Daily Development for
Thursday, April 11, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

Here are two important broker regulation developments from a cauldron of "experimental legal reform" - New Jersey. Some New Jersey ideas catch on. Others don't.

The first case is relatively old (March, 1995) and this reprise posting is made in response to Karl Holtschue's recent comment. It first was reported in DIRT on April 18. 1995. The reporter was Ann Burkhardt, a professor of law at University of Minnesota and Chair of the ABA RPPT Section Committee on Legal Education in Real Estate. Parties interested in knowing more about Ann's committee should contact her at: burkh002@maroon.tc.umn.edu

The second is more recent, and equally provocative.

The Reporter for the following case is DIRT member Professor Cyril Fox of the University of Pittsburgh.

BROKERS; LICENSING; UNAUTHORIZED PRACTICE OF LAW: New Jersey Supreme Court finds that brokers and title companies engaged in processing residential transactions are engaged in the practice of law, but that such practice is not "unauthorized." In re Opinion No. 26 of the Committee on the Unauthorized Practice of Law, 654 A.2d 1344 (N.J. 1995) The issue was whether brokers and title company agents are engaged in the unauthorized practice of law when they handle all aspects of a residential real estate transaction if neither the seller nor the buyer is represented by a lawyer. Before deciding the case, the Court remanded it to a special master who held 16 days of hearings on the extent to which brokers and title agents engage in the practice of law and the consequences and implications of their doing so.

Based on the record developed by the special master, the Supreme Court determined that brokers and title agents are engaged in the practice of law. The Court further determined, however, that they are not engaged in the unauthorized practice of law because of the public interest in permitting residential transactions to be handled in this manner. Specifically, the court thought it inappropriate to mandate that attorneys must be involved in all residential closings, in part because the special master determined that, in the aggregate, sellers and buyers suffered no more actual damages when no lawyers were involved than when the parties were represented.

To attempt to ensure that sellers and buyers make an informed decision about whether to retain a lawyer, however, the Court mandates the use of a disclosure form, which it includes as an Appendix to its opinion, with all purchase agreements! The disclosure form quite pointedly states that the broker and title agent have financial interests in making sure that the transaction is consummated.

Reporter's Comment: In the past, the New Jersey Supreme Court certainly has taken a legislative approach in dealing with housing matters, and this case continues that tradition, albeit in a different context. Arguably, the Court is providing a service by letting the world know exactly what is going to be required to avoid liability for the unauthorized practice of law. In my opinion, however, the Court has gone off the deep end.

BROKERS; MORTGAGE BROKERS; REGULATION: Under regulations adopted by the New Jersey Real Estate Commission, licensed real estate brokers may receive commissions from sellers and additional compensation from a mortgage lender for helping the buyer obtain a mortgage loan and need not be licensed or affiliated with someone under the New Jersey Mortgage Bankers and Brokers Act. Mortgage Bankers Association of New Jersey v. New Jersey Real Estate Commission, 661 A.2d 832 (N.J. Superior A.D. 1995).

After lengthy proceedings before the New Jersey Real Estate Commission and Commissioner of the Department of Banking following a remand of this case in 1986 by the New Jersey Supreme Court, Mortgage Bankers Association of New Jersey v. New Jersey Real Estate Commission, 506 A.2d 773 (N.J. 1986), the Real Estate Commission determined that the New Jersey Licensing Act did not prevent licensed brokers from obtaining a fee from a buyer or a lender for assistance in obtaining mortgage financing, while, at the same time receiving a commission from the seller. The Real Estate Commission adopted regulations requiring the broker to disclose in writing the broker's exclusive fiduciary duty to the seller and other matters to the seller and buyer. The regulations prohibit a broker from receiving a "kickback" for only acting in steering a buyer to a particular mortgage source.

The court refused to consider whether the New Jersey Commission's regulations are inconsistent with the Federal Real Estate Settlement and Procedures Act. Those opposed to the regulations must exhaust their administrative remedies before the U.S. Secretary of the Treasury before litigating this issue in state court.

The court invalidated as arbitrary a requirement of the Commissioner of Banking requiring real estate brokers to employ licensees or to become licensed as affiliated mortgage brokers. New Jersey had adequate regulations to protect the interest of the public without this additional requirement

Comment: Obviously the issues involved in this case are complex political issues, and perhaps are not appropriate for resolution in a court of law. But if the members of the Real Estate Commission honestly believe that their ruling is not going to result in "kickbacks," then they should see Ross Perot to buy some of that beachfront swampland he talks about.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. This item, however, has not been. It is an April Fool story. But no one ever reads this fine print anyway. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Laprica Mims at the ABA. (312) 988 5260.

Items reported here and in the ABA publications are for general information (and, in this case disinformation) purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.