K e n t u c k y R e a l E s t a t e Archive/2008 KREC... · 2013-11-14 · K e n t u c k y R e a l E s t a t e A Publication of the Kentucky Real Estate Commission CONTENTS Comments

K e n t u c k y R e a l E s t a t e

A Publication of the Kentucky Real Estate Commission

CONTENTS

Comments from theChair

From the Director’sDesk

Web-Based Documents& Forms

Guidance for UniqueLegal Situations

Errors and OmissionsInsurance

Disciplinary Actions

R.E.S.P.A

Historic Properties

Staff Extensions

Printed with State FundsIssue No. 208, Spring 2008

Background

It is impossible to turn on the TV orlook at a newspaper without run-ning into an article about the mort-gage crisis that the country is cur-rently experiencing. Due to laxlending practices, consumer spend-ing practices and fluctuations in thehousing market, there are manyhomeowners who need to sell theirhome but can't sell it for enough topay off their loans. In addition,there are some homeowners whohave fallen behind on their pay-ments for a variety of reasons andare in various stages of foreclosure.When they find a buyer, most ofthese homeowners must eitherbring funds to closing or negotiatewith their lender to accept less thanthe full amount due on the loan. Iftheir lender does agree to accept lessthan a total payoff, this is called a"short sale."

The Process

The process of obtaining lenderapproval for a short sale is a labori-ous one. The seller usually mustprovide financial documentation of

his or her income and budget toshow the lender that the seller can-not afford to pay the full amountdue. It can take many phone callsand faxes over weeks (and months)to get the correct information to thecorrect person at the lender to con-sider the offer. Usually, lenders willnot discuss a short sale unless theborrower/seller is behind on his orher payments. In addition, lenderswill not discuss the borrowers' situa-tion with anyone (such as attorneysand realtors) other than the borrow-er without express written permis-sion signed by the borrowers and onrecord with the lender.

One of the items that the Seller willneed to provide, further along inthe negotiation process, is anEstimated HUD. Oftentimes thefirst item on the HUD that thelender will cut is the commission.lenders say "If we are taking less,the agents will take less." This canbe particularly frustrating for agentsbecause they will usually spend farmore time on a short sale than on atypical sale; if anything, theydeserve a higher commission.

It is critical to begin this process assoon as possible. When you areaware that a short sale may berequired, you should obtain the sell-er's permission to indicate on the

Short SalesIndustry Expert ArticleBy: Michelle RawnBorders & Borders Attorneys

continued on page 5

Kentucky RealEstate Commission10200 Linn Station Road,Suite 201Louisville, KY 40223Phone: 502-429-7250Toll Free: 1-888-373-3300Fax: 502-429-7246Web Site: www.krec.ky.gov

Commissioners

Lois Ann Disponett, Chair

Lawrenceburg

Ken PerryCold Spring

Ron SmithLouisville

F. M. SponcilMount Sterling

James H. HuffFt. Mitchell

Commission Staff

Norman BrownExecutive Director

Education and Licensing

Linda PoliskieEducation Director

Sarah WestSarah ChandlerMichelle Gary

Legal

Lee B. HarrisGeneral Counsel

Dianna RogersDenise Payne WadeKristen ReeseTricia Lawson

Administrative

Shelly SaffranDirector of Administration

Kim Brewer-DavisLouis CarterMelissa Keithley

Comments fromthe Chairby: Lois Ann Disponett,

Chair

RECENT RULINGS:

We recently received a ruling fromthe Kentucky Court of Appealsregarding the Commission’s inter-pretation of KRS 324.160(4)(f) andKRS 324.020(4), as they pertain tofactoring companies that advancecommissions to agents. The Courtof Appeals and the JeffersonCircuit Court have both found thatfactoring does not, in fact, violatelicense laws. The Commissionvoted to let this decision stand andnot to appeal to the KentuckySupreme Court for DiscretionaryReview. Therefore, if you are aprincipal broker and you haveagents who want to use a commis-sion-advance service, this service isconsidered legal under license laws.

The Commission also recentlylooked at a case in which thelicensees indicated that they weredual agents, even though they onlyrepresented the buyers of the prop-erty. The reason, they explained,was that the house was owned byHUD and the brokerage had previ-ously done Broker Price Opinionsfor HUD. The Commission deter-mined that this is not dual agencyand should not be reflected as suchon the Agency DisclosureStatement.

At our February meeting, theCommission looked at the issue ofan agent closing down the businessof a deceased broker, as allowed byKRS 324.425. This statute indi-

cates that the agent may only closean existing business but may nottake on new clients or customers.(To do that, the brokerage wouldneed to hire a new principal bro-ker.) However, the Commissiondetermined that referring clients toother brokers is acceptable underthe law, since that act does not con-stitute taking on new clients or cus-tomers.

Finally, we looked at the issue of anagent going into escrow and thenbeing entered into a bonus drawingfor selling a particular listing. TheCommission determined that, solong as the contract was createdprior to the agent going into escrow,the agent may still be entered intothe bonus drawing and receive pay-ment from his or her previous prin-cipal broker, should the agent belucky enough to win.

We look at license law issues eachmonth. So, if you run into a novelor unique situation, please feel freeto send it to the Legal Staff. TheCommission will apply the facts tothe law and give you an opinion.

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When engaging inproperty manage-ment, be sure to

retain your receiptsfor payments to

vendors.

From theDirector’s Deskby: Norman E. Brown,

Executive Director

In this ever-changing realestate market, buyers andsellers are structuring theirdeals differently in manycases. For example, leaseoptions are becoming moreprevalent than they have beenin the past few years. Alongwith these different types ofsales, commission structuresmay be different as well. TheCommission has received sev-eral complaints lately fromconsumers who did notunderstand the commissionstructure or payments in theirparticular transactions.

It is important for you, as alicensee, to clearly set out, inwriting, exactly how the pay-ments will be made. Forexample, if a partial paymentis due at the time of the leaseand another payment is dueat the time of the closing,make sure this is clearly setout in the listing or compen-sation agreement. If thecommission is still going tobe due whether the buyer ulti-mately closes or not, makesure this fact is also clearlyspelled out between the bro-ker and the seller.

As you can see from the listof forms and documents inthe right-hand column of thispage, we have an abundanceof information available toyou on our website. Please

feel free to use these formsand documents in your dailytransactions. Among theitems we have recently addedare forms translated intoSpanish, commercial docu-ments, landlord-tenant docu-ments and interactive con-tracts and listing agreements.There are also several docu-ments that allow you to betterexplain the short-sale processto your clients and customers.In addition, there is an expla-nation of how to measuresquare footage using ANSIStandards. These forms arerestricted to licensees. Theuser name and password arebelow.

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Licensee-RestrictedLicensee-RestrictedForms & ContractsForms & ContractsUser Name &User Name & PasswordPassword

Below are the User Name andPassword you need in order to

access forms on theCommission’s website

(www.krec.ky.gov). The link isunder General Information.

User Name: get (lower case)

Password: forms (lower case)

Be sure to check the box thatsays, “remember my password.”

WEB-BASED RESTRICTEDFORMS & DOCUMENTS

Explanation of New Agency Forms

Seller Disclosure of Property Condition Form

Exclusive Right to Sell Agency Contract

Exclusive Right to Sell Agency Contract - Español

Instructions for completing the Exclusive Rightto Sell Agency Contract

Real Estate Purchase Offer/Contract

Real Estate Purchase Offer/Contract - Español

Instructions for completing the Real EstatePurchase Offer/Contract

Property Management Agreement

Exclusive Buyer Agency Contract

Exclusive Buyer Agency Contract - Español

Release of Earnest Money Deposit

Vacant Land Disclosure Statement

Consumer Guide to Agency Relationships –Model Policy/Dual Agency

Consumer Guide to Agency Relationships –Model Policy/Designated Agency

Agency Disclosure Statement-Buyer

Agency Disclosure Statement-Seller

Agency Disclosure - Español

Residential One-Time Showing Agreement

Consent to Advertise - Pursuant to 201 KAR11:105

Commercial One-Time Showing Agreement

Sample Tenant Move In - Move Out InspectionReport

Sample Residential Lease

Blank Lease

Confidentiality Agreement

Liability Escrow Release

Binding Listing Contract

Commercial Offer to Purchase Agreement

How to Successfully Manage Rental Houses inKentucky

An Explanation of Short Sales

Short Sale Listing Addendum to PurchaseContract

Short Sale Listing Addendum

Commissioner’s

Corner

F. M. Sponcil

4

Ron Smith

Lois Ann Disponett

James H. Huff

Ken Perry

WHAT ARE LICENSEES TO DO?

On a daily basis, the Commission'sLegal Staff speaks with many licenseesand consumers regarding issues thatarise during real estate transactions. Attimes, these issues create considerableconfusion, leading to the inevitablequestion: What is a licensee to do?

The purpose of this article is to provideguidance to licensees in areas of con-cern that have been brought to theCommission's attention. These areasinvolve: (1) identifying boundary lines;(2) advertising or promoting a licensee'sparticipation in a sale under 201 KAR11:105, Section 1; (3) advertising pro-duction levels of agents; (4) terminatingcontracts; and (5) using one-time show-ing agreements.

IDENTIFYING BOUNDARY LINES

Q: What should a buyer's agent do ifhis or her buyer-client seeks the agent'sassistance in writing an offer on proper-ty that has been viewed by the buyer-client but not by the buyer's agent?

A: A buyer's agent should view theproperty prior to assisting the buyerwith writing an offer on it. The buyer'sagent should also verify or ask about theboundaries of the listed property, espe-cially if the seller or the seller's agenthas not affirmatively identified theboundaries of the property on theground-by word, deed, or writing. Ifthere is no confirmation of the bound-aries, the buyer's agent should recom-mend that his or her buyer-client, beforesigning a contract to purchase, receive asurvey from which the buyer-client canclearly identify the boundaries of theproperty on the ground. In the absenceof such affirmative representations orsuch a survey, the buyer's agent should

advise the buyer-client that he or shebears the risk that the property pur-chased is not the actual property on theground that the buyer-client assumes isbeing purchased.

ADVERTISING OR PROMOTINGPARTICIPATION IN A SALEUNDER 201 KAR 11:105 (1)

Q: What should a licensee do if thelicensee has participated in the sale ofproperty that is subsequently placedback on the market for sale?

A: If a licensee advertises propertiesthat he or she has sold over a period ofseveral years, the advertisements shouldbe clear to the public. If, for example,one of these properties is, at the time ofthe advertisement, listed by anotheragent, the advertisement might lead tothe mistaken belief that the propertyhas already been sold. To avoid suchconfusion, the licensee should includethe time frame for his or her participa-tion as a buyer's agent in a sale of thatparticular piece of property, wheneverhe or she advertises or promotes his orher participation in the sale, pursuant to201 KAR 11:105, Section 1, with noticethat the property has, thereafter, beenplaced back on the market.

ADVERTISING PRODUCTIONLEVELS OF AGENTS

Q: What should a principal broker doif he or she wants to advertise the pro-duction levels of the agents in his or herreal estate company?

A: To be clear, and to avoid possibleviolations of KRS 324.117, the princi-pal broker should identify the coverageperiod for the volume of sales beingpublished and state the source (MLS ornon-MLS) for each published sales vol-ume.

Guidance for Unique Legal SituationsBy: Lee Harris, General Counsel &

continued on page 11

Denise Payne Wade, Staff Attorney

As you probably have already heard, WilliamsUnderwriting Group is the NEW program administratorfor real estate group errors and omissions insurance forlicense year 2008/2009. The new carrier for the pro-gram is National Union Fire Insurance Company ofPittsburgh, PA. Inc. (a member company of AIG)".

There was a lot of confusion this year regarding theerrors and omissions insurance group program.There was a protest filed in February shortlyafter the contract was awarded and theCommission had to wait for a decision to bemade by the Finance and AdministrationCabinet. As soon as the protest was denied,the contract was awarded and the Commissionbegan sending out information and renewalpackages to principal brokers. We apologize forthe delay and the lack of information; however, theCommission had to wait until the protest was overbefore renewals could be mailed. If you still have ques-tions regarding the group program or new group carrier,please do not hesitate to contact Shelly Saffran at ouroffice, extension #15.

As always, this is a guaranteed issue program. Underthe basic group plan, licensees have a $100,000 limit ofliability, a $0 deductible, and a $1,000,000 annual aggre-gate. Also included in the basic policy will be lockboxcoverage with a $5,000 limit and a $10,000 aggregate.The franchise grantor is also automatically included as

an additional insured for vicarious liability under thebasic policy.

Williams Underwriting Group is also offering severalendorsements and enhancements to the basic policy.The following endorsements are being offered to

licensees at a rate of $10.00 in addition to thebasic policy: Fair Housing/Discrimination,

Regulatory Complaints, Pollution ExclusionsAmendatory. Licensees can also purchase aPersonal Identity Coverage endorsement for$13.50. Williams Underwriting Group is

also offering higher limits of liability up to$500,000 on a guaranteed issue basis and firm

excess coverage of up to $1,000,000.Remember, any endorsements or higher limits of

liability must be purchased directly from WilliamsUnderwriting Group. Licensees can purchase these atany time throughout the year.

The contact information for the new administrator islisted below. We encourage licensees to become familiarwith the basic policy as well as any endorsements andenhancements that are offered.

Williams Underwriting GroupP.O. Box 769Jeffersonville, IN 47131-0769Phone: 812-284-2321 or Toll Free: 1-800-222-4035Fax 812-284-3252www.wugieo.com & email: [email protected]

New E & O Group Carrier - Williams Underwriting Group

listing that the sale will be "sub-ject to approval by the seller’slender(s)." In addition, the con-tract should contain a contin-gency for the approval by the sell-er's lender. Also, keep in mindthat if the seller is in foreclosure,you also must be aware of whenthe property is scheduled to besold at the Commissioner's sale.

If you have a client who is buyinga property under a short sale,make sure they know to fastentheir seat belts. The good news isthat they are usually walking intosome equity. The bad news is

that it will be a bumpy road. It isnot unusual for a short sale nego-tiation to take months, whichalmost always puts the partiesoutside their contract timeframe.If the buyer is in a position ofneeding possession soon, it canbe a bad experience for allinvolved. Be sure to have thesediscussions with your buyer asearly as possible.

What happens to thedeficiency?

When a lender takes a loss on thepayoff, it has two options. It canrequire the borrower/seller to payback the remaining amount. Thiswill come in the form of a note,

or a promise to pay; however, itis not secured by the propertysince it has been sold. Believe itor not, lenders seldom choose thisoption.

In the alternative, lenders can"forgive" the difference. In thatcase, the amount of debt that wasforgiven may be considered asincome for the borrower and maybe taxable. Congress passed theMortgage Forgiveness Debt ReliefAct of 2007, allowing in certaincircumstances, for forgiven debtnot to be taxable to the borrower,thus giving the borrower somerelief. Your client should checkwith his or her tax preparer to seeif he or she may qualify underthe Act.

Short SalesContinued from Page 1

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Disciplinary ActionsArchie Nealy(Bowling Green) Case Nos. 07-0082,07-0163 and 07-0232Violation: Mr. Nealy agreed tostipulate to violations of KRS324.160(4)(b),(c),(d),(h),(v) and (w)and KRS 324.160(4)(u), specifically201 KAR 11:121, for failing to remitinvestor client funds.Disposition: Mr. Nealy voluntarilysurrendered his license, and he maynot reapply for licensure for a mini-mum of five (5) years. TheCommission awarded fifty thousanddollars ($50,000.00) to be paid outof the Education, Research, andRecovery Fund to the complainantsin this matter.

Joanna L. Gnau(Louisville) Case No. 07-0078Violation: Ms. Gnau agreed tostipulate to an unintentional breachof KRS 324.160(4)(u) for violating201 KAR 11:121 by failing to pro-vide to a repair person her buyer-customer’s detailed written requestfor repairs, which was in her posses-sion.Disposition: Ms. Gnau agreed topay eight thousand dollars($8,000.00) to the complainants inthis matter, representing a portion ofthe cost to repair the plumbing inquestion. Ms. Gnau agreed toattend six (6) hours of continuingeducation in law, in addition to anyhours already required by law.

Barbara D. Campbell(Murray) Case Nos. 05-0097 & 05-0098Violation: Ms. Campbell agreed tostipulate to an unintentional andinadvertent violation of KRS324.160(4)(v), resulting from hermistaken, but good-faith, belief thatshe properly completed a one-timeshowing agreement.Disposition: Ms. Campbell agreedto pay a fine in the amount of one

thousand dollars ($1,000.00) and tosuccessfully complete six (6) hoursof continuing education in aCommission-approved law course,in addition to any hours alreadyrequired by law.

Brent L. Hoffmeier(Louisville) Case No. 06-0234Violation: Mr. Hoffmeier agreed tostipulate to a violation of KRS324.160(4)(h), for failing to properlyaccount for, or remit, money belong-ing to others, in a timely manner.Disposition: Mr. Hoffmeier agreedto pay a fine in the amount of onethousand dollars ($1,000.00) and toattend six (6) hours of continuingeducation in law. Mr. Hoffmeieragreed to accept a formal repri-mand. Mr. Hoffmeier is currently inescrow and agreed to have hislicense placed on probation fortwelve (12) months if he reactivateshis license.

Paul M. Grisanti(Louisville) Case No.07-0376Violation: Mr. Grisanti agreed tostipulate to a violation of KRS324.160(4)(u), specifically 201 KAR11:110, for unintentionally and inad-vertently inducing parties to two list-ing contracts to break the contractsfor the purpose of substituting inlieu thereof new contracts withthem. These violations resultedfrom reliance upon dates in the orig-inal listings rather than dates in thesigned extensions to them, whichwere overlooked during a reviewthat took place during Respondents’transition from Sperry Van NessWard Commercial Group toGrisanti-Head Commercial RealEstate.Disposition: Mr. Grisanti agreed topay a fine in the amount of onethousand dollars ($1,000.00) and tosuccessfully complete twelve (12)

hours of continuing education inCommission-approved law courses.

Herbert T. Head(LaGrange) Case No.07-0376Violation: Mr. Head agreed to stip-ulate to a violation of KRS324.160(4)(u), specifically 201 KAR11:110 for unintentionally and inad-vertently inducing parties to two list-ing contracts to break the contractsfor the purpose of substituting inlieu thereof new contracts withthem. These violations resultedfrom reliance upon dates in the orig-inal listings rather than dates in thesigned extensions to them, whichwere overlooked during a reviewthat took place during Respondents’transition from Sperry Van NessWard Commercial Group toGrisanti-Head Commercial RealEstate.Disposition: Mr. Head agreed topay a fine in the amount of onethousand dollars ($1,000.00) and tosuccessfully complete twelve (12)hours of continuing education inCommission-approved law courses.

Barbara J. Barnett(Murray) Case No. 07-0124)Violation: Ms. Barnett agreed tostipulate to a violation of KRS324.160(4)(u) for violating 201 KAR11:121, resulting from her failure totimely initiate the earnest-moneyrelease process that her seller-clientrequired, due to the incapacity andsubsequent death of Ms. Barnett’sprincipal broker.Disposition: Ms. Barnett agreed topay a fine in the amount of sevenhundred fifty dollars ($750.00) andto attend and successfully completesix (6) hours of continuing educa-tion in law, in addition to any hoursalready required by law.

continued on page 76

Kenneth C. Klumb(Bowling Green) Case No. 07--150Violation: Mr. Klumb agreed tostipulate to a violation of KRS324.160(4)(u)p; specifically 201KAR 11:400, resulting from his fail-ure to provide an agency disclosureform to the buyer of the property inquestion.Disposition: Mr. Klumb agreed topay a five hundred dollar ($500.00)fine and to accept a formal repri-mand.

Paul F. Mik, Jr.(Ekron) Case No. 07-0129Violation: Mr. Mik agreed to stipu-late to a violation of KRS 324.111for using his escrow account for per-sonal use and maintaining a nega-tive balance in that account.Disposition: Mr. Mik agreed toattend six (6) hours of continuingeducation in law in addition to anyhours already required by law. Mr.Mik also agreed to pay a fine in theamount of five hundred dollars($500.00) and receive a formal repri-mand from the Commission.

Billy M. Hudson(Boston) Case No. 07-0323Violation: Mr. Hudson agreed tostipulate to a violation of KRS324.160(4)(e) for failing to disclosehis status as a licensee and as abuyer in the purchase contract.Disposition: Mr. Hudson agreed topay a fine in the amount of fivehundred dollars ($500.00).

Joseph N. Cochran(Prospect) Case No. 07-0214Violation: Mr. Cochran agreed tostipulate to a violation of KRS324.160(4)(u), for violating KRS324.020, for practicing while notactively licensed by theCommission.Disposition: Mr. Cochran agreedto pay a fine in the amount of fivehundred dollars ($500.00) and to

complete three (3) hours of continu-ing education in law, in addition toany hours already required by law.

Darrell B. Karnes(Columbia) Case No. 06-0277Violation: Mr. Karnes agreed tostipulate to unintentional violationsof KRS 324.160(4)(u), specifically201 KAR 11:350 and 201 KAR11:400. These violations resultedfrom the failure to present agencydisclosure forms and a seller’s dis-closure form, neither of whichcaused any actual damages.Disposition: Mr. Karnes agreed toa five hundred dollar ($500.00) fineand to successfully complete six (6)hours of continuing education inlaw, in addition to any hours alreadyrequired by law. Mr. Karnes alsoagreed to accept a formal repri-mand.

William B. Schuler(Burnside) Case No. 07-0216Violation: Mr. Schuler agreed tostipulate to a violation of KRS324.020 for advertising as a licenseewhile his license was still in escrow.Disposition: Mr. Schuler agreed topay a fine in the amount of twohundred fifty dollars ($250.00) andto attend six (6) hours of continuingeducation, in addition to any hoursalready required by law.

Cynthia M. Brouillette(Villa Hills) Case No. 07-0236Violation: Ms. Brouillette agreed tostipulate to a violation of KRS324.160(4)(u) for violating 201 KAR11:250 for failing to have the signa-ture of all owners on a listing con-tract.Disposition: Ms. Brouillette agreedto pay a fine in the amount of twohundred fifty dollars ($250.00) andto attend three (3) hours of continu-ing education in law, in addition toany hours already required by law.

Joseph P. Bryant(Breeding) Case No. 06-0277Violation: Mr. Bryant agreed tostipulate to unintentional violationsof KRS 324.160(4)(u), specifically201 KAR 11:350 and 201 KAR11:400. These violations resultedfrom the failure to present agencydisclosure forms and a seller’s dis-closure form, neither of whichcaused any actual damages.Disposition: Mr. Bryant agreed toa two hundred fifty dollar ($250.00)fine and to complete six (6) hours ofcontinuing education in law, in addi-tion to any hours already requiredby law. Mr. Bryant also agreed toaccept a formal reprimand.

Tammye Osborne(Elizabethtown) Case No. 07-0335Violation: Ms. Osborne agreed tostipulate to a violation of KRS324.160(4)(s) for failing to timelyrespond to a formal Commissioncomplaint.Disposition: Ms. Osborne agreedto pay a fine in the amount of twohundred fifty dollars ($250.00).

Jennifer Robertson(Atlanta, GA) Case No. 07-0272Violation: Ms. Robertson agreed tostipulate to a violation of KRS324.160(4)(u) for using the incorrectseller’s disclosure form on her list-ings.Disposition: Ms. Robertson agreedto pay a fine in the amount of twohundred fifty dollars ($250.00).

Danita E. Toll(Lawrenceburg) Case #07-0110Violation: Ms. Toll agreed to stipu-late to a violation of KRS324.160(4)(u) for violating 201 KAR11:121 by failing to include a contin-gency in a purchase contract, whichled to the buyers ultimately losingtheir good-faith money.Disposition: Ms. Toll agreed to paya fine in the amount of two hundreddollars ($200.00) and to attend three(3) hours of continuing education inlaw, in addition to any hours alreadyrequired by law.7

Disciplinary ActionsContinued fromPage6

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Real estate brokers and agents must comply with the RealEstate Settlement Procedures Act, or RESPA. Violatorsof RESPA may receive harsh penalties, including tripledamages, fines, and even imprisonment. While theenforcement of RESPA by the U.S. Department ofHousing and Urban Development, or HUD, has beendormant in the past, HUD has stepped up its efforts inthis area in the past eighteen months. HUD hired newstaff and entered into a contract with an investigationfirm in Arlington, Virginia to conduct on-site reviews tomonitor conformity with RESPA. Now, more than ever,real estate brokers and agents must ensure they are com-plying with RESPA.

1. Entities Subject to RESPAServices that occur at or prior tothe purchase of a home are typi-cally considered "settlement ser-vices." These services includetitle insurance, mortgage loans,appraisals, abstracts, and homeinspections. Services that occurafter closing generally are notconsidered "settlement services."

RESPA covers, among others:*Real Estate Brokers and

Agents*Mortgage Bankers and Mortgage Brokers*Title Companies and Title Agents*Home Warranty Companies*Hazard Insurance Agents*Appraisers*Flood and Tax Service Providers*Home and Pest Inspectors

RESPA, however, does not apply to:*Moving Companies*Gardeners*Painters*Decorating Companies*Home Improvement Contractors

2. RESPA ProhibitionsRESPA prohibits a real estate broker or agent from

receiving a "thing of value" for referring business to a set-tlement service provider, or "SSP," such as a mortgagebanker, mortgage broker, title company or title agent.

RESPA also prohibits SSP’s from splitting fees receivedfor settlement services, unless the fee is for a service actu-ally performed.

3. Exceptions to RESPA's ProhibitionsNot all referral arrangements fall under RESPA's referralrestriction. In fact, RESPA and its regulation feature anumber of exceptions. Two examples are:

Promotional and Educational Activities

Settlement service providers, such as mortgage bankers,mortgage brokers, title insurance companies, and titleagents, can provide normal promotional and educationalactivities under RESPA.These activities must not defray the expenses that the real

estate broker/agent otherwisewould have had to pay.The activity cannot be inexchange for or tied in any wayto referrals.

Payments in Return for GoodsProvided or Services Performed

A real estate broker or agentmust provide goods, facilities,and services that are actual, nec-essary, and distinct from whatthey already provide.

The amount paid to a real estate broker or agent must becommensurate with the value of those goods and ser-vices. If the payment exceeds market value, the excesswill be considered a kickback and violates RESPA.

The payments should not be "transactionally based." Apayment for services rendered is transactionally based ifthe amount of the payment is determined by whether thereal estate broker/agent's services resulted in a successfultransaction. Payments may not be tied to the success ofthe real estate broker/agent's efforts, but must be a flatfee that represents fair market value.

Affiliated Business Arrangements

Real estate brokers and agents are permitted to own aninterest in a settlement service company, such as a mort-

By: Phillip L. SchulmanK&L Gates LLP1601 K Street,N.W.Washington, D.C. 20006(202)-778-9027 [email protected]

Do’s and Don'ts For Real Estate Licensees UnderDo’s and Don'ts For Real Estate Licensees Under

The Real Estate Settlement Procedures ActThe Real Estate Settlement Procedures Act

Continued on Page 9

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gage brokerage or title company, so long as the real estatebroker/agent:

*Discloses its relationship with the joint venture com-pany when it refers a customer to the mortgage broker ortitle company;

*Does not require the customer to use the joint venturemortgage broker or title company as a condition for thesale or purchase of a home; and

*Does not receive any payments from the joint venturecompany other than a return on its ownership interest inthe company. These payments cannot vary based on thevolume of referrals to the joint venture company.

The joint venture mortgage broker or title company mustbe a bona fide, stand-alone business with sufficient capi-tal, employees, separate office space, and must performcore services associated with that industry.

4. Examples of Permissible Activities and PaymentsThe following are permissible:

A title agent provides a food tray for an open house,posts a sign in a prominent location indicating that theevent was sponsored by the title agent, and distributesbrochures about its services.

A mortgage lender sponsors an educational lunch for realestate agents where employees of the lender are invitedto speak. If, however, the mortgage lender subsidizes thecosts of continuing education credits, this activity may beseen as defraying costs the agent would otherwise incur,and may be characterized as an unallowable referral fee.

A title company hosts an event that various individuals,including real estate agents, will attend and posts a signidentifying the title company's contribution to the eventin a prominent location for all attending to see and dis-tributes brochures regarding the title company's services.

A hazard insurance company provides notepads, pens, orother office materials reflecting the hazard insurancecompany's name.

A mortgage brokerage sponsors the hole-in-one contest ata golf tournament and prominently displays a signreflecting the brokerage's name and involvement in thetournament.

A real estate agent and mortgage broker jointly advertisetheir services in a real estate magazine, provided thateach individual pays a share of the costs in proportionwith his or her prominence in the advertisement.

A lender pays a real estate agent fair market value to rent

a desk, copy machine, and phone line in the real estateagent's office for a loan officer to prequalify applicants.

A title agent pays for dinner for a real estate agent duringwhich business is discussed, provided that such dinnersare not a regular or expected occurrence.

A lender pays a real estate agent fair market value to takea loan application and collect credit documents (ifallowed in the real estate agent's state).

5. Examples of Prohibited Activities and Payments

The following are prohibited:A title company hosts a monthly dinner and reception forreal estate agents.

A mortgage broker pays for a lock-box without includingany information identifying the mortgage broker on thelock-box.

A mortgage lender provides lunch at an open house, butdoes not distribute brochures or display any marketingmaterials.

A hazard insurance company hosts a "happy hour" anddinner outing for real estate agents.

A home inspector pays for a real estate agent to go todinner, but does not attend the dinner.

A title company makes a lump-sum payment toward afunction hosted by the real estate agent, but does not pro-vide advertising materials or make a presentation at thefunction.

A mortgage broker buys tickets to a sporting event for areal estate agent, or pays for the real estate agent to playa round of golf.

A title company sponsors a "get away" in a tropical loca-tion, during which only an hour or two is dedicated toeducation and the remainder of the event is directedtoward recreation.

A mortgage lender only pays a real estate agent for takingthe loan application and collecting credit documents ifthe activity results in a loan.

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Before you undertake any activity with a SSP oraccept any payments, goods or services from a SSP,you should speak with an attorney familiar withRESPA and make sure the activity complies withlocal and state laws, which may prohibit activitiesthat are otherwise permissible under RESPA.

Real Estate Settlement Procedures ActContinued from Page 8

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Owners of property located with-in local historic preservation dis-tricts in Kentucky may berequired to follow certain guide-lines when doing exterior renova-tions such as remodeling, rehabil-itating or adding on to buildingsdesignated as historic.Sometimes, owners are not awarethat their property is located in ahistoric district. Buyers can alsobe surprised to find out that theproperty they purchased hasrestrictions on what can and can-not be done to the property.Recently, the Commission hasseen cases involving these typesof properties and the problemsthat can arise when owners andbuyers are not aware of historicdistrict designation and obliga-tions that come with ownership.

Historic properties may either belisted in the National Register ofHistoric Places (“HistoricRegister”) or located within alocal district that governs historicproperties. National Register list-ing is honorary and does notplace any restrictions or obliga-tions on property owners, and infact it offers benefits such as mak-ing buildings potentially eligiblefor federal and state historic reha-bilitation tax credits and otherincentives. Listing property inthe National Register does offer ameasure of protection for it fromfederally funded projects such asa proposed highway, which maytrigger a project review. For moreinformation, seewww.nps.gov/history/nr/.

Listing property in the NationalRegister should not be confusedwith the local historic district des-ignation. Local preservationordinances contain provisions fordesignating resources as either anindividual historic resource orpart of a district. ManyKentucky communities have alocal preservation ordinancewhich creates a local reviewboard and establishes a processfor review of proposed exteriorchanges. It is important to notethat local historic district designa-tion occurs only when requested

by a majority of homeowners in aneighborhood; designation is notimposed by local government.Citizens are directly involved inthe development of local districtguidelines and determiningacceptable standards for anybuilding alterations. Notably,numerous studies have shownthat historic designation increasesproperty values more than com-parable neighborhoods with nosuch protections.

Owners of properties in locally-designated areas may be requiredto seek approval for exteriorchanges, additions, new construc-tion (both residential and com-

mercial), and relocation or demo-lition, so that changes compli-ment the historic appearance ofthe building and the area. Otherexamples of guidelines mayinclude what the property can beused for and what types of mate-rials can be used in repairing orrehabilitating the property.

Enactment of a preservation ordi-nance may allow a community toparticipate in the Certified LocalGovernment (CLG) program, agrants program administered bythe National Park Service and thestate. For more informationabout historic preservation ordi-nances and CLGs, see http://www.nps.gov/history/hps/workingonthepast/ and http://www.nps.gov/history/hps/clg/.

Recently, there was a questionadded to the Seller's Disclosure ofProperty Condition Form askingsellers to disclose if the propertybeing sold is in a historic district.If you are representing the seller,we recommend that you makesure the question is answeredproperly and that the seller con-tacts the local governing body, ifthere is any doubt. If you arerepresenting a buyer, and if theseller has checked "yes" to thisquestion, make sure that yourbuyer understands that there maybe guidelines governing exteriorchanges to that property due toits location within a local historicdistrict. Advise your buyer-clientto contact the local governingbody to see what they can andcannot do to the property. Youdo not want your buyers in a situ-ation where they make an after-

Property Located in Historic DistrictsBy: Shelly Saffran

Director of Administration

Continued on Page 11

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the-fact discovery that their improvements orrepairs to the property does not comply withlocal ordinances. This could be very costly tothe homeowner. An example would be:

A consumer purchases a home from a seller whodid not know the property was in a local historicpreservation district with design guidelines thatprohibit the use of vinyl siding. The buyer startsmaking improvements to the home, one ofwhich is replacing the wood siding with a newer,cheaper vinyl material. The buyer is notifiedthat the vinyl siding will have to be removed andthe wood siding restored in order to preserve thehistoric nature of the home. The homeownerwould not only have incurred the expense ofnew vinyl siding, but would also have to incurthe expense of removing it and either replacingor making repairs to any remaining wood siding.You can imagine the costs involved in this sce-nario, which could have been avoided if thehomeowner had first consulted the city or localpreservation board and inquired about the his-toric district status and any applicable guidelinesconcerning the property.

In closing, please become familiar with yourlocal historic districts and make sure that yourbuyers and sellers are also informed. For moreinformation, see the Kentucky Heritage CouncilWeb site at www.heritage.ky.gov. For an on-linedirectory of preservation districts in the UnitedStates go to www.preservationdirectory.com.

TERMINATING CONTRACTS

Q: What should a licensee do if: (1) his or herbuyer-clients verbally state that their loan applica-tion has been canceled by them; (2) the buyer-clients' loan officer notifies the licensee, verbally andin writing, that the loan application has been can-celed and will not be revived; and (3) the licenseehas a different prospective buyer for the property?

A: A licensee should make his or her best efforts toobtain a written release of a purchase contractbefore entering into a second purchase contract witha different buyer. If there is no release signed, theoriginal buyers could file a complaint or a lawsuit,claiming that their contract is still in full force andeffect. The best practice is to obtain written releasesfrom all parties to a contract to purchase real estatewhen the contract has been canceled or terminated.

USING ONE-TIME SHOWING AGREEMENTS

Q: What should a licensee do if he or she wants toenter into a one-time showing agreement with aprospective client?

A: A licensee should make sure that the agreementis not a one-time showing agreement in name only.In other words, if a "one-time showing agreement"is structured as a listing agreement, it must complywith the mandates of 201 KAR 11:250 because itwill be deemed to be a listing agreement rather thana one-time showing agreement.

Property Located in Historic DistrictsContinued from Page 10

Louis Carter, Receptionist - Extension 10([email protected])

Lee Harris, General Counsel - Extension 12([email protected])

Denise Wade, Staff Attorney - Extension 13([email protected])

Dianna Rogers, Legal Secretary - Extension 14([email protected])

Shelly Saffran, Admin. Director - Extension [email protected])

Kim Brewer-Davis, Accounting - Extension 16([email protected])

Sarah West, Education Secretary - Extension 18([email protected])

Linda Poliskie, Education Director - Extension 19([email protected])

Sarah Chandler, Licensing, Escrow/Changes - Extension 20([email protected])

Michelle Gary, New Applicants/Reciprocity - Extension [email protected])

Norman Brown, Executive Director - Extension 22([email protected])

Melissa Keithley, Executive Secretary - Extension 24([email protected])

Kristen Reese, Staff Attorney, Extension 29([email protected])

Tricia Lawson, Legal Secretary - Extension 34([email protected])

S T A F F E X T E N S I O N S

Guidance for Unique Legal SituationsContinued from Page 4

PRESORTED STANDARD

U.S. POSTAGE PAID

LOUISVILLE, KY

PERMIT NO. 73

The Kentucky RealThe Kentucky RealEstate CommissionEstate Commissionwill be closed on:will be closed on:

May 26, 2008May 26, 2008

(Memorial Day)(Memorial Day)

&&

July 4, 2008July 4, 2008

(Independence Day)(Independence Day)

Kentucky Real Estate Commission10200 Linn Station Road, Suite 201Louisville, KY 40223Phone: (502) 429-7250 Fax: (502) 429-7246Toll Free: 1-888-373-3300Web Address: www.krec.ky.gov

KRECCommissioners &

Staff