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Does Zillow’s co-marketing program violate RESPA?

Zillow’s co-marketing program between agents and lenders could constitute widespread RESPA violations, but let’s dig deeper before we all judge.

zillow comarketing violate respa?

Six years ago, Jillayne Schlicke founded The National Association of Mortgage Fiduciaries to raise the ethical standards of the industry, creating a framework for industry self regulation. Schlicke is also the CEO of CE Forward which researches, writes, and instructs education courses for the real estate and mortgage industries. In other words, she’s deeply involved in the ethics of the industry.

Schlicke recently took a fine-tooth comb to the co-marketing program at Zillow, examining whether or not the program violates The Real Estate Settlement Procedures Act (RESPA), and while her results do not constitute legal advice, it is the most detailed breakdown available on the topic, published below in her own words:

Emerging questions about Zillow’s co-marketing program

I have recently received several calls about the Zillow co-marketing program from loan originators who report that their real estate agent clients are inviting loan originators to co-advertise with them as the real estate agent’s “Preferred Lender” on Zillow.

Loan originators checking to be sure if the co-marketing program is compliant with RESPA, talk with their company compliance department, and when the answer is, “No, this does not appear to comport with the requirements of RESPA,” the real estate agent says to the loan originator, “Gee, that’s too bad because your competitor WILL co-advertise with me.”

Let’s take a look at the Zillow Co-Marketing program here and here.

Zillow encourages real estate agents to select a lender:

“Lenders get featured next to the agent on the agent’s Premier Agent website and on Zillow’s websites and mobile apps, exposing them to millions of potential clients across the country and down the street.”

From the Zillow website:

Q: Who pays for what?

A: The agent pays for their Premier Agent advertising subscription. In turn, the lender gets additional exposure on Zillow as the agent and lender are sharing advertising space on Zillow.

Q: What is the cost of the premier agent ad subscription?

A: We sell it by zip code, and the cost depends on several factors including the estimated # of contacts, house values, sales, etc.  The average monthly subscription is about $250/month.

Q: Is it a flat monthly fee or is it something else?

A: It’s a flat monthly fee based on the number of impressions delivered to the agent.

Q: How is the lender/co-marketing amount paid in relation to what the premier agent pays each month?

A: It’s between the agent and the lender to work out within the parameters of the program, but generally the agent and lender agree to a specific $ monthly spend that the lender pays for.

Q: Will the lender always be shown next to the PA?

A: The lender is always shown unless there are multiple lenders co-marketing with the agent. In that case, the frequency with which the lender is shown is based on how much they are paying compared to other lenders.

Q: Are the agent and lender referring business to each other?

A: No. Under the co-marketing program, the agent is not referring business to the lender and the lender is not referring business to the agent; they are simply sharing ad space and costs.

Because what real estate agents always want is a loan originator to subsidize their advertising, and then they definitely do not want to refer business to that lender.  This is just as simple “Shared ad space/cost arrangement,” according to Zillow. 

However, it is common knowledge that the opposite is true and Zillow knows it. Zillow asked real estate agents how to structure the co-marketing program and Tony Small, VP of Sales, Strategy and Operations with Zillow said, “We discovered that real estate agents prefer their homebuyers work with a loan originator who is competent, experienced, and who can get the transaction closed on or before the contract date. They prefer to refer homebuyers to loan originators with a solid performance history. What they do not prefer is when a homebuyer chooses a loan originator who is unknown.”

I agree with Tony.  I have yet to meet a real estate agent who would say to a potential homebuyer, “I have no idea which lender you should use.”

The Zillow ad says “My Preferred Lender”

“Lender” This word is problematic because the consumer sees a loan originator’s ad, not a company ad and loan originators can work for a bank, a non-bank lender, or a mortgage broker.  By definition a mortgage broker is not a lender. “Loan Originator” would be a more accurate word.

“Typically, the agents and lenders who share marketing costs already have an established professional relationship.”

The Zillow video confirms that an agent’s “preferred lender” IS a loan originator with whom the real estate agent already knows and works with.  The premise that this is NOT a referral-based relationship is false. One of the hallmarks of RESPA Section 8 is that companies and individuals subject to RESPA are not to give or receive items of value in exchange for a referral on a federally-related loan. Zillow does a good job of explaining in the fine print that this is simply co-marketing and NOT a referral relationship.

Within the Zillow Co-Marketing Program, lenders may not refer business to agents and agents may not refer business to lenders. This restriction does not apply to referrals by agents and lenders that are completely separate from the Zillow Co-Marketing Program.

The problem with pretending that referrals aren’t happening is that they are happening. Zillow says it’s okay if the homebuyer found the loan originator outside of the Zillow program.  That would mean a loan originator would need to keep track of where and how the consumer was referred to the loan originator.  Luckily 100 percent of loan originators know how the consumer was referred to them.  But then how would a loan originator prove or dis-prove that a consumer who just happens to have been referred to the loan originator from that real estate agent did or did not see the ad?

The assumption that a real estate agent is NOT going to refer the homebuyer to the LO subsidizing their marketing is not grounded in reality. If the LO receives no referrals from that marketing, then the LO will pull their marketing support. Steering happens. Zillow is pretending it doesn’t.  Michelle Wynne, Senior Corporate Counsel for Zillow says, “In the event that we are notified that a participant in the program is not in compliance with our terms of service, we will investigate and follow up as necessary.”

What this policy doesn’t take into account is the professional, referral-based relationship between real estate agents and their LOs.  No loan originator is going to complain that his/her real estate agent threatened to pull business if the LO did not co-advertise with the real estate agent on Zillow because then the LO would definitely face retaliation from that Realtor.  So everyone checks the box on the Zillow “terms of service” page and the quid pro quo continues.

Zillow is fully aware that the Realtor/LO symbiosis it is based on referrals yet real estate agents and loan originators are suppose to apparently pretend that it isn’t.  That really sucks. NOBODY wants to violate RESPA. Apparently we just need to chant “co-marketing” over and over again.

Q: I’m an agent. Are there any limits to how much marketing costs a lender can share with me?

A: Yes, there are some limits. A single lender cannot share more than 50% of your total monthly spend with Zillow. Also, if you have more than one lender, all of them together cannot share more than 90% of your total monthly spend with Zillow.

Oh wow, what a deal. Real estate agents can get up to 90 percent of the agent’s monthly “spend” (I guess that means advertising fees) paid for by their lender.  What a deal for real estate agents and what a $deal$ for Zillow. But is it allowed under RESPA? Read on.

Q: I’m a lender. If I co-market with an agent, where will I appear?

A: A lender who co-markets with an agent will appear in the following places: On the agent’s featured listings, on the agent’s profile, on the agent’s Premier Agent Website, and on any e-mail campaigns the agent sends to clients from Zillow

Because nothing says, “this is not a referral and is only co-marketing” like Zillow’s millions seeing “My Preferred Lender” on featured listings, profile page, website and emails.

In my opinion, the Zillow co-marketing program is not co-marketing but a possible RESPA Section 8 Violation due to the nature of the professional, referral based relationship between real estate agents and their preferred loan originators.

Now let’s take a look at the advertising.  In the past, HUD has been notoriously vague about Section 8 of RESPA until prodded by the industry for more guidance.  Zillow is very upfront about who they are: They are a marketing company.  We can co-relate a website to print advertising.  We could theoretically print out a page from Zillow and look at it like we would look at a newspaper or magazine advertisement. HUD does offer guidance on advertising.

Here is a helpful PDF from HUD :

18. Can a mortgage banker and a real estate agent advertise their services together, for example, on the same brochure or newspaper advertisement?

Nothing in RESPA prevents joint advertising. However, if one party is paying less than a pro-rata share for the brochure or advertisement, there could be a RESPA violation.

K&L Gates provides this very helpful article: “It’s Time for a RESPA Checkup: Federal and State Regulators Begin to Scrutinize Marketing Agreements

“…a marketing agreement will qualify for a Section 8(c)(2) exception from RESPA if it satisfies the following two conditions:

(1) The payment recipient performs real marketing services; and
(2) The marketing fee is commensurate with the fair market value of the services performed and not paid on a per-transaction basis.

A marketing agreement will not comply with RESPA if it merely disguises the payment of referral fees to providers in a position to refer settlement service business.

Let’s apply the Zillow co-marketing program to the above.

(1)  We agree that advertising to Zillow’s millions IS considered a real marketing service.

(2)  But what is “fair market value?” We could establish FMV if we knew what each premier agent pays each month to Zillow, and then take a look at how much space the loan originator’s ad appears on the web page, multiplied by the number of times “the millions” of Zillow visitors views the real estate agent’s web page.

If the fee the agent pays Zillow each month is a moving target based on clicks or web traffic then we’d first look at that agent’s web traffic and then analyze the proportion of space that LO’s ad appears on the agent’s page(s)

The LO’s advertising fee could be measured after the fact, each month, supported by Zillow data, and then billed to the LO.

And also, along with that, instead of what is now a clear referral-based program, Zillow could change the program to be something other than “My Preferred Lender.”

Instead how about “Local Loan Originator.”

LOs can choose to advertise with ALL real estate agents in the state in which they are licensed, or in their chosen market zip code. They will be billed at the end of each month and provided with RESPA-compliant data to back it up. They will appear blindly with real estate agents who choose to have a random, local, licensed LO “advertising” on the agent’s Zillow page.

So who is ultimately responsible for being compliant?

Moral of the story: Never trust an advertising salesperson to tell you something is “perfectly legal” and “it’s all been reviewed by attorneys” if their paycheck is tied to how many people they get to sign on the line that is dotted.

Zillow pretty much says in their Terms of Service that it is ultimately the responsibility of each lender and agent to ensure their own compliance with the laws and regulations to which they are subject. Which means the program may or may not be compliant and it’s up to real estate agents and LOs to figure out if they are or are not violating RESPA.

Too bad that Zillow chooses to not hold itself and its programs to the standard (of following the law) that it requires of its users.

I have always been and continue to be a big fan of the Zillow marketing business model and encourage Zillow to make it easy for their real estate agents and loan originators to advertise in a way that is RESPA-compliant.

Many real estate agents and loan originators already hold a false belief that the program IS compliant. And that’s too bad because this would make a great CFPB test case.

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