Suit claims Zillow broke the law
WASHINGTON — Zillow is back in hot water: A classaction suit against the online realty giant is moving forward after whistleblowers alleged its “comarketing” program violates federal anti-kickback laws.
Zillow termed the charges “without merit” and 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. Socalled “premier” agents and brokers, who receive prominent placement on Zillowlisted home sites, pay hundreds or thousands of dollars a month in advertising fees. Premier agents need not be the highest volume or most successful agents; they simply need to pay for the label. According to the company’s latest SEC filing, it earned nearly $900 million — twothirds of its corporate revenue — in fees from agents paying for ads last year.
In 2013, Zillow rolled out a program 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%, later revised to 50% — a lender could get hot leads directly to active buyers.
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. In April 2017, the Consumer Financial Protection Bureau informed Zillow that it was investigating whether its comarketing program violated the law’s prohibition against kickbacks. 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 bought Zillow stock at inflated prices relying on company statements that its co-marketing concept did not violate federal law filed a class-action suit alleging securities fraud. A judge dismissed portions of the suit but allowed the plaintiffs to file an amended complaint if they presented evidence that the co-marketing scheme violated RESPA.
They appear to have done so successfully — at least enough to convince a federal district court judge to put the case back on track. Last November, the plaintiffs 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 “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.”
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.