Junk fees belong in the garbage

Wow, what a deal! But you might want to check the fine print.

Beginning July 1, 2024, offering a price for a good or service — product — that does not include all fees or charges the consumer will incur to receive the good or service offered, other than governmentally imposed taxes and transactional fees or shipping costs, is unlawful under California’s Consumer Legal Remedies Act (CLRA).

Adverts need not disclose the amount of any government transactional taxes and fees and any shipping costs since these are all predictable, expected costs and their absence in adverts is not considered to mislead consumers.

The question for real estate brokers is whether, when soliciting owners to list property for sale, the costs of selling — the licensed services of brokers — are “predictable and expected” or simply not part of brokerage services. They certainly are material to the seller’s decision-making process to sell and at what price and on what terms. While these issues are not here further discussed, they will be in the future.

Targeting so-called junk fees or garbage fees, this new law aims to level the playing field among all products as the advertising standard for consumer protection and fairness among competitors.

While full-disclosure laws are already in place in many sectors to limit false advertising in specific industries — including property sales and mortgage lending — the new law’s goal is to prohibit misleading advertisements “across the board.” Consumers of all products are given shelter from the storm of surprise costs not anticipated and worse, not disclosed up front.

With authorities cracking down on misleading advertising, real estate brokers and mortgage loan originators (MLOs) will be wise to take this opportunity to ensure their adverts are in compliance.

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Mortgage advertisements

A lender’s solicitation of homebuyers and owners to originate a mortgage is carried out in some form of advertising. Of course, the advertisement makes statements about the terms of the offered mortgage and the costs to originate and carry the mortgage to induce borrowers to apply to the lender for a mortgage.

Some statements in advertising either deliberately or implicitly mislead the reader into believing the offered mortgage is something it is not. To stop lenders from using misleading advertisements, the federal government set standards for the content of mortgage-related advertisements entitled the Federal Mortgage Acts and Practices — Advertising rule, known simply as Regulation N.

What is sought by Reg N is the prohibition of incomplete advertising copy, including the use of selective information or deceitfully unclear wording which misleads a consumer to believe the mortgage offered is other than what it is. Inaccurate and partial-truth claims, whether direct or implicit, made by a mortgage loan originator (MLO) or mortgage lender are prohibited.

Advertising offering a mortgage origination must openly provide consumers with the mortgage terms such as fees, costs, repayment and peculiarities of the mortgage offered — not hype and puffery. [12 Code of Federal Regulations §§1014.2-3]

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Anti-trust concerns, CAR and consumers

Anti-trust law promotes competition and a fair marketplace, limiting monopolies while promoting new start-up businesses and consumer protection. Violations of anti-trust law do the opposite, to the detriment of consumers.

In real estate, the term anti-trust has increasingly become synonymous with the word Realtor. ®

Most recently, the National Association of Realtors’ (NAR’s) compensation rules have come under fire from a class action lawsuit claiming NAR rules:

  • prevent multiple listing services (MLSs) from disclosing fee rates paid by consumers to member brokers; and
  • mislead buyers into thinking the buyers broker’s services are free (when in fact they are paid by the seller, and thus included in the equation setting the price of the listed property).

While listings on the MLS do not follow the same advertising rules, a listing is essentially an advertisement for a property. Thus, it needs to be truthful and upfront with all material facts — by extension, this includes the existence of the buyers broker fee. Surprised that a buyer needs to know the amount of compensation their agent is getting for their services?

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While these types of hidden fees are not explicitly targeted in California’s new law, awareness and suspicion are spreading among buyers and sellers. The current real estate recession will bring on a lot of case law clarifying who is entitled to what information about deals.

Don’t get caught acting like the proverbial used-car salesman or hawker of snake oil with your clients. Always be upfront with the disclosure of your fee and cost-of-transaction disclosures. Thus, you maintain trust among consumers of your services when it comes to their reliance on your brokerage practice. [See RPI Form 150 §16]

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