Consumer protection bureau shifts gears on policing Zillow’s co-marketing schemes

In a move with potentially significant implications for consumers, realty agents and lenders, the Trump administration has decided not to take legal action against online realty giant Zillow for alleged violations of federal anti-kickback and deceptive-practices rules.

The decision represents a departure from the direction the Consumer Financial Protection Bureau appeared to be headed under its previous director, Richard Cordray, an Obama appointee who resigned last November to run for governor of Ohio.

Mick Mulvaney, the CFPB’s acting director appointed by President Trump, simultaneously serves as director of the White House Office of Management and Budget. Mulvaney has promised to bring a more business-friendly approach to the bureau’s enforcement activities in the financial arena. Cordray, by contrast, aggressively sued or obtained settlements from banks, mortgage companies, title companies and other businesses and obtained an estimated $12 billion in fines and consumer restitutions.

Though the consumer bureau made no announcement of its decision and declines to discuss the case, Zillow said in a statement that “we are pleased the CFPB has concluded their inquiry into our co-marketing program.” Early last year Zillow was informed by the CFPB that the bureau was considering legal action because of alleged violations of the Real Estate Settlement Procedures Act (RESPA) and federal unfair and deceptive practices rules. Zillow has steadfastly denied that its program violates any federal law.

The focus of the bureau’s concerns was Zillow’s “co-marketing” plan, under which “premium” realty agents have portions of their advertising bills on Zillow sites paid for by mortgage lenders. Some quick background here: When buyers visit Zillow’s website, which includes millions of home listings, they frequently see “premium” agents featured prominently, along with a photo and contact information.

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“Premium” agents often are not the listing agent for the property nor are they necessarily among the most active or successful in the neighborhood. Instead they are advertisers, paying Zillow hundreds — sometimes thousands — of dollars per month for the placement, hoping that shoppers will contact them. Given these high costs for leads, Zillow instituted a “co-marketing” plan that allows mortgage lenders to be featured on the same page as the agent along with contact information. In exchange for the placement, lenders pay as much as one-half of the realty agent’s Zillow bill. As with premium agents, “premium” lenders do not necessarily offer the best financial deal or the lowest interest rates to the shopper; they pay money to reduce the realty agent’s monthly expenses and market their own mortgages.

Among the key issues in the CFPB’s investigation, according to legal experts familiar with the case, was whether the Zillow plan violates federal prohibitions against paying compensation for referrals of business — kickbacks. RESPA bans “giving or receiving” anything of value in exchange for referrals of business related to real estate settlements. The rationale is that referral payments are anti-consumer — they add to overall costs, frequently are unknown to the consumer, and discourage shopping for the best available services or prices. Zillow insists its co-marketing plan does not entail referrals or endorsements, but on its website in an area designated for realty agents it touts the program as a way to “Promote your favorite lenders to customers on Zillow.”

In multiple cases, the bureau under Cordray targeted what it considered to be illegal and deceptive marketing arrangements. In one high-profile settlement last year, the bureau fined Prospect Mortgage, LLC, a national lender, $3.5 million for allegedly illegal referral-fee-marketing arrangements with more than 100 realty firms. The schemes were designed to “funnel payments to [realty] brokers and others in exchange” for referrals of loan business involving “thousands” of buyers, according to the CFPB. Among the allegations in the settlement were that Prospect paid portions of realty agents’ marketing costs on an unidentified “third-party website” — widely understood to be Zillow. Prospect neither admitted nor denied wrongdoing as part of the settlement.

Following the Prospect settlement, some lawyers active in the financial regulatory field expected that the CFPB would sue Zillow or seek a settlement. By dropping the case, the bureau under its new leadership appears to be signaling that Cordray’s tough approach to policing co-marketing schemes between realty agents, lenders and title companies is dead, said Marx Sterbcow, a nationally known RESPA expert.

“This is going to drive up consumers’ costs” in real estate transactions, said Sterbcow, because the extra expense paid by participants in co-marketing schemes — whether they violate RESPA or not — inevitably gets passed on to consumers.