According to a recent article in the Washington Post, Zillow is again on the defensive concerning a class action suit against the company for designing a “co-marketing” program for both agents/brokers and lenders that could potentially violate federal anti-kickback laws. Once disallowed in 2017 by the Consumer Financial Protection Bureau (CFPB), this class action suit is now active with an amended complaint against the real estate behemoth.
A little background… in 1974, the Congress passed the Real Estate Settlement Procedures Act (RESPA) to prohibit the payment of fees for business referrals among realty, mortgage and title industry providers that ARE NOT for services actually rendered.
In 2013, Zillow launched a program that enabled agents to have large portions of their advertising fees (advertising fees for programs such as Zillow’s Premier Agent program that rewards agents with prominent placements on their website based upon fees paid rather than performance) paid for by lenders. This pay-for-play program allowed lenders to pay up to 90% but now revised down to 50% of the agents’ fees. The more fees paid, the more prominent the agent’s ranking on the Premier Agent section of Zillow’s website and the more likely a potential buyer would contact that “higher ranked” or more prominent agent.
In return for the lender paying a percentage of the advertising fee on behalf of the agent in the Premier Agent program (program generated $900M, 2/3 of its corporate revenue, last year), the agent would then refer that potential buyer to that specific lender who “helped” pay the agent’s fees. Got it?
Then, in 2017, the CFPB told Zillow it was investigating its co-marketing program for possible kickback violations of RESPA. The CFPB suddenly dropped that investigation when Trump appointed a new head to the CFPB and Zillow told its investors it had not violated RESPA. The investors filed a class action suit against Zillow alleging the company had committed securities fraud anyway. The district court judge hearing the case dismissed portions of the suit but allowed the investors, the plaintiffs, to file an amended complaint if they could present conclusive evidence of fraud.
Now the plaintiffs/investors have done just that and the case is back on track in the court system.
How did the plaintiffs/investors get that “conclusive evidence of fraud?” They have testimonies from two unnamed Zillow insiders who corroborate the position of the class action suit.
One of the testimonies came from a regional sales manager with Zillow who said that alleged lenders “expected real estate agents to refer business” to them. The other testimony came from a sales and operations trainer with Zillow who alleged, “every agent and lender knew that the co-marketing program was for the lender to get leads and referrals…it was understood that lenders were paying for referrals.” That trainer was told to “not ask questions.” That same trainer knew of a lender “…who had been paying 100% of an agent’s fees for 2.5 years.”
On April 19, 2019, Judge John L. Coughenour of the US District Court in Seattle said, “The court can draw a reasonable inference that Zillow designed the co-marketing program to allow agents to provide referrals to lenders in violation of RESPA.”
Though the case is still not decided, the consequences for mortgage companies and banks could be major if the allegations in the class action suit are correct. Marx Sterbcow, a nationally recognized RESPA attorney, said, “…it could cause mortgage companies and banks to pull out (of the co-marketing advertising program) completely for fear of violating RESPA and being exposed to major legal jeopardy.”
And for buyers, sellers and owners? Sterbcow said, “When agents and lenders are linked in marketing efforts, it’s a problem.”
For Zillow? The company is already moving forward with a possible replacement to its Premier Agent advertising program. The company is currently piloting a referral program in Connecticut and Colorado whereby agents pay Zillow a portion of their commission on closed deals. (This type of back-end payment for leads is closer to realtor.com’s referral platform from Opcity.) For the first two months, agents are to get leads from Zillow based on their past performance…after those first two months, Zillow will switch to an algorithm that will match potential buyers with agents “most likely to close.”
How much would agents pay Zillow from their commissions on closed deals? Zillow’s not being specific, only saying that paying for referrals on closed deals will be “competitive.”