Texas Promulgated Forms Ch 8
Flipping
When a property is purchased and then quickly resells at a value that is artificially inflated by false appraisals, loan fraud has taken place. - Often, the first buyer is reselling the property to someone who is participating in the fraudulent activity. - For example, if the first buyer purchases a home for $400,000 (which is the actual value) and then resells it at $600,000 with a phony appraisal to a straw (phony) buyer, the first buyer and the straw buyer might both pocket $100,000. - No payments are made on the $600,000 loan, and upon foreclosure, the lender discovers that the property is only worth $400,000. e lender takes the loss and its costs increase. Because of the pressure from special interest groups and federal regulatory authorities to make loans, frequently to unqualified buyers, many fraudulent practices flourished before the savings and loan failures that lasted from the late 1970s to the early 1990s. - One of the more blatant frauds went something like this: 1. Con 1 buys the shell of a "scraper" and has a very cheap paint job done on the exterior, plus adds cheap curtains to the windows. 2. Con 2 (the appraiser) does a drive by (or computer-generated) appraisal to support whatever loan is being sought. 3. Con 3 (the loan broker) generates fraudulent loan application documentation to show a creditworthy borrower for purposes of reselling the loan on the secondary market, often bundled with some good and many highly questionable loans. 4. Upon approval, Con 3 finds a cooperator to provide a signature on all documents, closes the loan, and distributes the loan proceeds (many times the actual value of the property) among the conspirators. 5. No loan payments are made, and after a few months the property goes into foreclosure, at which time the lender discovers that the property is virtually worthless and for all practical purposes the "borrower" doesn't exist. 6. Cons 1, 2, and 3 move on to the next property. In one of the more egregious examples of this practice, the thieves added a twist; once the property was "appraised" and photographed, the house (which was sitting on steel supports used for house-moving, disguised by skirting and shrubbery), was moved to a new location, painted a different color, and used as collateral many times over. - e only changes needing to be made were the name of the borrower, the address of the property, and perhaps minor adjustments to the numbers to prevent them from being identical to the most recent loan. - Once apprehended and convicted, the cons were sentenced to varying prison terms, together with the loss of their respective licenses. Another variation involved a newly constructed home, duly appraised and used to collateralize several loans. e house was never moved, but the address, paint color, and interior description were modified from application to application. - After pulling several hundred thousand dollars from the loans, the cons disappeared. When a lender had the house appraised, it was discovered that it was truly a shell; no glass or screens in the windows, only enough interior framing to hold up the walls and roof, no drywall, no electrical wiring, no plumbing, no HVAC. - Dummy wires had been run from the nearest utility pole to indicate electric and phone service, and a forged certificate of occupancy was part of the loan application package. - In this case, several of the perpetrators were apprehended and imprisoned, but the ringleader died in an apparent auto accident while leaving the jurisdiction. As a result of these sorts of practices, as well as the 2008 housing crisis and subprime lending practices, documentation controls have been tightened considerably and new requirements placed on appraisers, both in terms of quality of training and of the appraisal product. Appraisals are required to meet more stringent standards, with numerous checks on the appraisal. e new controls and vigilance do not mean new methods of defrauding buyers and lenders will not be created; the ingenuity that permeates the U.S. business community is not limited to honest practitioners. In a thriving economy with rising values and buyers desperate to have a successful bid for a home, the opportunities for overstating values and overreaching on price abound. As stated previously, if it sounds too good to be true, it probably is.
Loss of License
TRELA Section 1101.652 provides for the suspension or revocation of a real estate license by the Texas Real Estate Commission for various offenses. Section 1101.652(a)(1) states the following: (a) e 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) 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. Depending on the severity of the fraud, suspension or loss of license could be the least of a license holder's concerns.
Occupancy Standards
Neither the Fair Housing Act nor HUD has a particular rule regarding occupancy. Both allow for housing providers to comply with reasonable local, state, and federal occupancy restrictions. In some cases, housing providers have been permitted to develop and implement reasonable occupancy restrictions on their own. e primary intention of HUD is to make sure the occupancy standards are not so strict as to eliminate the protection of families with children. For example, an apartment building that limits one-bedroom apartments to only one person would probably not be acceptable because the one person would certainly be an adult, eliminating children. In a statement of policy, effective December 18, 1998, HUD stated that two people per bedroom was a reasonable standard (and the age of the two people is not a consideration). ey further clarified that when considering a complaint, they would consider whether any policy was so strict it was making it difficult for families to find housing. Since 1998, however, there have been numerous disputes involving exactly how many persons may be allowed or prohibited. Not the least among these involved a situation in which the bedrooms were especially large, thus allowing more children for a large but economically limited family. Property managers and owners seeking reimbursement via Section 8 payments should be sure the property has been inspected by a HUD-certified inspector so that both occupancy and habitability standards are met. Using that information, we can conclude that HUD would probably agree that a four-bedroom home would be available to a single parent and seven children. Property managers need to make sure their owners (landlords) are aware of the fair housing laws. HUD also has habitability standards that must be met. ese are strict, but less so than HUD's housing quality standards that must be met if federal housing assistance payments are to be received. e following is from Chapter 10 (50 pages of detail) of the HUD Housing Quality Standards handbook, which provides detailed standards that must be met. Housing that falls under these standards must be inspected annually and continue to meet these standards. e areas to be covered include the following: Sanitary facilities Food preparation and refuse disposal Space and security ermal environment Illumination and electricity Structure and materials Water supply Lead-based paint Access Site and neighborhood Sanitary condition Smoke detectors 10.4 lead-based paint requirements and responsibilities Basic lead-based paint requirements In addition, many states (including Texas) and local municipalities have habitability standards that apply to residential rentals in general, not just those seeking governmental payments. In Texas, a landlord must provide hot water to the premises, as well as repair any condition that materially affects the health or safety of an ordinary tenant. In addition, there are requirements for having adequate heat and cooling, and safety devices such as smoke detectors. If the tenant is hearing impaired, the landlord must provide detectors that also display some sort of warning light. Many municipalities have their own habitability standards, including such things as how often the premises must be painted and carpeting replaced. In addition, areas with active environmentalists often have insulation, HVAC, and materials standards that effectively drive up the cost of rental housing.
HUD Issues Guidance on Lesbian, Gay, Bisexual, and Transgender (LGBT) Housing Discrimination Complaints
"On July 1, 2010, HUD announced a new policy that provides LGBT individuals and families with further assistance when facing housing discrimination. e new guidance treats gender identity discrimination as gender discrimination under the Fair Housing Act and instructs HUD staff to inform individuals filing complaints about state and local agencies that have LGBT-inclusive discrimination laws," according to HUD press release no. 10-139. Approximately 20 states and the District of Columbia and, as well as more than 200 cities, towns, and counties, have additional protections that prohibit discrimination against LGBT individuals. e HUD press release provides examples of situations that may be jurisdictional under the Fair Housing Act. ese examples are as follows: If a man alleges that he is being evicted because he is gay and his landlord believes he will infect other tenants with HIV, then the allegation of discrimination may be jurisdictional under the Fair Housing Act based on disability, because the man is regarded as having a disability, HIV/AIDS. Similarly, if a female prospective tenant is alleging discrimination by a landlord because she wears masculine clothes and engages in other physical expressions that are stereotypically male, then the allegations may be jurisdictional under the Act as discrimination based on gender.
Defenses to the DTPA
(1) a reasonable offer of settlement within specified time limits, (2) written notice to the consumer prior to consummation of the sale that the broker is relying on written information prepared by others, and (3) the impossibility of the broker's knowing that the information was false or inaccurate. e act also permits recovery of court costs and attorneys' fees if the lawsuit was ruled frivolous or harassing.
History of Residential Segregation
1920s Whites who controlled the housing industry implemented a series of techniques designed to segregate the black population. ese techniques included (1) racial zoning; (2) restrictive covenants; and (3) discriminatory sales, rental, and financing practices. 1930s Segregation was perpetuated by federal policies that encouraged racial discrimination in federally assisted housing 1940s-'50s-'60s e Age of Industrialization and Urbanization brought millions of black families to cities in both the South and the North. e primary method of providing housing opportunities was through "blockbusting" neighborhoods next to ghettos. 1960s Geographic regions throughout the United States experienced an increase in residential segregation by race. 1980s A HUD study estimated that approximately two million incidents of housing discrimination were occurring every year. It is naive to think that 50 years of segregated housing patterns and institutionalized discrimination would be reversed with the passage of this country's fair housing laws. Housing segregation has multiple causes, such as economic factors and personal preference to live with persons of the same race. However, the primary cause of the patterns of racial segregation identified in metropolitan areas must be attributed to discrimination e history of residential segregation in America also established the necessity to pass laws that prohibited discrimination in order to ensure a housing market that provides equal opportunity in housing to all.
Protections for Individuals With Disabilities
A disability is a physical or mental impairment. It is unlawful to discriminate against prospective buyers or tenants on the basis of disability. e term includes those having a history of, or being regarded as having, an impairment that substantially limits one or more major life activities. Persons who have AIDS are protected by the fair housing laws under this classification. e federal Fair Housing Act's protection of people with disabilities does not include those who are current users of illegal or controlled substances. Individuals who have been convicted of the illegal manufacture or distribution of a controlled substance are also not protected under this law. However, the law does prohibit discrimination against those who are participating in addiction recovery programs. For instance, a landlord could lawfully discriminate against a cocaine addict but not against a member of Alcoholics Anonymous. A landlord may not do the following: Refuse to let a person with disabilities make reasonable modifications to dwellings or common use areas, at the person's expense, if the modifications are necessary for the person to use the housing. Where reasonable, the landlord may permit changes only if the person agrees to restore the property to its original condition upon move-out. Refuse to make reasonable accommodations in rules, policies, practices, or services, if necessary for a person with disabilities to use the housing Here are a few examples: A building with a "no pets" policy must allow a visually impaired tenant to keep a guide dog. An apartment complex that offers tenants ample, unassigned parking must honor a request from a mobility-impaired tenant for a reserved space near her apartment, if necessary to assure that she can have access to her apartment. Housing need not be made available to a person who is a direct threat to the health or safety of others or who currently uses illegal drugs.
Prohibited Disclosures
A good business practice is to never disclose anything about the most stringent fair housing protected classes (e.g., if local law adds additional protected classes, use that as the basis). HIV and AIDS are included in the protected class of disability under the Fair Housing Act. e disclosure that a previous or current occupant has AIDS or an HIV-related illness is not required. Additionally, HUD, NAR, and the Canons of Professional Ethics in TRELA advise against disclosure, inquiry, or response regarding this issue. e Texas Real Estate License Act reads: Notwithstanding Subsection (b) of this section, a person is not subject to civil liability or criminal prosecution because the person did not inquire about, make a disclosure related to, or release information related to whether a previous or current occupant of real property had, may have had, has or may have AIDS, HIV related illnesses or HIV infection as defined by the Center for Disease Control of the U.S. Public Health Service.
Equal Access to Housing in HUD Programs Regardless of Sexual Orientation or Gender Identity
According to HUD, "is final rule, effective March 5, 2012, HUD implements policy to ensure that its core programs are open to all eligible individuals and families regardless of sexual orientation, gender identity, or marital status." Owners and operators of HUD-funded housing, or housing insured by HUD, are prohibited from inquiring about an applicant's sexual orientation or gender identity or denying housing on that basis. e term family is slightly reorganized in the opening clause to read as follows: "Family includes but is not limited to the following, regardless of actual or perceived sexual orientation, gender identity, or marital status." e rule adds sexual orientation and gender identity to the characteristics that an FHA lender may not take into consideration in determining the adequacy of a mortgagor's income. e language of the final rule says that "it is important not only that HUD ensure that its own programs do not involve discrimination against any individual or family otherwise eligible for HUD-assisted or -insured housing, but that its policies and programs serve as models for equal housing opportunity."
Red Flags
Almost everyone involved in a real estate transaction could be involved in fraud: - the agents, the mortgage broker, the appraiser, the title company, et cetera. lender is usually the victim. License holders can learn to spot fraud. e following is a list of some red flags that might indicate fraudulent activity in a real estate transaction: Inflated price and/or appraisal License holder is frequently asked to remove the property from the multiple listing service (MLS) (which is a violation of MLS rules) or asked to increase the price in the MLS False financial statements by the buyer Contract calling for future improvements High fees to the mortgage broker, real estate broker, or both No fee for a title policy on the closing documents A title company the license holder has never heard of before Last-minute amendments to the contract, increasing the sales price
Rights of African Americans
Although the signers of the Declaration of Independence stated that "all men" should be considered equal, it became apparent that persons of African descent would not be accorded any rights or freedoms. Article 1 of the United States Constitution, adopted in 1787, quantified slaves as "three-fifths" of a person in determining a state's population for congressional representation. e rights of African Americans were further eroded by the 1857 Supreme Court case of Dred Scott v. Sanford. e decision declared that no black, free or slave, could claim U.S. citizenship and that blacks had no rights that whites were bound to respect. In addition, the ruling stated that Congress could not prohibit slavery in any U.S. territory. e ruling was influential because it built angry resentment in the North and moved the nation closer to civil war. It also paved the way for the passage of the Fourteenth Amendment to the U.S. Constitution in 1868, which extended full citizenship and civil rights to African Americans. e amendment also guaranteed all persons due process and equal protection under the law. Following the American Civil War (1861-1865), the irteenth Amendment, enacted in 1865, formally abolished slavery
Intent and Effect
An additional source of claimed discrimination has come into vogue in recent years. If an owner or real estate professional purposely sets out to engage in some form of unfair or discriminatory activity, the intent to discriminate is obvious. However, even if there is not an intent to discriminate, if the effect of the behavior is unintentional discrimination, then it can be claimed to have occurred. e phrase used to describe this situation is disparate effect or disparate impact. It means that an otherwise neutral or nondiscriminatory behavior or practice that has a disproportionate impact on individuals having a disability or belonging to a protected class due to age, ethnicity, race, or sex, will be deemed discriminatory despite the complete absence of discriminatory intent. is "effects" test is applied by regulatory agencies to determine whether an individual has been discriminated against.
Buyer Rebates
Anything during the transaction that causes money to go back to the buyer, either at or after closing, without the knowledge of the lender, is illegal. - Sometimes the money comes from the seller, sometimes from the real estate agent or the mortgage loan broker, and sometimes through a third-party vendor. - It is essential that the lender know exactly how much money for down payment and/or closing costs are being paid from the buyer's own funds. - Anything being paid by any other party in the transaction must be disclosed in the contract and on the closing documents. One of the common forms of rebates happens when the contract calls for money to be paid to a certain vendor for improvements to be made after closing. - For example, $20,000 is to be paid by the seller to ABC Home Improvements for future improvements. - ABC Home Improvements is actually owned by a friend of the buyer, and after closing, the friend and the buyer split the $20,000. - No improvements are made and no mortgage payments are made. - Upon foreclosure, the lender finds that the property is worth less than the loan amount.
Stigmatized Properties Disclosures
As noted in the Permitted section above, there are some disclosure topics that can be tricky. ese often involve a property that is stigmatized due to something that has happened there. For our purposes, we'll define stigmatized as being branded or characterized as disgraceful or repulsive or highly undesirable. While some occurrences may have no negative impact at all on a potential buyer, other buyers may have a real aversion to the property if they are aware of the occurrence. Remember that we are not discussing whether that client's reaction is reasonable or not; if the potential buyer has an adverse reaction, then that is something the agent must consider. e agent can be faced with a real dilemma; on the one hand, the agent is obligated to treat all parties fairly and to disclose material issues. On the other hand, the agent is obligated to use her best efforts to sell the property and to not disclose something that might negatively impact a potential buyer if that something is not material. And, the agent is obligated to not disclose anything the client does not want disclosed unless required to do so by law. Although not an easy choice in terms of possible consequences, the decision—if there is a conflict between the client's demands and the law—is perhaps the clearest. If the disclosure is required, then it is required. If the client will not consent, the agent is compelled to terminate the relationship. Risking losing a license because a client is less than honest isn't worth it. ings get tougher when the issue is whether something is "material" or not. Structural issues, availability of utilities, a history of flooding, a pending eminent domain proceeding against the property, absence of a building permit and/or a certificate of occupancy for an addition or remodel, any sort of health/safety code violations—these are the "easy" ones. It gets harder when the determination of what is material is in the eyes of the potential buyer, and this is especially true if the property itself is in fine condition and the stigma has to do with reputation or public perception rather than the opinion of an unbiased third party. It can be a particularly difficult situation if the issue relates to any sort of crime involving children or sexual activity. While those issues clearly have nothing to do with the condition of the property, whether they are "material" to a potential buyer with children, or with a history involving sexual abuse, is another question. e agent certainly does not want to hear testimony in a disciplinary hearing or court proceeding that says, "If I had known that, I would never have bought the house," or "Mr. Broker, why didn't you tell Ms. Buyer about that?" Perhaps the best practice in dealing with matters of public record is to refer the potential buyer to whatever resources are available (registered sex offender website in Texas) that would provide the information. If no such resource exists, the agent should consider a candid discussion with the client before the property is listed to deal with any sensitive issues. So long as the disclosure is not required by law, the client does have the ultimate authority over what can and cannot be disclosed. However, if the agent feels that a significant item is going to be concealed and such concealment could jeopardize the agent's reputation, she may want to rethink the desirability of listing the property.
Strict requirements must be met for the waiver to be valid and enforceable
By statute, consumers may waive their rights to bring a suit under the DTPA. However, court opinions consistently uphold that "any waiver by a consumer of the provisions of the subchapter is contrary to public policy and is unenforceable and void." e waiver must be in writing and signed by the consumer. e consumer must not be in a significantly disparate bargaining position. e consumer must be represented by legal counsel (not referred by the defendant or an agent of the defendant) in seeking or acquiring the goods or services. e waiver must be conspicuous and in boldface type at least 10 points in size. e waiver must be in substantially the promulgated form under the heading "Waiver of Consumer Rights."
Fraud Perpetrated by Buyers or Sellers
Fraud is everywhere and committed by many different individuals. - It evolves constantly in response to increased scrutiny and laws, and as new methods prove to be profitable (at least in the short run) -. Some current forms are included here, but an important takeaway for all license holders is to pay attention, listen to your instincts (if it doesn't sound right, it's probably not; if it sounds too good to be true, it probably is), and consult your broker or firm's attorney if you have any concerns.
Three circumstances under which the DTPA does apply to the actions of real estate agents are
In 2011, the Texas Legislature sought to reduce frivolous lawsuits against real estate brokers and salespersons by providing that the DTPA does not apply to claims arising from an act or an omission by a broker or a salesperson, with certain exceptions "an express misrepresentation of a material fact that cannot be characterized as advice, judgment, or opinion;" a failure to disclose information concerning goods or services that was known at the time of the transaction if the failure to disclose such information was intended to induce the consumer into a transaction which the consumer would not have entered had the information been disclosed; or "an unconscionable action or course of action that cannot be characterized as advice, judgment, or opinion.
Separate but Equal Doctrine
In a major setback in the struggle for racial equality, the Supreme Court's 1896 decision in Plessy v. Ferguson opened the door for institutionalized segregation. e famous "separate but equal" doctrine legalized the separation of the races in everything from schools to public accommodations. e facilities were indeed separate but rarely equal. e Supreme Court finally overturned the doctrine in the 1954 landmark decision in Brown v. the Topeka Board of Education. is ruling outlawed the separation of the races in public schools, and it was soon followed by other rulings outlawing the separation of the races. e Court made clear that all forms of government-endorsed segregation violated the Fourteenth Amendment. In 1948, the U.S. Supreme Court held in Shelly v. Kraemer that enforcement of racially restrictive covenants by state courts violated the equal protection clause of the Fourteenth Amendment. us, persons were precluded from using the judicial system to enforce racial discrimination.
Testers
In order to enforce fair housing laws, federal and state governments often employ "testers." A tester is one or more persons who approach a property manager, landlord, or real estate professional seeking to rent or buy property. e tester neither identifies himself nor his mission. He may ask questions or simply indicate by words and actions that he is a member of one or more protected classes. If the person contacted practices some sort of discriminatory behavior, the tester can file a complaint with the proper authority, which can then file a complaint or take such other enforcement action as is permitted by law. Note that the testers themselves are not the complaining parties; the state or federal agency to which the complaint is made files the complaint. However, also note that if a real estate professional is damaged due to the discriminatory action of someone else, that professional may also have the right to sue for damages.
Response to Concerns of Terrorism
Landlords and property managers have been developing new security procedures in response to concerns of terrorist attacks. ese procedures have focused on protecting buildings and residents. Landlords and property managers are also educating residents on signs of possible terrorist activity and how and where to report it. At the same time, landlords and property managers need to ensure that their procedures and education do not infringe on the fair housing rights of others. For screening and rental procedures, it is unlawful to screen housing applicants on the basis of race, color, religion, sex, national origin, disability, or familial status. According to HUD, landlords and property managers have been inquiring about whether they can screen applicants on the basis of citizenship status. e Fair Housing Act does not specifically prohibit discrimination based solely on a person's citizenship status. erefore, asking applicants for citizenship documentation or immigration status papers during the screening process does not violate the Fair Housing Act. For many years, the federal government has been asking for these documents in screening applicants for federally assisted housing. HUD provides a specific procedure for collecting and verifying citizenship papers.
Required Disclosures
Many disclosures are required when selling property. Everything the sellers or agents know about the condition of the property must be disclosed to potential buyers. Any information or reports regarding the roof, structure, electrical, plumbing, drainage, et cetera must be shared with the buyer to prevent future lawsuits. e Seller's Disclosure Notice signed by the buyer is the seller's proof of disclosure. Paragraph 6E (1-10) discloses many things to the buyer that are required by law. Anytime you are using a form other than a TREC form you have to be aware to give those required notices by a different method.
Equal Opportunity in Housing
On November 20, 1962, President John F. Kennedy issued Executive Order 11063, "Equal Opportunity in Housing." e order prohibited discrimination in the sale, rental, or use of all residential property that was owned, operated, or financed by the federal government. e order had little impact because it did not provide for judicial enforcement. e Civil Rights Act of 1964 prohibited discrimination in public accommodations; in all federally assisted programs and in employment on the basis of race, color, religion, sex, or national origin. e year 1968 marked the beginning of the modern era of fair housing law in this country. On March 1, 1968, the National Advisory Commission on Civil Disorders published e Kerner Report, which showed that America was moving toward two societies, one black and one white—separate and unequal. President Lyndon B. Johnson first introduced fair housing legislation in 1966. e three-year debate culminated in the passage of the federal Fair Housing Act. e new law was not the result of careful congressional consideration; rather, it was the product of an intense debate occurring over a relatively short period, against a background of dramatic national events. On April 4, 1968, Dr. Martin Luther King Jr. was assassinated in Memphis, Tennessee. President Johnson, in urging unity and peace, said, "America is shocked and saddened by the brutal slaying." King was the symbol of the nonviolent civil rights protest movement. Although the Senate had passed an amended version of the Fair Housing Bill on March 11, 1968, there was little hope that the bill would pass the House of Representatives. After King's assassination, however, the House hastily passed the Fair Housing Act. President Johnson signed the Civil Rights Act of 1968 (also known as the Fair Housing Act) into law on April 11, 1968. e 1968 law prohibited discrimination on the basis of race, color, religion, and national origin. e act was, for the most part, ineffective in combating housing discrimination. e enforcement mechanisms were simply too weak to have any perceptible impact on housing discrimination In 1974, Congress passed the Housing and Community Development Act, which added sex as another basis on which discrimination was prohibited. is prohibited basis includes sexual harassment but not sexual orientation. is act also created a new set of housing assistance programs for lower-income families, the Section 8 programs. e passage of the 1988 Fair Housing Amendments Act represented the most important development in fair housing law in the 20 years since the Civil Rights Act of 1968. e number of protected classes expanded. Federal civil rights protections were extended to families with children and to persons with physical and mental handicaps. e 1988 Fair Housing Amendments Act radically changed the HUD enforcement procedure by adding a wide range of serious sanctions and remedies. Monetary awards were now available for actual damages, as well as for noneconomic injuries such as embarrassment, humiliation, inconvenience, and mental anguish. e cap of $1,000 on punitive damages was removed in federal district court actions. e 1995 Amendment to the Fair Housing Act repealed the significant facilities and services requirements designed to meet the physical and social needs of older persons. e 1995 amendment called on HUD to implement rules for verifying the age of occupants. e amendment also prohibits the awarding of monetary damages against persons who reasonably believed, in good faith, that the property, as housing for older persons, was exempt from the familial status provisions of the Fair Housing Act.
Fraud Perpetrated by License Holders Deceptive Trade Practices—Consumer Protection Act
One very important consideration in fraud that involves license holders is the Deceptive Trade Practices—Consumer Protection Act. Texas Deceptive Trade Practices—Consumer Protection Act (DTPA) is Chapter 17, Subchapter E of the Business and Commerce Code. - This act declares, among other things, that "false, misleading or deceptive acts or practices" in the advertising, offering for sale, selling, or leasing of any real or personal property are unlawful. - As set forth in the act, false, misleading, or deceptive acts or practices are included in a "laundry list" of 27 items; some of them are as follows: Representing that something is new or original when it is not, or that it is of a particular quality when it is not Advertising property with no intention of selling the property as advertised Making false statements of fact concerning the reasons for a price reduction Misrepresenting the authority of an agent to negotiate the final terms of a sales contract Representing that a warranty guarantees or confers rights or remedies not included Representing that work has been done on real or personal property when the work has not been done
Broker's Fee
Paragraph 8 of the contract reads, "All obligations of the parties for payment of brokers' fees are contained in separate written agreements." So where are these separate written agreements? e listing agreement is an agreement between seller and broker. e buyer's representation agreement is an agreement between buyer and broker. An agreement between brokers is either a written agreement or through the MLS system e agreement between brokers is referred to on page 9 of the sales contract: "Listing Broker has agreed to pay Other Broker ___________ of the total sales price when the Listing Broker's fee is received. Escrow agent is authorized and directed to pay other Broker from Listing Broker's fee at closing." is is not the agreement between brokers; it only affirms what the agreement is. If the property is in MLS, the amount in this blank should be the same as the subagency compensation (SAC) or buyer agency compensation (BAC) in MLS. e listing agreement usually has a clause saying the seller will pay a commission to the listing broker. is commission usually includes the amount the listing broker is going to earn for the service plus an amount the listing broker intends to share with the broker that brings a buyer. e buyer's representation agreement usually has a clause saying the buyer will pay a commission to the selling broker. Frequently, it says that the selling broker will try to collect the commission first from the seller or the seller's agents, and only if they are unable to collect it from the seller or their agents does the buyer owe any amount. For example, if the buyer's representation agreement says that the buyer's broker will receive 3.5% and the MLS printout says the listing broker is offering the selling broker 3.5%, the buyer would owe nothing. In this case, the agreement between brokers is through MLS. When a listing broker enters a property in MLS and enters an amount under SAC or BAC that is an offer to selling agents to participate in the sale and receive compensation of a certain amount. When a selling agent shows the property and writes an offer, the listing broker's offer of compensation has been accepted. is agreement can't be changed simply by entering a different amount in the Broker Information section of the contract If the property is not in MLS, even if the listing broker is a member of MLS, there is no offer of compensation. A buyer's agent should get an agreement between brokers signed before showing the property to be clear on the offer. Remember, the statute of frauds says that anything regarding real estate must be in writing to be enforceable.
KEY POINT REVIEW
Real estate fraud continues to be on the rise and takes various forms. License holders who suspect fraud in a real estate transaction should document the issues, disclose information to pertinent parties as necessary, and withdraw from fraudulent transactions. Broker's commission is discussed in written agreements separate from the TREC contract forms: the listing agreement, the buyer's representation agreement, or an agreement between brokers (either a written agreement or through the MLS).
Housing Opportunities for Families
Unless a building or a community qualifies as housing for older persons, it may not discriminate based on familial status. at is, it may not discriminate against families in which one or more children under the age of 18 live with a parent; a person who has legal custody of the child or children; or the designee of the parent or legal custodian, with the parent or custodian's written permission Familial status protection also applies to pregnant women and anyone securing legal custody of a child under the age of 18. Housing for older persons is exempt from the prohibition against familial status discrimination if any of the following apply: e HUD secretary has determined that it is specifically designed for and occupied by elderly persons under a federal, state, or local program. It is occupied solely by persons age 62 or older. It is occupied by at least one person 55 years of age or older per unit (where 80% of the units are occupied by individuals age 55 or older). It adheres to a policy that demonstrates an intent to house persons age 55 or older.
Risk Management
When license holders suspect fraud, they should do the following to protect themselves and the parties to the transaction: Document everything Disclose everything to the lender (representing the buyer does not include helping the buyer cheat the lender) Verify the accuracy of items on the closing documents Withdraw from a transaction that appears to be fraudulent and tell the seller to seek legal advice if the seller intends to continue with the transaction
Fair Housing Act
covers most housing. In some circumstances, the act exempts owner-occupied buildings with no more than four units, single-family housing sold or rented without the use of a broker, and housing operated by organizations and private clubs that limit occupancy to members. However, an owner who is exempt from the Fair Housing Act may still be liable for racial discrimination under the Civil Rights Act of 1866. ere are no exceptions under that act In the sale and rental of housing, no one may take any of the following actions based on an applicant's race, color, national origin, religion, sex, familial status, or disability: Refuse to rent or sell housing Refuse to negotiate for housing Make housing unavailable Set different terms, conditions, or privileges for sale or rental of a dwelling Provide different housing services or facilities Falsely deny that housing is available for inspection, sale, or rental For profit, persuade owners to sell or rent (blockbusting) Deny anyone access to or membership in a facility or service (such as a multiple listing service) related to the sale or rental of housing Local and state fair housing laws and professional organizations can add to the federal law's list of protected classes. For instance, in its Code of Ethics, the National Association of REALTORS® has added sexual orientation as a protected class. In their real estate practice, all REALTORS® must honor sexual orientation as a protected class, in addition to the seven classes protected under the federal law. In addition to the protected groups in federal and Texas fair housing laws, TRELA § 1101.652(b)(32) and TREC Rule § 531.19(a)(6) add ancestry as an additional category to the protected classes
Texas Real Estate Fraud Act
e Act says that fraud involving real estate consists of a (1) false representation of a past or existing material fact, when the false representation is (A) made to a person for the purpose of inducing that person to enter into a contract; and (B) relied on by that person in entering into that contract; or (2) false promise to do an act, when the false promise is (A) material; (B) made with the intention of not fulfilling it; (C) made to a person for the purpose of inducing that person to enter into a contract; and (D) relied on by that person in entering into that contract. e Act is similar to most statutory and common law rules; it requires falsity and reliance on that falsity to induce someone to enter into a contract c) A person who makes a false representation or false promise with actual awareness of the falsity thereof commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness. d) A person who (1) has actual awareness of the falsity of a representation or promise made by another person, and (2) fails to disclose the falsity of the representation or promise to the person defrauded, and (3) benefits from the false representation or promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.
Exemptions to the Fair Housing Act
e Fair Housing Act contains seven exemptions with respect to property transactions not subject to the act's general mandate of nondiscriminatory treatment. It is important to note, however, that a housing provider exempt from coverage under the Fair Housing Act could still be liable for racial discrimination under the Civil Rights Act of 1866. e Civil Rights Act of 1866 is still good law and contains no exemptions to coverage. 1. Religious organizations—A religious organization may discriminate with respect to its noncommercial property, provided that the religion itself doesn't discriminate on the basis of race, color, or national origin. e exemption also applies to a nonprofit institution operated in conjunction with a religious organization. is exemption is quite limited and has generated very little litigation. 2. Private clubs—e act does not prohibit a private club, not in fact open to the public, from limiting the rental or occupancy of noncommercial lodgings to members. Courts have held that Congress deliberately used the word lodging and not dwelling to limit the exemption to temporary accommodations. is exemption, then, appears to be narrowly construed to cover temporary rooming facilities of social organizations, such as university clubs. 3. Occupancy standards—e act does not limit "the applicability of any reasonable local, state, or federal restrictions regarding the maximum number of persons permitted to occupy a dwelling." e occupancy standard provision was added in 1988 at the same time families with children became a protected group and appears to be included primarily to alleviate concerns that housing providers would have to accommodate families to the extent of violating other occupancy laws. 4. Drug conviction—e act does not prohibit conduct against a person because that person has been convicted in a court of law for the illegal manufacture or distribution of a controlled substance. is exemption was intended to allow landlords to protect tenants by refusing to provide housing to persons convicted of distributing or manufacturing illegal drugs. 5. Familial status—Discrimination based on familial status will not apply to housing qualifying for exempt status as housing for older persons. is type of housing may allow children, but would not violate fair housing laws by excluding them. Racial and other prohibited forms of discrimination are not allowed in the housing for older persons. e exemptions for housing for older persons include the following: Housing provided under any state or federal program that the secretary of HUD has determined is specifically designed and operated to assist elderly persons Housing intended for and solely occupied by persons 62 years of age or older Housing intended and operated for occupancy by at least one person 55 years of age or older per unit in at least 80% of the units 6. Single-family housing—e sale or rental of a single-family house by the owner will be exempt from coverage, provided that the following conditions are met: e owner does not own or have any interest in more than three single-family houses at any one time. e house is sold or rented without the services of a real estate agent or the facilities of any person in the business of selling or renting dwellings. e exemption will apply to one sale or rental within a two-year period unless the owner was the most recent occupant. is exemption does not apply if a person in the real estate business is involved or if discriminatory advertising is used. 7. Mrs. Murphy's exemption—e act does not cover owner-occupied dwellings designed for occupancy by no more than four families living independently of each other. It must be remembered that a single-family homeowner, or a "Mrs. Murphy," is still liable for racial discrimination under the Civil Rights Act of 1866.
Discriminatory Housing Practices
e Fair Housing Act prohibits the following discriminatory housing practices (the listed discriminatory housing practices are quoted from 42 U.S.C. §§ 3601-3619): To refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin To discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin. Note: e first two provisions do not include handicap as a protected class. e 1988 Fair Housing Amendments Act added several new provisions that deal exclusively with protections for this class. e reason for treating handicap discrimination in this way was apparently to clarify that the law does not condemn housing that is available only to persons with physical or mental disabilities. To make, print, or publish, or cause to be made, printed, or published any notice, statement, or advertisement, with respect to the sale or rental of a dwelling, that indicates any preference, limitation, or discrimination based on race, color, religion, sex, handicap, familial status, or national origin, or an intention to make any such preference, limitation, or discrimination To represent to any person because of race, color, religion, sex, handicap, familial status, or national origin that any dwelling is not available for inspection, sale, or rental when such dwelling is in fact so available For profit, to induce or attempt to induce any person to sell or rent any dwelling by representation regarding the entry or prospective entry into the neighborhood of a person or persons of a particular race, color, religion, sex, handicap, familial status, or national origin To discriminate in the sale or rental, or to otherwise make unavailable or deny, a dwelling to any buyer or renter because of a handicap of — that buyer or renter; — a person residing in or intending to reside in that dwelling after it is sold, rented, or made available; or — any person associated with that buyer or renter To discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection with such dwelling, because of a handicap of — that buyer or renter; — a person residing in or intending to reside in that dwelling after it is sold, rented, or made available; or — any person associated with that buyer or renter To refuse to permit, at the expense of the handicapped person, reasonable modifications of existing premises occupied or to be occupied by such person if such modifications may be necessary to afford such person full enjoyment of the premises, except that in the case of a rental, the landlord may, where it is reasonable to do so, condition permission for a modification on the renter agreeing to restore the interior of the premises to the condition that existed before the modification, reasonable wear and tear excepted To refuse to make reasonable accommodations in rules, policies, practices, or services, when such accommodations may be necessary to afford a handicapped person equal opportunity to use or enjoy the dwelling To fail to design and construct covered multifamily dwellings for first occupancy after March 12, 1991, that are accessible to and usable by handicapped persons To deny any person access to or membership or participation in any multiple listing service, real estate brokers' organization, or other service, organization, or facility relating to the business of selling or renting dwellings, or to discriminate in the terms or conditions of such access, membership, or participation, on account of race, color, religion, sex, handicap, familial status, or national origin For persons whose business includes engaging in residential real estate- related transactions, to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin
The Civil Rights Act of 1866
e following year, the Reconstruction Congress passed the Civil Rights Act of 1866, which guaranteed equal rights under the law. e act specifically provided the following: All citizens of the United States shall have the same right, in every State and Territory, as is enjoyed by white citizens thereof to inherit, purchase, lease, sell, hold, and convey real and personal property. For more than a century, the Civil Rights Act of 1866 would be of little importance in combating housing discrimination, primarily because courts interpreted the law to prohibit public, or governmental, discrimination only. Not until 1968 would the Supreme Court rule, in Jones v. Mayer, that the act "bars all racial discrimination, private as well as public, in the sale or rental of property, and that the statute, thus construed, is a valid exercise of the power of Congress to enforce the irteenth Amendment." Today, the act is still good law and is often used in fair housing discrimination lawsuits, especially in situations not subject to the Fair Housing Act.
Permitted Disclosures
ere are a few disclosures that are not required but are permitted. For example, disclosing a suicide that took place in a property is not required but permitted if the seller chooses to disclose it. Another example is the disclosure of registered sex offenders in the neighborhood. It is not required. e disclosure is permitted, but it is often best to just provide the resources to buyers to investigate for themselves. In Texas, sex offender information may be found at the Texas Department of Public Safety website, www .dps .texas .gov.
Recovery under the DTPA
limited to economic damages—costs of repair and replacement. However, if the defendant is found to have committed the act knowingly, then damages for mental anguish may also be awarded (and in some cases, up to three times the amount of economic damages). If the defendant is found to have committed the act intentionally, then the economic and mental anguish damages may be trebled. In addition to consumer compensation, the DTPA allows for civil penalties of up to $20,000 per violation, with an additional penalty of up to $250,000 for deceptive acts or practices that target the elderly. Note that an errors and omissions insurance policy purchased by a broker will not cover fraud or intentional violations of the DTPA. (St. Paul Insurance Company v. Bonded Realty, Inc. 583 S.W.2d 619 [Tex. 1979] p. 141.)
Under Section 1101.805 of the License Act
parties to a contract and license holders are protected from liability for misrepresentation or concealment of material facts by each other or by a subagent unless the party or license holder knew of the falsity or concealment. A defendant who is only marginally at fault in a claim will be liable to the consumer for that defendant's percentage of responsibility. In addition to proportionate responsibility, a defendant may be held jointly and separately responsible for all damages recoverable by the claimant if (a) the defendant's percentage of responsibility is greater than 50% or (b) the defendant, with specific intent to do harm to others, acted with another person to engage in a felony of the third degree or higher—including forgery, misapplication of fiduciary property, or securing execution of a document by deception. However, proportional responsibility laws do not diminish the broker's liability for the acts of the broker's salespersons, for whom the broker is still fully responsible.
In a DTPA suit:
the consumer must prove that the deceptive act was the producing cause of damages. e suit must be commenced within two years after a false, misleading, or deceptive act or practice occurred—or within two years after the consumer discovered, or should have discovered, the deceptive act or practice. With the exception of residential property, the DTPA does not apply to transactions that exceed $100,000 where there is a written contract and the consumer is represented by legal counsel.
Texas Real Estate Fraud Act Absent the legalese
the statute is saying that if the seller knows a statement or representation he is making about the property is false, or circumstances are such that a reasonable person would conclude that the seller did know of the falsity, then that knowledge can be assumed or implied to be present. In that case, not only is the seller liable for actual damages but also for exemplary (punitive) damages. e second paragraph (d) says that if someone else (seller's agent, for example) knows of the false representation, fails to disclose that knowledge, and benefits from the false representation (for example, earns a commission), that person can also be liable for both actual and exemplary damages. Suppose there are a variety of structural problems with the property (all concealed from casual inspection but known to the seller), as well as a history of roof leakage, basement flooding, and electrical issues, all of which are actively concealed by the seller. at concealment takes the form of denials of "any" problems of any sort. Further suppose that the listing agent is aware of these issues and stands by silently while the denials are made. Upon discovery of the problems and the active fraud by the seller, as well as the silence of the listing agent, the odds are that both seller and agent will be liable for both actual and punitive damages, and the agent will likely face disciplinary action from TREC. And in case you didn't realize they are serious, the legislators added a final reminder: (e) Any person who violates the provisions of this section shall be liable to the person defrauded for reasonable and necessary attorney's fees, expert witness fees, costs for copies of depositions, and costs of court. If you or your client participates in this sort of activity and lose the lawsuit, you get to pay actual damages, exemplary damages, reasonable attorney's fees, expert witness fees, the costs for copies of depositions and court costs. Keep in mind that the Act is in addition to any other remedies a client or seller or buyer might have, including the Deceptive Trade Practices Act, ethical violations under TREC rules and regulations, breach of contract and/or breach of warranties, and so on. e word "intent" is not used with respect to a false representation. at is, to be liable, the person making the false representation does not have to intend to violate the statute to be liable. e only intent required is the intent to have the other person rely on the false representation to induce that person to enter into the deal. As with the commingling of a client's funds, just don't do it.