Risk Management and Compliance

Risk management protects clients, brokerages, and the public. The exam focuses on supervision, privacy rules, antitrust, fraud, and insurance coverage.

Supervision Responsibilities

Brokers must supervise agents to ensure compliance with law and ethics. This includes:

• Reviewing advertising
• Monitoring escrow accounts
• Training on fair housing and disclosure rules
• Ensuring timely document handling

Failure to supervise can lead to disciplinary actions and civil liability.

Privacy and Do Not Contact Rules

Federal and state rules protect consumer information. Key points include:

• Protecting nonpublic personal information
• Using client data only for authorized purposes
• Complying with Do Not Call registries and marketing restrictions

Vicarious Liability

Vicarious liability means a broker can be held responsible for the actions of agents acting within the scope of their duties. This is why broker supervision is critical.

Antitrust Laws

Antitrust laws protect competition. Common violations include:

• Price fixing (agreeing on commission rates)
• Market allocation (dividing territories)
• Group boycotts

Discussing commission rates with competitors is a major risk.

Table: Risk Management Focus Areas

Fraud and Misrepresentation

Fraud involves intentional deception. Misrepresentation can be negligent or unintentional but is still actionable. Common examples include:

• Misstating property condition
• Failing to disclose known material defects
• Exaggerating income potential for investment property

Insurance Coverage

Two common insurance types are:

• Errors and omissions (E&O) - Covers professional mistakes and negligence.
• General liability - Covers bodily injury or property damage claims.

E&O does not cover intentional fraud.

Summary

Risk management depends on supervision, compliance with privacy laws, avoiding antitrust violations, and honest representation. Insurance provides financial protection, but it does not replace good practices.

Supervision and Office Policies

Brokers should establish written office policies that cover advertising review, escrow handling, and transaction file audits. Routine file reviews catch missing disclosures or expired contingencies before they become legal problems.

Do Not Contact Compliance

Marketing rules require agents to honor Do Not Call lists and to follow opt-out rules for email marketing. Violations can result in fines and license discipline. Agents should maintain updated contact lists and follow brokerage policies.

Material Facts and Stigmatized Property

Material facts affect value or desirability. Agents must disclose known material facts even if the seller prefers to keep them private. Stigmatized property rules vary by state, so for the national exam focus on the general rule: do not misrepresent or conceal material facts.

Exam Application Check

If a question asks whether an agent must disclose a known defect, the answer is yes. If it asks whether E&O covers intentional fraud, the answer is no.

Escrow Handling and Trust Accounts

Trust accounts must be reconciled regularly and handled only by authorized personnel. Brokers should track deposit dates, disbursements, and balances for each transaction. Missing records can lead to audits, fines, and license suspension.

Complaint Handling

When a complaint is received, brokers should document the issue, notify their legal counsel or insurance carrier if needed, and respond promptly. Delayed responses often increase liability.

Exam Application Check

If a question asks which practice best reduces risk, the answer is consistent documentation and compliance with written office policies.

Privacy and Data Security in Practice

Brokerages should use secure storage, limit access to client data, and destroy records properly after retention periods. Emailing sensitive data without encryption can create liability if a breach occurs.

Fraud Prevention Steps

Common fraud prevention steps include:

• Verifying property condition with inspections
• Documenting disclosures in writing
• Avoiding exaggerated marketing claims
• Keeping communication records

Antitrust Red Flags

Avoid any discussion with competitors about:

• Standard commission rates
• Dividing territories or customer groups
• Refusing to work with certain brokers

Even casual conversations can create liability.

Disclosure and Documentation

Risk management also includes documenting disclosures and communications. Written records protect the agent and broker in disputes. Key documents include:

• Property condition disclosures
• Lead-based paint disclosures (for older homes)
• Agency disclosure forms
• Inspection reports and repair addenda

Common Compliance Scenarios

• A buyer asks if a property is in a flood zone. The agent should provide factual sources and recommend the buyer verify with official maps.
• A seller wants to hide a known defect. The agent must disclose material facts and cannot assist in misrepresentation.

Exam Application Check

If a question asks which action violates antitrust law, the answer is any agreement to fix prices or divide markets.

If a question asks whether an agent can withhold a known material defect, the answer is no. Disclosure is required.

Practical Risk Controls

Brokerages reduce risk by using:

• Written policies and training programs
• Checklists for disclosures and timelines
• Secure trust accounts for client funds
• Document retention policies

Exam Application Check

If a question asks which insurance covers negligence, the answer is errors and omissions. If it asks which covers bodily injury, the answer is general liability.