This article is Part Two of a series arguing for the reinstatement of the Department of Real Estate (DRE)’s code of ethics. If you haven’t already, take a look at Part One, which provides context for the current vacuum in California ethical standards.
Why a code of ethics?
Every public-facing industry, especially one as complex as the real estate industry, is in need of common standards of practice. Presently, the code providing those standards for California real estate agents is far from an ideal set of rules governing an agent’s conduct in service of the public.
The code in question is a generic product of the National Association of Realtors® (NAR), which NAR’s state-level manifestation, the California Association of Realtors® (CAR), has commandeered as its own. Real estate practice is rooted in state codes, cases and regulations aimed at protecting residents of that state, and as a result, this national code of ethics is frequently ill-fit to the unique marketplace of California. NAR has next to nothing to do with California, where principals might have little to no personal knowledge of the agent representing them (especially in urban population centers), and have no choice but to operate under a general set of expectations for licensee conduct.
Further, the Department of Real Estate (DRE) has continuously pushed the NAR code as an acceptable standard for those California licensees who also happen to be Realtors®. As we discussed recently, the state nixed the DRE’s code of ethics in 1996, and California has consequently been left without a California code of ethics for the real estate industry — a situation the DRE could rectify.
But before we can argue for the reinstatement of the DRE code of ethics, we need to understand what’s in it. What are we arguing for? And maybe more critically, what are we arguing against?
Taking a look at the DRE’s standards
The latest (1990) version of the DRE code of ethics is split into two sections:
- Unlawful Conduct in Sale, Lease and Exchange Transactions; and
- Unlawful Conduct When Soliciting, Negotiating, or Arranging a Loan Secured by Real Property or the Sale of a Promissory Note Secured by Real Property.
The body of the code describes acts and practices the state classifies as unlawful conduct. Anything not disallowed, of course, is lawful conduct — in other words, licensees dealing with members of the public in California need to know what they cannot do before determining what they can do. This negative framework permits innovation in the offering and management of real estate services, restricted only by limitations of prohibited conduct.
The first section of the DRE’s code prohibits licensees from:
- knowingly misrepresenting to a buyer or seller of real estate:
- the value of the real estate, including when it is securing a note;
- the licensee’s relationship with a broker; and
- the amount of closing costs in a transaction;
- knowingly misrepresenting to a seller of real estate:
- the nature of a buyer’s deposit toward the purchase of real estate; and
- a buyer’s ability to pay back a carryback loan;
- failing to disclose to a principal:
- the licensee’s interest in a transaction or ownership interest in the underlying real estate;
- the licensee’s interest in any entity related to the transaction; and
- any material facts about a property.
- falsely representing to a seller that the licensee has obtained a bona fide written offer when they have not;
- falsely claiming broker fees are nonnegotiable due to law or regulation;
- defacing or modifying a signed agreement without the knowledge and consent of the signor;
- failing to present a written purchase offer to a seller when acting as the seller’s agent;
- failing to explain any contingency in an offer which may affect the closing date of the transaction to a principal; and
- refunding a buyer’s deposit after the seller has accepted the offer without the seller’s express permission.
Section (b), on the other hand, lists prohibited conduct regarding the origination or sale of mortgages. It forbids licensees from:
- knowingly misrepresenting to a prospective mortgage lender:
- information about the homebuyer taking out the mortgage, including their identity, occupation, income, credit data, payment history on an existing note and their ability to repay the mortgage;
- the probable closing costs of a transaction;
- the priority of the security in the real estate;
- the amount of future mortgage payments; and
- material facts about the property securing a mortgage, such as its size, interior or exterior features and fair market value (FMV);
- knowingly misrepresenting to a prospective homebuyer:
- the existence of a lender willing to make the mortgage;
- the probable closing costs in a transaction;
- that any service is free when the licensee knows it is not;
- the disposition of an advance fee received from the buyer; and
- the terms or conditions of a mortgage.
In addition, the code is accompanied by a “Suggestions for Professional Conduct” addendum. The addendum is comprised of a series of “guidelines for elevating the professionalism of real estate licensees,” which carry far less weight than the body of the code itself. The code notes the guidelines, “…are not intended as statements of duties imposed by law nor as grounds for disciplinary action by the Department of Real Estate.” Without disciplinary recourse, these guidelines are essentially toothless.
This addendum contains plenty of vague advice, suggesting licensees:
- prepare advertisements carefully;
- inform themselves about factors affecting the real estate market; and
- aspire to a “high level of competent, ethical and quality service.”
But strangely, this section includes some unquestionably vital provisions, such as:
- cooperating with the DRE’s enforcement of real estate law;
- not misrepresenting the licensee’s expertise in any given subject matter; and
- providing “equal opportunity for quality housing and a high level of service to all persons regardless of race, color, sex, religion, ancestry, physical handicap, marital status or national origin.”
Weighing the pros and cons
The DRE code has a couple of critically important things going for it. To begin with, the DRE code comes from the DRE, and by extension the state of California. This may sound like it goes without saying, but it is an incredibly pertinent fact — the NAR code is the product of an out-of-state trade union concerned primarily with political action. The DRE, on the other hand, is native to California soil and brought about by California legislative authority, and thus has a mandate to protect members of the public when dealing with licensees. For the DRE to cede authority to a private political organ is at best a deliberate shirking of its responsibility to the state legislature and the public.
Like the DRE itself, the DRE’s code is state-specific. The NAR code, while longer and more in-depth than the DRE code, does not provide insight into the nuanced workings of any state’s real estate industry — especially not California’s — because it can’t, if it is to be applicable in all states. This “one-size-fits-all” mentality just doesn’t work in California, the fifth largest economy in the world.
But that doesn’t mean the DRE’s erstwhile code is perfect. If anything, it is slavishly dependent on California statute, as well as case law interpretation and application. By classifying the addendum to the code as mere “suggestions,” as well as keeping these suggestions vague, the DRE is careful to absolve itself of the responsibility to take any action — however minor — against licensees who violate even the more significant provisions of the suggested conduct. This fundamentally weakens the efficacy of the code.
Further, the DRE defers to the NAR code in some respects. Section (a)(12) of the “Suggestions for Professional Conduct” implores licensees to “make every attempt to comply with these Guidelines for Professional Conduct and the Code of Ethics of any organized real estate industry group of which the licensee is a member,” a clear tip of the hat to NAR. Instead of stepping up to the plate, the DRE passes the buck — little wonder, then, that so many licensees believe CAR and the DRE to be one and the same.
What about NAR?
Whatever its inherent faults, it’s hard to deny that NAR’s code is far more readable and comprehensive than the DRE’s.
And why wouldn’t it be? If the association’s goal is to be able to uniformly apply their standards nationally, it makes sense that it would attempt to cover all bases, whether or not they are applicable in the context of California.
Unlike the DRE, NAR does not distinguish in its code of ethics between ethical behavior it has the power to regulate and “suggestions” for ethical behavior. Instead, NAR — as a private organization — may discipline and arbitrate among members at its discretion, as its code comprises both illegal behavior and behavior merely deemed unethical.
The code is split into three sections:
- Duties to Clients and Customers;
- Duties to the Public; and
- Duties to REALTORS®.
The first section covers largely the same content as the DRE’s code— albeit in a fashion which is less beholden to the legalese on which the DRE code is based. This is a plus for readability, but a solid minus in terms of reliability.
The key differences between the two codes lie in language and scope. While the NAR code may be more comprehensive, it also uses language which is overly broad and not uniformly applicable to California. For example, buyer’s agents are referred to as “cooperating brokers,” a seller-centric term traditionally used to obscure the buyer’s agency in the transaction. In terms of California law, the idea of a “cooperating broker” is a fabrication, betraying NAR’s historical objection to buyer protections.
But nothing encapsulates the non-specificity of the NAR code better than its incessant referral to a generic “state law.” For example, the code defines an “agent” as “a real estate licensee (including brokers and sales associates) acting in an agency relationship as defined by state law or regulation.” While the basic agency relationship between licensees and principals may be similar in all states, the reference to “state law” renders this an irrelevant standard against which to hold California licensees — especially if it is the only standard.
The second section of the NAR code, “Duties to the Public,” encompasses some of those provisions the DRE couches as “suggestions,” including:
- the extension of “equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity”;
- not providing “specialized professional services concerning a type of property or service that is outside their field of competence”; and
- not misrepresenting oneself or one’s practice in any marketing materials.
That NAR (and by extension CAR) has the power to enforce these stipulations is central to the ability of NAR’s code of ethics to function as such. And these are not frivolous provisions. For example, the assurance that a principal will not receive substandard treatment due to their race is crucial to the development of ethical real estate practices and the functioning of a healthy market.
The third and final section of NAR’s code concerns Realtors’® responsibilities to other Realtors®, and precludes Realtors® from:
- making misleading statements about other Realtors®;
- interfering with another Realtor’s® exclusive relationships with their principals; and
- litigating any dispute with other Realtors® in lieu of arbitration.
This is the most problematic section of NAR’s code. The language implies not only that members of the union are the only ones beholden to these rules, but that members are only beholden to the rules insofar as their actions affect other union members. Simply put, if a Realtor® interferes with the practice of another agent who is not a member of the union, the Realtor® may not be disciplined by the union. The conclusion is incompatible with an open, competitive market where members and nonmembers coexist.
Additionally, mandatory arbitration between union members presents serious drawbacks in disputes where the statutory reality of the circumstances is in question. Unlike judicial rulings, which may be appealed if they are incorrect, an arbitrator’s judgment is final. This holds even when the judgment is unfair or constitutes a misinterpretation of the law.
Arbitration became CAR and NAR’s favored method of dispute resolution several decades ago as a means of avoiding a display of the industry’s dirty laundry — not to mention the costly court action between its members. More importantly, the advent of arbitration allowed trade union leaders to maintain control by requiring all disputes be settled internally — and invisibly — outside the influence and involvement of state or federal governments, without the protection of constitutional law and the release of information to the public. [The People v. National Association of Realtors (1984) 155 CA4th 578]
Arbitration provisions are undoubtedly more harmful when they appear in purchase agreements, where unsuspecting buyers or seller may be sidelined by the loss of rights they were not even aware of giving up. However, the arbitration provision between union members in NAR’s code of ethics parallels many adverse legal repercussions for union members.
The holy grail of ethics codes
Both the NAR and DRE codes leave a lot to be desired in their own unique ways. NAR’s is overlong and not specific to any given locale; the DRE’s is stuffy and short, and a large portion of it is effectively unenforceable (not to mention the fact that the code no longer technically exists).
Partly, the disparity between these two codes as they stand has to do with the fact that the most recent version of the DRE code was written in 1990 — nearly three decades ago. In contrast, NAR’s code is up to date, and many of its provisions were created or updated in the last 10 to 20 years.
Because of this, the DRE need not simply reinstate its original code — this would be an unproductive (and largely symbolic) exercise. While the symbolism of the gesture is important, it is not as important as having a California-unique, up-to-date code of ethics to which real estate agents and their clients may refer and which has state-specific legal backing.
Instead, the DRE needs to revive and refresh its code — taking the skeleton of the 1990 version and revising it substantially to fit current law and practice in California. For starters, the DRE needs to simplify the language of its code to be accessible not only to real estate licensees and industry insiders, but members of the public. In addition, the DRE needs to be able to enforce all provisions included in its code of ethics. This means everything included needs to be backed by statute.
What licensees need out of a code of ethics is readability, comprehensiveness and the authority of an actual regulatory governing body. The DRE owes this to California real estate agents: an unbiased, clear, state-specific set of ethical standards to guide — and bind — its licensees.
If NAR can’t live up to that challenge, who will?