Kenneth Harney

Zillow is back in hot water: A class-action suit against the online realty giant is moving forward after insider whistleblowers alleged that the company designed its controversial “co-marketing” program to violate federal anti-kickback laws.  

Zillow termed the charges “without merit” and said it intends to “vigorously defend” itself.  

Best known to the general public for its Zestimates property-valuation feature, Zillow is a multibillion–dollar, publicly traded behemoth whose principal revenues come from advertising placed by realty agents.  

So-called “premier” agents and brokers, who receive prominent placement on Zillow-listed home sites, pay hundreds or thousands of dollars a month in advertising fees to the company. Premier agents need not have the highest sales volume or be the most successful agents in their area; they simply need to pay for the label. According to the company’s latest SEC filing, it earned nearly $900 million – two-thirds of its corporate revenue – in fees from agents paying for ads last year. 

Investors Say Program Inflated Stock Prices 

Zillow rolled out a program in 2013 whereby realty agents could have large portions of their advertising fees paid for by lenders who share advertising costs with them. Buyers interested in a particular property could then contact not only an agent but a lender to shepherd them through the financing process. 

The idea proved wildly popular among agents and lenders. For paying part of an agent’s Zillow advertising fees – initially up to a maximum of 90 percent, later revised to 50 percent – a lender could get hot leads directly to active buyers. For realty agents, the attraction was obvious: “Hey, why not? Lenders will subsidize my costs.” 

However, a federal law known as RESPA – the Real Estate Settlement Procedures Act – prohibits payment of fees for business referrals among realty, mortgage and title industry providers that are not for services actually rendered. 

Identify New Prospects with Targeted Marketing Lists
Property owners are a prime target market for insurance, banks, real estate, home improvement, investment, and most retail and home service businesses. With information on more than 130 million households – encompassing 94 percent of the U.S. population – we invite you to learn more about how The Warren Group’s Targeted Marketing Lists can generate more quality business leads to develop your business.

The Consumer Financial Protection Bureau informed Zillow that it was investigating whether its co-marketing program violated the law’s prohibition against kickbacks in April 2017. Zillow negotiated with the CFPB, but last year, after the Trump administration appointed a new CFPB director, the agency abruptly dropped the case.  

Meanwhile, investors who said they purchased Zillow stock at inflated prices relying on company executives’ statements that its co-marketing concept did not violate federal law filed a class-action suit alleging securities fraud. A district court judge later dismissed portions of the suit but allowed the plaintiffs to file an amended complaint if they presented conclusive evidence that the co-marketing scheme violated RESPA.  

Lenders Could Abandon ‘Premier’ Program 

The plaintiffs appear to have been successful – at least enough to convince a federal district court judge to put the case back on track.  

Last November, they filed their amended complaint, bolstered by testimony from two unnamed Zillow insiders. The first: a regional sales manager for the company who alleged that lenders participated in the program because they “expected real estate agents to refer business.” The second: a sales and operations trainer who alleged that “every agent and lender knew that the co-marketing program was for the lender to get leads and referrals. … It was understood that lenders were paying for referrals.”  

Whenever the second insider “spoke to Zillow about potential concerns with the co-marketing program,” she was told “not to ask questions,” according to the court. She also alleged that she knew of a lender who had been paying 100 percent of a realty agent’s fees for two and a half years. Both whistleblowers provided “consistent testimony regarding how agents and lenders used the [program] to provide mortgage referrals in exchange for advertising payments,” according to the court. 

In his decision handed down April 19 Judge John C. Coughenour of the U.S. district court in Seattle said, “the court can draw a reasonable inference that Zillow designed the co-marketing program to allow agents to provide referrals to lenders in violation of RESPA.” 

“The court certainly seems to suggest there is a lot of smoke involving the legality of Zillow’s” program, said Marx Sterbcow, a nationally known RESPA lawyer based in New Orleans.  

If the whistleblowers’ allegations are correct, he said, “it could cause [mortgage companies] and banks to pull completely out” of the program, for fear of violating RESPA themselves and being exposed to major legal jeopardy. 

The significance for buyers, sellers and owners? The case is still out on the alleged federal law violations, but now when you see “premier” agents linked up in marketing efforts with lenders, you have a better idea about what’s really going on. 

Ken Harney’s email address is harneycolumn@gmail.com.