hearing Closed Proposal for Decision (PFD) Commissioners Final Order Exceptions Filed Motion for Rehearing Rehearing Denied No Motion Filed Closed PFD Revised/ No Action Rehearing Granted Appeal Filed in District Court Appendix E 59

102 Complaint Subject Categories for June 2015 through June 2016 Administrative % Advertising % 6.98% 4.75% 7.06% Breach of Fiduciary Duty % Broker Supervision % 11.58% Failure to Disclosure % 29.85% Improper contract/seller Disclosure form usage % 6.75% 2.99% Intermediary/IABS -.99% Leasing/Property Management - Misappropriation % 4.22% Leasing/Property Management - Other % 5.14% 7.44% 11.12% 0.15% Licensure Issues % License Holder Acting as Principal % 0.92% 0.99% Sales Misappropriation % Sales Other % Unlicensed Activity % Complaint Subject Categories by Month Subject Matter Categories Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 YTD Administrative Bad check, contact information, % uncooperative, etc. Advertising Includes misleading & dba % Breach of Fiduciary Duty Including false promise % Broker Supervision % Failure to Disclose % Improper contract/seller Disclosure form usage % Intermediary/IABS % Leasing/Property Management - Misappropriation % Leasing/Property Management - Other Includes negligence, referral, etc % Licensure Issues Criminal background check, % disapprovals, probationary license,etc. License Holder Acting as Principal % Sales Misappropriation Other than Leasing/Property % Management - Misappropriation Sales Other Includes negligence, rebate, referral, earnest money, etc. (other than Leasing/Property Management - Other) % Unlicensed Activity % Total Appendix E

103 Appendix F From TREC Advisor December 2015 Issue When Talking about Value, Choose Your Words Carefully What do you think this property is worth? All of us who are in the real estate profession have been asked this question hundreds of times. You try to answer it for a customer or client each time you do a Comparative Market Analysis (CMA) or a Broker Price Opinion (BPO). As a license holder, you are allowed to perform this task in the name of the broker as a distinct service and for a separate fee. This is a very particular skill you can learn to do competently. But when you do so, be careful to ensure you stay clearly within your area of expertise and do not exaggerate the skill you ve developed. Real estate brokers and sales agents do not offer opinions of value that area of expertise requires an appraiser license in Texas. So there is no such thing as a broker opinion of value (BOV) in Texas! Now before you get upset about this, realize that clearly establishing your area of expertise is one of the requirements of your professional license. Your license allows you to perform many skilled tasks associated with real property analysis, marketing, sale and transfer, but it also requires you to perform these tasks competently, that is, with a minimum level of expertise. And to refrain from engaging in activities even those permitted by your license if you have not developed that expertise. For example, you would never attempt to complete a 1031 Exchange without acquiring the knowledge and skill to do so competently. And your license also does not allow you to trespass into other real estate transaction-related tasks which require separate and distinct licenses. You already know and accept this. Competence and Licensing You may be a great contract negotiator, but you know you cannot write substantive provisions into a client s contract unless you have a law license. You may be a very skilled closing or escrow counselor, but you cannot perform certain escrow or closing tasks without an escrow agent or law license. You may be highly accomplished at estimating mortgage qualifications for customers or clients, but you cannot underwrite and originate a loan without a mortgage loan originator license. Similarly, you may have tremendous skills in estimating the likely sale price of a home, and even more so in the marketing strategy of recommending a listing price based on that analysis, but that is clearly not the same as the detailed process used to establish a market value for purposes of collateralizing a mortgage loan. Establishing a market value requires adherence to the Uniform Standards of Professional Appraisal Practice (USPAP). And in Texas like in most states performing that task requires an appraiser license. As you are likely aware, as a license holder you are allowed to create a CMA or a BPO relating to the estimated price of real property as part of the ordinary course of business if the analysis, opinion or conclusion is related to Appendix F 61

104 the actual or potential management, acquisition, disposition or encumbrance of an interest in real property. Most importantly, the CMA or BPO cannot be referred to as an appraisal, and you are required to use a disclaimer that specifically informs the user or reader that this is not an appraisal and was not developed following the guidelines in the Uniform Standards of Professional Appraisal Practice (USPAP). See Tex. Occ. Code Sec (1)(A)(xi) and Title 22 TAC Sec Precision Offers Protection While there are certainly instances where the term value is used generically in the realty marketplace, as professionals, we are required to be more precise in our language. This is especially true in our advertising which tends to use simple and brief terminology. We know how to do this we already do it all time. We differentiate between brokers and sales agents, and between REALTORS and other license holders, even when our clients may not fully comprehend the implications of the distinction. We explain the difference between a customer and a client, to ensure either party does not misunderstand the scope of professional assistance we can offer. We carefully distinguish between tax value and market price to ensure our clients are both realistic and fully informed. To serve our clients competently, and to avoid misleading them, it is required that we are also able to clearly explain the difference between sale price and market value. Price vs. Value To start, a sale price is the amount of money that the buyer agrees to pay for, and for which the seller agrees to transfer, the property. Think of it as the exchange price. Based on a widely variable set of determinate and indeterminate factors, this amount may be very close to, or very far from, the market value of a property. Price is just one element to be taken into consideration when determining market value. Often it can be the most predictive element, but that does not make it equivalent. What about the potential for a change in property use? Or the zoning classification? What about an easement or some other key entitlement or restriction? Would any of these variables affect market value? Of course they would! Without a detailed analysis performed under recognized methods and techniques, and using current data to consider all three major approaches to value income potential, comparable sales and replacement costs and then reconciling those relevant results, a fair market value cannot be reliably determined. And these skills are precisely what an appraiser is trained to do. And this is why the lending community relies almost exclusively on an appraisal report to estimate the market value of the collateral property when making a mortgage loan. A BPO just won t cut it. There are many circumstances for which a CMA or a BPO provide the kind of information needed to assist an owner or the owner s agent in evaluating the options for dealing with a specific property versus the structured, detailed analysis provided by an appraisal report. But that does not make them equivalent. A BPO or CMA is not a comprehensively sufficient analysis to establish market value, though it may be done competently enough to support a likely sales price prediction or a listing price marketing strategy. The Take-Away So, unless you hold a current appraiser license, the next time someone asks you, What do you think that property is worth? choose your words carefully when you answer. In today s market, I think it would sell for $XX is always a more appropriate response for a real estate professional broker or sales agent. The most professional approach is to simply avoid using the term value without an appropriate prior qualifier that makes a clear distinction that you are not offering an opinion of value, which is the legal definition of an appraisal in Texas, and requires an appraiser license to do competently and legally. 62 Appendix F

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107 Appendix G Use of Standard Contract Forms Broker Price Opinion or Comparative Market Analysis Consumer Information Information About Brokerage Services Registration and Use of Alternate, Team and Assumed Business Names Used in Advertisements Advertisements

108 CHAPTER 537 PROFESSIONAL AGREEMENTS AND STANDARD CONTRACTS Use of Standard Contract Forms. (a)when negotiating contracts binding the sale, exchange, option, lease or rental of any interest in real property, a real estate license holder shall use only those contract forms approved for mandatory use by the Texas Real Estate Commission (the Commission) for that type of transaction with the following exceptions: (1)transactions in which the license holder is functioning solely as a principal, not as an agent; (2)transactions in which an agency of the United States government requires a different form to be used; (3)transactions for which a contract form, or addendum to a contract form, has been prepared by a property owner or prepared by a lawyer and required by a property owner; or (4)transactions for which no mandatory contract form or addendum has been approved by the Commission, and the license holder uses a form: (A)prepared by a lawyer licensed by this state, or a trade association in consultation with one or more lawyers licensed by this state, for the particular type of transactions involved that contains: (i)the name of the lawyer or trade association who prepared the form; (ii)the name of the broker or trade association for whom the form was prepared; (iii)the type of transaction for which the lawyer or trade association has approved the use of the form; (iv)any restrictions on the use of the form; and (v)if it is an addendum that changes the rights, obligations or remedies of a party under a contract or addendum form approved by the Commission for mandatory use, the form must also include: (I)a statement about how the addendum changes the rights, obligations or remedies of a party, with a reference to the relevant paragraph number in the mandatory use form; (II)a statement that the form is not a mandatory Texas Real Estate Commission form; and (III)a statement that Commission rules prohibit real estate license holders from giving legal advice; or (B)prepared by the Texas Real Estate Broker-Lawyer Committee (the committee) and approved by the Commission for voluntary use by license holders. (b)a license holder may not: (1)practice law; (2)directly or indirectly offer, give or attempt to give legal advice; (3)give advice or opinions as to the legal effect of any contracts or other such instruments which may affect the title to real estate; (4)give opinions concerning the status or validity of title to real estate; (5)draft language defining or affecting the rights, obligations or remedies of the principals of a real estate transaction, including escalation, appraisal or other contingency clauses; (6)add factual statements or business details to a form approved by the Commission if the Commission has approved a form or addendum for mandatory use for that purpose; (7)attempt to prevent or in any manner whatsoever discourage any principal to a real estate transaction from employing a lawyer; or (8)employ or pay for the services of a lawyer, directly or indirectly, to represent a principal to a real estate transaction in which the license holder is acting as an agent. Page 1 of 2

109 Chapter 537 Professional Agreements and Standard Contracts (c)this section does not limit a license holder's fiduciary obligation to disclose to the license holder's principals all pertinent facts that are within the knowledge of the license holder, including such facts which might affect the status of or title to real estate. (d)it is not the practice of law for a license holder to fill in the blanks in a contract form authorized for use by this section. A license holder shall only add factual statements and business details or shall strike text as directed in writing by the principals. (e)this section does not prevent the license holder from explaining to the principals the meaning of the alternative choices, factual statements and business details contained in an instrument so long as the license holder does not offer or give legal advice. (f)when a transaction involves unusual matters that should be reviewed by a lawyer before an instrument is executed, or if the instrument must be acknowledged and filed of record, the license holder shall advise the principals that each should consult a lawyer of the principal's choice before executing the instrument. (g)a license holder may employ and pay for the services of a lawyer to represent only the license holder in a real estate transaction. (h)a license holder shall advise the principals that the instrument they are about to execute is binding on them. (i)forms approved by the Commission may be reproduced only from the following sources: (1)electronically reproduced from the files available on the Commission's website; (2)printed copies made from copies obtained from the Commission; (3)legible photocopies made from such copies; or (4)computer-driven printers following these guidelines: (A)The computer file or program containing the form text must not allow the end user direct access to the text of the form and may only permit the user to insert language in blanks in the forms. Blanks may be scalable to accommodate the inserted language. The Commission may approve the use of a computer file or program that permits a principal of a license holder to strike through language of the form text. The program must be: (i)limited to use only by a principal of a transaction; and (ii)in a format and authenticated in manner acceptable to the Commission. (B)Typefaces or fonts must appear to be identical to those used by the Commission in printed copies of the particular form. (C)The text and order of the text must be identical to that used by the Commission in printed copies of the particular form. (D)The name and address of the person or firm responsible for developing the software program must be legibly printed below the border at the bottom of each page in no less than six point type and in no larger than 10 point type. (j)forms approved or promulgated by the Commission must be reproduced on the same size of paper used by the Commission with the following changes or additions only: (1)The business name or logo of a broker, organization or printer may appear at the top of a form outside the border. (2)The broker's name may be inserted in any blank provided for that purpose. (k)standard Contract Forms adopted by the Commission are published by and available from the Commission at P.O. Box 12188, Austin, Texas or Page 2 of 2

110 CHAPTER 535 GENERAL PROVISIONS Subchapter B. General Provisions Relating to the Requirements of Licensure Broker Price Opinion or Comparative Market Analysis (a) A real estate license holder may not perform an appraisal of, or provide an opinion of value for, real property unless the license holder is licensed or certified under Texas Occupations Code, Chapter (b) If a real estate license holder provides a broker price opinion, comparative market analysis, or estimated worth or sale price under the Act, the license holder shall also provide the person for whom the opinion, analysis, or estimate is prepared with a written statement containing the following language: "This represents an estimated sale price for this property. It is not the same as the opinion of value in an appraisal developed by a licensed appraiser under the Uniform Standards of Professional Appraisal Practice." (c) The statement required by subsection (b) of this section must be made part of any written opinion, analysis, or estimate of worth or sale price and must be reproduced verbatim in at least 12-point font. (d) A sales agent may prepare, sign, and present a broker price opinion, comparative market analysis, or estimate of worth or sale price for the sales agent's sponsoring broker, but the sales agent must submit the broker price opinion, comparative market analysis, or estimate of worth or sale price in the broker's name and the broker is responsible for it. Page 1 of 1

111 CHAPTER 531 CANONS OF PROFESSIONAL ETHICS AND CONDUCT Consumer Information (a) The Commission adopts by reference the Consumer Protection Notice TREC No. CN 1-2. This document is published by and available from the Texas Real Estate Commission, P.O. Box 12188, Austin, Texas , (b) Each active real estate broker and sales agent shall provide the notice adopted under subsection (a) by: (1) displaying it in a readily noticeable location in each place of business the broker maintains; and (2) providing a link to it in a readily noticeable place on the homepage of each business website, labeled: (A) "Texas Real Estate Commission Consumer Protection Notice", in at least 10 point font; or (B) "TREC Consumer Protection Notice", in at least 12 point font. (c) For purposes of this section, business website means a website on the internet that: (1) is accessible to the public; (2) contains information about a license holder's real estate brokerage services; and (3) the content of the website is controlled by the license holder. (d) For purposes of providing the link required under subsection (b)(2) on a social media platform, the link may be located on: (1) the account holder profile; or (2) a separate page or website through a direct link from the social media platform or account holder profile. Page 1 of 1

112 CHAPTER 531 CANONS OF PROFESSIONAL ETHICS AND CONDUCT Information About Brokerage Services (a) The Commission adopts by reference the Information About Brokerage Services Notice, TREC No. IABS 1-0 (IABS Notice). The IABS Notice is published by and available from the Texas Real Estate Commission, P.O. Box 12188, Austin, Texas , (b) Each active real estate broker and sales agent shall provide: (1) a link to a completed IABS Notice in a readily noticeable place on the homepage of each business website, labeled: (A) "Texas Real Estate Commission Information About Brokerage Services", in at least 10 point font; or (B) "TREC Information About Brokerage Services", in at least 12 point font; and (2) the completed IABS Notice at the first substantive communication as required under , Texas Occupations Code. (c) For purposes of , Texas Occupations Code, the completed IABS Notice can be provided: (1) by personal delivery by the broker or sales agent; (2) by first class mail or overnight common carrier delivery service; (3) in the body of an ; or (4) as an attachment to an , or a link within the body of an , with a specific reference to the IABS Notice in the body of the . (d) The link to a completed IABS Notice may not be in a footnote or signature block in an . (e) For purposes of this section, business website means a website on the internet that: (1) is accessible to the public; (2) contains information about a license holder's real estate brokerage services; and (3) the content of the website is controlled by the license holder. (f) For purposes of providing the link required under subsection (b)(1) on a social media platform, the link may be located on: (1) the account holder profile; or (2) a separate page or website through a direct link from the social media platform or account holder profile. (g) License holders may reproduce the IABS Notice published by the Commission, provided that the text of the IABS Notice is copied verbatim and the spacing, borders and placement of text on the page must appear to be identical to that in the published version of the IABS Notice, except that the Broker Contact Information section may be prefilled. Page 1 of 1

113 CHAPTER 535 GENERAL PROVISIONS Subchapter N. Suspension and Revocation of Licensure , Registration and Use of Alternate, Team and Assumed Business Names Used in Advertisements (a)definitions. For the purposes of this section: (1)"Advertisement" has the meaning assigned by (2)"Alternate name" (commonly known as an alias) means a name used by an individual license holder other than the name shown on the license issued by the Commission, such as a middle name, maiden name, or nickname. It does not include a common derivative of a name, such as Kim for Kimberly or Bill for William, which is considered the same as the name shown on the license. (3)"Associated broker" means a broker who associates with and gets paid through another broker under a relationship that is intended to be a continuous relationship, including but not limited to, an employment or ongoing independent contractor relationship. (4)"Assumed business name" (commonly known as a DBA or trade name) means any name used in business by a broker that meets the requirements of subsection (d), other than the name shown on the broker's license issued by the Commission, a team name, or an alternate name. (5)"Team name" means a name used by a group of one or more license holders sponsored by or associated with the same broker that performs real estate activities under an exclusive collective name other than the broker's licensed name or assumed business name. (b)alternate names. (1)Before a license holder starts using an alternate name in an advertisement, the license holder must register the name with the Commission on a form approved by the Commission. (2)The Commission may request supporting documentation evidencing the legal authority to use the alternate name if the last name submitted is different from the last name shown on the license issued by the Commission. (3)A license holder must notify the Commission, and their sponsoring broker, not later than the 10th day after the date the license holder stops using an alternate name. (c)team names: (1)A team name may not include any terms that could mislead the public to believe think that the team is offering brokerage services independent from its sponsoring broker. (2)A team name must end with the word "team" or "group". (3)Before an associated broker or a sales agent sponsored by a broker starts using a team name in an advertisement, the broker must register the name with the Commission on a form approved by the Commission. (4)A broker must notify the Commission in writing not later than the 10th day after the date the associated broker or a sales agent sponsored by the broker stops using a team name. (d)assumed business names. (1)Before a broker, associated broker or a sales agent sponsored by a broker starts using an assumed business name of the broker in an advertisement, the broker must: Page 1 of 2

114 Chapter 535 General Provisions Subchapter N. Suspension and Revocation of Licensure (A)register the name with the Commission on a form approved by the Commission; and (B)provide written evidence of legal authority to use the assumed business name in Texas, such as registration of the name with the Secretary of State or county clerk's office. (2)A broker must notify the Commission in writing not later than the 10th day after the date the broker stops using an assumed business name. Page 2 of 2

115 CHAPTER 535 GENERAL PROVISIONS Subchapter N. Suspension and Revocation of Licensure , Advertisements (a)each advertisement must include the following in a readily noticeable location in the advertisement: (1)the name of the license holder or team placing the advertisement; and (2)the broker's name in at least half the size of the largest contact information for any sales agent, associated broker, or team name contained in the advertisement. (b)for the purposes of this section: (1)"Advertisement" is any form of communication by or on behalf of a license holder designed to attract the public to use real estate brokerage services and includes, but is not limited to, all publications, brochures, radio or television broadcasts, all electronic media including , text messages, social media, the Internet, business stationery, business cards, displays, signs and billboards. Advertisement does not include a communication from a license holder to the license holder's current client. (2)Associated broker has the meaning assigned by (3)"Broker's name" means: (A)the broker's name as shown on a license issued by the Commission; (B)if an individual, an alternate name registered with the Commission; or (C)any assumed business name that meets the requirements of (4)"Contact Information" means any information that can be used to contact a license holder featured in the advertisement, including a name, phone number, address, website address, social media handle, scan code or other similar information. (5)"Party" means a prospective buyer, seller, landlord, or tenant, or an authorized legal representative of a buyer, seller, landlord, or tenant, including a trustee, guardian, executor, administrator, receiver, or attorneyin-fact. The term does not include a license holder who represents a party. (6)"Team name" has the meaning assigned by (c)for an advertisement on social media or by text, the information required by this section may be located on a separate page or on the account user profile page of the license holder, if the separate page or account user profile is: (1)readily accessible by a direct link from the social media or text; and (2)readily noticeable on the separate page or in the account user profile. (d)for purposes of this section and (b)(23) of the Act, an advertisement that misleads or is likely to deceive the public, tends to create a misleading impression, or implies that a sales agent is responsible for the operation of the broker's real estate brokerage business includes, but is not limited to, any advertisement: (1)that is inaccurate in any material fact or representation; (2)that does not comply with this section; (3)that identifies a sales agent as a broker; (4)that uses a title, such as owner, president, CEO, COO, or other similar title, or website address that implies a sales agent is responsible for the operations of a brokerage; Page 1 of 2

116 Chapter 535 General Provisions Subchapter N. Suspension and Revocation of Licensure (5)that contains a team name with terms that imply that the team is offering brokerage services independent from its sponsoring broker, including, but not limited to, "realty", "brokerage", "company", and "associates"; (6)that contains the name of a sales agent that is not the name as shown on the sales agent's license issued by the Commission or an alternate name registered with the Commission; (7)that contains the name of a sales agent whose name is, in whole or in part, used in a broker's name and that implies that the sales agent is responsible for the operation of the brokerage; (8)that causes a member of the public to believe that a person not licensed to conduct real estate brokerage is engaged in real estate brokerage; (9)that contains the name or likeness of an unlicensed person that does not clearly disclose that the person does not hold a license; (10)that creates confusion regarding the permitted use of a property; (11)about the value of a property, unless it is based on an appraisal that is disclosed and readily available upon request by a party or it is given in compliance with ; (12)that implies the person making the advertisement was involved in a transaction regarding a property when the person had no such role; (13)about a property that is subject to an exclusive listing agreement without the permission of the listing broker and without disclosing the name of the listing broker unless the listing broker has expressly agreed in writing to waive disclosure; (14)offering a listed property that is not discontinued within 10 days after the listing agreement is no longer in effect; (15)about a property 10 days or more after the closing of a transaction unless the current status of the property is included in the advertisement; (16)that offers to rebate a portion of a license holder's compensation to a party if the advertisement does not disclose that payment of the rebate is subject to the consent of the party the license holder represents in the transaction; (17)that offers to rebate a portion of a license holder's commission contingent upon a party's use of a specified service provider, or subject to approval by a third party such as a lender, unless the advertisement also contains a disclosure that payment of the rebate is subject to restrictions; (18)that offers or promotes the use of a real estate service provider other than the license holder and the license holder expects to receive compensation if a party uses those services, if the advertisement does not contain a disclosure that the license holder may receive compensation from the service provider; (19)that ranks the license holder or another service provider unless the ranking is based on objective criteria disclosed in the advertisement; or (20)that states or implies that the license holder teaches or offers Commission approved courses in conjunction with an approved school or other approved organization unless the license holder is approved by the Commission to teach or offer the courses. Page 2 of 2

117 Broker Responsibility Course (Supplemental Material) #31450 THE REAL ESTATE B U S I N E S S S C H O O L Get Your License. Learn to Use it. The Real Estate Business School fka Austin Institute of Real Estate 8828 Research Blvd., Austin, TX info@buildmyrebusiness.com Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner.

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119 CHAPTER 2: INFORMATION ABOUT BROKERAGE SERVICES The Texas Real Estate Licensing Act requires information be given to potential buyers, sellers, tenants, and landlords at the first substantive dialogue about a property. TRELA states, substantive dialogue means a meeting or written communication that involves a substantive discussion relating to specific real property. Most licensees use a TREC approved Information About Brokerage Services form to relay this information. It is for voluntary use. This information explains how a broker can represent clients in a transaction. It does not disclose how a broker is representing his client. TYPES OF REPRESENTATION There are four types of representation discussed in the Information About Brokerage Services. The broker may: 1. Represent the owner 2. Act as a subagent 3. Represent the buyer 4. Act as an intermediary 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

120 Information About Brokerage Services Texas law requires all real estate license holders to give the following information about brokerage services to prospective buyers, tenants, sellers and landlords. TYPES OF REAL ESTATE LICENSE HOLDERS:. A BROKER is responsible for all brokerage activities, including acts performed by sales agents sponsored by the broker. A SALES AGENT must be sponsored by a broker and works with clients on behalf of the broker. A BROKER S MINIMUM DUTIES REQUIRED BY LAW (A client is the person or party that the broker represents): Put the interests of the client above all others, including the broker s own interests; Inform the client of any material information about the property or transaction received by the broker; Answer the client s questions and present any offer to or counter-offer from the client; and Treat all parties to a real estate transaction honestly and fairly. A LICENSE HOLDER CAN REPRESENT A PARTY IN A REAL ESTATE TRANSACTION: AS AGENT FOR OWNER (SELLER/LANDLORD): The broker becomes the property owner's agent through an agreement with the owner, usually in a written listing to sell or property management agreement. An owner's agent must perform the broker s minimum duties above and must inform the owner of any material information about the property or transaction known by the agent, including information disclosed to the agent or subagent by the buyer or buyer s agent. AS AGENT FOR BUYER/TENANT: The broker becomes the buyer/tenant's agent by agreeing to represent the buyer, usually through a written representation agreement. A buyer's agent must perform the broker s minimum duties above and must inform the buyer of any material information about the property or transaction known by the agent, including information disclosed to the agent by the seller or seller s agent. AS AGENT FOR BOTH - INTERMEDIARY: To act as an intermediary between the parties the broker must first obtain the written agreement of each party to the transaction. The written agreement must state who will pay the broker and, in conspicuous bold or underlined print, set forth the broker's obligations as an intermediary. A broker who acts as an intermediary: Must treat all parties to the transaction impartially and fairly; May, with the parties' written consent, appoint a different license holder associated with the broker to each party (owner and buyer) to communicate with, provide opinions and advice to, and carry out the instructions of each party to the transaction. Must not, unless specifically authorized in writing to do so by the party, disclose: ᴑ that the owner will accept a price less than the written asking price; ᴑ that the buyer/tenant will pay a price greater than the price submitted in a written offer; and ᴑ any confidential information or any other information that a party specifically instructs the broker in writing not to disclose, unless required to do so by law. AS SUBAGENT: A license holder acts as a subagent when aiding a buyer in a transaction without an agreement to represent the buyer. A subagent can assist the buyer but does not represent the buyer and must place the interests of the owner first. TO AVOID DISPUTES, ALL AGREEMENTS BETWEEN YOU AND A BROKER SHOULD BE IN WRITING AND CLEARLY ESTABLISH: The broker s duties and responsibilities to you, and your obligations under the representation agreement. Who will pay the broker for services provided to you, when payment will be made and how the payment will be calculated. LICENSE HOLDER CONTACT INFORMATION: This notice is being provided for information purposes. It does not create an obligation for you to use the broker s services. Please acknowledge receipt of this notice below and retain a copy for your records. Licensed Broker /Broker Firm Name or Primary Assumed Business Name License No. Phone Designated Broker of Firm License No. Phone Licensed Supervisor of Sales Agent/ Associate License No. Phone Sales Agent/Associate s Name License No. Phone Buyer/Tenant/Seller/Landlord Initials Date Regulated by the Texas Real Estate Commission Information available at Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev IABS 1-0

121 Read the document carefully as it will be necessary to explain this to a potential buyer. This form is a way to start a dialogue with the buyer about why it is important for the buyer to be represented. It is the LAW that you cover this information with the buyer. TIP: First, ask the buyer if they are familiar with this form (this will help you to determine if they are working with another agent). Below, the Information About Brokerage Services is broken into paragraphs with a simple explanation of each paragraph in layman s terms. We will also provide you with some TIPS on how to cover the information with the buyer. Paragraph #1: Describes the responsibilities of Broker and the Broker s relationship with their Sales Associates. Paragraph #2: Lists the Broker s minimum duties as required by law. Paragraph #3: In general, this paragraph explains how license holders can represent a party in a real estate transaction. An agent must represent someone in the transaction. If the buyer is NOT represented by the agent they are working with, then, by default, that agent automatically represents the Seller Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

122 Paragraph #3A: When, through a written agreement (listing), an agent represents the owner. Duties are tied to those in paragraph #2 above. This paragraph explains that the listing agent represents the Seller of the property and must inform the owner of any material information about the property and/or transaction known by the agent including information disclosed to the agent. Paragraph #3B: When, through a written agreement (buyer/tenant agency agreement), the Broker agrees to represent the buyer. Duties are tied to those in paragraph #2 above. TIP: Now would be a good time to explain to the buyer why it is important to be represented (a Buyer s agent places the Buyer s interest FIRST) 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

123 Paragraph #3C: This situation would occur if the buyers wanted to purchase a property that was listed with the same company as their agent s company. Intermediary always involves on company. In other words, there is always only one intermediary in a transaction. It is the way the company handles an in-house sale. The broker from one company represents both the buyer and the seller. The broker is required to notify both clients when a transaction involving intermediary is going to occur. Paragraph #3D: If the buyers choose not to be represented by an agent, the agent they are working with automatically becomes a subagent of the Listing Agent and again, both agents represent the Seller. The agent can work with the buyer without representing them; however, the buyers must be aware that: (1) They are not being represented. (2) The buyers should only give the agent information and facts knowing that the information may be communicated to the seller. Paragraph #4: The written agreement discussed in this paragraph refers to the Buyer Representation Agreement which an agent will cover with buyers and have them sign and agree to work with that agent for a certain period of time and within a certain geographic area. It also refers to the listing agreement signed between the Broker or Broker s Associate and the owner of a property. Paragraph #5: States that this notice is for information purposes and does not create any obligation for a buyer or seller to use the Broker s services Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

124 SIGNIFICANT FEDERAL LEGISLATION (CRA, TILA, RESPA, SAFE, APA, DODD- FRANK) CRA: The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. It was enacted by the Congress in The purpose of the CRA: Prohibits redlining (denying or increasing the cost of banking to residents of racially defined neighborhoods), And Encourages efforts to meet the credit needs of all community members, including residents of low- and moderate-income neighborhoods. TILA: The Truth in Lending Act (TILA) was enacted on May 29, 1968, as Title I of the Consumer Credit Protection Act. The TILA was implemented by Regulation Z and became effective July 1, The purpose of TILA is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA also includes substantive protections. For example, the act and regulation give consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling. Regulation Z also prohibits specific acts and practices in connection with an extension of credit secured by a consumer's dwelling. REGULATION X: REAL ESTATE SETTLEMENT PROCEDURES ACT There have been significant changes in the federal legislation and guidelines with regard to lending since the recession of It is important for you the student to have a basic understanding of these changes and how they affect your industry. This information is not provided to make you an expert in the financial markets but IS provided so that you can understand and explain to your clients and customers the impact of these lending rule changes. *Information provided by the CFPB The Real Estate Settlement Procedures Act of 1974 (RESPA) (12 U.S.C et seq.) (The Act) became effective on June 20, The Act requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process. The Act also prohibits specific practices, such as kickbacks, and places limitations upon the use of escrow accounts. The Department of Housing and Urban Development (HUD) originally promulgated Regulation X which implements RESPA. Congress has amended RESPA significantly since its enactment. The National Affordable Housing Act of 1990 amended RESPA to require detailed disclosures concerning the transfer, sale, or assignment of mortgage servicing. It also requires disclosures for mortgage escrow accounts at closing and annually thereafter, itemizing the charges to be paid by the borrower and what is paid out of the account by the servicer. In October 1992, Congress amended RESPA to cover subordinate lien loans. Congress, when it enacted the Economic Growth and Regulatory Paperwork Reduction Act of 1996, 1 further amended RESPA to clarify certain definitions including controlled business arrangement, which was changed to affiliated business arrangement. The changes also reduced the disclosures under the mortgage servicing provisions of RESPA Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

125 In 2008, HUD issued a RESPA Reform Rule (73 Fed. Reg , November 17, 2008) that included substantive and technical changes to the existing RESPA regulations and different implementation dates for various provisions. Substantive changes included a standard Good Faith Estimate form and a revised HUD-1 Settlement Statement that were required as of January 1, Technical changes, including streamlined mortgage servicing disclosure language, elimination of outdated escrow account provisions, and a provision permitting an average charge to be listed on the Good Faith Estimate and HUD-1 Settlement Statement, took effect on January 16, In addition, HUD clarified that all disclosures required by RESPA are permitted to be provided electronically, in accordance with the Electronic Signatures in Global and National Commerce Act (E-Sign). The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L (July 10, 2010) (Dodd- Frank Act) granted rule-making authority under RESPA to the Consumer Financial Protection Bureau (CFPB) and, with respect to entities under its jurisdiction, generally granted authority to the CFPB to supervise for and enforce compliance with RESPA and its Laws and Regulations RESPA CFPB April 2015 RESPA 2 implementing regulations. 3 In December 2011, the CFPB restated HUD s implementing regulation at 12 CFR Part 1024 (76 Fed. Reg ) (December 20, 2011). On January 17, 2013, the CFPB issued a final rule to amend Regulation X (78 Fed. Reg ) (February 14, 2013). The final rule implemented certain provisions of Title XIV of the Dodd-Frank Act and included substantive and technical changes to the existing regulations. Substantive changes included modifying the servicing transfer notice requirements and implementing new procedures and notice requirements related to borrowers error resolution requests and information requests. The amendments also included new provisions related to escrow payments, force-placed insurance, general servicing policies, procedures, and requirements, early intervention, continuity of contact, and loss mitigation. The amendments are effective as of January 10, On July 10, 2013, September 13, 2013, and October 22, 2014, the CFPB issued final rules to further amend Regulation X (78 Fed. Reg ) (July 24, 2013), (78 Fed. Reg ) (October 1, 2013), and (79 Fed. Reg ) (November 3, 2014). The final rules included substantive and technical changes to the existing regulations, including revisions to provisions on the relation to State law of Regulation X s servicing provisions, to the loss mitigation procedure requirements, and to the requirements relating to notices of error and information requests. On October 15, 2013, the CFPB issued an interim final rule to further amend Regulation X (78 Fed. Reg ) (October 23, 2013) to exempt servicers from the early intervention requirements in certain circumstances. The Regulation X amendments are effective as of January 10, The amendments issued on January 17, 2013; July 10, 2013; September 13, 2013; October 15, 2013; and October 22, 2014 are collectively referred to in this document as the Amendments. On December 31, 2013, the CFPB published final rules implementing Sections 1098(2) and 1100A(5) of the Dodd-Frank Act, which direct the CFPB to publish a single, integrated disclosure for mortgage transactions, which includes mortgage disclosure requirements under the and Truth in Lending Act (TILA) and sections 4 and 5 of RESPA. These amendments are referred to in this document as the TILA-RESPA Integrated Disclosure Rule or TRID, and are applicable to covered closed-end mortgage loans for which a creditor or mortgage broker receives an application on or after August 1, As a result, Regulation Z now houses the integrated forms, timing, and related disclosure requirements for most closed-end consumer mortgage loans. The new integrated disclosures are not used to disclose information about reverse mortgages, home equity lines of credit (HELOCs), chattel-dwelling loans such as loans secured by a mobile home or by a dwelling that is not attached to real property (i.e., land), or other transactions not covered by the TILA-RESPA Integrated Disclosure rule. The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year. Creditors originating these types of mortgages must continue to use, as applicable, the Good Faith Estimate, HUD-1 Settlement Statement, and Truth in Lending disclosures Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

126 CONSUMER FINANCIAL PROTECTION BUREAU Subpart A General Provisions Coverage 12 CFR (a) RESPA is applicable to all federally related mortgage loans, except as provided under 12 CFR (b) and (d), discussed below. Federally related mortgage loans are defined as: Loans (other than temporary loans), including refinancing, that satisfy the following two criteria: First, the loan is secured by a first or subordinate lien on residential real property, located within a State, upon which either: A one-to-four family structure is located or is to be constructed using proceeds of the loan (including individual units of condominiums and cooperatives); or A manufactured home is located or is to be constructed using proceeds of the loan. Second, the loan falls within one of the following categories: Loans made by a lender, creditor, dealer; Loans made or insured by an agency of the federal government; Loans made in connection with a housing or urban development program administered by an agency of the federal government; Loans made and intended to be sold by the originating lender or creditor to FNMA, GNMA, or FHLMC (or its successor); Loans that are the subject of a home equity conversion mortgage or reverse mortgage issued by a lender or creditor subject to the regulation. Federally related mortgage loans are also defined to include installment sales contracts, land contracts, or contracts for deeds on otherwise qualifying residential property if the contract is funded in whole or in part by proceeds of a loan made by a lender, specified federal agency, dealer or creditor subject to the regulation. EXEMPTIONS 12 CFR (b) The following transactions are exempt from coverage: A loan primarily for business, commercial or agricultural purposes (definition identical to Regulation Z, 12 CFR (a)(1)). A temporary loan, such as a construction loan. (The exemption does not apply if the loan is used as, or may be converted to, permanent financing by the same financial institution or is used to finance transfer of title to the first user of the property.) If the lender issues a commitment for permanent financing, it is covered by the regulation. Any construction loan with a term of two years or more is covered by the regulation, unless it is made to a bona fide contractor. Bridge or swing loans are not covered by the regulation. A loan secured by vacant or unimproved property where no proceeds of the loan will be used to construct a one-to-four family residential structure. If the proceeds will be used to locate a 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

127 manufactured home or construct a structure within two years from the date of settlement, the loan is covered. An assumption, unless the mortgage instruments require lender approval for the assumption and the lender approves the assumption. A conversion of a loan to different terms which are consistent with A conversion of a loan to different terms which are consistent with provisions of the original mortgage instrument, as long as a new note is not required, even if the lender charges an additional fee for the conversion. A bona fide transfer of a loan obligation in the secondary market. (However, the mortgage servicing requirements of Subpart C, 12 CFR , still apply.) Mortgage broker transactions that are table funded (the loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds) are not secondary market transactions and therefore are covered by RESPA. Similarly, neither the creation of a dealer loan or consumer credit contract, nor the first assignment of such loan or contract to a lender, is a secondary market transaction. RESPA: The Real Estate Settlement Procedures Act of 1974 became effective on June 20, It ensures that consumers throughout the nation are provided with more helpful information about the cost of the mortgage settlement and protected from unnecessarily high settlement charges caused by certain abusive practices. RESPA is about closing costs and settlement procedures. It requires that consumers receive disclosures at various times in the transaction and outlaws kickbacks that increase the cost of settlement services. It is designed to help homebuyers be better shoppers in the home buying process, and is enforced by CFPB. An acronym you'll see in relation to RESPA is AfBA, or Affiliated Business Arrangement. One purpose of RESPA is to regulate the referral of business between companies involved in a real estate transaction settlement. SAFE: The Secure and Fair Enforcement for Mortgage Licensing Act or SAFE Act is designed to enhance consumer protection. It required the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the former Office of Thrift Supervision, the National Credit Union Administration, and the Farm Credit Administration, to jointly develop and maintain a Federal registration system for individual employees of Agency-regulated institutions who engage in the business of residential mortgage loan origination. Its goal was to reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators. Also, for the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to establish and maintain a nationwide mortgage licensing system and registry for the residential mortgage industry for the purpose of achieving the following objectives: (1) Providing uniform license applications and reporting requirements for state-licensed loan originators; (2) Providing a comprehensive licensing and supervisory database; (3) Aggregating and improving the flow of information to and between regulators; (4) Providing increased accountability and tracking of loan originators; (5) Streamlining the licensing process and reducing regulatory burden; 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

128 (6) Enhancing consumer protections and supporting anti-fraud measures; (7) Providing consumers with easily accessible information, offered at no charge, utilizing electronic media, including the Internet, regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against, loan originators; (8) Establishing a means by which residential mortgage loan originators would, to the greatest extent possible, be required to act in the best interests of the consumer; (9) Facilitating responsible behavior in the subprime mortgage marketplace and providing comprehensive training and examination requirements related to subprime mortgage lending; and (10) Facilitating the collection and disbursement of consumer complaints on behalf of state mortgage regulators. Effective July 21, 2011, the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) has been transferred to the Consumer Financial Protection Bureau (CFPB) for administration and enforcement. SECURE AND FAIR ENFORCEMENT FOR MORTGAGE LICENSING ACT The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) was Enacted on July 30, 2008, and mandates a nationwide licensing and registration system for residential mortgage loan originators (MLOs). The SAFE Act prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining and maintaining annually: For individuals who are employees of covered financial institution, registration as a registered mortgage loan originator and a unique identifier (federal registration), or For all other individuals, a state license and registration as a state-licensed mortgage Loan originator, and a unique identifier (state licensing/registration). The SAFE Act requires that federal registration and state licensing and registration be accomplished through the same online registration system, the Nationwide Mortgage Licensing System and Registry (Registry). The objectives of the SAFE Act include aggregating and improving the flow of information to and between regulators; providing increased accountability and tracking of MLOs; enhancing consumer protections; supporting anti-fraud measures; and providing consumers with easily accessible information at no charge regarding the employment history of and publicly adjudicated disciplinary and enforcement actions against MLOs. On July 28, 2010, the OCC, Board, FDIC, OTS, NCUA, and FCA (collectively the Agencies) published substantively similar regulations implementing the SAFE Act federal registration requirements for the institutions they supervise and the institutions MLO employees (SAFE Act regulation). On July 21, 2011, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) transferred rule-making authority for the SAFE Act from the Agencies to the Consumer Financial Protection Bureau (CFPB). On December 19, 2011, the CFPB restated the implementing SAFE Act regulations to 12 CFR 1007 (76 Federal Register 78483), establishing a new Regulation G, SAFE Mortgage Licensing Act Federal Registration of Residential Mortgage Loan Originators. These examination procedures lay out the background and requirements of the SAFE Act and the SAFE Act regulation concerning federal registration Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

129 APA: Administrative Procedures Act. Passed in 1946, the Administrative Procedure Act (APA) governs the process by which federal agencies develop and issue regulations. The APA requires most rules to have a 30-day delayed effective date. It includes requirements for publishing notices of proposed and final rulemaking in the Federal Register and provides opportunities for the public to comment on notices of proposed rulemaking. In addition to setting forth rulemaking procedures, the APA addresses other agency actions such as issuance of policy statements, licenses, and permits. It also provides standards for judicial review if a person has been adversely affected or aggrieved by an agency action. DODD-FRANK: Before the crash that devastated our economy in the 2000s, there were seven different regulators with authority over the consumer financial services marketplace. Accountability was lacking because the responsibility was diffused and fragmented. In addition, many mortgage lenders and mortgage brokers were almost completely unregulated. The Dodd- Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation passed in 2010 as a response to the financial crisis of DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT The Dodd Frank Wall Street Reform and Consumer Protection Act (Pub.L , H.R. 4173; commonly referred to as Dodd-Frank) was signed into federal law by President Barack Obama on July 21, Passed as a response to the Great Recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation's financial services industry. The Act is categorized into sixteen titles and, by one law firm's count, it requires that regulators create 243 rules, conduct 67 studies, and issue 22 periodic reports. The stated aim of the legislation is: To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end too big to fail, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes. The Act changes the existing regulatory structure, by creating a number of new agencies (while merging and removing others) in an effort to streamline the regulatory process, increasing oversight of specific institutions regarded as a systemic risk, amending the Federal Reserve Act, promoting transparency, and additional changes. The Act's intentions are to provide rigorous standards and supervision to protect the economy and American consumers, investors and businesses; end taxpayer-funded bailouts of financial institutions; provide for an advanced warning system on the stability of the economy; create new rules on executive compensation and corporate governance; and eliminate certain loopholes that led to the 2008 economic recession. The new agencies are either granted explicit power over a particular aspect of financial regulation, or that power is transferred from an existing agency. All of the new agencies, and some existing ones that are not currently required to do so, are also compelled to report to Congress on an annual (or biannual) basis, to present the results of current plans and explain future goals. Important new agencies created include the Financial Stability Oversight Council, the Office of Financial Research, and the Bureau of Consumer Financial Protection. Of the existing agencies, changes are proposed, ranging from new powers to the transfer of powers in an effort to enhance the regulatory system. The institutions affected by these changes include most of the regulatory agencies currently involved in monitoring the financial system (Federal Deposit Insurance Corporation (FDIC), U.S. Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC), Federal Reserve (the "Fed"), the Securities Investor Protection Corporation (SIPC), etc.), and the final elimination of the Office of Thrift Supervision(further described in Title III Transfer of Powers to the Comptroller, the FDIC, and the FED) Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

130 As a practical matter, prior to the passage of Dodd Frank, investment advisers were not required to register with the SEC if the investment adviser had fewer than 15 clients during the previous 12 months and did not hold itself out generally to the public as an investment adviser. The act eliminates that exemption, thereby rendering numerous additional investment advisers, hedge funds, and private equity firms subject to new registration requirement. Certain non-bank financial institutions and their subsidiaries will be supervised by the Fed in the same manner and to the same extent as if they were a bank holding company. To the extent that the Act affects all federal financial regulatory agencies, eliminating one (the Office of Thrift Supervision) and creating two (Financial Stability Oversight Council and the Office of Financial Research) in addition to several consumer protection agencies, including the Bureau of Consumer Financial Protection, this legislation in many ways represents a change in the way America s financial markets will operate in the future. Few provisions of the Act became effective when the bill was signed. It will take months if not years to see what the true impact of the regulations of Dodd Frank will be. STATE & LOCAL PROGRAMS (incl. TDHCA) The mission of the Texas Department of Housing and Community Affairs is to administer its assigned programs efficiently, transparently, and lawfully, and to invest its resources strategically and develop highquality, affordable housing which allows Texas communities to thrive. However, because several major housing programs require the participation of private investors and private lenders, TDHCA also operates as a housing finance agency. Ensuring program compliance with the many state and federal laws that govern housing programs is another important part of the Department's mission. The Department accomplishes this mission by acting as a conduit for federal grant funds for housing and community services. This ensures the health and safety of TDHCA's housing portfolio and guarantees state and federal resources are expended in an efficient and effective manner. TDHCA also serves as a financial and administrative resource that helps provide essential services and affordable housing opportunities to Texans who qualify for this assistance based on their income level. Additionally, the Department is a resource for educational materials and technical assistance for housing, housing related, and community services matters. Other programs in Texas can be located at AGRICULTURAL LENDING Agricultural lending: A credit financing vehicle, such as a loan, banker's acceptance, or letter of credit, which is designed specifically for agriculture producers. Typically, this financing is used to fund operations, purchase equipment, or acquire real estate. AGRICULTURAL LENDING MARKETS *Provided by: Office of the Comptroller of the Currency Washington, DC Repayment of Ag loans depends primarily on the successful planting and harvest of crops (or the raising and feeding of livestock) and marketing the harvested commodity (including grain, milk, hay, cattle, swine, and poultry). Typically, any illiquid collateral securing the Ag loan represents the secondary, rather than the primary, source of repayment. Similarly, loans for Ag real estate that is farmed by tenants are dependent on cash flow from tenant rental income as the primary source of repayment. Technological advances have had a dramatic effect on Ag production. As new technologies involving fertilization, equipment, irrigation, genetics, and biotechnology have advanced, the supply of most Ag 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

131 commodities has increased. These technological advances have affected virtually all sectors of the Ag industry. In many cases, larger farm operations benefit from economies of scale so they can produce products at a lower per unit cost. Larger farms, however, tend to retain more financial leverage and thus more risk. Changes in consumers preferences have increased demand for farm products raised in a noncommercial setting, creating niche markets often filled by smaller, independent operators. Examples of growth in niche markets include demand for organic foods, specialty crops, free-range livestock and poultry, and gluten-free products. Also, demand for certain food types can vary because of demographic changes and general public perception. Prices may rise or fall based on these changes. Examples include the mad cow disease and avian flu concerns in the early 2000s, a long-term decline in pork product demand, and a spike in egg demand related to the popularity of high protein/low carbohydrate diets. The prices of other commodities indirectly influence Ag markets. For example, energy prices affect many farmers, because natural gas is a basic component of most inorganic nitrogen fertilizers, and gasoline and diesel fuel are used for farm equipment and transportation to market. Banks are competitive in the Ag credit market, but nonbank lenders are increasingly competitive for certain types of Ag loans. These nonbank lenders include the following: Farm Credit System (FCS): The FCS comprises cooperative institutions regulated by the Farm Credit Administration. FCS institutions lend money to farmers through local FCS associations. Wholesale lending (to FCS institutions) is shared between the Farm Credit System Funding Corporation and the regional farm credit banks. The FCS relies exclusively on selling farm credit bonds to fund lending operations. The liability for FCS bond underwriting is jointly and severally shared by the farm credit banks and is guaranteed by the Farm Credit System Insurance Corporation. Primarily, financial institutions purchase the bonds. FCS lenders traditionally are most competitive in the Ag real estate market, because they can issue long-term bonds to offset their interest rate exposure on long-term mortgages. Other products include operating loans, intermediate-term debt for capital purchases, rural home mortgage loans, leases, credit-related life insurance, crop insurance, commercial real estate loans, and accounting/income tax preparation. Farm Service Agency (FSA): The FSA, formerly known as the Farmers Home Administration (FHA), is the agency within the U.S. Department of Agriculture (USDA) that administers federal Ag lending programs. (Appendix C contains descriptions of the federal loan and guarantee programs.) FSA loans are funded from the USDA s budget and from funds repaid by borrowers. The FSA focuses resources on serving small, less experienced, and disadvantaged farmers. Life insurance companies: These companies primarily provide farm real estate financing to larger Ag enterprises, generally borrowers financing amounts greater than $1 million. Captive lenders: Vendors such as equipment manufacturers, seed companies, and retailers normally provide limited-purpose vendor financing to enhance market penetration for their products. Other lenders: These include parents financing their children s Ag operations, property owners providing self-financing for their tenant farmers, and individuals financing the sale of land and other capital assets using a contract for deed or sales contract. REVIEW OF THE NEW LOAN ESTIMATE CFPB requires the lender to provide the consumer with a LOAN ESTIMATE within three days of loan application. A Loan Estimate is a form that lists basic information about the terms of a mortgage loan for 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

132 which the consumer applied. It includes the estimated costs needed to pay for the home loan as well as providing the basic information about the loan, which will help the consumer: Compare offers Understand the real cost of the loan Make an informed decision about your loan choice The lender or the mortgage broker must provide a Loan Estimate within three business days of receiving the application or other required information. No fees can be charged until the Loan Estimate is received, and plans are made to take out the loan; however, a credit report fee can be charged. If the lender denies the application within three business days, it does not have to provide a Loan Estimate. Within 30 days, your lender must disclose why the application was denied. THE LOAN ESTIMATE *Provided by the Consumer Financial Protection Bureau The Loan Estimate tells you important details about the loan you have requested. The lender must provide you a Loan Estimate within three business days of receiving your application. The Loan Estimate is a new form that went into effect on October 3, Every lender must also use the same three-page Loan Estimate form. The new document was designed by the Consumer Financial Protection Bureau to replace the lendercreated Good Faith Estimate form borrowers had been receiving. The form provides the borrower with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. In addition, the form indicates if the loan has special features like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization). If the loan has a negative amortization feature, it appears in the description of the loan product. The form uses clear language and design to help you better understand the terms of the mortgage loan you ve applied for. All lenders are required to use the same standard Loan Estimate form. This makes it easier for you to compare mortgage loans so that you can choose the one that is right for you. The borrower will receive a similar document at closing call the Closing Disclosure. The Loan Estimate will provide you with information on the following: On the first page of the form, under the Loan Terms for the line that says "Loan Amount." Will tell you the amount of money the borrower is borrowing. If the number is more than the borrower asked to borrow, the lender has probably rolled in some closing costs. Closing Costs are on the bottom of Page 2 under Calculating Cash to Close on the line that says: "Closing Costs Financed (Paid from the Loan Amount)." 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

133 The interest rate is on the Loan Terms line that says "Interest Rate." (See above.) The amount of the monthly payment can be found on The Projected Payments. It breaks down the three major parts of a loan payment and shows how they will change over time. Principal & Interest: This is what the borrower paying to reduce the amount borrowed and cover the interest charges. Mortgage Insurance: This coverage limits the lender's loss if the borrower does not make the payments. Banks and mortgage companies usually require this protection when buyers put less than 20% down on a home. During the first seven years of the loan, the borrower will pay a monthly premium. After that, the charge is usually dropped because the borrower has enough equity in the home to drop the coverage or the loan will be reduced to an 80% loan-to-value and the lender will no longer require the premium to be paid. Estimated Escrow: Most lenders will escrow for property taxes, homeowners insurance and association fees in advance and then pay them when they are due on behalf of the borrowers. To see what fees the lender escrows look at the Other Costs on Page 2 of the Loan Estimate. The amount of fees escrowed is for the current year. Even though the "Estimated Escrow" line on Page 1 will not show property taxes and insurance rate increases in the future as they have no way of projecting these increases, the borrower should expect this part of their monthly payment to rise as those premiums, taxes and fees go up. For the borrower to verify that they are obtaining a fixed-rate loan, they will see "No" three times in the Loan Term under the question "Can this amount increase after closing?" Plus, the Projected Payments tab should show the same amount for Principal & Interest in years 1-7 and years If the loan is an adjustable rate loan, the borrower will see "Yes" three times in the Loan Term tab, under the question "Can this amount increase after closing?" Plus, the Projected Payments tab should show different amounts for Principal & Interest in years 1-7 and years To find out the cost of the mortgage, the borrower will look at the list of charges on Page 2 under Loan Costs. These will include items such as the origination fee (a 1% fee that the borrower will pay to the lender for originating a loan for them), mortgage application fees, underwriting fees, etc. These fees typically run between 0.5% and 2% of the loan ($1,000 to $4,000 on a $200,000 loan) Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

134 Discount points are interest you prepay at closing in exchange for a lower interest rate. It is often called "buying down the rate." One discount point (1% of the loan amount) typically decreases the interest rate by to 0.25 of a percentage point on a 30-year mortgage. If the borrower chooses to buy down the interest rate, the fee is disclosed on Page 2 on the Loan Costs under "Origination Charges" where there is a percentage followed by "(Points)." (See arrow above.) Another fee normally paid by the borrower is the appraisal. It is often paid by the buyer because it is their responsibility to get the loan and appraisal is part of that process. The answer on Page 2 in the Loan Costs under "Services You Cannot Shop For will show if the borrower is paying for the appraisal. Normally the appraisal is POC (paid out of closing). What that means is that it will be paid up front before the loan goes to closing and normally paid at loan application. To find the amount of money needed to close, the borrower should look on Page 1 on the Costs at Closing. The borrower can see how the lender arrived at that number by looking at Page 2 on the Calculating Cash to Close tab. Most lenders require that the borrowers bring a certified check to the closing table Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

135 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

136 Loan Estimate: Page 1 questions to ask and items to be clear on before you proceed 1. Check spelling of your name: Ask the lender to correct any inaccurate contact information. Even minor misspellings can cause big problems later. 2. Check loan term, purpose, product and loan type: Make sure the information matches what you discussed with your lender. 3. Is your loan rate locked? Some lenders may lock your rate as part of issuing the Loan Estimate, but some may not. 4. Check that the loan amount is what you are expecting: If you are purchasing a new home, check to see that the loan amount plus your down payment equals the sale price of the home. If it doesn t, ask the lender why. 5. Is your interest rate fixed or adjustable? If the right-hand column says YES, your interest rate is adjustable and can change after closing. Make sure your Loan Estimate shows the type of interest rate you were expecting. If you have an adjustable rate, your Loan Estimate form will have additional information in the Projected Payments table on page 1 and in two additional tables at the bottom of page Does your loan have a pre-payment penalty? His feature is risky. If your loan includes a prepayment penalty, learn more and ask your lender about your other options? 7. Does your loan have a balloon payment? This feature is risky. If your loan includes a balloon payment, ask your lender about your other options. 8. Does the estimated total monthly payment meet your expectations? Are you comfortable spending this much on housing each month? 9. Do you have items in estimated taxes, insurance and assessments that are not escrowed? Are you comfortable spending this much on housing each month? 10. Do you have enough cash on hand to pay your estimated cash to close? This is the amount you will have to pay at closing, in addition to any money you have already paid. This payment is usually made by cashier s check or wire transfer. You will need to provide your lender with proof of the source of these funds Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

137 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

138 Loan Estimate: Page 2 questions to ask and items to be clear on before you proceed. 1. Compare the Origination charges to loan estimates from other lenders. he best way to tell if you have a competitive loan offer is to compare it to Loan Estimates from other lenders. Origination charges are upfront fees charged by your lender, and are an important part of the cost of your loan. When comparing Loan Estimates, make sure to compare the origination charges. Depending on the lender, origination charges may be more or less itemized. Common origination charges include application fees, origination fees, underwriting fees, processing fees, verification fees, and rate-lock fees. It s the total that matters. 2. Does the loan include points? If there is an amount listed on this line, it means that you are paying points to the lender to reduce your interest rate. Did you discuss this choice with the lender? A similar loan may also be available without points, if you prefer. Ask the lender what other options may be available to you, and how the other options would impact your interest rate and the total cost of your loan. 3. Compare the services you cannot shop for with estimates from other lenders. The services and service providers in this section are required and chosen by the lender. Because you can t shop separately for lower prices from other providers, compare the overall cost of the items in this section to the Loan Estimates from other lenders. Some fees in this section may depend on the kind of loan you have chosen. For example, if you have an FHA,VA, or USDA loan, the upfront mortgage insurance premium or funding fee will appear in this section. These fees are usually set by the government program and not the lender. If you have a conventional loan with private mortgage insurance (PMI), any upfront mortgage insurance premium would typically be listed in this section. PMI premiums are set by the private mortgage insurance company, which is usually chosen by your lender. 4. Review the services you can shop for and shop for these services. The services in this section are required by the lender, but you can save money by shopping for these services separately. Along with the Loan Estimate, the lender should provide you with a list of approved providers for each of these services. You can choose one of the providers on the list. You can also look for other providers, but check with your lender about any provider not on the list. 5. Is the homeowner s insurance accurate? The homeowner s insurance premium is set by the homeowner s insurance company, not by the lender. You get to choose your homeowner s insurance company. Comparison shop to find the insurance policy you want and to learn if the amount the lender estimated is accurate for your specific situation. Usually you ll pay the first 6 to 12 months of homeowner s insurance premiums at or before closing. Homeowner s insurance is also sometimes referred to as hazard insurance. 6. Are the property taxes accurate? Property taxes are set by your local or state government, not by the lender. To avoid surprises later, check now to find out whether the lender has estimated these costs accurately. Contact your local tax authority or ask your real estate agent for more information about property taxes in your area. 7. Does your loan include lender credits? If there is an amount listed on this line, it means that the lender is giving you a rebate to offset your closing costs. You may be paying a higher interest rate in exchange for this rebate. Did you discuss this choice with the lender? A similar loan may be available with a lower interest rate and without lender credits, if you prefer. Ask the lender what other options may be available to you, and how the other options would impact your interest rate and the total cost of your loan. 8. Is the estimated cash to close what you were expecting? Our Estimated Cash to Close is the estimated amount of money you will have to bring to closing. This section shows how the Estimated 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

139 Cash to Close was calculated. Your Estimated Cash to Close includes your down payment and closing costs, minus any deposit you have already paid to the seller, any amount the seller has agreed to pay toward your closing costs (seller credits), and other adjustments. If the Estimated Cash to Close isn t what you were expecting, ask the lender to explain why. You will typically need a cashier's check or wire transfer for this amount at closing. The lender you choose will also need to document the source of the funds you bring to closing. Ask the lender about what documents you will need Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

140 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

141 Loan Estimate: Page 3 questions to ask and items to be clear on before you proceed 1. Is the information about the loan officer what you were expecting? Is the loan officer that you are working with listed here? If not, ask questions. Most loan officers are required to be licensed or registered with the Nationwide Mortgage Licensing System & Registry (NMLS). You can look up the loan officer by name or NMLS ID number in the NMLS database. In most cases, it will tell you whether the loan officer is authorized to operate in your state and whether there are any disciplinary actions on their record. 2. Use the comparison section to compare loan estimates. His section offers several useful calculations to compare the cost of this loan offer with other offers from different lenders. Because loan costs vary both across lenders and across different kinds of loans, it s important to request Loan Estimates for the same kind of loan from different lenders. 3. How much will it cost if you make a late payment? It s important to make your mortgage payments on time and in full, every month, to avoid fees and improve your credit record. However, it s good to know in advance how much the fee will be if your payment is late Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

142 REVIEW OF THE CLOSING DISCLOSURE A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs). The Closing Disclosure is a new form. For most kinds of mortgages, borrowers who apply for a loan on or after October 3, 2015 will receive a Closing Disclosure. The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the Loan Estimate that you previously received from the lender. The three days also gives you time to ask your lender any questions before you go to the closing table Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

143 Closing Disclosure: Page Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

144 Closing Disclosure Page 1: questions to ask and items to be clear on before you proceed 1. Check the spelling of your name. Ask the lender to correct any inaccurate contact information. Even minor misspellings can cause big problems later. 2. Check the loan term, purpose, product and loan type match your most recent Loan Estimate. 3. Check that the loan amount matches your most recent Loan Estimate. If it has increased, ask your lender why. A possible reason could be that closing costs have been rolled into your loan. This reduces your upfront costs at closing, but adds to your overall costs because of the added interest you will pay. 4. Check your interest rate. If your interest rate isn't what you were expecting, ask your lender why. If you locked your rate, your lender is only allowed to change it under limited circumstances. 5. Does your loan have a prepayment penalty? This feature is risky. If your loan includes a prepayment penalty, learn more and ask your lender about your other options. 6. Does your loan have a balloon payment? This feature is risky. If your loan includes a balloon payment, learn more and ask your lender about your other options. 7. Check that your total monthly payment matches your most recent Loan Estimate. Make sure you can comfortably afford to pay the Estimated Total Monthly Payment every month. If this number doesn't reflect what you were expecting, ask your lender why it has changed. 8. Check to see if you have items in estimated taxes, insurance and assessments that are not being escrowed. If so, have you budgeted to pay for these costs separately? 9. Check that your closing costs match your most recent Loan Estimate. If there are significant changes in your closing costs, ask your lender to explain why. 10. Check that your cash to close matches your most recent Loan Estimate. If not, ask your lender to explain why Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

145 Closing Disclosure: Page 1989 Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

146 Closing Disclosure Page 2: questions to ask and items to be clear on before you proceed 1. Check that Services that borrower did not shop for is the same as your Loan Estimate. These are third-party services required by your lender in order to get a loan. Compare with Section B, Services You Cannot Shop For and Section C, Services You Can Shop For on page 2 of your Loan Estimate form. Check to see that, overall, there are no new services listed that were not on your Loan Estimate form. The costs should be similar, but may be somewhat different from what was on your Loan Estimate form. 2. Check that price in services borrow did shop for match what you agreed to pay. These are services that you shopped for separately. If there are any services in this section that you do not recognize, or companies that you did not choose, ask your lender to explain what these charges are for and how the companies were chosen Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

147 Closing Disclosure: Page 3 Closing Disclosure Page 3: questions to ask and items to be clear on before you proceed 1. Check that your seller credit reflects what you agreed upon with the seller. This is the amount the seller has agreed to contribute to your closing costs. If the seller has agreed to pay for specific costs rather than contribute a general amount, those amounts may be listed as Seller Paid line items on page 2 instead Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

148 Closing Disclosure: Page Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

149 Closing Disclosure Page 4: questions to ask and items to be clear on before you proceed 1. How much will it cost if you make a late payment? It s important to make your mortgage payments on time and in full, every month, to avoid fees and improve your credit record. However, it s good to know in advance how much the fee will be if your payment is late. 2. Will the lender accept partial monthly mortgage payments? If you are unable to make the full mortgage payment in a given month, your lender may not accept a partial payment. Even if the lender accepts partial payments, the lender may hold them in a separate account instead of applying them to your loan. The lender may also charge you a late fee every month until you make up the difference. The lender may also report you to the credit reporting agencies as not making your required payment. Ask questions so you understand exactly what happens if you can t make a payment in full. 3. Will you have an escrow account? Many homeowners pay their property taxes and homeowner s insurance as part of their monthly payment. This arrangement is called an escrow account. This section tells you: whether you have an escrow account, which homeownership expenses are included in the escrow account, and the estimated costs. Ask questions so you understand exactly what is included in the escrow account and what isn t. For example, homeowner s association fees are often not included in the escrow account. If your Closing Disclosure shows that you don t have an escrow account, but you would prefer to pay your property taxes and homeowner s insurance monthly instead of in one large lump sum, talk to the lender. 4. If you do not have an escrow account, will you be paying a waiver fee to the lender? Some lenders may charge a fee if you choose not to have an escrow account. Did you discuss this choice with your lender? If your Closing Disclosure shows an escrow waiver fee and you would prefer to pay your property taxes and homeowner s insurance monthly into an escrow account instead of paying this fee, talk to the lender Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev

150 Closing Disclosure: Page Vandiver-Morgan, Inc. dba The Real Estate Business School. All rights reserved. Except as permitted under the Copyright Act of 1976 this work may not be reproduced in whole or in part in any manner. Rev