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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.

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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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Real Estate Corporate

Has REX Homes finally ceased operations?

After two rounds of layoffs, a restructure to join MLSs, and swirling rumors regarding leadership, staffers tell us the company has crumbled.

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Real estate brokerage REX Homes became famous in recent years for spearheading an anti-trust lawsuit against Zillow and the National Association of Realtors, accusing them of being a ‘cartel’ to edge out non-MLS participants. But it appears that as of today, the company has ceased operations.

Numerous staff reached out to us directly to indicate the company’s last day was Tuesday and that a companywide call on Friday outlined the end of REX Homes. While the entity of the brokerage still exists, we are told there are no longer offices, staff, leadership, or agents.

Staff at the Austin, TX and Woodland Hills, CA offices (both in Texas) have confirmed that as of today, the doors are literally closed. It is unclear what REX’s plans are for wrapping up any current contracts that haven’t closed.

The company’s website remains live with no notification of any service interruptions and there have been no changes to the faces that appear on the staffing page.

Many Glassdoor users have begun leaving reviews asserting that operations have ceased. To thicken the mystery, we’ve already seen several recent reviews disappear, but it is unclear if that is Glassdoor or REX’s doing.

Several LinkedIn users formerly employed at REX Homes are putting their #OpenToWork signs up, stating the company has closed – some indicate departments dissolving, others that the entire company has collapsed.

What has been especially interesting with this company is staff’s consistent fears of CEO Jack Ryan, consistently citing a fear of retribution not just professionally, but personally, and several told us we should worry about our own personal safety, having been the only news outlet covering REX’s unraveling.

Also consistent is that everyone we’ve spoken to in the last year has cited an imminent demise of the company as a whole.

In August of 2021, REX Homes laid off 60 staff without severance, and on October 7th, 2021, REX Homes had their second round of layoffs – both times, staff said they were not initially given severance pay, but report to us that after our coverage, they began seeing payment.

Also in October of last year, they shut down their New York and Chicago offices, and announced internally that they would be joining MLSs. They called it a restructure. The joining of any MLS shocked many as the premise of their structure was always that their magical proprietary tech as well as their bypassing of the MLSs to save consumers thousands of dollars.

They earned several rounds of private equity funding and never went public. Several staff told us that going IPO had been a talking point from Ryan, often used to lure them to the company in the first place and accept lower pay with the idea that shares would soon be coming their way.

Between the August and October layoffs, they closed their Series D round of funding, but never disclosed the amount, closing date, or investor. It is therefore unclear how their investors feel about the company’s status, but it is also possible that they’re who initiated the pulling of the plug.

It is also unclear what this means for their ongoing lawsuit against Zillow and NAR and how a non-existent company can pursue a class action lawsuit, but no filings have been made in the past week regarding the case.

As with all REX stories, we have reached out for comment. Because we track all emails, we have always seen them open every press inquiry within seconds, but it is of note that our current request for comment has yet to be viewed

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Real Estate Corporate

Zillow seeks a patent to fill out forms electronically – sounds familiar…

(TECHNOLOGY) In yet another broad patent application, Zillow is aiming for ownership of the ability to fill out “transactional documents” electronically.

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In yet another obscenely broad patent application, Zillow is aiming for ownership of the ability to fill out “transactional documents” electronically.

The official patent application describes “generating electronic transactional documents using a form generating system” and “using a design tool that allows a user to place data entry fields over an image or snapshot of a transactional document.”

If that sounds familiar, it’s because virtually every website that allows customers to e-sign anything already does this. Some concerns also address the fact that services such as DocuSign – a service in which both Google and NAR invested – and even Google Forms might fall under this category.

Should Zillow see this patent approved, it could spell disaster for a huge operational segment of any real estate sale: the actual signing of a contract.

What’s odd about this patent application is the bizarre, gaslighting-lite language it uses to pitch the idea of something that is already used widely on the internet. In the background section, the patent claims that “Most of the time the parties are not in the same physical location when the offers, counteroffers, and acceptances are signed. Fax machines are often used to facilitate the process, as well as emailing scanned documents.”

The background continues with, “Sellers, buyers, and their agents are often not in the same contemporaneous physical location. Therefore, signed documents are often faxed between parties, with original signed copies being retained for the closing.”

Using the implied inconvenience of a physical fax machine as an argument for the efficacy of electronic documents makes sense, albeit in an obvious kind of way; however, using this argument to support the notion that Zillow should be able to claim a patent that gives them domain overall electronic forms in the real estate microcosm seems particularly villainous.

It’s also worth noting that, should this patent be granted any time soon, the likelihood that the world will still be in the grips of the COVID-19 pandemic is high. From the patent office’s standpoint, restricting the remote signature options of any real estate firm not affiliated with Zillow during a period of time in which purchasing property is already laborious and dangerous shouldn’t even be an option.

Time will tell whether or not Zillow is successful in achieving its bid for e-signing. Other document-signing services may be able to dispute the patent, but Zillow’s history of scooping up unlikely patents is undoubtedly on their side.

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Real Estate Corporate

Zillow hit with another lawsuit after iBuying collapse, claiming they misled investors

(REAL ESTATE) Stockholders are suing, alleging that Zillow publicly praised the iBuying program despite knowing it was dying, and they claim to “suffer significant damages.”

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Zillow Group was hit late Thursday with yet another investor lawsuit on the heels of the collapse of their iBuying program (“Zillow Offers”). Hillier v. Zillow Group, Inc. et al in the Western Washington District Court is seeking class action status in this federal securities lawsuit, alleging that Zillow failed to disclose to investors that they did not have the ability to price homes for their Zillow Offers program, and that paired with a known supply and labor shortage, led to an inventory backlog.

The suit claims that under these conditions, Zillow (ZG) knew they would have to end the iBuying program, which would hurt their bottom line, something investors were not made aware of. In fact, this suit notes that company leadership continued to speak positively in public, making “materially false and/or misleading statements” about the program despite their overpaying for numerous homes and selling them at a loss.

In the Notice of Related Cases filed, Braua v. Zillow Group, Inc., et al., and Silverberg v. Zillow Group Inc., et al. were cited, both of which are seeking damages for allegations of misleading investors. The Hillier suit is specifically seeking to certify a class of Zillow stock buyers who made purchases from Aug. 7, 2020, and Nov. 2, 2021.

The new lawsuit outlines the following (our words, not theirs):

  • Zillow launched the home buying program in 2018 to rapidly flip properties.
  • By close of 2019, they were in 22 markets, and the program accounted for half of their annual revenue ($1.4B).
  • On August 05, 2021, the company released Q2 earnings, citing $772M from the iBuying program, roughly 60% of their annual revenue. In the release, Defendant Rich Barton said that their “iBuying business, Zillow Offers, continues to accelerate as we offer more customers a fast, fair, flexible and convenient way to move” and “is proving attractive to sellers even in this sizzling-hot seller’s market.”
  • In October, RBC Capital Markets began cooling on Zillow, lowering their price target for the stock, warning that Zillow Offers would likely miss quarterly expectations, dragging ZG down from $91.40 on October 01 to $85.68 on October 04.
  • Shortly thereafter, in October 2021, Zillow announced they would be halting the program through year’s end, and stocks continued to slip.
  • In November, the company released their Q3 financials and simultaneously declared an end to the program and a 25% workforce cut.

It appears that the crux of the Hillier case is that leadership continued to praise the program even as it declined, right up until the Q3 earnings statements went public and it could no longer sustain the program.

“As a result of defendants’ wrongful acts and omissions, and the resulting declines in the market value of the company’s securities, plaintiff and other members of the class have suffered significant damages,” the suit concludes.

As recently as this week, InvestorPlace said, “it’s going to be a while before ZG stock could make a comeback,” noting that Zillow’s house is not in order.

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