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Minutes for SB42 - Committee on Commerce
Short Title
Amending the meaning of the terms "rebate" and "interest" as used in the real estate brokers' and salespersons' license act.
Minutes Content for Tue, Feb 12, 2019
Chairperson Lynn opened the hearing on SB 42 and requested Revisor Chuck Reimer to provide an overview of the bill.
Chairperson Lynn recognized Bryon Schlosser, Chair, Kansas Real Estate Commission (Commission), who provided testimony in support of the bill. SB 42 would amend the Kansas Real Estate Brokers' and Salespersons' License Act to provide a definition of a rebate. The bill defines "rebate" as the return of all or part of the purchase price of real estate, whether by cash or cash equivalent, that is promised or agreed to by a licensee and a client or customer before closing and is contingent on the transaction closing. A rebate would also include the return of all or part of any commission or compensation paid to a licensee in any transaction that has as its purpose the purchase of real estate at a price different from the price specified in the closing statement. For the purposes of defining "rebate", "cash equivalent" means gift cards, prepaid credit cards and any other item with a value equal to a specific amount of money that can be used in the same manner as cash.
The longstanding Kansas law that prohibits offering against rebates was put in place for three primary reasons:
1. To discourage buyers and sellers from inflating the contract price so the seller could rebate a portion of the selling price to the buyer after closing. Such schemes were used to misrepresent to lenders the true amount of the down payment by buyer in order to get a higher loan to value ratio than what lenders were led to believe by the contract terms.
2. To discourage licensees from participating in schemes to increase the contract price and the commission earned so that the licensee could rebate a portion of the commission back to buyer to reduce the cash investment by the buyer, or to make a repair or improvement that buyer lacked enough funds to perform after making the down payment required by buyer's lender.
3. To keep Kansas licensees on an equal playing field, and to reduce misrepresentations by out-of-state brokerages over which we have no authority to regulate. Allowing out-of-state licensees to offer rebates to Kansas consumers promotes their use of advertising tactics that are unlawful for Kansas licensees to perform.
As background, in August 2016, the Commission rescinded a guidance document that allowed for a gift card to be provided by a licensee to a client in a transaction if the value of the gift card did not exceed 0.5 percent of the purchase price of the property as shown on the closing statement. The Commission rescinded the guidance document because it directly conflicted with current law that prohibits licensees from offering rebates in real estate transactions. This resulted in several questions from licensees regarding what constituted a prohibited rebate.
To provide legal parameters, the Commission proposed a regulation to define rebates. The language in the proposed regulation is nearly identical to the proposed definition of rebate on page 3, lines 1-10 of SB 42. The Commission solicited input from the industry and discussed various drafts of the regulation during Commission meetings between August 2016 and February 2017. The Commission conducted a public hearing on the proposed regulation in June 2017. Several individuals affiliated with USAA provided testimony opposing the regulation due to the provision that considered gift cards to be cash equivalent. The Commission tabled further discussion to give parties time to provide further comments and possibly offer changes to the proposed regulation.
In October 2017, the Commission tabled consideration of the regulation indefinitely to explore an option to define an unlawful rebate in statute. This was based on concerns that the Federal Trade Commission would sue the Commission over alleged antitrust violations. The Commission worked with USAA to come to a compromise on possible statutory language that would not fundamentally alter the longstanding Kansas policy against rebates. USAA and the Commission could not come to a compromise, so the Commission decided to seek an Attorney General's opinion to get an independent opinion on whether USAA's referral program violated the provisions of Kansas law with respect to providing unlawful rebates in real estate transactions. The Attorney General's opinion was included in the testimony.
The Attorney General's opinion concluded that a rebate is something that is returned to a purchaser out of the purchase price of goods to accomplish a reduction of the purchase price. It further concluded that the conveyance of the gift card would violate current law if it is intended to reduce the amount paid by the referred client as the broker's commission or fee or the real property's purchase price.
The Commission feels that the definition proposed in SB 42 provides legal clarity to licensees and the public on what is an unlawful rebate and is supported by the Attorney General's opinion. The Commission requested approval of the amendments proposed in the bill. (Attachment 2)
There were no questions for Mr. Schlosser.
Chairperson Lynn recognized Patrick Vogelsberg, Vice President of Governmental Affairs, Kansas Association of Realtors (KAR), who provided testimony in support of the bill. KAR supports SB 42, which would provide a definition of the term "rebate" for the purposes of the Kansas Real Estate Brokers' and Salespersons' License Act (Act). Kansas is one of ten states that ban rebates in real estate transactions. The Legislature has not provided in statute a definition of "rebate". The lack of a precise definition of "rebate" as it pertains to the Act has left members in the industry without clear legal parameters as to what would be considered an illegal rebate and what would continue to be considered a permissible gift or gratuity.
SB 42 provides the following definition:
"Rebate" means the return of all or part of the purchase price of real estate, whether by cash or cash equivalent, that is promised or agreed to be a licensee and a client or customer before closing and is contingent on the transaction closing.
"Rebate" includes the return of all or part of any commission or compensation paid to a licensee in any transaction that has as its purpose the purchase of real estate at a price different from the price specified in the closing statement. For the purposes of defining "rebate," "cash equivalent' means gift cards, prepaid credit cards and any other item with a value equal to a specific amount of money that can be used in the same manner as cash.
KAR believes the legal uncertainty regarding rebates needs to be eliminated because it clouds competition in the real estate industry leading to an unequal playing field. While the Attorney General's opinion does provide guidance, it should be noted that an Attorney General's opinion is not law similar to a court of jurisdiction's opinion. Therefore, KAR believes it would be best to have a codified definition and it supports SB 42. (Attachment 3)
Chairperson Lynn asked Mr. Vogelsberg to briefly review the opinion provided by the Attorney General.
Senator Olson noted some of these potential gifts could be a taxable event. Mr. Vogelsberg responded he did not know if rebates would be taxable.
Senator Sykes asked for clarification that the agreement for the gift would occur after the closing of the transaction. Mr. Vogelsberg responded affirmatively. In a gift situation, the person is giving something of value and getting nothing in return.
Senator Holland asked if there was a cap established for the size of the gift. Mr. Vogelsberg responded the bill does not contain a cap. Senator Holland asked additional information be provided about what other states are doing concerning real estate rebates and gifts.
Senator Alley said he did not think the bill solves the problems being addressed, other than providing a definition for a rebate. The bill does not include a cap or solve the issue concerning the out-of-state broker. Mr. Vogelsberg responded the bill addresses a small piece of the overall issue.
Chairperson Lynn recognized Bill Sneed, on behalf of Cartus Corporation and USAA Residential Real Estate Services, who provided testimony requesting an amendment to SB 42. The Attorney General's opinion reviewed a specific scenario and opined as to whether such acts would constitute a rebate. The scenario analyzed is the exact type of reward program being used by Mr. Sneed's clients. The Attorney General opined that the client's program is not a rebate. Based on that opinion, the KREC voted to seek legislation on other forms of rebates, but in the meeting the Commission was clear they were not seeking any change that would adversely affect his client's program. The testimony included a legal analysis from Mr. Sneed's firm concerning why USAA's program makes legal and business sense. Wanting to err on the side of caution, Mr. Sneed requested the amendment be included if SB 42 is worked by the Committee. (Attachment 4)
Senator Holland requested Mr. Sneed to review USAA's gift card program. Senator Holland asked Mr. Sneed to find out the maximum limit for the gift card.
Chairperson Lynn closed the hearing on SB 42.
