Earlier this month, Zillow Group Z, +0.68% , the popular online real estate data provider, reported blowout earnings. Revenue rose 32% compared to a year ago, and online visits were up 18%.
But there was a note of caution in its earnings release. In April, the company said, it had received a notice from the Consumer Financial Protection Bureau that questioned whether some of Zillow’s advertising revenues violated regulations against kickbacks.
At issue is the question of how a real estate service provider, like a real-estate agent or lender, gets business from a home buyer. Congress passed the Real Estate Settlement Procedures Act, also known as RESPA, in 1974 to make sure those providers weren’t funneling customers to each other in exchange for kickbacks or other inappropriate rewards.
Real estate market observers say that while Zillow’s broad footprint and accessible data have been a boon for customers, deciding whom to hire for the transaction is often a fraught process that could benefit from more transparency and less of the old handshake-deal approach that has often characterized real estate.
In Zillow’s case, what’s called “co-marketing” works by allowing a real estate agent to share the cost of an ad on the web site with a preferred lender.
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A practice like Zillow’s, in which a few service providers are offered by what seems to be a trusted marketplace, makes it seem as though those lenders or agents are receiving a seal of approval from each other or from Zillow itself. Many industry participants see the co-marketing process as little more than advertising that may appear like due diligence to a captive and uninformed customer.
There’s broad recognition among consumer advocates – and the CFPB itself – that would-be home buyers don’t shop for mortgages. It’s hard to spend the time required with more than one lender, and there are concerns about checking credit scores too frequently. And many lenders use confusing jargon that makes it hard for consumers to compare one offer to another.
“People do real estate transactions rarely, a couple times in their lifetime, so it’s not like people can gain experience, and it’s hard to shop around because you don’t know what you’re asking for,” said Andrew Pizor, a staff attorney at the National Consumer Law Center.
“It’s opaque and there’s very little competition,” Pizor continued. “It’s a horrible market. As a consumer advocate I have my doubts about the free market, but this is not a free market in terms of supply and demand and transparency. It just puts consumers even more at risk.”
As Pizor puts it, “you only want people to be making a referral for reasons based on the merits of the product or the service: they’re good and you trust them or they have a product you can’t get elsewhere, not because you’re getting referrals.”
The CFPB’s interest dates back to 2015. The agency has requested information several times since then, with the most recent request, a civil investigative demand, coming in April. “We are continuing to cooperate with the CFPB in connection with their most recent request for information,” Zillow’s earnings report noted. “We continue to believe that our acts and practices are lawful and that our co-marketing program allows lenders and agents to comply with RESPA.”
The next step, Zillow added, could be what’s known as an “enforcement action,” which could include “restitution, civil monetary penalties, injunctive relief or other corrective action. We cannot provide assurance that the CFPB will not ultimately commence a legal action against us in this matter, nor are we able to predict the likely outcome of the investigation into this matter.”
A Zillow spokeswoman declined to answer MarketWatch questions on the scale of the co-marketing program. Company management fielded four analyst questions on the CFPB review on its quarterly earnings call and said little except that “it’s a small portion of overall revenue.”
But the prepared remarks for the earnings release noted that customer leads rose 30% compared to a year ago in the first quarter, and “we continue to expect that growth in contacts sent to Premier Agent advertisers will outpace unique user growth.”
The CFPB also declined to discuss the matter with MarketWatch.
The agency usually only takes actions like the ones against Zillow when it believes its case is “pretty clear-cut,” Pizor told MarketWatch. “I think the CFPB is being generous. I think the law is pretty clear.”
Still, Pizor said, a ruling from the CFPB would help bring clarity to the market – a step many real estate professionals would welcome. The National Association of Realtors has released best practices materials recommendations and industry lawyers are watching carefully.
The CFPB earlier this year fined Prospect Mortgage, a lender, with failing to comply with RESPA. It also fined two real estate brokers and a mortgage servicer, all of whom it said took kickbacks from Prospect.
To many industry participants, it seems clear that the co-marketing arrangement must be very profitable for Zillow. Why else would a new-media company founded to, as it says in its mission statement, “empower” customers with new ways of shopping for and maintaining a home cling to an outdated way of doing business, rather than trying to disrupt it with a newer, better model?
“Nobody is doing referral fees any more. They were done away with. Marketing service agreements are the next wave of that,” said Brian Faux, CEO of Morty, an online mortgage brokerage.
Faux describes Zillow as a “great web site with a lot of data that’s good for consumers,” including data that helps them understand the cost of owning a home.
Still, he said, “anything that makes it easier for lenders to advertise non-qualified rates isn’t good for the industry.”