How Will CMLS’s White Paper Argue Against RINRA?

I had heard that CMLS had retained two former DOJ and FTC attorneys to help them draft a white paper laying out all of the reasons why the MLS is a force for good in the world, and Inman News published confirmation in this story:

In order to do this, Batts and Carson are working on a white paper that, once finished, they’ll submit to the DOJ and FTC. Then they’ll ask for meetings with their former friends and colleagues at the agencies.

“In the white paper, we’ll set out the reasons why MLSs are good for consumers and good for competition,” Carson said.

“The goal is to get a seat at the table for CMLS and the MLS industry when any regulatory review of MLSs is done. We want to provide a voice for the MLS industry so that antitrust enforcers have a complete picture of all the good things that you do every day before they contemplate and enact any changes.”

This is, of course, tactically smart. Having former DOJ and FTC lawyers lobby their former colleagues to give them a hearing provides an excellent chance to persuade the FTC (in particular) to hold off on doing anything really harsh or punitive in terms of regulation.

Based on what I’m reading in Inman, I can’t wait to read this white paper… even though I suspect that I already know all of the arguments that it will make.

There is,  however, an issue that the authors of the white paper should really think about as they write it. It’s a difficult issue, and one that is a real challenge for the industry.

Even if the FTC accepts all of the arguments we have already heard, and wishes to preserve all of the benefits of the MLS, it can do so without accepting cooperation and compensation. Put differently, how will the CMLS paper argue against RINRA?

Let me explain.

What the White Paper is Likely to Argue

Anyone who has spent more than a season or two in the MLS space can likely guess what the arguments for leaving the MLS alone will be. Inman covers most of them:

  • MLS provides complete and comprehensive information that is accurate and timely.
  • MLS makes information widely available, instead of locked away in individual brokerage databases.
  • MLS drives efficiency by making all of that information available to all brokers and agents in a marketplace.
  • MLS creates competition by allowing small brokerages access to the same information on the same basis as the largest brokerage.
  • The data from the MLS is used by many companies — Inman article says “fuels innovation in the real estate industry” from portals to appraisers to insurance companies.
  • Wide availability of information promotes fair housing goals.

I have no real idea what the white paper will ultimately say of course, but I am pretty confident that we’ll have these points brought forward and hammered home over and over again.

The alternative to the MLS, I assume it will be argued, is total chaos. Look at commercial real estate or international markets where buyers have to go visit every single brokerage to find out what’s for sale, and they (and their agents) might or might not have access to all of the data. The chaos makes the transaction more expensive, more time consuming, more painful, and more susceptible to bad actors doing bad things like racial discrimination and such.

As a fan of the MLS, I generally agree with all of those points and always have. These points are more or less what we have heard over and over again from NAR and from CMLS and from the MLS community over the last ten years (and more).

However, there is a serious problem with this entire line of reasoning. I would like to see CMLS and its team deal with that problem.

The Problem of RINRA

In a VIP post last year, I presented a thought experiment called RINRA, or the Realty Industry Regulatory Authority. It was fashioned specifically after FINRA, the Finance Industry Regulatory Authority. Here’s what I wrote:

Turns out, there is a model already existing, already successful, and already operating that fits rather perfectly: FINRA, or the Financial Industry Regulatory Authority. A RINRA, or the Realty Industry Regulatory Authority, would accomplish almost everything the government wants to accomplish, win support from huge segments of the industry, as well as garner support from the think tanks, media, influencers and the various nonprofits that want to see the real estate industry change.

Therefore, I fully expect to see RINRA or something very similar be the endgame of this round of regulations.

Basically, my thought experiment was that if the FTC is going to regulate the real estate industry as per the Executive Order, then it has a template already in place in the finance industry: FINRA.

You see, FINRA is not a government agency. It is a Self Regulating Organization, or SRO. NAR, CMLS, and every single MLS are also SROs… with one critical difference:

The Securities Exchange Act of 1934 provides for self-regulatory organizations (SROs) under the control of the actual government agency, the SEC. But the truth is that SROs are a common feature in the American administrative state and there are thousands of them. In fact, Wikipedia says:

The National Association of Realtors (NAR) is an example of an SRO that fills the vacuum left by the absence of government oversight or regulation. The NAR sets the rules for multiple listing services and how brokers use them.

The problem for NAR is that unlike FINRA or other SROs under securities law, it has no official statutory status. It just kind of… came to be. There is no Securities Exchange Act of 1934 to provide for a real estate industry SRO.  Which means that unlike FINRA and other finance SROs, there is no government agency that controls and regulates NAR. Yet.

On the one hand, that gives NAR free rein to regulate the real estate industry as it has for the last 100 years. On the other hand, NAR has no special authority, no special power. It is a purely private organization whose power comes from network effect. Go ahead and read that whole post if you need a refresher on FINRA, on SROs, on RINRA, etc. I go into some depth about political gridlock, about unofficial oversight by the FTC or DOJ or HUD over NAR and the MLSs, etc.

But what I did not tackle in that post, and want to discuss now, are the policy justifications that the CMLS White Paper will raise.

The Benefits of MLS, via Regulated SRO

The basic problem is that the FTC can have its cake and eat it too.

All of the benefits listed in Inman, touted by NAR over the years, and likely to be in the CMLS White Paper all stem from wide availability of accurate and timely real estate information. The MLS is the vehicle for collecting that information and making it available to Participants. We get benefits like increased competition and more efficient transactions and accurate data because of the centralization of the data into a single (times 550ish) source. So far so good.

As far as I can tell, nothing stops the FTC from promulgating regulations requiring that all brokers and agents submit listings to a single regulated SRO (“RINRA”) so that all of the information can be collected, checked for accuracy, and then made widely available. In fact, as a regulated SRO, RINRA could make the information even more widely available than the MLS does. Instead of only licensed real estate agents who pay a subscription getting access, the public itself could get access. This is the whole “data utility” argument long advanced by folks like Stephen Brobeck at Consumer Federation of America.

The FTC does not have to requires that the 550 or so MLSs go out of business; it merely has to require that all 550 submit a copy of their data to a national real estate database under formal or informal control of the government in a timely fashion… which in 2022 means internet-speeds, not US Postal Service speeds.

As far as I can tell, cooperation and compensation has very little to do with this collection, normalization, ensuring accuracy, and dissemination of real estate information. The FTC can absolutely require submission of the data, without blessing commission sharing.

The idea in the industry, I suspect, is that without cooperation and compensation, there will be no incentive for brokers and agents to submit listings to a common database like the MLS. So eliminating cooperation and compensation — the practice of having sellers pay the buyer agent’s commission — will destroy the MLS and lead to chaos. There won’t be any sources left to submit copies of their data to RINRA.

Unfortunately, there actually is a strong incentive for brokers and agents to submit listings to a common database if the FTC says so: civil and criminal penalties.

Securities dealers and stockbrokers and investment bankers have very strong incentives to comply with whatever the SEC demands, because non-compliance leads to all sorts of really bad things happening to their careers and firms. The exact same “incentive” (to not get destroyed) exists if the FTC acts in real estate. After all, both securities industry professionals and real estate professionals have jobs thanks to a license from the government. Not a strong bargaining position when that’s the case, is it?

In fact, a regulated SRO is likely to lead to even better collection of data, even better data accuracy, and even better timeliness of data. Why?

It’s one thing to ignore your local MLS’s nastygram about some compliance problem; it’s a whole different thing to ignore a nastygram from the FTC or from its SRO, RINRA. The MLS can slap you on the wrist with a fine; the FTC can seize your bank accounts and send you to jail.

It’s one thing to bitch and whine about Clear Cooperation Policy from NAR; it’s a totally different thing when it is the federal government requiring the same conduct.

Therefore, it seems obvious to me that the FTC can receive the CMLS White Paper, nod along in agreement, then decide to pass regulations to require all brokers and agents to submit a copy of their listings (via their local MLS) to RINRA so that the public and the entire business community can enjoy the pro-competitive benefits of the MLS system.

What is the argument against that?

I have spent a lot of time and brain cycles over the years to attempt a counter to that regulated data utility. As a libertarian anarchist, I have zero desire to see government takeover of the real estate industry, but such liberty-minded policy arguments rarely work when talking to people whose entire reason for being is to regulate industries.

The Relevance of the Hundred Years’ War

In live presentations, I like to point out that the United States has been at war against NAR and by extension the MLS system for almost 100 years. I wrote about that earlier this year:

TL;DR takeaway: this fight against real estate commissions and cooperating compensation is not new. It has been going on for most of the 20th century and all of the 21st century. It may be that NAR and the industry somehow manage to escape this time around as well, but… it isn’t as if the DOJ and FTC hostility to real estate’s compensation structure is a recent phenomenon.

I went into some detail about the 1983 “Butters” Report from the FTC and how the staff at the FTC had outlined most of the problems from the 50s, 60s and the 70s… and none of them have actually been addressed to date.

Why is this relevant to us now?

Because the FTC said in 1983 that “the market for real estate brokerage service does not accord with the customary model of competitively functioning markets.” They have been saying that since the 1940s when the DOJ sued NAR (then called NAREB) for antitrust violations, resulting in a Supreme Court decision in 1950.

What argument would prevail against the FTC in 2022 to drop their 100-year crusade to (in their view) make the market for real estate function properly?

I have a distinct memory of Katie Johnson, NAR’s Chief Legal Counsel, blurting out at the 2018 joint workshop of the DOJ and FTC on competition in real estate, “Free market! Free market! Free market!” But as Sunny reminds me regularly, my memory is highly suspect… so anyone who was there, feel free to fact check me.

NAR or CMLS suggesting that the current MLS system is the exemplar of the free market in action goes directly against the FTC’s understanding of the real estate brokerage services market since (at least) 1983… and probably decades before that. I don’t think that’s gonna carry a lot of weight.

That is particularly true when NAR is currently embroiled in several major civil antitrust lawsuits (Moehrl, Sitzer, Rex v. NAR, and PLS v. NAR) alleging that the free market does not exist within the NAR-controlled MLS industry, not to mention the DOJ’s own lawsuit against NAR and subsequent kerfuffle.

Making Great Points… But Missing the Point

So it is that I am extremely interested to read the CMLS White Paper once it is published. I imagine that it will make excellent and data-supported arguments for the pro-competitive benefits of the MLS from the centralization, normalization, and wide availability of real estate data.

And yet, I also suspect that it will miss the larger point: that the FTC can have all of the benefits of the MLS without cooperation and compensation. The FTC can have all of the benefits without NAR or CMLS or any non-statutory SROs… simply by requiring real estate brokers and agents and the MLS that serves them to submit a copy of all listing data to the FTC or its SRO.

As I am unable to come up with a good argument against that sort of approach by the FTC, I await the arguments from Alicia Batts and Dylan Carson, the two former DOJ/FTC attorneys retained by CMLS. If anyone could, I believe they could.

Final Nightmare

While we’re at it, let me leave you with a final nightmare speculation/observation.

Suppose the FTC does want to take the “have my cake and eat it too” approach by requiring submission of listing data to a SRO. But the FTC doesn’t want to wait for enabling legislation to charter a statutory SRO. The FTC would rather have an unofficial pet SRO. From my previous post:

The FTC and/or HUD do not need statutory authority to regulate RINRA if RINRA willingly and voluntarily agrees to be so regulated. If RINRA makes a point of sending along all of its rules and policies to HUD for approval prior to publication, then statutory authority is bit of a moot point. If RINRA agrees to accept HUD “suggestions” on who to put on its Board of Governors, then statutory status might not be as important. And if the DOJ tacitly agrees not to bring any antitrust actions against RINRA as long as it is being cooperative with HUD… well… there’s your protection from antitrust right there.

Rather than having to promulgate FTC regulations, then, the FTC can backdoor the regulations via the non-statutory RINRA, whose own rules and codes of conduct will be precisely what the FTC and HUD want them to be… all voluntarily, as it were.

Who could be such an organization, voluntarily cooperating with the FTC?

Well, the federal government doesn’t typically want to work with tiny organizations whose budgets come with two commas. They typically want to deal with big organizations with big professional staffs and large legal and compliance teams. Not a single MLS in existence today would fit the bill — not even the largest MLS, like CRMLS or Bright MLS, is big enough to be a national data utility. NAR certainly could not be that SRO unless it does a complete 180 in its approach to regulation.

Most people’s minds will immediately jump to Zillow. It is a big organization with big professional staff and large legal and compliance teams. They are at this point a pillar of the real estate industry, and they have expertise in real estate data.

However, Zillow has never been an MLS. And Zillow’s relationship with the MLS industry over the years has been… well… let’s call it “spotty”.

What if I told you that there was an entity, which has direct experience operating something very much like a national MLS for decades, and is valued at north of $30 billion today with a very large professional staff and large legal and compliance teams? And bonus of all bonuses, said entity is located right there in Washington DC, a mere Uber ride away from the FTC and DOJ’s offices. And what if I told you that said large national entity recently broke off an engagement with an important non-statutory SRO called the Broker Public Portal because (and I quote) “MLSs were wanting to have more say individually, particularly large MLSs, about what we could do or not do with Homesnap Pro in their local markets”?

FTC + CoStar = RINRA in all but name.

What arguments could CMLS muster to prevent that union from happening?

-rsh

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