UNIT 5: ETHICS OF PRACTICE AS A LICENSE HOLD- ER

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1 UNIT 5: ETHICS OF PRACTICE AS A LICENSE HOLD- ER INTRODUCTION In a previous unit, we discussed The Real Estate License Law that details licensing laws and regulations that licensed brokers and sales agents must follow. Because ethics are based on the Golden Rule, they frequently impose a higher standard of professionalism than the law. Contrary to popular belief, the practice of ethics in business is not the latest hot topic or trend in business. Centuries ago, Confucius had the following conversation with one of his students, Ze Gong: Ze Gong (Tzu-kung) said, Poor without being obsequious, wealthy without being arrogant. What do you think of this saying? The Master said, That will do, but better still Poor yet delighting in the Way, wealthy yet observant of the rites. Confucius was not against profit as long as it was acquired ethically observant of the rites. As participants in organizations, businesses, families, and life in general, we frequently find ourselves facing ethical dilemmas situations concerning right and wrong where values are in conflict. Real estate professionals must not only be prepared to meet the duties and obligations required by law, they also must keep ethics at the forefront of their everyday practices. By following the Golden Rule when dealing with potential clients and customers, licensees will earn a reputation for operating at a high standard. This leads to referrals and repeat business. Texas Real Estate Principles I, 4 th Edition 219

2 220 Texas Real Estate Principles I Learning Objectives After completing this Unit, you should be able to: 5A 5B 5C differentiate between ethics and law. recall TREC s Canons of Professional Conduct and NAR s Code of Ethics. recognize federal and state consumer protection laws that deal with business practices. ETHICS VS. LAW Ethics and law overlap, but are not the same. Ethics is much more extensive, and carries on after the law ends. The word ethics is from the Greek word ethos meaning moral custom, use, and character. Ethics is a set of principles or values by which an individual guides his or her own behavior and judges that of others. It is frequently defined as a system of moral principles or standards that govern the conduct of members of a group, such as the Texas Canons of Professional Ethics and the Code of Ethics that REALTORS must follow. Ethics refers to our business and social conduct and our attitudes toward others. Professional, ethical standards are the foundation for a successful real estate career. The ability to do repeat business is a direct function of doing business in an ethical manner. A sales agent should align with a brokerage firm that adheres to both legal and ethical business practices. It is important to follow all the correct procedures for transaction paperwork, advertising, trust funds, and fair housing practices. As a real estate sales professional, your livelihood will depend on the integrity of your employing broker s license; therefore, it is imperative to choose a brokerage firm that follows all legal and ethical business practices. By law, a brokerage firm must adhere to all fair housing laws. If your employing broker s license is revoked or suspended, you will have to immediately transfer your license to another broker or stop working. Be sure to follow The Real Estate License Act, the regulations of the Texas Real Estate Commission, and the Deceptive Trade Practices Act.

3 Unit 5: Ethics of Practice as a License Holder 221 BUSINESS ETHICS What do Monsanto, Phillip Morris, Enron/ Arthur Andersen, and Solyndra have in common? They all had ethical problems in the practice of their businesses. The opportunity for repeat business is a direct function of doing business in an ethical manner. Determining the proper course of action is not always easy. For many real estate licensees, the need to make a living can get in the way of doing what is right. Therefore, it may be need rather than greed. What they do not understand is that real estate professionals can make as much or more money by being ethical. Texas real estate license holders must follow the Texas Real Estate Commission s Canons of Professional Ethics and Conduct for Licensees. Additionally, if the licensee is a member of the Texas Association of REALTORS, he or she must follow the Code of Ethics published by the National Association of REALTORS. Real estate brokerage firms should include ethics training as part of its orientation. The ethical behavior to be taught and practiced in a company is behavior that is consistent with the principles, norms, and standards of practice that have been established by and are in agreement with societal norms. Over time, a real estate company will reflect the beliefs and behavior of management. If management practices ethical behavior, longtime associates will reflect that behavior in their actions. The state of Texas decrees ethics training in its bi-yearly continuing education (CE) requirement and the National Association of REALTORS requires training in its Code of Ethics every four years for its membership. TREC Canons of Professional Ethics and Conduct for Licensees Stressing the importance of business ethics, the Texas legislature wrote the Canons of Professional Ethics into the state statutes. The Rules of the Texas Real Estate Commission Title 22, Chapter 531 have five Canons of Professional Ethics and Conduct that apply to real estate licensees when acting as fiduciaries.

4 222 Texas Real Estate Principles I A fiduciary is a person who is faithful, loyal, and trustworthy. A fiduciary relationship is one that implies a position of trust and confidence. As a fiduciary, a real estate licensee must exercise a standard of duty and care when representing a client in a real estate transaction. The courts use a standard of care to decide whether an agent has used reasonable skill and care in a disputed transaction. Reasonable care refers to the amount of care that an average, rational person would take under the same or similar circumstances. A judge would determine if, under similar circumstances, a reasonably prudent broker would use the same amount of care to protect the best interests of the client. If the answer is yes, then the agent acted responsibly. A licensee must subordinate his or her own interest to the client s interest and must not profit from the relationship, unless agreed to by the client. The canons also support the Federal Fair Housing Act in forbidding discrimination in real estate activities. The Five Canons These canons are similar in content to general business ethics and codes of ethics of many professional and trade associations. The Canons of Professional Ethics and Conduct for Licensees are found in Chapter 531 of the Rules of the Texas Real Estate Commission and emphasize the agency/ principal relationship established by TREC. Fidelity A real estate broker or sales agent, while acting as an agent for a client is a fiduciary. The primary duty of a real estate agent is to represent the interests of his or her client. Special obligations are imposed on real estate licensees when fiduciary relationships are created. [TAC 531.1]. Duties of a Licensee as a Fiduciary A licensee must make his or her position clear to all parties concerned in a real estate transaction. As a fiduciary, the licensee represents his or her client but must treat other parties to a transaction fairly. The real estate agent must be faithful and observant to the trust placed in him or her by the client. A licensee must perform duties scrupulously and meticulously. The real estate agent must place no personal interest above the client s interest.

5 Unit 5: Ethics of Practice as a License Holder 223 Integrity A real estate broker or sales agent has a special obligation to exercise integrity in the discharge of his or her responsibilities, including employment of prudence and caution to avoid misrepresentation, in any manner, by acts of commission or omission. [TAC 531.2]. Competency It is the obligation of a real estate agent to be knowledgeable as a real estate brokerage practitioner. [TAC 531.3]. An agent should be informed on market conditions affecting the real estate business and pledge to continuing education in the intricacies involved in marketing real estate for others. An agent should be informed on national, state, and local issues and developments in the real estate industry. An agent should exercise judgment and skill in the performance of his work. Case Study The owner of a residential property entered into a property management agreement with a broker. The broker advised the owner to accept a prospective tenant with a City of Houston Section 8 voucher that was less than the rental amount listed for the property. The broker also advised the owner to accept a pay ment of additional money outside the written lease agreement. The broker then prepared, and the owner signed a lease, which lowered the rent to the voucher amount but increased the security deposit. In addition, the broker prepared a lease addendum cited past due although the rents were not past due. Finally, the broker advised the owner in an to leave her belongings in the house and let the Section 8 inspector mistakenly think that the personal property belonged to the prospective tenant. Although the owner eventu ally terminated the listing agreement with the broker and found a new tenant, the owner filed a complaint with TREC. Result: The broker entered into an agreed order with TREC admitting that she failed to be knowledge able as a real estate brokerage practitioner in viola tion of of the TREC Rules, and acted negli gently or incompetently in her role as an agent for the owner in violation of Tex. Occ. Code (b)(1). TREC reprimanded the broker, assessed an adminis trative penalty of $500, and ordered the broker to take 30 classroom hours in a property management course.

6 224 Texas Real Estate Principles I Consumer Information Form Each active real estate broker or real estate inspector must display Consumer Information Form 1-1 prominently in each place of business that the broker or inspector maintains. The form contains information about the two recovery funds administered by TREC. [TAC ]. Illegal Discriminatory Practices No real estate licensee shall inquire about, respond to, facilitate inquiries about, or make a disclosure that indicates any preference, limitation, or discrimination based on protected classes. Protected classes include race, color, religion, sex, national origin, ancestry, and familial status. Protected classes also include disability of an owner, previous or current occupant, potential purchaser, lessor or potential lessee of real property. A person with a disability includes a person who had, may have had, has, or may have AIDS, HIV-related illnesses or HIV infection as defined by the Centers for Disease Control of the U.S. Public Health Service. [TAC ].

7 Unit 5: Ethics of Practice as a License Holder 225 This Rule is reinforced by TRELA (1) and the Texas Property Code 5.008(c) extends the obligation of nondisclosure to sellers as well. Enforcing the Canons TREC takes enforcement of ethics by licensees and non-licensees (when illegally practicing real estate) very seriously. Examples of Violations and Their Penalties TREC Website Agreed reprimand of sales agent license, entered January 25, 2011 Agreed administrative penalty of $2,000, entered April 18, 2011 Agreed reprimand of sales agent license, entered July 18, 2007; Agreed administrative penalty of $500, entered July 18, 2007 Agreed reprimand of sales agent license, entered March 1, 2007; Agreed administrative penalty of $1,000, entered March 1, 2007 acting negligently or incompetently while acting as a broker or sales agent by giving out a lock box property access code to a prospective tenant without authority, in violation of Tex. Occ. Code (b)(1). procuring or attempting to procure a license under this chapter for the license holder or sales agent by fraud, misrepresentation, or deceit or by making a material misstatement of fact in an application for a license, in violation of Tex Occ. Code (a)(2). engaging in misrepresentation, dishonesty or fraud when selling, buying, trading, or leasing real property in the name of the license holder by failing to include agreed-upon repairs in the contract for sale of her own property to another, by checking the box for intermediary on the broker information page of the contract, by failing to discuss having an inspection performed on the property and for delaying completion of agreed-upon repairs, in violation of (a)(3) of the Texas Occupations Code failing to exercise judgment and skill in the performance of her work by failing to have a written agreement with the sellers regarding compensation which later led to a civil dispute, in violation of 22 TAC 531.1(3) of the Rules of the Texas Real Estate Commission

8 226 Texas Real Estate Principles I Agreed administrative penalty of $1,000, entered June 4, 2008 Assessment of an administrative penalty of $5,000, entered August 13, 2010 engaging in the business of, or advertising or holding itself out as engaging in or conducting the business of a real estate sales agent without first obtaining a real estate license by accepting commissions for and assisting in negotiations between sellers and buyers for the sale of commercial property, in violation of of the Texas Occupations Code advertising or marketing the company s services in a false, misrepresentative, misleading, deceptive, or unfair manner in violation of Tex. Occ. Code (a)(6). Agreed two-year suspension of sales agent license fully probated for two years. Agreed administrative penalty of $2, Agreed 25 months suspension of sales agent license fully probated for 25 months, effective June 1, 2011; Agreed administrative penalty of $3,000, entered June 1, 2011 respondent managed property without the knowledge of her broker and failed to use trust accounts and account for security deposits or provide monthly statements. misrepresentation, or deceit or by making a material misstatement of fact in an application for a license, in violation of Tex. Occ. Code (a)(2); failing to provide, within a reasonable time, information requested by the Commission that relates to a formal or informal complaint to the Commission that would indicate a violation of this chapter, in violation of Tex. Occ. Code (a)(6); and failing to notify the Commission, not later than the 30th day after the date of a final conviction or the entry of a plea of guilty or nolo contendere, that the person has been convicted of or entered a plea of guilty or nolo contendere to a felony or a criminal offense involving fraud, in violation of Tex. Occ. Code (a)(9) The common theme that runs through all of these violations includes misrepresentation, deceit, dishonesty, and fraud. All of these are violations of ethical business practices.

9 Unit 5: Ethics of Practice as a License Holder 227 Professional Codes of Conduct Every professional group or trade association adopts a code of conduct or standards of practice for its members. A trade association is a voluntary nonprofit organization of independent and competing business units engaged in the same industry or trade, formed to help solve industry problems, promote progress, and enhance service. Doctors, attorneys, and accountants who belong to professional associations, follow their codes of ethics. The real estate industry is no different. National Association of REALTORS The National Association of REALTORS (NAR) was founded on May 12, 1908 as the National Association of Real Estate Exchanges. Its purpose was to provide self-regulation of the real estate industry and regain the public s confidence in the real estate profession. At that time, there were 120 founding members, 19 boards, and one state Association. In 1972, the name was changed to the National Association of REALTORS. Today, with over 1 million members, 54 State Associations (including Guam, Puerto Rico, and the Virgin Islands), and more than 1,400 local Associations (Boards); the National Association of REALTORS is the largest trade association in the United States. A real estate board or association is made up of members who share an interest in the business of real estate. By becoming, a member in a local board or association of REALTORS, membership to the state and national associations is automatically extended. A member of NAR is a REALTOR and must follow NAR s rules and the Code of Ethics. The Texas Association of REALTORS was established on October 11, TAR performs the same function as NAR, but on the state level. Major Real Estate Related Trade Associations: National Association of REALTORS Texas Association of REALTORS Real Estate Center

10 228 Texas Real Estate Principles I NAR Code of Ethics The National Association of REALTORS Code of Ethics, adopted in 1913, served as a model for many of the original state licensing laws. The following quotation from the NAR Code of Ethics illustrates the importance of real estate in our society. Under all is the land. Upon its wise utilization and widely allocated ownership depends the survival and growth of free institutions and of our civilization. The NAR Code of Ethics was created to protect and promote private ownership of real property, establish and promulgate high professional standards of education and behavior, and foster respect for real estate professionals. The basis of the NAR Code of Ethics is the Golden Rule often expressed as Do unto others as you would have them do unto you. This is also known as the Ethic of Reciprocity, which states that each person should treat others in a decent manner. If the Golden Rule is found in almost all religions, ethical systems, and philosophies, why is the concept cloudy for so many people? The Code of Ethics is typically updated yearly to reflect the current business environment and practices. The Code has Three Divisions Duties to Clients and Customers Duties to the Public Duties to fellow REALTORS Those duties are then expressed in the 17 articles or principles that a member of the National Association of REALTORS a REALTOR agrees to abide by when joining that organization. Each article has Standards of Practice, which are real world applications of the principles referenced in the Articles. Even if you are not a NAR member, the Code of Ethics provides excellent standards of practice. Complaints of Ethics Violations Local Associations of REALTORS receive complaints alleging ethics violations against their members.

11 Unit 5: Ethics of Practice as a License Holder 229 Typically, a grievance panel will conduct an initial review to determine if the complaint alleges a violation of the NAR Code of Ethics. If there is an alleged ethics violation, a hearing panel will convene to hear testimony and presentation of evidence, decide whether a violation of the association s code of ethics occurred, and order any warranted disciplinary action. The panel will advise the parties of any rights to appeal the decision. Typical Disciplinary Action Reprimand Fine Probation Suspension of membership Revocation of membership Any combination of the above actions TAR began a citation policy in January 2011, to provide an option for faster resolution of ethics complaints. Only complaints related to certain articles (NAR Code of Ethics) qualify for the program. A grievance tribunal determines whether a complaint is subject to citation. If a citation is issued, the respondent is advised that he or she has the right to request a full due process hearing rather than pay the citation fine. Sanctions for an agreed-to citation include fines and education. UNFAIR BUSINESS PRACTICES An important part of business ethics is avoiding unfair business practices. Licensees should understand the federal and state regulations that protect consumers from unfair business practices. Regulations include federal and state antitrust laws, the Texas Deceptive Trade Practices Act, and the Texas Real Estate Fraud Act. Antitrust and Unfair Competition Laws Real estate is a competitive industry, which can foster illegal acts by licensees who are vying for business and seeking a competitive advantage. Certain firms will offer a variety of services at certain prices in an effort to outlast their competition. Some go to extremes when competing for business, which calls for regulatory measures by the federal and state governments.

12 230 Texas Real Estate Principles I Federal and state antitrust laws prohibit unwarranted restraints on free and open competition. Antitrust violations are not just ways of doing business they are serious crimes for which the penalties are severe. Licensees who violate the antitrust laws are committing a felony for which they could go to prison. Additionally, licensees found guilty of violating the antitrust laws are liable to their victims for three times the amount of the injury. Actions Prohibited by Federal & State Antitrust Laws Federal and state antitrust laws are created to protect and preserve business competition. The laws prohibit businesses from forming a monopoly and restrict the way businesses interact with their competitors and customers. These laws cover many specific actions, including monopolies and horizontal arrangements. Monopolies A monopoly exists when a person or group has exclusive control over a product or service within a given region. It is illegal for businesses to conspire with others to drive its competitors out of business in order to create a monopoly. Sometimes a natural monopoly occurs. A natural monopoly results from circumstances over which the business has no control, e.g. the product or service is so specialized that only one provider is needed to meet the demand. Natural monopolies are not illegal. A legal monopoly occurs when the government gives the exclusive control over a specified commercial activity to a single party, e.g. providing utility service. Horizontal Arrangements Business agreements between competitors are called horizontal arrangements. Some horizontal arrangements conflict with antitrust laws. All business agreements for the intentional purpose of restraining trade or gaining a monopoly in the market are illegal. These agreements could include price fixing, boycotting, dividing the market, and tying.

13 Unit 5: Ethics of Practice as a License Holder 231 Price Fixing Price fixing is the collaboration or agreement of one or more persons to set a fixed price for goods or services, thereby removing the ability of a free market to influence prices. A real estate company is not allowed to collaborate with another real estate company to set a standard commission to be charged. The agreement does not need to be in writing even an informal understanding concerning commission rates between competing brokers is illegal. This is considered horizontal price fixing, which is the agreement between competitors to set their prices at the same amount or within the same range. Group Boycotting Group boycotting, also called a collective refusal to deal, is the deliberate exclusion of a particular business or group from the benefits of competition and inclusion. An example of boycotting in real estate would be two brokers who decide to collaborate and refuse to show any of the properties listed by another broker, in an effort to force the broker out of business. Unlike a boycott by consumers of a particular business, a group boycott is unlawful because it has the effect of restraining freedom of trade. Occasionally, a joint venture is in violation of antitrust laws. For example, there may be an antitrust violation if several competing brokerage firms form a joint venture and exclude others particularly if there are more businesses included in the joint venture than those that are excluded. Market Division Market division (allocation of customers) occurs when two or more competing businesses agree to divide the market among themselves. This is an illegal arrangement because it limits the ability of the public to negotiate for the best price and services. Usually, the market division is geographic. The businesses agree not to enter into the geographic area assigned to their

14 232 Texas Real Estate Principles I competitors to sell their products or services. In real estate, this could occur if two brokers agree that one will only take business from one section of town and the other will only take business from another section of town. The market can also be divided by product. In real estate, this could occur if one broker agrees to specialize only in townhouses and condominiums and the other broker only handles the single-family residences. Tying Tying is the illegal action of requiring buyers to purchase one product or service (tied product or service) in order to obtain another product or service (tying product or service). This practice is more common in consumer products. For example, a consumer may purchase a breadbox that is guaranteed to keep bread fresh for two weeks at a reduced rate provided a specific loaf of bread is purchased. An example of tying in real estate would be for a mortgage broker to require a buyer to use an affiliated insurance company in order for the buyer to obtain a loan with favorable interest rate and terms. Federal Antitrust Laws The U.S. Congress passed the Sherman Antitrust Act of The Sherman Antitrust Act is the basic federal antitrust statute. The act prohibits collaboration between companies and individuals when the collaboration has the affect of restraining trade. For many years, the federal authorities did not enforce the act due to various Supreme Court rulings. President Theodore Roosevelt invoked the Sherman Antitrust Act in his trust-busting campaigns, and in 1904, the Supreme Court upheld the government s suit dissolving the Northern Securities Company. In 1914, the Clayton Antitrust Act was enacted to supplement the Sherman Antitrust Act. This law specifically prohibits leases, sales, contracts for sale, or other conditions, agreements, or understandings that have the effect of substantially lessening competition or creating a monopoly in a line of commerce. Price fixing, price discrimination, tying, and exclusive dealing are covered by this law. In 1936, Congress passed the Robinson-Patman Act to amend the Clayton Act and strengthen prohibitions on price discrimination. The federal antitrust acts are regulated and enforced by the Department of Justice (DOJ) and the Federal Trade Commission (FTC).

15 Unit 5: Ethics of Practice as a License Holder 233 Texas Antitrust Law The Texas antitrust law is the Free Enterprise and Antitrust Act of 1983, found in Section 15 of the Business and Commerce Code. It has provisions that are substantially similar to the Sherman Act and the Clayton Act. The purpose of the Act is to maintain and promote economic competition in trade and commerce occurring wholly or partly within the State of Texas and to provide the benefits of that competition to consumers in the state. Texas Real Estate Fraud Act SUMMARY The Real Estate Fraud Act is found in of the Texas Business and Commerce Code. The Act provides similar protections to those found in the DTPA but applies to all real estate transactions, regardless of dollar amount. Real estate fraud is the false representation of a past or existing material fact, made to induce a person to enter into a contract, and relied on. The two types of fraud claims in Texas are common-law fraud and statutory fraud. Common-law fraud is a promise to perform made when the promisor did not intend to perform the promise. Under Section of the Business & Commerce code, statutory fraud is defined as a representation of a past or existing material fact that was false or a false promise to do any act with no intention of fulfilling the promise that (1) were made to induce a person to enter into a contract, (2) were relied upon by that person entering the contract, and (3) caused injury. If a broker benefits from a fraud committed by another, that broker is liable only if he or she was actually aware of the fraud and failed to disclose it to the principal. Plaintiffs may recover actual and exemplary damages as well as legal fees and costs. Law and ethics overlap, but are not the same. Ethics frequently impose a higher standard of professionalism than the law and refer to our business and social conduct and our attitudes toward others. Every real estate licensee in Texas must adhere to The Real Estate License Act (TRELA) and the Texas Administrative Code (TAC). In addition, every licensee who is also a REALTOR (member of NAR) must follow the NAR Code of Ethics. Of course, if every licensee followed the Golden Rule, the public and the real estate industry would be better served.

16 234 Texas Real Estate Principles I The Canons of Professional Ethics and Conduct for Licensees start in Chapter 531 of the Texas Administrative Code and emphasize the agency/principal relationship established by TREC. The Canons demand fidelity, integrity, and competency.