Harney: Zillow in hot water with CFPB

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Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.

You’re probably familiar with online real estate marketing giant Zillow because of its voluminous home sale listings and its controversial “Zestimate” property valuation feature.

But you may not know this: Zillow is in hot water with the federal government over alleged violations of anti-kickback and deceptive practices rules. According to Zillow, the Consumer Financial Protection Bureau has concluded a two-year investigation into the company’s “co-marketing” arrangements that allow mortgage lenders to pay for portions of realty agents’ monthly advertising costs on Zillow websites. In exchange for the money, lenders are presented in agents’ ads to site visitors as sources of financing, which ultimately generates “leads” and new mortgage business. Consumers likely are in the dark about the lender’s financial relationship with the realty agent unless they know to click on a question mark icon after the promotional words “ask these lenders about financing.”

Though the CFPB declined to comment for this column, Zillow confirmed that the bureau has threatened it with legal action if it does not agree to a settlement. The CFPB has not publicly detailed its specific reasons for pursuing Zillow, but the company says the allegations involve the Real Estate Settlement Procedures Act — which prohibits kickbacks in exchange for business referrals — and a section of the Consumer Financial Protection Act that prohibits “unfair, deceptive or abusive” practices.

A Zillow spokeswoman told me that “we believe our program is lawful,” and the company welcomed an opportunity to discuss the allegations with the CFPB.

Some background: Thousands of agents across the country pay Zillow for advertising space, mainly because millions of consumers visit its sites to check out listings and information on more than 100 million homes, whether they are for sale or not.

On homes listed for sale, frequently there is also contact information for local “premier agents” who may or may not be the actual listing agent. Premier agents pay Zillow for the promotional space and other benefits — typically hundreds of dollars per month but sometimes more than $1,000 — and receive leads to consumers who are actively searching for a home or plan to in the future. Premier agent monthly payments are a crucial part of Zillow’s business model, amounting to nearly $190 million during the second quarter of 2017 alone. This represented more than 70 percent of Zillow’s total revenues during the quarter.

Legal experts say the CFPB’s concerns likely focus on an optional feature of the premier agent program that permits real estate agents to have their monthly advertising fees paid for in part — or almost entirely — by lenders who seek leads to potential borrowers. A loan officer who is given exclusive promotion along with a premier agent might pay 50 percent of the agent’s monthly bill. Three lenders who’ve cut individual deals with the agent might pay a combined total of up to 90 percent.

The sticky legal question here is whether the lenders or loan officers are paying for referrals of business — banned by RESPA — or whether they are simply jointly advertising their wares and paying fair market value for the exposure.

In a multimillion-dollar settlement in January with national lender Prospect Mortgage over alleged violations of the anti-kickback law, the CFPB tipped its hand: It cited payments made by loan officers to subsidize real estate agents’ advertising costs on an unnamed online site that was widely understood to be Zillow. In that case, the CFPB levied fines against real estate brokerages as well as the lender — opening the door to possible future legal attacks against realty agents themselves.

Marx Sterbcow, a RESPA legal expert based in New Orleans, said that absent details from the CFPB, the anti-kickback case against Zillow is “confusing” since individual loan officers and agents appear to be the direct participants in the payment arrangements. However, he said, Zillow’s role in providing “substantial assistance” to the arrangements could make it vulnerable to charges by the CFPB under the deceptive practices act.

George Souto, sales manager and loan originator for McCue Mortgage in New Britain, Conn., told me he checked out the Zillow program but “got a bad feeling very quickly.”

“Once I saw the way it really works, it became clear to me that it wasn’t a lead generator but a way to pay for referrals. I felt uncomfortable,” he said, and worried about possible legal action by the CFPB or banking regulators.

Where’s this all headed? Only lawyers at Zillow and the CFPB know whether the case is destined for litigation or a settlement. Meanwhile, now you know how agents and lenders end up on Zillow pages: They pay. Or co-pay.