CFPB investigates Zillow's co-marketing program: What agents should know

Any mystery about whether Zillow Group was under federal investigation for potential anti-kickback violations cleared up last week when the company itself came clean.

At the very end of its earnings call remarks, the real estate giant announced that for the last two years, the CFPB has been investigating its co-marketing program for compliance with the Real Estate Settlement Procedures Act (RESPA).

The program, launched in June 2013, allows “Premier Agents” who pay for advertising on Zillow Group’s apps and websites to invite lenders to share marketing costs by paying Zillow Group to appear as “Premier Lenders” in advertising alongside the agent.

The CFPB’s Office of Enforcement is considering whether to recommend that the CFPB take legal action against the company, alleging Zillow Group violated an anti-kickback provision of RESPA and a part of the Consumer Financial Protection Act that prohibits anyone from helping financial service providers deceive consumers.

Zillow Group said in a public filing: “We are continuing to cooperate with the CFPB in connection with their most recent request for information,” adding, “we continue to believe that our acts and practices are lawful and that our co-marketing program allows lenders and agents to comply with RESPA.”

RESPA experts say portal co-marketing programs such as Zillow Group’s could expose agents to legal liability under state and federal laws if regulators find that agents are not paying their fair share of advertising spend.

The CFPB has demonstrated an increasing willingness to go after those accepting payments for mortgage referrals — as evidenced by fines leveled at real estate brokerages in February  — which will likely impact more real estate brokers in the future.

Agents may also find themselves with less ad buying power if lenders pull back from portal co-marketing programs or if sites alter or eliminate their programs following the CFPB’s investigation of Zillow Group’s program.

On the other hand, the CFPB’s lack of guidance on this issue has sparked uncertainty among agents and brokers, and some agents and lenders who had previously been unwilling to participate in such programs for fear of violating RESPA could benefit from clearer guidance from the CFPB as a result of this probe.

The investigation

In December 2014, Inman reported on a lawsuit filed by a Zillow inside sales consultant alleging mortgage lenders may have violated RESPA by bending the rules of Zillow’s co-marketing program — and that the company turned a blind eye.

A company spokeswoman at the time said Zillow has “zero tolerance for inappropriate business practices of any kind.”

In last week’s first-quarter earnings filing with the Securities and Exchange Commission, Zillow Group revealed that, in 2015, it received “an initial Civil Investigative Demand from the CFPB containing a broad request for information,” which the company responded to. In February 2017, the federal agency sent Zillow Group a “Notice and Opportunity to Respond and Advise” (NORA) letter.

Such letters explain to individuals or firms that evidence gathered in a CFPB investigation indicates they have violated consumer financial protection laws and gives recipients an opportunity to respond within 14 days with any relevant legal or policy arguments and facts, according to the bureau.

The NORA letter alleged Zillow Group violated Section 8 of RESPA and Section 1036 of the Consumer Financial Protection Act, according to Zillow Group.

Section 8(a) of RESPA forbids settlement service providers — which includes lenders, real estate agents and real estate brokers, among others — from paying or receiving any fees or other items with the understanding or agreement that business will be sent their way.

RESPA’s Section 8(b), prohibits settlement service providers from splitting charges made or received for performing a real estate settlement service other than for services actually performed.

Section 1036 of the Consumer Financial Protection Act prohibits those offering or providing a consumer financial product or service from engaging in “any unfair, deceptive, or abusive act or practice.” It also forbids anyone from “knowingly or recklessly” providing “substantial assistance” to service providers engaging in such acts or practices.

There is an exception to this rule, however: Solely “providing or selling time or space to a covered person or service provider placing an advertisement” is not a violation.

In its SEC filing, Zillow Group said it believed its March response to the NORA letter addressed the CFPB’s concerns related to its co-marketing program.

Nevertheless, the company received another “Civil Investigative Demand” from the CFPB in April, which the company said related to its March response.

“Should the CFPB commence an action against us, it may seek restitution, civil monetary penalties, injunctive relief or other corrective action,” Zillow Group noted in the filing. “We cannot provide assurance that the CFPB will not ultimately commence a legal action against us in this matter, nor are we able to predict the likely outcome of the investigation into this matter.”

Third-party website with co-marketing identified as vehicle for RESPA violations

In the CFPB’s consent order against Prospect Mortgage earlier this year, the agency alleged Prospect violated RESPA by using a third-party’s website ads to pay for referrals.

The order did not identify the website, but said the site had a co-marketing program and references a check box in the advertisement that says “I want financing information.” The latter is language Zillow has on its lead forms, though it’s not the only website to have the same language.

The consent order says, “In return for subsidizing a portion of these agents’ third-party website advertising, Respondent’s loan officers required them to exclusively promote Respondent in all of the agent’s advertisements on that third-party website.”

When asked if that is something lenders are able to require under Zillow Group’s co-marketing program, the company declined to comment. The company also declined to say whether Zillow was the website referred to in the consent order.

Co-marketing ‘a small portion’ of revenue

In last week’s first-quarter earnings call, Zillow Group Chief Financial Officer Kathleen Philips said the company doesn’t know how long it will take the CFPB to digest the information provided by Zillow Group or what next steps could be.

“We really don’t have a sense of how long this will take to resolve,” she said.

Zillow Group’s Premier Agent program brings in the vast majority of the company’s revenue (71 percent in the first quarter). According to Philips, the co-marketing program accounts for “a small portion” of Premier Agent revenue and of Zillow Group’s overall revenue, but she declined to specify further.

When asked whether Zillow Group had noticed agents or lenders pulling back from the program, Philips said, “We haven’t observed anything specific. [Agents and lenders] are intent on complying and pay close attention to their behavior, monitoring themselves.”

Zillow Group declined to offer details on the information the CFPB is requesting from the company. The company also declined to say what specific features of the co-marketing program were at issue in the CFPB’s investigation.

During the call, Philips emphasized that the company “believes wholeheartedly in the consumer protection mission of the CFPB.”

“Zillow Group was founded, and operates on, a philosophy that the consumer comes first in all of our decisions,” she said.

“We also believe that RESPA is an important law designed to protect consumers and, among other things, promote transparency in the homebuying process.”

The CFPB declined to comment on its investigation of Zillow Group.

“More generally, the CFPB enforces RESPA and has been consistent in reminding the industry that any agreement that entails exchanging a thing of value for referrals of settlement service business likely violates federal law,” said CFPB spokesman Samuel Gilford in an emailed statement.

Gildford also pointed Inman to an October 2015 compliance bulletin on marketing service agreements (MSAs).

‘Created a situation’ for potential agent RESPA violations

“My biggest concern with Zillow’s co-marketing program (and other co-marketing programs) is that it created a situation where real estate agents and others could violate RESPA and think what they were doing was OK simply because ‘Zillow wouldn’t let me do this if it could violate RESPA,'” Ken Trepeta, executive director of the Real Estate Services Providers Council (RESPRO), told Inman via email.

Where agents can get in trouble is if they’re not paying their fair share of marketing expenses, according to Trepeta.

“Doing co-marketing where a real estate agent and some other provider pay a reasonable share of the marketing is thought to be perfectly fine even before the internet. The problem is when one side is paying a grossly disproportionate share or one side is not paying anything at all,” he said.

“So a real estate agent and loan officer splitting the marketing 50-50 and giving each other prominence in the display should be fine. However, a real estate agent paying nothing and a loan officer paying all of it — probably not fine.

“Or a real estate agent paying nothing and two loan officers paying 50 percent each is probably not fine. In either of those scenarios, it is a problem for the real estate people and loan officers.

“Zillow could wash its hands of it all, they are ‘just an advertising platform.’ That is what I have heard industry people say, but this will affect them no matter what.”

Zillow Group spokeswoman Emily Heffter noted that the scenarios Trepeta mentions in which an agent doesn’t pay anything toward marketing spend would require someone to circumvent the rules of the Zillow Group program, which dictate that a single lender can’t pay for more than 50 percent of an agent’s total monthly ad spend and multiple lenders can’t pay for more than 90 percent of the spend.

Zillow Group requires agents to pay their “fair share” of ad spend in the program, but doesn’t spell out what that is.

But the determining factor will be whether lenders and agents are paying “fair market value” for the advertising, according to Marx Sterbcow, a RESPA attorney based in New Orleans.

‘Fair market value’

What’s that?

It’s the general market value for a good or service that a non-settlement service provider would pay for that good or service. When demonstrating to attorneys, compliance experts and regulators that you are providing a thing of value at fair market value, you must show that the value of the good or service is commensurate with what anyone would expect to pay for it today.

The idea is that providers aren’t paying you a higher or lower rate for goods or services with the expectation that you will be referring business to each other as a reward.

(Additional tips and pitfalls in calculating fair market value can be found in Inman’s RESPA explainer).

Sterbcow declined to comment specifically on Zillow Group, since he doesn’t know the full scope of the CFPB’s inquiry, but said that, because the CFPB tends to provide guidance through enforcement, any action it takes in regards to Zillow Group will likely have a spillover effect to other lead generation portals, affecting how those companies price advertising and generate income.

Examples of other real estate tech companies with an agent-lender co-marketing program include TigerLead, Kunversion, Commissions Inc., and BoomTown.

The CFPB could determine that lenders and other settlement service providers can only subsidize an agent’s marketing spend up to a certain point that is equivalent to fair market value, according to Sterbcow.

“If a company is out there saying that I can have three lenders paying 90 percent of an agent’s expenses in a particular website portal, I will tell you right now that those three lenders can’t pay 90 percent. They would be over-subsidizing the agent’s business expenses,” he said.

He predicted that portals with co-marketing programs will have to break down exactly how each side is paying their fair share of ad spend.

“[The portals] need to definitely show what each and every aspect of their program costs, so that the lenders and whoever else is going to be participating can defend themselves in the event of an enforcement action,” Sterbcow said.

“They’re going to have to be detailed and transparent with the way that the pricing is” and the exposure each side is getting.

What would happen to the real estate client experience if the CFPB officially tightens its grip on co-marketing across the industry? According to Trepeta, it’s unlikely that transaction efficiencies would be hampered.

“All co-marketing does is provide a way in which agents and lenders or loan officers or other settlement service providers can share in the expense of Zillow or other ads,” Trepeta said. “So if if co-marketing was curtailed in some way, it would have very little impact on the ability of ‎people to work together and present a ‘one-stop shopping’ package to consumers.

“Some just choose to work together without doing a monetary agreement.”

Possible repercussions for Zillow Group

Zillow Group did not respond to a question asking whether it expected its co-marketing program to change or go away as a result of the CFPB investigation.

Sterbcow added: “I would think that any company that is in the lead portal space that relies on loan officer and real estate agent co-marketing where their program may not be fully compliant, I would say there could be a significant impact to their overall operations.

“If in fact Zillow is hit with a … violation it could have a significant hit on these companies. Not all companies, some of them do it right.”

Sterbcow anticipates that if agents aren’t able to count on lenders to subsidize their marketing expenses — either because lenders pull out of the program or because the CFPB shuts it down — that will make it harder for portals to attract agents to pay for advertising, possibly leading to fewer such lead generation portals.

“If the actual cost to the agent is $800 a month for one of these programs, yet the agent is paying $200 a month or even $400 a month, are they going to come up with the additional $400 themselves or are they going to cut back on their expenses or terminate that relationship altogether?” Sterbcow said.

But Trepeta anticipates that clarity from the CFPB could boost co-marketing programs.

“It will be good to have this addressed because many conscientious settlement service providers are willing to co-market but are not willing to go further than RESPA permits, and they lose out to those who do not understand RESPA or do not care.

“So settling this issue of what can and cannot be done in Zillow (or any other) co-marketing should be helpful,” he said.

“Those who feel they are losing out because they are unwilling to cross a RESPA line have the most to gain. Agents who are getting excessive co-marketing deals have the most to lose.

“Also, if third parties are not paying up, Zillow might have to reduce its prices so they may lose in the short run. However, they could gain if more industry players are willing to co-market under clearer rules.”

‘Agents should be careful’

“If [agents] participate in a program that’s illegal and where someone else is subsidizing more than their fair market value or their pro rata share, then the agents have exposure from both federal laws under RESPA, state laws, even civil litigation, class action litigation,” Sterbcow said.

“You really have to be careful with these programs.”

The most important thing agents can do before they enter into co-marketing agreements is to talk to their broker and their broker’s in-house counsel for their legal opinion, Sterbcow said.

Agents should also talk to in-house counsel about whether what they’re paying for advertising is fair market value, “so they don’t accidentally enter into a program that is illegal,” he added.

Agents should not rely on a company’s affirmation that a program is RESPA compliant, according to Sterbcow.

“[Agents are] professionals. They have a responsibility to the consumers to do what is best for the consumer, not themselves. And that’s the way the government looks at it,” he said.

Besides that, the “single most important thing that agents and lenders need to know” is that their emails to each other can be used as evidence, Sterbcow said.

“No matter how compliant you set it up, the email can sink the entire thing,” he said.

A loan officer or an agent typing something as simple as “Hey, did you get these people? I sent them over to you” could indicate an illegal referral arrangement, he added.

According to Sterbcow, some other factors the CFPB will likely consider are:

• Are there written agreements between the parties?
• Did the parties independently reach out to consumers (or did consumers independently reach out to them) or are the parties relying on each other to refer consumers?
• Are the parties paying independently of each other?
• Can the company show the calculations for fair market value?
• Do the ads contain endorsement language?

For instance, he approved of Zillow Group’s decision to change the language around its lender ads to explicitly say that neither Zillow nor the agent recommend or endorse Premier Lenders and to point out the financial relationship between the agent and the lender and the fact that they both pay to advertise on Zillow.

Zillow Group wouldn’t say if it had made any changes to its co-marketing program as a result of the CFPB’s two-year investigation, though it did say, “We often evolve our products as the regulatory environment changes to provide the best experience for our real estate industry partners.”

Zillow Group also made clear that “the CFPB hasn’t imposed anything or made any ruling or determination.”

Email Andrea V. Brambila.

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Amy Tankersley contributed reporting to this article as the author of Inman’s RESPA explainer page.