Lesson Ten: Agency, Ethics and the Law

Transcription

1 Lesson Ten: Agency, Ethics and the Law Lesson Topics This lesson focuses on the following topics: Distinction between State Law, Professional Ethics, and Personal Morals Federal and State Law Relating to all License Holders TRELA and Rules of the Commission (Ethics) Professional Codes of Ethics Minimum Ethical Standards Lesson Learning Objectives At the conclusion of this lesson you will be able to: Identify the role of the Texas Real Estate Commission in protecting the public and describe its structure. Summarize the basic components of the Real Estate License Act. Recognize the violations that an agent must be aware of in real estate practice. Explain the rules of the Texas Real Estate Commission and how they ensure protection of the real estate consumer. Distinction between State Law, Professional Ethics, and Personal Morals State laws are rules that are enforced by authority. Real estate laws can be both state and/or federal laws. Even city laws have an effect on our day to day activity. In court cases where there are no state or federal laws that cover the issue, court cases develop common law that becomes a precedent for future issues. Even when we do not agree with a certain law, we know we must follow the law. If we do not, there are consequences. Ethics are motivation based on ideas of right and wrong. For example, our National Association of REALTORS Code of Ethics is a written document defining expectations of Page 1 of 97

2 REALTORS on ideal of right and wrong. If we violate a Code of Ethics, there are disciplinary actions and fines. Morals are values that we attribute to a system of beliefs. The human race is affected by the environment in which we are raised. No two humans are raised the same way. As a result of the way we are raised, our morals are developed as to what is right and wrong. Opinions can vary greatly as to what is ethical, moral, right or wrong. Knowing what is in the Texas Real Estate Licensing Act and the REALTOR Code of Ethics is the best way to practice real estate. However nothing can take the place of good judgment and common sense. Real estate is a unique business where situations occur that you may have never encountered or prepared for. A good moral compass is essential to be a good real estate professional. Consequences for violating your own moral compass are more personal. You have to live with yourself. This could certainly affect your business if clients believe you do not always do what is correct and right. How a Law Becomes a Law in Texas An Overview of Business Law. GREG'S RESOURCE CENTER FOR PARALEGALS. Legislation refers to the preparation and enactment of laws by a legislative body through its lawmaking process. The legislative process includes evaluating, amending, and voting on proposed laws and is concerned with the words used in the bill to communicate the values, judgments, and purposes of the proposal. An idea becomes an item of legislative business when it is written as a bill. A bill is a draft, or tentative version, of what might become part of the written law. A bill that is enacted is called an act or statute. Ideas for legislation can come from legislators who have experience in a particular field, or legislators can copy legislation because an idea that works well in one jurisdiction can be useful to its neighbors. Legislators also receive proposals from the National Conference of Commissioners on Uniform State Laws; a conference of 250 lawyers Page 2 of 97

3 appointed by governors to represent the states. The Council of State Governments, the American Law Institute, the American Bar Association, and numerous other organizations all produce model acts for legislatures. Protection and promotion of social and economic interests of particular groups also motivate legislation. Interests groups usually become involved in the legislative process through lobbyists. The general procedure of enactment of legislation is governed by the relevant constitution. When a bill is first introduced by a sponsor it is referred to a committee. If the bill must go through more than one committee, the first committee must refer it to the second. To accommodate interested and affected groups and to eliminate technical defects a bill can be amended. If the committee recommends that the bill be passed, the bill is placed on the agenda for action by the full legislative body, or floor action. After a lengthy and complex procedure of deliberation and debates, legislators vote on the final passage of the bill. In bicameral legislatures (legislatures that are divided into to two bodies as Senate and House in the United States government) the bill must be passed through both houses in exactly the same form to become the law. When the two houses cannot agree on a final form for the bill, a complex procedure of compromise is attempted. Once the bill is approved by both houses and is put into final form, it must be signed by the executive. An executive can refuse to sign a bill and can return it to the legislature with a veto message explaining why. If the executive signs the bill, it is filed and becomes law. (Source: An Overview of Business Law Federal and State Law Relating to all License Holders Many federal laws guide the actions of all real estate license holders: Read them and become familiar with what they say, what you can do and what you cannot do. Page 3 of 97

4 Truth and Lending Act of 1968 Truth and Lending Act of 1968 promotes informed use of consumer credit and requires lenders to make disclosures to borrowers about terms and cost to standardize the manner in which the costs associated with borrowing are calculated and disclosed. Truth in Lending. Office of the Comptroller of the Currency The Truth in Lending Act (TILA) protects you against inaccurate and unfair credit billing and credit card practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans. For loans covered under TILA, you have a right of rescission, which allows you three days to reconsider your decision and back out of the loan process without losing any money. This right helps protect you against high-pressure sales tactics used by unscrupulous lenders. Truth in Lending Act (TILA) does not tell banks how much interest they may charge or whether they must grant a consumer loan. Learn more. Read Facts for Consumers: Home Equity Credit Lines on the Federal Trade Commission Web site and Office of the Controllers of the Currency s (OCC) Answers about Consumer Loans. Federal law authorizes the Office of the Controllers of the Currency s (OCC) to order supervised institutions to make monetary and other adjustments to the accounts of consumers where an annual percentage rate (APR) or finance charge was inaccurately disclosed under certain circumstances. An interagency policy statement on administrative enforcement and related questions and answers provide additional information for consumers and institutions. (Source: Page 4 of 97

5 The Federal Fair Housing Act of 1968 Fair Housing Act. Wikipedia. The Fair Housing Act (Title VIII of the Civil Rights Act of 1968) introduced meaningful federal enforcement mechanisms. It outlaws: Refusal to sell or rent a dwelling to any person because of race, color, religion, sex, familial status, or national origin. Types of Banned Discrimination The Civil Rights Act of 1968 prohibited the following forms of discrimination: Refusal to sell or rent a dwelling to any person because of his/her race, color, religion or national origin. People with disabilities and families with children were added to the list of protected classes by the Fair Housing Amendments Act of 1988; gender was added in 1974 (see below). Discrimination against a person in the terms, conditions or privilege of the sale or rental of a dwelling. Advertising the sale or rental of a dwelling indicating preference of discrimination based on race, color, religion or national origin (amended by Congress as part of the Housing and Community Development Act of 1974 to include sex [18] and, as of 1988, people with disabilities and families with children.) Coercing, threatening, intimidating, or interfering with a person's enjoyment or exercise of housing rights based on discriminatory reasons or retaliating against a person or organization that aids or encourages the exercise or enjoyment of [fair housing] rights. (Source: Texas Fair Housing Act Sec SHORT TITLE. This chapter may be cited as the Texas Fair Housing Act. Added by Acts 1993, 73rd Leg., ch. 268, Sec. 40, eff. Sept. 1, Page 5 of 97

6 Sec Texas Workforce Commission. The powers and duties exercised by the Commission on Human Rights under this chapter are transferred to the Texas Workforce Commission. A reference in this chapter to the "commission" means the Texas Workforce Commission. Sec Purposes. The purposes of this chapter are to: (1) provide for fair housing practices in this state; (2) create a procedure for investigating and settling complaints of discriminatory housing practices; and (3) provide rights and remedies substantially equivalent to those granted under federal law. Sec Definitions. In this chapter: (1) "Aggrieved person" includes any person who: (A) claims to have been injured by a discriminatory housing practice; or (B) believes that the person will be injured by a discriminatory housing practice that is about to occur. (2) "Complainant" means a person, including the commission that files a complaint under Section (3) Repealed by Acts 2003, 78th Leg., ch. 302, Sec. 4(3). (4) "Conciliation" means the informal negotiations among an aggrieved person, the respondent, and the commission to resolve issues raised by a complaint or by the investigation of the complaint. (5) "Conciliation agreement" means a written agreement resolving the issues in conciliation. (6) "Disability" means a mental or physical impairment that substantially limits at least one major life activity, a record of the impairment, or being regarded as having the impairment. The term does not include current illegal use or addiction to any drug or illegal or federally controlled substance and does not apply to an individual Page 6 of 97

7 because of an individual's sexual orientation or because that individual is a transvestite. (7) "Discriminatory housing practice" means an act prohibited by Subchapter B or conduct that is an offense under Subchapter I. (8) "Dwelling" means any: (A) structure or part of a structure that is occupied as, or designed or intended for occupancy as, a residence by one or more families; or (B) vacant land that is offered for sale or lease for the construction or location of a structure or part of a structure described by Paragraph (A). (9) "Family" includes a single individual. (10) "Respondent" means: (A) a person accused of a violation of this chapter in a complaint of discriminatory housing practice; or (B) a person identified as an additional or substitute respondent under Section or an agent of an additional or substitute respondent. (11) "To rent" includes to lease, sublease, or let, or to grant in any other manner, for a consideration, the right to occupy premises not owned by the occupant. (12) "Person" means: (A) an individual; (B) a corporation, partnership, association, unincorporated organization, labor organization, mutual company, joint-stock company, and trust; and (C) a legal representative, a trustee, a trustee in a case under Title 11, U.S.C., a receiver, and a fiduciary. Sec Familial Status. A discriminatory act is committed because of familial status if the act is committed because the person who is the subject of discrimination is: (1) pregnant; (2) domiciled with an individual younger than 18 years of age in regard to whom the person: (A) is the parent or legal custodian; or Page 7 of 97

8 (B) has the written permission of the parent or legal custodian for domicile with that person; or (3) in the process of obtaining legal custody of an individual younger than 18 years of age. Subchapter B. Discrimination Prohibited Sec SALE OR RENTAL. (a) A person may not refuse to sell or rent, after the making of a bona fide offer, refuse to negotiate for the sale or rental of, or in any other manner make unavailable or deny a dwelling to another because of race, color, religion, sex, familial status, or national origin. (b) A person may not discriminate against another in the terms, conditions, or privileges of sale or rental of a dwelling or in providing services or facilities in connection with a sale or rental of a dwelling because of race, color, religion, sex, familial status, or national origin. (c) This section does not prohibit discrimination against a person because the person has been convicted under federal law or the law of any state of the illegal manufacture or distribution of a controlled substance. Sec Publication. A person may not make, print, or publish or effect the making, printing, or publishing of a notice, statement, or advertisement that is about the sale or rental of a dwelling and that indicates any preference, limitation, or discrimination or the intention to make a preference, limitation, or discrimination because of race, color, religion, sex, disability, familial status, or national origin. Sec Inspection. A person may not represent to another because of race, color, religion, sex, disability, familial status, or national origin that a dwelling is not available for inspection for sale or rental when the dwelling is available for inspection. Page 8 of 97

9 Sec Entry into Neighborhood. A person may not, for profit, induce or attempt to induce another to sell or rent a dwelling by representations regarding the entry or prospective entry into a neighborhood of a person of a particular race, color, religion, sex, disability, familial status, or national origin. Sec Disability. (a) A person may not discriminate in the sale or rental of, or make unavailable or deny, a dwelling to any buyer or renter because of a disability of: (1) the buyer or renter; (2) a person residing in or intending to reside in that dwelling after it is sold, rented, or made available; or (3) any person associated with the buyer or renter. (b) A person may not discriminate against another in the terms, conditions, or privileges of sale or rental of a dwelling or in the provision of services or facilities in connection with the dwelling because of a disability of: (1) the other person; (2) a person residing in or intending to reside in that dwelling after it is sold, rented, or made available; or (3) any person associated with the other person. (c) In this section, discrimination includes: (1) a refusal to permit, at the expense of the person having a disability, a reasonable modification of existing premises occupied or to be occupied by the person if the modification may be necessary to afford the person full enjoyment of the premises; (2) a refusal to make a reasonable accommodation in rules, policies, practices, or services if the accommodation may be necessary to afford the person equal opportunity to use and enjoy a dwelling; or (3) the failure to design and construct a covered multifamily dwelling in a manner: Page 9 of 97

10 (A) that allows the public use and common use portions of the dwellings to be readily accessible to and usable by persons having a disability; (B) that allows all doors designed to allow passage into and within all premises within the dwellings to be sufficiently wide to allow passage by a person who has a disability and who is in a wheelchair; and (C) that provides all premises within the dwellings contain the following features of adaptive design: (i) an accessible route into and through the dwelling; (ii) light switches, electrical outlets, thermostats, and other environmental controls in accessible locations; (iii) reinforcements in bathroom walls to allow later installation of grab bars; and (iv) kitchens and bathrooms that are usable and have sufficient space in which an individual in a wheelchair can maneuver. (d) Compliance with the appropriate requirements of the American National Standard for buildings and facilities providing accessibility and usability for persons having physical disabilities, commonly cited as "ANSI A 117.1," satisfies the requirements of Subsection (c)(3)(c). (e) Subsection (c) (3) does not apply to a building the first occupancy of which occurred on or before March 13, (f) This section does not require a dwelling to be made available to an individual whose tenancy would constitute a direct threat to the health or safety of other individuals or whose tenancy would result in substantial physical damage to the property of others. (g) In this subsection, the term "covered multifamily dwellings" means: (1) buildings consisting of four or more units if the buildings have one or more elevators; and (2) ground floor units in other buildings consisting of four or more units. Page 10 of 97

11 Sec Residential Real Estate Related Transaction. (a) A person whose business includes engaging in residential real estate related transactions may not discriminate against another in making a real estate related transaction available or in the terms or conditions of a real estate related transaction because of race, color, religion, sex, disability, familial status, or national origin. (b) In this section, "residential real estate related transaction" means: (1) the making or purchasing of loans or the provision of other financial assistance: (A) to purchase, construct, improve, repair, or maintain a dwelling; or (B) to secure residential real estate; or (2) the selling, brokering, or appraising of residential real property. Sec Brokerage Services. A person may not deny another access to, or membership or participation in, a multiplelisting service, real estate brokers' organization, or other service, organization, or facility relating to the business of selling or renting dwellings, or discriminate against a person in the terms or conditions of access, membership, or participation in such an organization, service, or facility because of race, color, religion, sex, disability, familial status, or national origin. Subchapter C. Exemptions Sec Sales and Rentals Exempted. (a) Subchapter B does not apply to: (1) the sale or rental of a single-family house sold or rented by the owner if: (A) the owner does not: (i) own more than three single-family houses at any one time; or (ii) own any interest in, nor is there owned or reserved on the person's behalf, under any express or voluntary agreement, title to or any right to any part of the proceeds from the sale or rental of more than three singlefamily houses at any one time; and (B) the house is sold or rented without: Page 11 of 97

12 (i) the use of the sales or rental facilities or services of a broker, agent, or salesperson licensed under Chapter 1101, Occupations Code, or of an employee or agent of a licensed broker, agent, or salesperson, or the facilities or services of the owner of a dwelling designed or intended for occupancy by five or more families; or (ii) the publication, posting, or mailing of a notice, statement, or advertisement prohibited by Section ; or (2) the sale or rental of the rooms or units in a dwelling containing living quarters occupied by or intended to be occupied by not more than four families living independently of each other, if the owner maintains and occupies one of the living quarters as the owner's residence. (b) The exemption in Subsection (a)(1) applies only to one sale or rental in a 24-month period if the owner was not the most recent resident of the house at the time of the sale or rental. Sec Religious Organization, Private Club, and Appraisal Exemption. (a) This chapter does not prohibit a religious organization, association, or society or a nonprofit institution or organization operated, supervised, or controlled by or in conjunction with a religious organization, association, or society from: (1) limiting the sale, rental, or occupancy of dwellings that it owns or operates for other than a commercial purpose to persons of the same religion; or (2) giving preference to persons of the same religion, unless membership in the religion is restricted because of race, color, or national origin. (b) This chapter does not prohibit a private club that is not open to the public and that, as an incident to its primary purpose, provides lodging that it owns or operates for other than a commercial purpose from limiting the rental or occupancy of the lodging to its members or from giving preference to its members. (c) This chapter does not prohibit a person engaged in the business of furnishing appraisals of real property from considering in those appraisals factors other than race, color, religion, sex, disability, familial status, or national origin. Page 12 of 97

13 Sec Housing for Elderly Exempted. The provisions of this chapter relating to familial status do not apply to housing: (1) that the commission determines is specifically designed and operated to assist elderly individuals under a federal or state program; (2) intended for, and solely occupied by, individuals 62 years of age or older; or (3) intended and operated for occupancy by at least one individual 55 years of age or older for each unit as determined by commission rules. Sec Effect on Other Law. (a) This chapter does not affect a reasonable local or state restriction on the maximum number of occupants permitted to occupy a dwelling or a restriction relating to health or safety standards. (b) This chapter does not affect a requirement of nondiscrimination in any other state or federal law. Subchapter D. Administrative Provisions Sec RULES. The commission may adopt rules necessary to implement this chapter, but substantive rules adopted by the commission shall impose obligations, rights, and remedies that are the same as are provided in federal fair housing regulations. Sec Complaints. As provided by Subchapters E and F, the commission shall receive, investigate, seek to conciliate, and act on complaints alleging violations of this chapter. Sec Reports and Studies. (a) The commission shall, at least annually, publish a written report recommending legislative or other action to carry out the purposes of this chapter. (b) The commission shall make studies relating to the nature and extent of discriminatory housing practices in this state. Page 13 of 97

14 Sec COOPERATION WITH OTHER ENTITIES. The commission shall cooperate with and may provide technical and other assistance to federal, state, local, and other public or private entities that are designing or operating programs to prevent or eliminate discriminatory housing practices. Sec Subpoenas and Discovery. (a) The commission may issue subpoenas and order discovery in investigations and hearings under this chapter. (b) The subpoenas and discovery may be ordered to the same extent and are subject to the same limitations as subpoenas and discovery in a civil action in district court. Sec Referral to Municipality. The commission may defer proceedings under this chapter and refer a complaint to a municipality that has been certified by the federal Department of Housing and Urban Development as a substantially equivalent fair housing agency. Sec Gifts and Grants. (a) The commission may accept gifts and grants from any public or private source for administering this chapter. (b) Gifts and grants received shall be deposited to the credit of the fair housing fund in the state treasury. (c) Money deposited to the credit of the fund may be used only for administering this chapter. Sec Accessibility Assistance and Information for Landlords. The commission shall provide to landlords technical and other assistance relating to the accessibility requirements under this chapter. Page 14 of 97

15 SUBCHAPTER I. Criminal Penalty Sec Intimidation or Interference. (a) A person commits an offense if the person, without regard to whether the person is acting under color of law, by force or threat of force intentionally intimidates or interferes with a person: (1) because of the person's race, color, religion, sex, disability, familial status, or national origin and because the person is or has been selling, purchasing, renting, financing, occupying, or contracting or negotiating for the sale, purchase, rental, financing, or occupation of any dwelling or applying for or participating in a service, organization, or facility relating to the business of selling or renting dwellings; or (2) because the person is or has been or to intimidate the person from: (A) participating, without discrimination because of race, color, religion, sex, disability, familial status, or national origin, in an activity, service, organization, or facility described by Subdivision (1); or (B) affording another person opportunity or protection to so participate; or (C) lawfully aiding or encouraging other persons to participate, without discrimination because of race, color, religion, sex, disability, familial status, or national origin, in an activity, service, organization, or facility described by Subdivision (1). (b) An offense under this section is a Class A misdemeanor. (Source: CFPB Consumer Laws and Regulations RESPA. Consumer Financial Protection Bureau. Page 15 of 97

16 Regulation X Real Estate Settlement Procedures Act 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. 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 Page 16 of 97

17 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 implementing regulations. 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 Page 17 of 97

18 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. 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. Page 18 of 97

19 Second, the loan falls within one of the following categories: Loans made by a lender 4, creditor, 5 dealer; 6 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); or 7 Loans that are the subject of a home equity conversion mortgage or reverse mortgage issued by a lender or creditor subject to the regulation. 4 A lender includes financial institutions either regulated by, or whose deposits or accounts are insured by any agency of the federal government. 5 A creditor is defined in Sec. 103(g) of the Consumer Credit Protection Act (15 U.S.C. 1602(g)). RESPA covers any creditor that makes or invests in residential real estate loans aggregating more than $1,000,000 per year. 6 Dealer is defined in Regulation X to mean a seller, contractor, or supplier of goods or services. Dealer loans are covered by RESPA if the obligations are to be assigned before the first payment is due to any lender or creditor otherwise subject to the regulation. 7 FNMA Federal National Mortgage Association; GNMA - Government National Mortgage Association; FHLMC - Federal Home Loan Mortgage Corporation. 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. Page 19 of 97

20 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 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 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. Partial Exemptions for Certain Mortgage Loans 12 CFR (d) Most closed-end mortgage loans are exempt from the requirement to provide the Good Faith Estimate, HUD-1 settlement statement, and application servicing disclosure requirements of 12 CFR , , , , and (a). Instead, these loans are subject to disclosure, timing, and other requirements under TILA and Regulation Z. Specifically, the aforementioned provisions do not apply to a federally related mortgage loan that: Is subject to the special disclosure (TILA-RESPA Integrated Disclosure) requirements for certain consumer credit transactions secured by real property set forth in Regulation Z, 12 CFR (e), (f), and (g); or Page 20 of 97

21 Is subject to the partial exemption under 12 CFR (h) (i.e., certain nointerest loans secured by subordinate liens made for the purpose of down payment or similar home buyer assistance, property rehabilitation, energy efficiency, or foreclosure avoidance or prevention. (12 CFR (h)) Note that a creditor may not use the TILA-RESPA Integrated Disclosure forms instead of the GFE, HUD-1, and Truth in Lending forms for transactions that continue to be covered by TILA or RESPA that require those disclosures (e.g., reverse mortgages). Summary of Applicable Disclosure Requirements: Use TILA-RESPA Integrated Disclosures (See Regulation Z): Most closed-end mortgage loans, including: Construction-only loans Loans secured by vacant land or by 25 or more acres Continue to use existing TIL, RESPA Disclosures (as applicable): HELOCs (subject to disclosure requirements under Regulation Z, 12 CFR ) Reverse mortgages9 (subject to existing TIL and GFE disclosures) Chattel-secured mortgages (i.e., mortgages secured by a mobile home or by a dwelling that is not attached to real property, such as land) (subject to existing TIL disclosures, and not RESPA) But note: in both cases, there is a partial exemption from these disclosures under 12 CFR (h) for loans secured by subordinate liens and associated with certain housing assistance loan programs for low- and moderate-income persons. 9 Openend reverse mortgages receive open-end disclosures, rather than GFEs or HUD-1s. Page 21 of 97

22 Subpart B Mortgage Settlement and Escrow Accounts Examiners should note that certain provisions in subpart B (12 CFR , , , and ) are applicable only to limited categories of mortgage loans. See the discussion of 12 CFR (d) above. Special Information Booklet 12 CFR For mortgage loans that are not subject to the TILA RESPA Integrated Disclosure rule (see 12 CFR (e), (f) and (g),* a loan originator 10 is required to provide the borrower with a copy of the Special Information Booklet at the time a written application is submitted or no later than three business days after the application is received. If the application is denied before the end of the three-business-day period, the loan originator is not required to provide the booklet. If the borrower uses a mortgage broker, the broker rather than the lender, must provide the booklet. The booklet does not need to be provided for refinancing transactions, closed-end subordinate lien mortgage loans and reverse mortgage transactions, or for any other federally related mortgage loan not intended for the purchase of a one-to-four family residential property. (12 CFR (a)(3); 12 CFR (g)(1)(iii)) A loan originator that complies with Regulation Z (12 CFR ) for open-end home equity plans (including providing the brochure entitled What You Should Know About Home Equity Lines of Credit or a suitable substitute) is deemed to have complied with this section. *NOTE: the Special Information Booklet may also be required under 12 CFR (g) for those closed-end mortgage loans subject to the TILA-RESPA Integrated Disclosure Rule. A discussion of those requirements is located in the Regulation Z examination procedures. Page 22 of 97

23 Good Faith Estimate (GFE) of Settlement Costs 12 CFR Standard GFE Required For closed-end reverse mortgages, a loan originator is required to provide a consumer with the standard GFE form that is designed to allow borrowers to shop for a mortgage loan by comparing settlement costs and loan terms. (See GFE form at Appendix C to 12 CFR Part 1024.) Overview of the Standard GFE The first page of the GFE includes a summary of loan terms and a summary of estimated settlement charges. It also includes information about key dates such as when the interest rate for the loan quoted in the GFE expires and when the estimate for the settlement charges expires. A loan originator is defined as a lender or mortgage broker. 12 CFR (b). The second page discloses settlement charges as subtotals for 11 categories of costs. The third page provides a table explaining which charges can change at settlement, a trade-off table showing the relationship between the interest rate and settlement charges, and a shopping chart to compare the costs and terms of loans offered by different originators. GFE Application Requirements The loan originator must provide the standard GFE to the borrower within three business days of receipt of an application for a mortgage loan. A loan originator is not required to provide a GFE if before the end of the three-business-day period, the application is denied or the borrower withdraws the application. An application can be in writing or electronically submitted, including a written record of an oral application. A loan originator determines what information it needs to collect from a borrower and which of the collected information it will use in order to issue a GFE. Under Page 23 of 97

24 the regulations, an application includes at least the following six pieces of information: 1) the borrower s name; 2) the borrower s gross monthly income; 3) the borrower s Social Security number (e.g., to enable the loan originator to obtain a credit report); 4) the property address; 5) an estimate of the value of the property; and 6) the mortgage loan amount sought. In addition, a loan originator may require the submission of any other information it deems necessary. A loan originator will be presumed to have relied on such information prior to issuing a GFE and cannot base a revision of a GFE on that information unless it changes or is later found to be inaccurate. While the loan originator may require the borrower to submit additional information beyond the six pieces of information listed above in order to issue a GFE, it cannot require, as a condition of providing the GFE, the submission of supplemental documentation to verify the information provided by the borrower on the application. However, a loan originator is not prohibited from using its own sources to verify the information provided by the borrower prior to issuing the GFE. The loan originator can require borrowers to provide verification information after the GFE has been issued in order to complete final underwriting. For dealer loans, the loan originator is responsible for providing the GFE directly or ensuring that the dealer provides the GFE. For mortgage brokered loans, either the lender or the mortgage broker must provide a: A loan originator is prohibited from charging a borrower any fee in order to GFE within three business days after a mortgage broker receives either an application or information sufficient to complete an application. The lender is responsible for ascertaining whether the GFE has been provided. If the mortgage broker has provided the GFE to the applicant, the lender is not Page 24 of 97

25 required to provide an additional GFE. obtain a GFE unless the fee is limited to the cost of a credit report. GFE Not Required for Open End Lines of Credit 12 CFR (h) A loan originator that complies with Regulation Z (12 CFR ) for open-end home equity plans is deemed to have complied with 12 CFR Availability of GFE Terms 12 CFR (c) Regulation X does not establish a minimum period of availability for which the interest rate must be honored. The loan originator must determine the expiration date for the interest rate of the loan stated on the GFE. In contrast, Regulation X requires that the estimated settlement charges and loan terms listed on the GFE be honored by the loan originator for at least 10 business days from the date the GFE is provided. The period of availability for the estimated settlement charges and loan terms as well as the period of availability for the interest rate of the loan stated on the GFE must be listed on the GFE in the important dates section of the form. After the expiration date for the interest rate of the loan stated on the GFE, the interest rate and the other rate related charges, including the charge or credit for the interest rate chosen, the adjusted origination charges and the per diem interest can change until the interest rate is locked. Key GFE Form Contents 12 CFR (d) The loan originator must ensure that the required GFE form is completed in accordance with the Instructions set forth in Appendix C of 12 CFR Part Page 25 of 97

26 First Page of GFE The first page of the GFE discloses identifying information such as the name and address of the loan originator which includes the lender or the mortgage broker originating the loan. The purpose section indicates what the GFE is about and directs the borrower to the Truth in Lending disclosures and HUD s website for more information. The borrower is informed that only the borrower can shop for the best loan and that the borrower should compare loan offers using the shopping chart on the third page of the GFE. The important dates section requires the loan originator to state the expiration date for the interest rate for the loan provided in the GFE as well as the expiration date for the estimate of other settlement charges and the loan terms not dependent upon the interest rate. While the interest rate stated on the GFE is not required to be honored for any specific period of time, the estimate for the other settlement charges and other loan terms must be honored for at least 10 business days from when the GFE is provided. In addition, the form must state how many calendar days within which the borrower must go to settlement once the interest rate is locked (rate lock period). The form also requires disclosure of how many days prior to settlement the interest rate would have to be locked, if applicable. The summary of your loan section requires disclosure of the initial loan amount; loan term; initial interest rate; initial monthly payment for principal, interest and any mortgage insurance; whether the interest rate can rise, and if so, the maximum rate to which it can rise over the life of the loan, and the period of time after which the interest rate can first change; whether the loan balance can rise if the payments are made on time and if so, the maximum amount to which it can rise over the life of the loan; whether the monthly amount owed for principal, interest and any mortgage insurance can rise even if payments are made on time, and if so, the maximum amount to which the monthly amount owed can ever rise over the life of the loan; whether the loan has a prepayment penalty, and if so, the maximum amount it could be; and whether the loan has a balloon payment, and if so, the amount of such payment and Page 26 of 97

27 in how many years it will be due. Specific instructions are provided with respect to closed-end reverse mortgages. The escrow account information section requires the loan originator to indicate whether the loan does or does not have an escrow account to pay property taxes or other property related charges. In addition, this section also requires the disclosure of the monthly amount owed for principal, interest and any mortgage insurance. Specific instructions are provided with respect to closed-end reverse mortgages. The bottom of the first page includes subtotals for the adjusted origination charges and charges for all other settlement charges listed on page two, along with the total estimated settlement charges. Second Page of GFE The second page of the GFE requires disclosure of all settlement charges. It provides for the estimate of total settlement costs in eleven categories discussed below. The adjusted origination charges are disclosed in Block A and all other settlement charges are disclosed in Block B. The amounts in the blocks are to be added to arrive at the total estimated settlement charges which is required to be listed at the bottom of the page. Disclosure of Adjusted Origination Charge (Block A) Block A addresses disclosure of origination charges, which include all lender and mortgage broker charges. The adjusted origination charge results from the subtraction of a credit from the origination charge or the addition of a charge to the origination charge. Block 1 the origination charges, which include lender processing and underwriting fees and any fees paid to a mortgage broker. Origination Charge Note: This block requires the disclosure of all charges that all loan originators involved in the transaction will receive for originating the loan (excluding any charges for points). A loan originator may not separately charge any additional fees for getting the loan such as application, processing or underwriting fees. The amount in Block 1 is subject to zero tolerance, i.e., the amount cannot change at settlement. Page 27 of 97

28 Block 2 a credit or charge for the interest rate chosen. Credit or Charge for the Interest Rate Chosen Note: Transaction Involving a Mortgage Broker. For a transaction involving a mortgage broker, 11 Block 2 requires disclosure of a credit or charge (points) for the specific interest rate chosen. The credit or charge for the specific interest rate chosen is the net payment to the mortgage broker (i.e., the sum of all payments to the mortgage broker from the lender, including payments based on the loan amount, a flat rate or any other compensation, and in a table funded transaction, the loan amount less the price paid for the loan by the lender.) When the net payment to the mortgage broker from the lender is positive, there is a credit to the borrower and it is entered as a negative amount. For example, if the lender pays a yield spread premium to a mortgage broker for the loan set forth in the GFE, the payment must be disclosed as a credit to the borrower for the particular interest rate listed on the GFE (reflected on the GFE at Block 2, checkbox 2). The term yield spread premium is not featured on the GFE or the HUD-1 Settlement Statement. Points paid by the borrower for the interest rate chosen must be disclosed as a charge (reflected on the GFE at Block 2, third checkbox). A loan cannot include both a charge (points) and a credit (yield spread premium). Transaction Not Involving a Mortgage Broker. For a transaction without a mortgage broker, a lender may choose not to separately disclose any credit or charge for the interest rate chosen for the loan in the GFE. If the lender does not include any credit or charge in Block 2, it must check the first checkbox in Block 2 indicating that The credit or charge for the interest rate you have chosen is included in our origination charge above. Only one of the boxes in Block 2 may be checked, as a credit and charge cannot occur together in the same transaction. 11 The 2008 RESPA Reform Rule changed the definition of mortgage broker to mean a person or entity (not an employee of a lender) that renders origination services and serves as an intermediary between a lender and a borrower in a transaction involving a federally related mortgage loan, including such person or entity that closes the loan in its own name and table funds the transaction. The definition will also apply to a loan correspondent approved under 24 CFR for Federal Housing Administration (FHA programs). The definition would also include an exclusive agent who is not an employee of the lender. Page 28 of 97

29 Disclosure of Charges for All Other Settlement Services (Block B) Block B is the sum of charges for all settlement services other than the origination charges. Block 3 required services by providers selected by the lender such as appraisal and flood certification fees; Block 4 title service fees and the cost of lender s title insurance; Block 5 owner s title insurance; Block 6 other required services for which the consumer may shop; Block 7 government recording charges; Block 8 transfer tax charges; Block 9 initial deposit for escrow account; Block 10 daily interest charges; Block 11 homeowner s insurance charges. Third Page of GFE The third page of the GFE includes the following information: A tolerance chart identifying the charges that can change at settlement (see discussion on tolerances below); A trade-off table that requires the loan originator to provide information on the loan described in the GFE and at the loan originator s option, information about alternative loans (one with lower settlement charges but a higher interest rate and one with a lower interest rate but higher settlement charges); A shopping chart that allows the consumer to fill in loan terms and settlement charges from other lenders or brokers to use to compare loans; and Language indicating that some lenders may sell the loan after settlement but that any fees the lender receives in the future cannot change the borrower s loan or the settlement charges. Tolerances on Settlement Costs 12 CFR (e) and (i) The 2008 RESPA Reform Rule established tolerances or limits on the amount actual settlement charges can vary at closing from the amounts stated on the GFE. The rule established three categories of settlement charges and each category has different Page 29 of 97

30 tolerances. If, at settlement, the charges exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator may cure the tolerance violation by reimbursing to the borrower the amount by which the tolerance was exceeded, at settlement or within 30 calendar days after settlement. Tolerance Categories Zero tolerance category. This category of fees is subject to a zero tolerance standard. The fees estimated on the GFE may not be exceeded at closing. These fees include: The loan originator s own origination charge, including processing and underwriting fees; The credit or charge for the interest rate chosen (i.e., yield spread premium or discount points) while the interest rate is locked; The adjusted origination charge while the interest rate is locked; and o State/local property transfer taxes. Ten percent tolerance category. For this category of fees, while each individual fee may increase or decrease, the sum of the charges at settlement may not be greater than 10 percent above the sum of the amounts included on the GFE. This category includes fees for: o Loan originator required settlement services, where the loan originator selects the third party settlement service provider; o Loan originator required services, title services, required title insurance and owner s title insurance when the borrower selects a third-party provider identified by the loan originator; and o Government recording charges. No tolerance category. The final category of fees is not subject to any tolerance restriction. The amounts charged for the following settlement services included on the GFE can change at settlement and the amount of the change is not limited: Page 30 of 97

31 o Loan originator required services where the borrower selects his or her own third-party provider; o Title services, lender s title insurance, and owner s title insurance when the borrower selects his or her own provider; o Initial escrow deposit; o Daily interest charges; and homeowner s insurance Identification of Third-Party Settlement Service Providers When the loan originator permits a borrower to shop for one or more required third-party settlement services and select the settlement service provider for such required services, the loan originator must list in the relevant block on page two of the GFE the settlement service and the estimated charge to be paid to the provider of each required service. In addition, the loan originator must provide the borrower with a written list of settlement service providers for those required services on a separate sheet of paper at the time the GFE is provided. Binding GFE 12 CFR (f) The loan originator is bound, within the tolerances provided, to the settlement charges and terms listed on the GFE provided to the borrower, unless a new GFE is provided prior to settlement (see discussion below on changed circumstances). This also means that if a lender accepts a GFE issued by a mortgage broker, the lender is subject to the loan terms and settlement charges listed in the GFE, unless a new GFE is issued prior to settlement. Changed Circumstances 12 CFR (b), (f)(1) and (f)(2) Changed circumstances are defined as: Acts of God, war, disaster, or other emergency; Information particular to the borrower or transaction that was relied on in providing the GFE that changes or is found to be inaccurate after the GFE has been provided; New information particular to the borrower or transaction that was not relied on in providing the GFE; or Page 31 of 97

32 Other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems. Changed circumstances do not include the borrower s name, the borrower s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE, unless the information changes or is found to be inaccurate after the GFE has been provided. In addition, market price fluctuations by themselves do not constitute changed circumstances. Changed circumstances affecting settlement costs are those circumstances that result in increased costs for settlement services such that the charges at settlement would exceed the tolerances or limits on those charges established by the regulations. Changed circumstances affecting the loan are those circumstances that affect the borrower s eligibility for the loan. For example, if underwriting and verification indicate that the borrower is ineligible for the loan provided in the GFE, the loan originator would no longer be bound by the original GFE. In such cases, if a new GFE is to be provided, the loan originator must do so within three business days of receiving information sufficient to establish changed circumstances. The loan originator must document the reason that a new GFE was provided and must retain documentation of any reasons for providing a new GFE for no less than three years after settlement. None of the information collected by the loan originator prior to issuing the GFE may later become the basis for a changed circumstance upon which it may offer a revised GFE, unless: 1) it can demonstrate that there was a change in the particular information; or 2) that the information was inaccurate; or 3) that it did not rely on that particular information in issuing the GFE. A loan originator has the burden of demonstrating nonreliance on the collected information, but may do so through various means including through a documented record in the underwriting file or an established policy of relying on a more limited set of information in providing GFEs. Page 32 of 97

33 If a loan originator issues a revised GFE based on information previously collected in issuing the original GFE and changed circumstances, it must document the reasons for issuing the revised GFE, such as its nonreliance on such information or the inaccuracy of such information. Borrower Requested Changes 12 CFR (f)(3) If a borrower requests changes to the mortgage loan identified in the GFE that change the settlement charges or the terms of the loan, the loan originator may provide a revised GFE to the borrower. If a revised GFE is provided, the loan originator must do so within three business days of the borrower s request. Expiration of Original GFE 12 CFR (f)(4) If a borrower does not express an intent to continue with an application within 10 business days after the GFE is provided, or such longer time provided by the loan originator, the loan originator is no longer bound by the GFE. Interest Rate Dependent Charges and Terms 12 CFR (f)(5) If the interest rate has not been locked by the borrower, or a locked interest rate has expired, all interest rate-dependent charges on the GFE are subject to change. The charges that may change include the charge or credit for the interest rate chosen, the adjusted origination charges, per diem interest, and loan terms related to the interest rate. However, the loan originator s origination charge (listed in Block 1 of page 2 of the GFE) is not subject to change, even if the interest rate floats, unless there is another changed circumstance or borrowerrequested change. If the borrower later locks the interest rate, a new GFE must be provided showing the revised interest rate dependent charges and terms. All other charges and terms must remain the same as on the original GFE, unless changed circumstances or borrower-requested changes result in increased costs for settlement services or affect the borrower s eligibility for the specific loan terms identified in the original GFE. Page 33 of 97

34 RESPA The Real Estate Settlement Procedures Act (Source: DEFINITION of 'Real Estate Settlement Procedures Act - RESPA'. Investopedia. This act was designed to protect potential homeowners and enable them to become more intelligent consumers. RESPA requires that lenders provide greater amounts of information to prospective borrowers at certain points in the loan settlement process. (Source: Real Estate Settlement Procedures Act. Wikipedia. Passed by the United States Congress in 1974 and codified as Title 12, Chapter 27 of the United States Code, 12 U.S.C , the main objective of the Real Estate Settlement Procedures Act (RESPA) was to protect homeowners by assisting them in becoming better educated while shopping for real estate services, and eliminating kickbacks and referral fees which add unnecessary costs to settlement services. RESPA requires lenders and servicers to provide borrowers with pertinent and timely disclosures regarding the nature and costs of a real estate settlement process. RESPA was also designed to prohibit abusive practices such as kickbacks and referral fees, the practice of dual tracking, and imposes limitations on the use of escrow accounts. Purpose It was created because various companies associated with the buying and selling of real estate, such as lenders, real estate agents, construction companies and title insurance companies were often engaging in providing undisclosed kickbacks to each other, Page 34 of 97

35 inflating the costs of real estate transactions and obscuring price competition by facilitating bait-and-switch tactics. For example, a lender advertising a home loan might have advertised the loan with a 5% interest rate, but then when one applies for the loan one is told that one must use the lender's affiliated title insurance company and pay $5,000 for the service, whereas the normal rate is $1,000. The title company would then have paid $4,000 to the lender. This was made illegal, in order to make prices for the services clear so as to allow price competition by consumer demand and to thereby drive down prices. On July 21, 2011, administration and enforcement of the Real Estate Settlement Procedures Act (RESPA) was transferred from the Department of Housing and Urban Development to the Consumer Financial Protection Bureau (CFPB). General Requirements RESPA outlines requirements that lenders must follow when providing mortgages that are secured by federally related mortgage loans. This includes home purchase loans, refinancing, lender approved assumptions, property improvement loans, equity lines of credit, and reverse mortgages. Under RESPA, lending institutions must: Provide certain disclosures when applicable, including a Good-Faith Estimate of Settlement Costs (GFE), Special Information Booklet, HUD-1/1A settlement statement and Mortgage Servicing Disclosures. Provide the ability to compare the GFE to the HUD-1/1a settlement statements at closing Follow established escrow accounting practices Not proceed with the foreclosure process when the borrower has submitted a complete application for loss mitigation options, and Not pay kickbacks or pay referral fees to settlement service providers (e.g., appraisers, real estate brokers/agents and title companies) Page 35 of 97

36 Good-Faith Estimate of Settlement Costs For closed-end reverse mortgages, a lender or broker is required to provide the consumer with the standard Good Faith Estimate (GFE) form. A Good Faith Estimate of settlement costs is a three-page document that shows estimates for the costs that the borrower will likely incur at settlement and related loan information. It is designed to allow borrowers to shop for a mortgage loan by comparing settlement costs and loan terms. These costs include, but are not limited to: Origination charges: Estimates for required services (e.g., appraisals, credit report fees, flood certification) Title insurance Per diem interest Escrow deposits, and Insurance premiums The bank or mortgage broker must provide the GFE no later than three business days after the lender or mortgage broker received an application, or information sufficient to complete and application, the application. Kickbacks and Unearned Fees A person may not give or receive a fee or anything of value for a referral of mortgage loan settlement business. This includes an agreement or understanding related to a federally related mortgage. Fees paid for mortgage-related services must be disclosed. Additionally, no person may give or receive any portion, split, or percentage of a fee for services connected with a federally related mortgage except for services actually performed. Page 36 of 97

37 Permissible Compensation: A payment to an attorney for services actually rendered; A payment by a title company to its agent for services actually performed in the issuance of title insurance; A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan; A payment to a cooperative brokerage and referral arrangements between real estate agents and real estate brokers; Normal promotional and education activities that are not conditioned on the referral of business, and do not involve the defraying of expenses that otherwise would be incurred by a person in a position to refer settlement services; and An employer s payment to its own employees for any referral activities. It is the responsibility of the lender to monitor third party fees in relationship to the services rendered to ensure no illegal kickbacks or referral fees are made. Borrower Requests for Information and Notifications of Errors Upon receipt of a qualified written request, a mortgage servicer is required to take certain steps, each of which is subject to certain deadlines. The servicer must acknowledge receipt of the request within 5 business days. The servicer then has 30 business days (from the request) to take action on the request. The servicer has to either provide a written notification that the error has been corrected, or provide a written explanation as to why the servicer believes the account is correct. Either way, the servicer has to provide the name and telephone number of a person with whom the borrower can discuss the matter. The servicer cannot provide information to any credit agency regarding any overdue payment during the 60-day period. Page 37 of 97

38 If the servicer fails to comply with the "qualified written request", the borrower is entitled to actual damages, up to $2,000 of additional damages if there is a pattern of noncompliance, costs and attorney s fees. Criticisms However, critics say that kickbacks still occur. For example, lenders often provide captive insurance to the title insurance companies they work with, which critics say is essentially a kickback mechanism. Others counter that economically the transaction is a zero sum game, where if the kickback were forbidden, a lender would simply charge higher prices. One of the core elements of the debate is the fact that customers overwhelmingly go with the default service providers associated with a lender or a real estate agent, even though they sign documents explicitly stating that they can choose to use any service provider. There have been various proposals to modify the Real Estate Settlement Procedures Act. One proposal is to change the "open architecture" system currently in place, where a customer can choose to use any service provider for each service, to one where the services are bundled, but where the real estate agent or lender must pay directly for all other costs. Under this system, lenders, who have more buying power, would more aggressively seek the lowest price for real estate settlement services. While both the HUD-1 and HUD-1A serve to disclose all fees, costs and charges to both the buyer and seller involved in a real estate transaction, it is not uncommon to find mistakes on the HUD. Both buyer and seller should know how to properly read a HUD before closing a transaction and at settlement is not the ideal time to discover unnecessary charges and/or exorbitant fees as the transaction is about to be closed. Buyers or sellers can hire an experienced professional such as a real estate agent or an attorney to protect their interests at closing. Page 38 of 97

39 Sources "Regulation X Real Estate Settlement Procedures Act" (PDF). CFPB Consumer Laws and Regulations. Consumer Financial Protection Bureau. March Retrieved 18 May This article incorporates text from this source, which is in the public domain. Jump up ^ "Recent Changes to the Law Governing Qualified Written Requests". Retrieved Jump up ^ 12 USC 2605(f) (Source: Texas Property Code Property Code. TITLE 1. General Provisions Chapter 1. General Provisions Sec Purpose of Code. (a) This code is enacted as a part of the state's continuing statutory revision program begun by the Texas Legislative Council in 1963 as directed by the legislature in Chapter 448, Acts of the 58th Legislature, Regular Session, 1963 (Article 5429b-1, Vernon's Texas Civil Statutes). The program contemplates a topic-by-topic revision of the state's general and permanent statute law without substantive change. (b) Consistent with the objectives of the statutory revision program, the purpose of this code is to make the law encompassed by this code more accessible and understandable by: (1) rearranging the statutes into a more logical order; (2) employing a format and numbering system designed to facilitate citation of the law and to accommodate future expansion of the law; (3) eliminating repealed, duplicative, unconstitutional, expired, executed, and other ineffective provisions; and (4) restating the law in modern American English to the greatest extent possible. Page 39 of 97

40 Sec Construction of Code. The Code Construction Act (Chapter 311, Government Code) applies to the construction of each provision in this code, except as otherwise expressly provided by this code. Sec Internal References. In this code: (1) a reference to a title, chapter, or section without further identification is a reference to a title, chapter, or section of this code; and (2) a reference to a subtitle, subchapter, subsection, subdivision, paragraph, or other numbered or lettered unit without further identification is a reference to a unit of the next larger unit of this code in which the reference appears. TITLE 1. General Provisions Chapter 2. Nature of Property Sec Manufactured Housing. (a) Except as provided by Subsection (b), a manufactured home is personal property. (b) A manufactured home is real property if: (1) the statement of ownership and location for the home issued under Section , Occupations Code, reflects that the owner has elected to treat the home as real property; and (2) a certified copy of the statement of ownership and location has been filed in the real property records in the county in which the home is located. (c) In this section, "consumer," "document of title," "first retail sale," "manufactured home," and "mobile home" have the meanings assigned by Chapter 1201, Occupations Code. (d) To (h) Repealed by Acts 2003, 78th Leg., ch. 338, Sec. 52(2). (i) This section does not require a retailer or retailer's agent to obtain a license under Chapter 1101, Occupations Code. Page 40 of 97

41 Sec Dry Fire Hydrants: Agreement Is Personal. (a) An agreement between an owner, lessee, or occupant of real property and a fire-fighting agency relating to the connection of a dry fire hydrant to a source of water on the property or the installation of a dry fire hydrant on the property may not bind a subsequent owner, lessee, or occupant of the real property. (b) In this section: (1) "Dry fire hydrant" means a fire hydrant that is connected to a stock tank, pond, or other similar source of water from which water is pumped in case of fire. (2) "Fire-fighting agency" means any entity that provides fire-fighting services, including: (A) a volunteer fire department; and (B) a political subdivision of this state authorized to provide fire-fighting services. TITLE 2. Conveyances Chapter 5. Conveyances Subchapter A. General Provisions Sec Fee Simple. (a) An estate in land that is conveyed or devised is a fee simple unless the estate is limited by express words or unless a lesser estate is conveyed or devised by construction or operation of law. Words previously necessary at common law to transfer a fee simple estate are not necessary. (b) This section applies only to a conveyance occurring on or after February 5, Sec Failing As a Conveyance. An instrument intended as a conveyance of real property or an interest in real property that, because of this chapter, fails as a conveyance in whole or in part is enforceable to the extent permitted by law as a contract to convey the property or interest. Page 41 of 97

42 Sec Partial Conveyance. (a) An alienation of real property that purports to transfer a greater right or estate in the property than the person making the alienation may lawfully transfer alienates only the right or estate that the person may convey. (b) Neither the alienation by deed or will of an estate on which a remainder depends nor the union of the estate with an inheritance by purchase or descent affects the remainder. Sec Conveyance by Authorized Officer. (a) A conveyance of real property by an officer legally authorized to sell the property under a judgment of a court within the state passes absolute title to the property to the purchaser. (b) This section does not affect the rights of a person who is not or who does not claim under a party to the conveyance or judgment. Sec Aliens. An alien has the same real and personal property rights as a United States citizen. Sec Attorney's Fees in Breach of Restrictive Covenant Action. (a) In an action based on breach of a restrictive covenant pertaining to real property, the court shall allow to a prevailing party who asserted the action reasonable attorney's fees in addition to the party's costs and claim. (b) To determine reasonable attorney's fees, the court shall consider: (1) the time and labor required; (2) the novelty and difficulty of the questions; (3) the expertise, reputation, and ability of the attorney; and (4) any other factor. Page 42 of 97

43 Sec Vendor and Purchaser Risk Act. (a) Any contract made in this state for the purchase and sale of real property shall be interpreted as including an agreement that the parties have the rights and duties prescribed by this section, unless the contract expressly provides otherwise. (b) If, when neither the legal title nor the possession of the subject matter of the contract has been transferred, all or a material part of the property is destroyed without fault of the purchaser or is taken by eminent domain, the vendor may not enforce the contract, and the purchaser is entitled to recover any portion of the contract price paid. (c) If, when either the legal title or the possession of the subject matter of the contract has been transferred, all or any part of the property is destroyed without fault of the vendor or is taken by eminent domain, the purchaser is not relieved from the duty to pay the contract price, nor is the purchaser entitled to recover any portion of the price already paid. (d) This section shall be interpreted and construed to accomplish its general purpose to make uniform the law of those states that enact the Uniform Vendor and Purchaser Risk Act. (e) This section may be cited as the Uniform Vendor and Purchaser Risk Act. Sec Seller's Disclosure of Property Condition. (a) A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed by this section which contains, at a minimum, all of the items in the notice prescribed by this section. (b) The notice must be executed and must, at a minimum, read substantially similar to the following: Page 43 of 97

44 SELLER'S DISCLOSURE NOTICE CONCERNING THE PROPERTY AT Street Address and City) THIS NOTICE IS A DISCLOSURE OF SELLER'S KNOWLEDGE OF THE CONDITION OF THE PROPERTY AS OF THE DATE SIGNED BY SELLER AND IS NOT A SUBSTITUTE FOR ANY INSPECTIONS OR WARRANTIES THE PURCHASER MAY WISH TO OBTAIN. IT IS NOT A WARRANTY OF ANY KIND BY SELLER OR SELLER'S AGENTS. Seller is is not occupying the Property. If unoccupied, how long since Seller has occupied the Property? 1. The Property has the items checked below [Write Yes (Y), No (N), or Unknown (U)]: Range Oven Microwave Dishwasher Trash Compactor Disposal Washer/Dryer Hookups Window Screens Rain Gutters Security System Fire Detection Equipment Intercom System TV Antenna Smoke Detector Satellite Dish Ceiling Fan(s) Smoke Detector-Hearing Exhaust Fan(s) Impaired Central A/C Carbon Monoxide Alarm Wall/Window Air Conditioning Plumbing System Emergency Escape Public Sewer System Ladder(s) Patio/Decking Cable TV Wiring Fences Pool Attic Fan(s) Spa Hot Tub Pool Equipment Central Heating Automatic Lawn Sprinkler System Fireplace(s) & Chimney (Wood burning) Septic System Fireplace(s) & Chimney (Mock) Natural Gas Lines Outdoor Grill Gas Fixtures Page 44 of 97

45 Liquid Propane Gas Sauna Pool Heater LP Community (Captive) LP on Property Garage: Attached Not Attached Carport Garage Door Opener(s): Electronic Control(s) Water Heater: Gas Electric Water Supply: City Well MUD Co-op Roof Type: Age: (approx.) Are you (Seller) aware of any of the above items that are not in working condition, that have known defects, or that are in need of repair? Yes No Unknown. If yes, then describe. (Attach additional sheets if necessary):. 2. Does the property have working smoke detectors installed in accordance with the smoke detector requirements of Chapter 766, Health and Safety Code? Yes No Unknown. If the answer to this question is no or unknown, explain (Attach additional sheets if necessary):. * Chapter 766 of the Health and Safety Code requires one-family or two-family dwellings to have working smoke detectors installed in accordance with the requirements of the building code in effect in the area in which the dwelling is located, including performance, location, and power source requirements. If you do not know the building code requirements in effect in your area, you may check unknown above or contact your local building official for more information. A buyer may require a seller to install smoke detectors for the hearing impaired if: (1) the buyer or a member of the buyer's family who will reside in the dwelling is hearing impaired; (2) the buyer gives the seller written evidence of the hearing impairment from a licensed physician; and (3) within 10 days after the effective date, the buyer makes a written request for the seller to install smoke detectors for the hearing impaired and specifies the locations for the installation. The parties may agree who will bear the cost of installing the smoke detectors and which brand of smoke detectors to install. 3. Are you (Seller) aware of any known defects/malfunctions in any of the following? Write Yes (Y) if you are aware, write No (N) if you are not aware. Page 45 of 97

46 Interior Walls Ceilings Floors Exterior Walls Doors Windows Roof Foundation/Slab(s) Sidewalks Walls/Fences Driveways Intercom System Plumbing/Sewers/Septics Electrical Systems Lighting Fixtures Other Structural Components (Describe):. If the answer to any of the above is yes, explain. (Attach additional sheets if necessary):. 4. Active Termites (includes wood destroying insects) Termite or Wood Rot Damage Needing Repair Previous Termite Damage Previous Termite Treatment Previous Flooding Improper Drainage Previous Structural or Roof Repair Hazardous or Toxic Waste Asbestos Components Urea-formaldehyde Insulation Radon Gas Lead Based Paint Water Penetration Located in 100-Year Floodplain Present Flood Insurance Coverage Landfill, Settling, Soil Movement, Fault Lines Aluminum Wiring Previous Fires Unplatted Easements Subsurface Structure or Pits Page 46 of 97

47 Single Blockable Main Drain in Pool/Hot Tub/Spa* Previous Use of Premises for Manufacture of Methamphetamine If the answer to any of the above is yes, explain. (Attach additional sheets if necessary):. * A single blockable main drain may cause a suction entrapment hazard for an individual. 5. Are you (Seller) aware of any item, equipment, or system in or on the Property that is in need of repair? Yes (if you are aware) No (if you are not aware) If yes, explain. (Attach additional sheets if necessary):. Room additions, structural modifications, or other alterations or repairs made without necessary permits or not in compliance with building codes in effect at that time. Homeowners' Association or maintenance fees or assessments. Any "common area" (facilities such as pools, tennis courts, walkways, or other areas) co-owned in undivided interest with others. Any notices of violations of deed restrictions or governmental ordinances affecting the condition or use of the Property. Any lawsuits directly or indirectly affecting the Property. Any condition on the Property which materially affects the physical health or safety of an individual. Any rainwater harvesting system located on the property that is larger than 500 gallons and that uses a public water supply as an auxiliary water source. Any portion of the property that is located in a groundwater conservation district or a subsidence district. If the answer to any of the above is yes, explain. (Attach additional sheets if necessary):. Page 47 of 97

48 If the property is located in a costal area that is seaward of the Gulf Intracoastal Waterway or within 1,000 feet of the mean high tide bordering the Gulf of Mexico, the property may be subject to the Open Beaches Act or the Dune Protection Act (Chapter 61 or 63, Natural Resources Code, respectively) and a beachfront construction certificate or dune protection permit maybe required for repairs or improvements. Contact the local government with ordinance authority over construction adjacent to public beaches for more information. Signature of Seller Date Signature of Seller Date The undersigned purchaser hereby acknowledges receipt of the foregoing notice. Signature of Purchaser Date Signature of Purchaser Date (c) A seller or seller's agent shall have no duty to make a disclosure or release information related to whether a death by natural causes, suicide, or accident unrelated to the condition of the property occurred on the property or whether a previous occupant had, may have had, has, or may have AIDS, HIV related illnesses, or HIV infection. (d) The notice shall be completed to the best of seller's belief and knowledge as of the date the notice is completed and signed by the seller. If the information required by the notice is unknown to the seller, the seller shall indicate that fact on the notice, and by that act is in compliance with this section. (e) This section does not apply to a transfer: (1) pursuant to a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest, or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the real property at a sale conducted pursuant to a power of sale under a deed of trust or a sale pursuant to a court ordered foreclosure or has acquired the real property by a deed in lieu of foreclosure; Page 48 of 97

49 (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to one or more other co-owners; (7) made to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors; (8) between spouses resulting from a decree of dissolution of marriage or a decree of legal separation or from a property settlement agreement incidental to such a decree; (9) to or from any governmental entity; (10) of a new residence of not more than one dwelling unit which has not previously been occupied for residential purposes; or (11) of real property where the value of any dwelling does not exceed five percent of the value of the property. (f) The notice shall be delivered by the seller to the purchaser on or before the effective date of an executory contract binding the purchaser to purchase the property. If a contract is entered without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason within seven days after receiving the notice. (g) In this section: (1) "Blockable main drain" means a main drain of any size and shape that a human body can sufficiently block to create a suction entrapment hazard. (2) "Main drain" means a submerged suction outlet typically located at the bottom of a swimming pool or spa to conduct water to a recirculating pump. Sec Duties of Life Tenant. (a) Subject to Subsection (b), if the life tenant of a legal life estate is given the power to sell and reinvest any life tenancy property, the life tenant is subject, with respect to the sale and investment of the property, to all of the fiduciary duties of a trustee imposed by the Texas Trust Code (Subtitle B, Title 9, Property Code) or the common law of this state. Page 49 of 97

50 (b) A life tenant may retain, as life tenancy property, any real property originally conveyed to the life tenant without being subject to the fiduciary duties of a trustee; however, the life tenant is subject to the common law duties of a life tenant. Sec Notice of Additional Tax Liability. (a) A person who is the owner of an interest in vacant land and who contracts for the transfer of that interest shall include in the contract the following bold-faced notice: NOTICE REGARDING POSSIBLE LIABILITY FOR ADDITIONAL TAXES If for the current ad valorem tax year the taxable value of the land that is the subject of this contract is determined by a special appraisal method that allows for appraisal of the land at less than its market value, the person to whom the land is transferred may not be allowed to qualify the land for that special appraisal in a subsequent tax year and the land may then be appraised at its full market value. In addition, the transfer of the land or a subsequent change in the use of the land may result in the imposition of an additional tax plus interest as a penalty for the transfer or the change in the use of the land. The taxable value of the land and the applicable method of appraisal for the current tax year is public information and may be obtained from the tax appraisal district established for the county in which the land is located. (b) This section does not apply to a contract for a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the land at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the land by a deed in lieu of foreclosure; Page 50 of 97

51 (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) of only a mineral interest, leasehold interest, or security interest; or (7) to or from a governmental entity. (c) The notice described by Subsection (a) is not required to be included in a contract for transfer of an interest in land if every transferee under the contract is: (1) a person who is a co-owner with an owner described by Subsection (a) of an undivided interest in the land; or (2) a spouse or a person in the lineal line of consanguinity of an owner described by Subsection (a). (d) The notice described by Subsection (a) is not required to be given if in a separate paragraph of the contract the contract expressly provides for the payment of any additional ad valorem taxes and interest that become due as a penalty because of: (1) the transfer of the land; or (2) a subsequent change in the use of the land. (e) If the owner fails to include in the contract the notice described by Subsection (a), the person to whom the land is transferred is entitled to recover from that owner an amount equal to the amount of any additional taxes and interest that the person is required to pay as a penalty because of: (1) the transfer of the land; or (2) a subsequent change in the use of the land that occurs before the fifth anniversary of the date of the transfer. Added by Acts 1997, 75th Leg., ch. 174, Sec. 1, eff. Jan. 1, Sec Seller's Disclosure Regarding Potential Annexation. (a) A person who sells an interest in real property in this state shall give to the purchaser of the property a written notice that reads substantially similar to the following: Page 51 of 97

52 Notice Regarding Possible Annexation If the property that is the subject of this contract is located outside the limits of a municipality, the property may now or later be included in the extraterritorial jurisdiction of a municipality and may now or later be subject to annexation by the municipality. Each municipality maintains a map that depicts its boundaries and extraterritorial jurisdiction. To determine if the property is located within a municipality's extraterritorial jurisdiction or is likely to be located within a municipality's extraterritorial jurisdiction, contact all municipalities located in the general proximity of the property for further information. (b) The seller shall deliver the notice to the purchaser before the date the executory contract binds the purchaser to purchase the property. The notice may be given separately, as part of the contract during negotiations, or as part of any other notice the seller delivers to the purchaser. (c) This section does not apply to a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the land at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the land by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to another co-owner of an undivided interest in the real property; (7) to a spouse or a person in the lineal line of consanguinity of the seller; (8) to or from a governmental entity; (9) of only a mineral interest, leasehold interest, or security interest; or Page 52 of 97

53 (10) of real property that is located wholly within a municipality's corporate boundaries. (d) If the notice is delivered as provided by this section, the seller has no duty to provide additional information regarding the possible annexation of the property by a municipality. (e) If an executory contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason within the earlier of: (1) seven days after the date the purchaser receives the notice; or (2) the date the transfer occurs. Sec Notice of Obligations Related To Membership In Property Owners' Association. (a) A seller of residential real property that is subject to membership in a property owners' association and that comprises not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice that reads substantially similar to the following: Notice of Membership In Property Owners' Association Concerning The Property At (Street Address) (Name Of Residential Community) As a purchaser of property in the residential community in which this property is located, you are obligated to be a member of a property owners' association. Restrictive covenants governing the use and occupancy of the property and all dedicatory instruments governing the establishment, maintenance, or operation of this residential community have been or will be recorded in the Real Property Records of the county in which the property is located. Copies of the restrictive covenants and dedicatory instruments may be obtained from the county clerk. Page 53 of 97

54 You are obligated to pay assessments to the property owners' association. The amount of the assessments is subject to change. Your failure to pay the assessments could result in enforcement of the association's lien on and the foreclosure of your property. Section , Property Code, entitles an owner to receive copies of any document that governs the establishment, maintenance, or operation of a subdivision, including, but not limited to, restrictions, bylaws, rules and regulations, and a resale certificate from a property owners' association. A resale certificate contains information including, but not limited to, statements specifying the amount and frequency of regular assessments and the style and cause number of lawsuits to which the property owners' association is a party, other than lawsuits relating to unpaid ad valorem taxes of an individual member of the association. These documents must be made available to you by the property owners' association or the association's agent on your request. Date: (a-1) The second paragraph of the notice prescribed by Subsection (a) must be in bold print and underlined. (b) The seller shall deliver the notice to the purchaser before the date the executory contract binds the purchaser to purchase the property. The notice may be given separately, as part of the contract during negotiations, or as part of any other notice the seller delivers to the purchaser. If the notice is included as part of the executory contract or another notice, the title of the notice prescribed by this section, the references to the street address and date in the notice, and the purchaser's signature on the notice may be omitted. (c) This section does not apply to a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the land at a sale conducted under a power of sale under a deed of trust or a Page 54 of 97

55 sale under a court-ordered foreclosure or has acquired the land by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to another co-owner of an undivided interest in the real property; (7) to a spouse or a person in the lineal line of consanguinity of the seller; (8) to or from a governmental entity; (9) of only a mineral interest, leasehold interest, or security interest; or (10) of a real property interest in a condominium. (d) If an executory contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason within the earlier of: (1) seven days after the date the purchaser receives the notice; or (2) the date the transfer occurs as provided by the executory contract. (e) The purchaser's right to terminate the executory contract under Subsection (d) is the purchaser's exclusive remedy for the seller's failure to provide the notice required by this section. (f) On the purchaser's request for a resale certificate from the property owners' association or the association's agent, the association or its agent shall promptly deliver a copy of the most recent resale certificate issued for the property under Chapter 207 so long as the resale certificate was prepared not earlier than the 60th day before the date the resale certificate is delivered to the purchaser and reflects any special assessments approved before and due after the resale certificate is delivered. If a resale certificate that meets the requirements of this subsection has not been issued for the property, the seller shall request the association or its agent to issue a resale certificate under Chapter 207, and the association or its agent shall promptly prepare and deliver a copy of the resale certificate to the purchaser. (g) The purchaser shall pay the fee to the property owners' association or its agent for issuing the resale certificate unless otherwise agreed by the purchaser and seller of the property. The property owners' association may require payment Page 55 of 97

56 before beginning the process of providing a resale certificate requested under Chapter 207 but may not process a payment for a resale certificate until the certificate is available for delivery. The association may not charge a fee if the certificate is not provided in the time prescribed by Section (a). Sec Seller's Disclosure of Location of Conditions Under Surface of Unimproved Real Property. (a) A seller of unimproved real property to be used for residential purposes shall provide to the purchaser of the property a written notice disclosing the location of a transportation pipeline, including a pipeline for the transportation of natural gas, natural gas liquids, synthetic gas, liquefied petroleum gas, petroleum or a petroleum product, or a hazardous substance. (b) The notice must state the information to the best of the seller's belief and knowledge as of the date the notice is completed and signed by the seller. If the information required to be disclosed is not known to the seller, the seller shall indicate that fact in the notice. (c) The notice must be delivered by the seller on or before the effective date of an executory contract binding the purchaser to purchase the property. If a contract is entered without the seller providing the notice as required by this section, the purchaser may terminate the contract for any reason not later than the seventh day after the effective date of the contract. (d) This section applies to any seller of unimproved real property, including a seller who is the developer of the property and who sells the property to others for resale. (e) In this section, "hazardous substance" and "hazardous waste" have the meanings assigned by Section , Health and Safety Code. (f) A seller is not required to give the notice if: (1) the seller is obligated under an earnest money contract to furnish a title insurance commitment to the buyer prior to closing; and (2) the buyer is entitled to terminate the contract if the buyer's objections to title as permitted by the contract are not cured by the seller prior to closing. Page 56 of 97

57 Sec Notice of Obligations Related To Public Improvement District. (a) A seller of residential real property that is located in a public improvement district established under Subchapter A, Chapter 372, Local Government Code, or Chapter 382, Local Government Code, and that consists of not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice that reads substantially similar to the following: Notice of Obligation to Pay Public Improvement District Assessment to (Municipality or County Levying Assessment) Concerning The Property At (Street Address) As a purchaser of this parcel of real property you are obligated to pay an assessment to a municipality or county for an improvement project undertaken by a public improvement district under Subchapter A, Chapter 372, Local Government Code, or Chapter 382, Local Government Code. The assessment may be due annually or in periodic installments. More information concerning the amount of the assessment and the due dates of that assessment may be obtained from the municipality or county levying the assessment. The amount of the assessments is subject to change. Your failure to pay the assessments could result in a lien on and the foreclosure of your property. Date: Signature of Purchaser (b) The seller shall deliver the notice required under Subsection (a) to the purchaser before the effective date of an executory contract binding the purchaser to purchase the property. The notice may be given separately, as part of the contract during negotiations, or as part of any other notice the seller delivers to the purchaser. If the notice is included as part of the executory contract or another notice, the title of the notice prescribed by this section, the references to the street Page 57 of 97

58 address and date in the notice, and the purchaser's signature on the notice may be omitted. (c) This section does not apply to a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the land at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the land by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to another co-owner of an undivided interest in the real property; (7) to a spouse or a person in the lineal line of consanguinity of the seller; (8) to or from a governmental entity; (9) of only a mineral interest, leasehold interest, or security interest; or (10) of a real property interest in a condominium. (d) If an executory contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason not later than the earlier of: (1) the seventh day after the date the purchaser receives the notice; or (2) the date the transfer occurs as provided by the executory contract. (e) The purchaser's right to terminate the executory contract under Subsection (d) is the purchaser's exclusive remedy for the seller's failure to provide the notice required by this section. Page 58 of 97

59 Sec Prohibited Fees. A person who has a right of first refusal in real property that is a condominium subject to Chapter 81 or Chapter 82 may not charge a fee for declining to exercise that right, such as a fee for providing written evidence of the declination. Sec Conveyance of Residential Property Encumbered by Lien. (a) A person may not convey an interest in or enter into a contract to convey an interest in residential real property that will be encumbered by a recorded lien at the time the interest is conveyed unless, on or before the seventh day before the earlier of the effective date of the conveyance or the execution of an executory contract binding the purchaser to purchase the property, an option contract, or other contract, the person provides the purchaser and each lienholder a separate written disclosure statement in at least 12-point type that: (1) identifies the property and includes the name, address, and phone number of each lienholder; (2) states the amount of the debt that is secured by each lien; (3) specifies the terms of any contract or law under which the debt that is secured by the lien was incurred, including, as applicable: (A) the rate of interest; (B) the periodic installments required to be paid; and (C) the account number; (4) indicates whether the lienholder has consented to the transfer of the property to the purchaser; (5) specifies the details of any insurance policy relating to the property, including: (A) the name of the insurer and insured; (B) the amount for which the property is insured; and (C) the property that is insured; (6) states the amount of any property taxes that are due on the property; and (7) includes a statement at the top of the disclosure in a form substantially similar to the following: Page 59 of 97

60 WARNING: ONE OR MORE RECORDED LIENS HAVE BEEN FILED THAT MAKE A CLAIM AGAINST THIS PROPERTY AS LISTED BELOW. IF A LIEN IS NOT RELEASED AND THE PROPERTY IS CONVEYED WITHOUT THE CONSENT OF THE LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER COULD DEMAND FULL PAYMENT OF THE OUTSTANDING BALANCE OF THE LIEN IMMEDIATELY. YOU MAY WISH TO CONTACT EACH LIENHOLDER FOR FURTHER INFORMATION AND DISCUSS THIS MATTER WITH AN ATTORNEY. (b) A violation of this section does not invalidate a conveyance. Except as provided by Subsections (c) and (d), if a contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason on or before the seventh day after the date the purchaser receives the notice in addition to other remedies provided by this section or other law. (c) This section does not apply to a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the real property at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the real property by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to one or more other co-owners; (7) to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors; Page 60 of 97

61 (8) between spouses resulting from a decree of dissolution of marriage or a decree of legal separation or from a property settlement agreement incidental to one of those decrees; (9) to or from a governmental entity; (10) where the purchaser obtains a title insurance policy insuring the transfer of title to the real property; or (11) to a person who has purchased, conveyed, or entered into contracts to purchase or convey an interest in real property four or more times in the preceding 12 months. (d) A violation of this section is not actionable if the person required to give notice reasonably believes and takes any necessary action to ensure that each lien for which notice was not provided will be released on or before the 30th day after the date on which title to the property is transferred. Sec Disclosure of Absence Of Certain Warranties. (a) A seller of residential real property that is exempt from Title 16 under Section shall give to the purchaser of the property a written notice that reads substantially similar to the following: NOTICE OF NONAPPLICABILITY OF CERTAIN WARRANTIES AND BUILDING AND PERFORMANCE STANDARDS The property that is subject to this contract is exempt from Title 16, Property Code, including the provisions of that title that provide statutory warranties and building and performance standards. (b) A notice required by this section shall be delivered by the seller to the purchaser on or before the effective date of an executory contract binding the purchaser to purchase the property. If a contract is entered into without the seller providing the notice, the purchaser may terminate the contract for any reason on or before the seventh day after the date the purchaser receives the notice. Page 61 of 97

62 (c) This section does not apply to a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the land at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the land by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to another co-owner of an undivided interest in the real property; (7) to a spouse or a person in the lineal line of consanguinity of the seller; (8) to or from a governmental entity; or (9) of only a mineral interest, leasehold interest, or security interest. Sec Notice of Water Level Fluctuations. (a) This section applies only to the sale of residential or commercial real property adjoining an impoundment of water, including a reservoir or lake, constructed and maintained under Chapter 11, Water Code, that has a storage capacity of at least 5,000 acre-feet at the impoundment's normal operating level. (b) A seller of real property shall give to the purchaser of the property a written notice in substantially the following form: Notice of Water Level Fluctuations The water level of the impoundment of water adjoining the property at (street address and city) or described as (legal description) fluctuates for various reasons, including as a result of: (1) an entity lawfully exercising its right to use the water stored in the impoundment; or Page 62 of 97

63 (2) drought or flood conditions. (c) The notice described by Subsection (b) shall be delivered by the seller to the purchaser on or before the effective date of an executory contract binding the purchaser to purchase the property. (d) If a contract is entered into without the seller providing the notice within the period required by Subsection (c), the purchaser may terminate the contract for any reason within seven days after the date the purchaser receives: (1) the notice described by Subsection (b) from the seller; or (2) information described by the notice under Subsection (b) from any other person. (e) After the date of the conveyance, the purchaser may bring an action for misrepresentation against the seller if the seller: (1) failed to provide the notice before the date of the conveyance; and (2) had actual knowledge that the water level described by Subsection (b) fluctuates for various reasons, including the reasons stated in Subsection (b). (Source: This is just an example of the property code and how we as license holders must be aware of these laws to perform all real estate transaction. The Real Estate Settlement Procedures Act prohibits the industry from accepting kickbacks as unearned income among other restrictions. Kickbacks would cause the cost of buying and selling property to increase. Individual states have their own license laws adopted by their state legislature. Real estate commissions are put in place to administer the laws. Page 63 of 97

64 Texas Property and Real Estate Laws Property and real estate law includes homestead protection from creditors; relationships between landlords and tenants; and other matters pertaining to one's home or residence. Property and real estate laws also include zoning regulations, which determine which kinds of structures may be built in a given location. In Texas, for example, there is no limit on how much a landlord may require for a security deposit, but the deposit must be returned to the tenant within 30 days after the termination of the lease. Texas Homestead Laws. FindLaw.com. Homestead Protection Laws in General So-called "homestead protection laws," (or "homestead laws") on the books in most states allow property owners to declare a limited piece of their property a "homestead" (based on either property value or acreage) and thus off limits to creditors. Basically, these laws protect real estate from forced sales, intended to prevent homelessness in certain situations. Texas homestead laws predate the state's admission into the union, but are also encoded into the state's constitution. Texas Homestead Protections Among the Strongest in the Nation Texas' homestead laws offer much more protection from creditors than homestead laws in most other states and are staunchly defended by the state's courts. They don't impose a dollar value on eligible property, limiting the size of the homestead to 10 urban acres or 200 rural acres. A Texas Justice's opinion in a 2011 appellate court case offers the following guidance: "Indeed, a court must uphold and enforce the Texas homestead laws even though in so doing the court might unwittingly assist a dishonest debtor in wrongfully defeating his creditor." (Source: Page 64 of 97

65 Texas Civil Statute of Limitations. FindLaw.com. The time limit for filing a civil suit or prosecuting a criminal case is called the "statute of limitations." In fact, states have several different statutes of limitations for different types of claims. When filing a civil case, it is important to note the statute of limitations for the claim you intend to file. If the statute of limitations has expired, you may not be able to pursue your claim in court -- even if you have a valid case. In Texas, civil statute of limitations laws are anywhere from one to five years, depending on the severity of the claim. While Texas plaintiffs have one year in which to file a claim for defamation, the time limit is five years for sex crimes. Injury to Person - 2 yrs. Civ. Prac. & Rem (a); 5 yrs. for sex crimes Libel/Slander - 1 yr. Civ. Prac. & Rem (a) Fraud - 4 yrs. Civ. Prac. & Rem (a)(4) Injury to Personal Property - 2 yrs. Civ. Prac. & Rem (a) Professional Malpractice - - Trespass - 2 yrs. Civ. Prac. & Rem (a) Collection of Rents - Contracts - Written: 4 yrs. real property Civ. Prac (a)(3) Collection of Debt on Account - 4 yrs. Civ. Prac. & Rem (a) (3) Judgments (Source: Page 65 of 97

66 Contracts Contract. Cornell University Law School. Legal Information Institute. Definition An agreement creating obligations enforceable by law. The basic elements of a contract are mutual assent, consideration, capacity, and legality. In some states, the element of consideration can be satisfied by a valid substitute. Possible remedies for breach of contract include general damages, consequential damages, reliance damages, and specific performance. Overview Contracts are promises that the law will enforce. The law provides remedies if a promise is breached or recognizes the performance of a promise as a duty. Contracts arise when a duty does or may come into existence, because of a promise made by one of the parties. To be legally binding as a contract, a promise must be exchanged for adequate consideration. Adequate consideration is a benefit or detriment which a party receives which reasonably and fairly induces them to make the promise/contract. For example, promises that are purely gifts are not considered enforceable because the personal satisfaction the grantor of the promise may receive from the act of giving is normally not considered adequate consideration. Certain promises that are not considered contracts may, in limited circumstances, be enforced if one party has relied to his detriment on the assurances of the other party. Contracts are mainly governed by state statutory and common (judge-made) law and private law. Private law principally includes the terms of the agreement between the parties who are exchanging promises. This private law may override many of the rules otherwise established by state law. Statutory law may require some contracts be put in writing and executed with particular formalities. Otherwise, the parties may enter into a binding agreement without signing a formal written document. Most of the principles of the common law of contracts are outlined in the Restatement of the Law Second, Page 66 of 97

67 Contracts, published by the American Law Institute. The Uniform Commercial Code, whose original articles have been adopted in nearly every state, represents a body of statutory law that governs important categories of contracts. The main articles that deal with the law of contracts are Article 1 (General Provisions) and Article 2 (Sales). Sections of Article 9 (Secured Transactions) govern contracts assigning the rights to payment in security interest agreements. Contracts related to particular activities or business sectors may be highly regulated by state and/or federal law. (Source: See Law Relating To Other Topics Dealing with Particular Activities or Business Sector) The Texas Real Estate Commission Enforces the License Act Texas Real Estate Commission and Agency Divisions. The TREC Standards & Enforcement Services (TREC SES) Division ensures that consumers are protected by providing timely, fair, and consistent enforcement of The Real Estate License Act, the Rules of the Commission, Chapter 1102 of the Texas Occupations Code regarding Real Estate Inspectors, the Texas Timeshare Act, and the Residential Service Company Act. TREC SES staff also implement standards for, and review applications for, licensure and determinations of moral character to assess the honesty, integrity, and trustworthiness of applicants, and oversee the sanction of license holders who have violated various legal requirements. TREC SES handles a high volume of signed written complaints from the public and license holders concerning alleged violations. While most complaints relate to the purchase, lease or inspection of a home, they may also include charges ranging from misleading advertising to unlicensed activity. Once it is determined that the complaint is within the agency s jurisdiction, the license holder is notified and given an opportunity to respond, and the complaint is investigated. Page 67 of 97

68 For those complaints where evidence suggests a violation has occurred, attempts will first be made to resolve the complaint through alternative dispute resolution (ADR) methods, such as informal settlement discussions or mediation. When ADR is not effective or appropriate, TREC SES pursues formal disciplinary action and a hearing may be set at the State Office of Administrative Hearings. TREC is the state's regulatory agency for the following: Real Estate Brokers and Sales Agents Real Estate Inspectors Education Providers for Real Estate and Inspection Courses Residential Service Companies Timeshare Developers Easement Or Right-of-Way (ERW) agents Types of businesses NOT regulated by TREC and who regulates them. Real Estate Developers Not regulated by any specific state agency Home Builders See Question #2 of "Consumer Problems" in our Enforcement FAQs Homeowners Association Not Regulated. See Question #5 of Consumer Problems in our Enforcement FAQs Mortgage Brokers Texas Dept. of Savings & Mortgage Lending Property Tax Consultants TX Dept. of Licensing and Regulation Title Insurance Companies TX Dept. of Insurance Auctioneers TX Dept. of Licensing and Regulation TREC exists to protect and serve the citizens of Texas. The Commission's programs of education, licensing, and industry regulation ensure that real estate service providers are honest, trustworthy and competent. Page 68 of 97

69 TREC requires that all real estate brokers and sales agents meet and maintain specified levels of education to hold a license to act as a real estate agent. Agents are required to follow the provisions of The Real Estate License Act and the Rules of the Texas Real Estate Commission in all transactions and to deal with the public in a competent and honest manner. The Commission also licenses real estate inspectors, residential service companies, real estate schools and registers timeshare properties. Created in 1949, the Texas Real Estate Commission (TREC) administers four laws: Texas Occupations Code, Chapter The Real Estate License Act Texas Occupations Code, Chapter Real Estate Inspectors Texas Occupations Code, Chapter the Residential Service Company Act Texas Property Code, Chapter the Texas Timeshare Act TREC has a statutory relationship with three state entities: The Commission partners with the Real Estate Center at Texas A&M University on research and education projects: it appoints two members to the Mortgage Broker Advisory Committee of the Texas Department of Savings and Mortgage Lending and cooperates with that agency on issues affecting real estate license holders and mortgage brokers; TREC provides administrative support to the Texas Appraiser Licensing & Certification Board (TALCB) under a memorandum of understanding approved by their governing boards. (Source: The Commission has the authority to perform the following actions: Create and enforce any rules that are necessary to enforce the Texas Occupations Code. Establish a Canon of Conduct and ethics for all license holders Conduct hearings and issue disciplinary decisions. Adopt rules that require license holders to use TREC-approved, promulgated contract Page 69 of 97

70 forms, but the Commission may not stop licensee license holder from using a contract form for sale, exchange, option or lease of property that was prepared by the owner or was prepared by an attorney and required by the owner. Issue subpoenas for witnesses and production of documents or other evidence. Maintain a registry of certificate holders. Charge and collect fees pertaining to licensing, applications and other relevant areas. Texas Real Estate Commission Enforcement Duties Filing a Complaint If you feel there has been a violation of the Real Estate Licensing Act or TREC Rules you have a right to pdf icon file a complaint. TREC is limited to taking disciplinary action against those who are licensed and regulated by TREC. Commissioners and staff are prohibited from giving legal advice or opinions. If you need legal advice or want to recover money, please consult an attorney. To file a complaint, complete ALL SECTIONS of the Complaint Form AND provide COMPLETE and LEGIBLE copies of all documentation relevant to the complaint, such as: Sales contract (front and back) - all pages and all accompanying forms and attachments Lease/rental agreement (front and back) Listing/management agreement (front and back) Disclosure statements (e.g. Information about Brokerage Services, Intermediary Relationship Notice, Seller's Disclosure Notice) Closing statement (HUD 1) Multiple listing service (MLS) printout Appraisals Inspection report Photographs Advertising Page 70 of 97

71 Repair bills Receipts Canceled checks (front and back) Monthly statements Correspondence, including demand letters and s Judgment/civil lawsuit documents (e.g. original petition, settlement documents) Other (describe) DO NOT SEND ORIGINAL DOCUMENTS WITH COMPLAINT--SEND COPIES ONLY. TEXAS LAW REQUIRES COMPLAINTS TO BE SIGNED. TREC WILL NOT ACCEPT OR PROCESS ANY UNSIGNED COMPLAINTS. , Mail or fax your signed complaint to TREC at the address listed on the pdf icon complaint form. You will be notified by mail when your complaint has been received. If an investigation is opened, the person(s) against whom the complaint is filed will receive a copy of the complaint. After the investigation is concluded, staff will determine whether there is sufficient evidence to take disciplinary action. TREC makes every effort to process complaints in a timely manner; however, each complaint is different. It is important to allow TREC adequate time to fully investigate your complaint. Disciplinary action can include: a formal reprimand, the suspension or revocation of a license, payment of an administrative penalty, or other appropriate action. Disciplinary History You can find information about Disciplinary Actions through our online search tool. This is where you can get information about any disciplinary actions that may have been taken against a particular license holder. Page 71 of 97

72 Recovery Funds TREC maintains two recovery funds available to consumers who have been harmed by certain license holders regulated by TREC, one applying to brokers, sales agents, or registered Easement or Right-of-Way agents, and one applying to real estate inspectors. Certain requirements need to be met before you are eligible to receive a payment from either fund. Check out our frequently asked questions on our FAQ page and the Model Application for the Real Estate Recovery Trust Account. Note The Texas Occupations Code is the collection of statutes and laws that govern many occupations in Texas, including health professions, cosmetology, accounting and law enforcement, as well as the real estate profession. The primary mission of TREC according to the Commission s website, is: The mission of the Texas Real Estate Commission is to assist and protect consumers of real estate services, thereby fostering economic growth in Texas. Through its programs of education, licensing and industry regulation, the Commission ensures the availability of capable and honest real estate service providers. Texas Real Estate License Act and the Texas Real Estate Commission Rules (Ethics) The following Section of the License Act defines the minimum level of service a Texas broker can offer their sellers. Texas Occupations Code. CHAPTER REAL ESTATE BROKERS AND SALES AGENTS. Page 72 of 97

73 Sec Acting as Agent; Regulation Of Certain Transactions. (a) 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. (b) 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. (c) 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). Page 73 of 97

74 Section (b)(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; (Source: The following Section of the License Act shows that the legislature considers disclosure of representation an ethical obligation of real estate professionals. Texas Occupations Code. CHAPTER REAL ESTATE BROKERS AND SALES AGENTS. Sec Representation Disclosure. (a) Repealed by Acts 2015, 84th Leg., R.S., Ch. 1158, Sec. 92, eff. January 1, (b) A license holder who represents a party in a proposed real estate transaction shall disclose, orally or in writing, that representation at the time of the license holder's first contact with: (1) another party to the transaction; or (2) another license holder who represents another party to the transaction. (b-1) At the time of a license holder's first substantive communication with a party relating to a proposed transaction regarding specific real property, the license holder shall provide to the party written notice in at least a 10-point font that: (1) describes the ways in which a broker can represent a party to a real estate transaction, including as an intermediary; (2) describes the basic duties and obligations a broker has to a party to a real estate transaction that the broker represents; and (3) provides the name, license number, and contact information for the license holder and the license holder's supervisor and broker, if applicable. Page 74 of 97

75 (b-2) The commission by rule shall prescribe the text of the notice required under Subsections (b-1)(1) and (2) and establish the methods by which a license holder shall provide the notice. (c) A license holder is not required to provide the notice required by Subsection (b-1) if: (1) the proposed transaction is for a residential lease for less than one year and a sale is not being considered; (2) the license holder meets with a party who the license holder knows is represented by another license holder; or (3) the communication occurs at a property that is held open for any prospective buyer or tenant and the communication concerns that property. (Source: Following section of the License Act that list reasons the license holder can have their license revoked. Review them carefully, and you will notice many prohibited acts of untruth, misrepresentation, lack of disclosure and other unethical practices. Texas Occupations Code. Chapter Real Estate Brokers and Sales Agents. Sec GROUNDS FOR SUSPENSION OR REVOCATION OF LICENSE. (a) The commission may suspend or revoke a license issued under this chapter or Chapter 1102 or take other disciplinary action authorized by this chapter or Chapter 1102 if the license holder: (1) enters a plea of guilty or nolo contendere to or is convicted of a felony or a criminal offense involving fraud, and the time for appeal has elapsed or the judgment or conviction has been affirmed on appeal, without regard to an order granting community supervision that suspends the imposition of the sentence; Page 75 of 97

76 (2) procures or attempts to procure a license under this chapter or Chapter 1102 for the license holder by fraud, misrepresentation, or deceit or by making a material misstatement of fact in an application for a license; (3) fails to honor, within a reasonable time, a check issued to the commission after the commission has sent by certified mail a request for payment to the license holder's last known business address according to commission records; (4) fails 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 or Chapter 1102; (5) fails to surrender to the owner, without just cause, a document or instrument that is requested by the owner and that is in the license holder's possession; (6) fails 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; or (7) disregards or violates this chapter or Chapter (a-1) 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: (1) engages in misrepresentation, dishonesty, or fraud when selling, buying, trading, or leasing real property in the name of: (A) the license holder; (B) the license holder's spouse; or (C) a person related to the license holder within the first degree by consanguinity; (2) fails or refuses to produce on request, within a reasonable time, for inspection by the commission or a commission representative, a document, book, or record that is in the license holder's possession and relates to a real estate transaction conducted by the license holder; or (3) fails to use a contract form required by the commission under Section Page 76 of 97

77 (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 engaged in real estate brokerage: (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 sales agent, 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 sales agent licensed in another state for compensation for services as a real estate agent; Page 77 of 97

78 (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 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; Page 78 of 97

79 (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: (A) have the abstract covering the real estate that is the subject of the contract examined by an attorney chosen by the buyer; or (B) be provided with or obtain a title insurance policy; (30) fails to deposit, within a reasonable time, money the license holder receives as escrow or trust funds in a real estate transaction: (A) in trust with a title company authorized to do business in this state; or (B) 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. Page 79 of 97

80 (Source: Do You Know? Review the following scenario. Which of the following could cause an agent to lose their license? a. misrepresenting the condition of the property b. commingling money c. false advertising d. all of the above The correct answer is d. Unauthorized Practice of Law The Rules of the Commission address the caution agents must take regarding the unauthorized practice of law. TEXAS Administrative Code. Chapter 537-Rule oc=&p_ploc=&pg=1&p_tac=&ti=22&pt=23&ch=537&rl=11 (a) When negotiating contracts binding the sale, exchange, option, lease or rental of any interest in real property, a real estate licensee shall use only those contract forms promulgated by the Texas Real Estate Commission (the Commission) for that kind of transaction with the following exceptions: (1) transactions in which the license holder is functioning solely as a principal, not as an agent; Page 80 of 97

81 (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 has been prepared by a principal to the transaction or prepared by an attorney and required by a principal to the transaction; or (4) transactions for which no standard contract form has been promulgated by the Commission, and the license holder uses a form prepared by an attorney at law licensed by this state and approved by the attorney for the particular kind of transactions involved or prepared by the Texas Real Estate Broker-Lawyer Committee (the committee) and made available for trial use by license holders with the consent of the Commission. (b) A license holder may not: (1) practice law; (2) offer, give or attempt to give legal advice, directly or indirectly; (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; or (5) attempt to prevent or in any manner whatsoever discourage any principal to a real estate transaction from employing a lawyer. (c) This section does not limit a license holder's fiduciary obligation to disclose to the license holder's principals all pertinent facts which are within the knowledge of the license holder, including such facts which might affect the status of or title to real estate. (d) A license holder may not undertake to draw or prepare documents fixing and defining the legal rights of the principals to a real estate transaction. (e) In negotiating real estate transactions, a license holder may prepare forms using only forms that have been approved and promulgated by the Commission or such forms as are otherwise permitted by these rules. (f) When filling in a form authorized for use by this section, the license holder may only fill in the blanks provided and may not add to or strike matter from such form, except that a license holder shall add factual statements and business details desired by the principals Page 81 of 97

82 and shall strike only such matter as is desired by the principals and as is necessary to conform the instrument to the intent of the parties. (g) A license holder may not add to a promulgated contract form factual statements or business details for which a contract addendum, lease or other form has been promulgated by the commission for mandatory use. (h) This section does not prevent the license holder from explaining to the principals the meaning of the factual statements and business details contained in an instrument so long as the license holder does not offer or give legal advice. (i) It is not the practice of law as defined in this Act for a real estate license holder to complete a contract form which is either promulgated by the Commission or prepared by the committee and made available for trial use by license holder with the consent of the Commission. (j) Contract forms prepared by the committee for trial use may be used on a voluntary basis after being approved by the Commission. (k) A contract form prepared by the committee and approved by the Commission to replace a previously promulgated form may be used by license holders on a voluntary basis before the effective date of rules requiring use of the replacement form. (l) When a transaction involves unusual matters that should be reviewed by legal counsel 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. (m) A license holder may not employ, directly or indirectly, a lawyer nor pay for the services of a lawyer to represent any principal to a real estate transaction in which the license holder is acting as an agent. The license holder may employ and pay for the services of a lawyer to represent only the license holder in a real estate transaction, including preparation of the contract, agreement, or other legal instruments to be executed by the principals to the transactions. (n) A license holder shall advise the principals that the instrument they are about to execute is binding on them. (o) Forms approved or promulgated by the Commission may be reproduced only from the following sources: Page 82 of 97

83 (1) numbered copies obtained from the Commission, whether in a printed format or 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. (p) 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. (q) Standard Contract Forms adopted by the Commission are published by and available from the Commission at P.O. Box 12188, Austin, Texas or Page 83 of 97

84 (Source: =&p_tloc=&p_ploc=&pg=1&p_tac=&ti=22&pt=23&ch=537&rl=11) The Cannons of Professional Ethics are included in the Rules of the Texas Real Estate Commission Canons of Professional Ethics and Conduct. Texas Administrative Code. Title 22. Part 23. Chapter Fidelity A real estate broker or salesperson, while acting as an agent for another, is a fiduciary. Special obligations are imposed when such fiduciary relationships are created. They demand: (1) that the primary duty of the real estate agent is to represent the interests of the agent's client, and the agent's position, in this respect, should be clear to all parties concerned in a real estate transaction; that, however, the agent, in performing duties to the client, shall treat other parties to a transaction fairly; (2) that the real estate agent be faithful and observant to trust placed in the agent, and be scrupulous and meticulous in performing the agent's functions; and (3) that the real estate agent place no personal interest above that of the agent's client Integrity A real estate broker or salesperson has a special obligation to exercise integrity in the discharge of the license holder's responsibilities, including employment of prudence and caution so as to avoid misrepresentation, in any wise, by acts of commission or omission. Page 84 of 97

85 Think About This On July 15 th, Sally s client Sam asked her to deliver a Notice of Termination to the seller while his contract was still in the option period. The next few days were really busy and Sally neglected to deliver the Termination. By the time she got it to the listing agent the option period had expired. Now the seller is saying that he did not receive the notice during the option period and he wants Sam to release the earnest money to him. What did Sally do wrong? What should Sally do to make this up to her client? How do you think TREC would look at it if a complaint is filed? Competency It is the obligation of a real estate agent to be knowledgeable as a real estate brokerage practitioner. The agent should: (1) be informed on market conditions affecting the real estate business and pledged to continuing education in the intricacies involved in marketing real estate for others; (2) be informed on national, state, and local issues and developments in the real estate industry; and (3) exercise judgment and skill in the performance of the work. Page 85 of 97

86 Think About This Marvin has a salespersons license. Real estate sales have slowed down and Marvin decides to start doing Property Management. He has had no training or experience in managing property and he does not talk with his broker about his decision. Marvin opened a checking account so that he can keep his client s money separate from his. It is not a trust account. He just starts taking properties to manage. Thing go well for a few months, then one of his owners and he have a disagreement and the owner filed a complaint. Do you think TREC or Marvin s broker will have a problem with Marvin s activity? Consumer Information (a) 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 , (b) 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 place on the homepage of the business website of the broker and sponsored sales agents. (Source: Page 86 of 97

87 Discriminatory Practices (a) No real estate license holder shall inquire about, respond to or facilitate inquiries about, or make a disclosure of an owner, previous or current occupant, potential purchaser, lessor, or potential lessee of real property which indicates or is intended to indicate any preference, limitation, or discrimination based on the following: (1) race; (2) color; (3) religion; Page 87 of 97