- Settlement talks between Zillow Group and the CFPB may result in changes to the company's agent and lender co-marketing program or lead to legal action against the company.
A federal investigation of Zillow Group’s co-marketing program for potential anti-kickback violations appears to be over, but that doesn’t mean the real estate giant is out of hot water.
The company expects to start settlement discussions with the investigating agency, the Consumer Financial Protection Bureau (CFPB), within the next two weeks, Zillow Group Chief Financial Officer, Kathleen Philips, told investors during its second-quarter earnings call Tuesday.
The program, launched in June 2013, allows “Premier Agents” who pay for advertising on Zillow Group’s apps and websites to invite lenders to share marketing costs by paying Zillow Group to appear as “Premier Lenders” in advertising alongside the agent.
RESPA experts say portal co-marketing programs such as Zillow Group’s could expose agents to legal liability under state and federal laws if regulators find that agents are not paying their fair share of advertising spend.
The CFPB has demonstrated an increasing willingness to go after those accepting payments for mortgage referrals — as evidenced by fines leveled at real estate brokerages in February — which will likely impact more real estate brokers in the future.
The CFPB’s Office of Enforcement was considering whether to recommend that the CFPB take legal action against the company, alleging Zillow Group violated an anti-kickback provision of RESPA and a part of the Consumer Financial Protection Act that prohibits anyone from helping financial service providers deceive consumers.
“Based on correspondence from the CFPB in August 2017, we understand that it has concluded its investigation,” Zillow Group said in a public filing Tuesday.
“The CFPB has invited us to discuss a possible settlement and indicated that it intends to pursue further action if those discussions do not result in a settlement.
“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, and we will vigorously defend against any allegations to the contrary.”
Further action could mean seeking “restitution, disgorgement, civil monetary penalties, injunctive relief or other corrective action,” the company continued.
Zillow Group said there was a “reasonable possibility” that a legal action from the CFPB could result in a loss for the company, but that it could not estimate the size of the loss. Moreover, legal action could have a “material impact” on future operating results, according to the filing.
“We cannot provide assurance that the CFPB will not commence a legal action against the company in this matter, nor are we able to predict the likely outcome of any such action,” the filing said.
“A negative outcome may have a material impact on net sales, revenue and other results of operations such that reported financial information may not be indicative of future operating results.”
Litigation analyst Tom Claps of Susquehanna Financial Group believes the CFPB’s invitation to “settle or else” means that a settlement or formal lawsuit is imminent, especially as CFPB Director Richard Cordray may be looking to tie up loose ends before his possible near-term departure to run for governor of Ohio.
Claps predicts the CFPB will issue a “relatively low” fine in the tens of millions of dollars, but that “the real threat for Zillow is a conduct-based remedy” — such as restricting or banning its co-marketing agreements — “that could disrupt Zillow’s current ‘co-marketing’ revenue stream.”
“If lenders are no longer able to contribute to an agent’s overall spend, or if the lender’s spending power is curbed, Zillow could potentially lose significant advertising dollars,” Claps said in a research note.
“On the other hand, if the CFPB issues guidance that allows the continuation (or expansion) of Zillow’s co-marketing program, Zillow could increase its revenues as new lenders and agents join the program (especially if a significant number of lenders have chosen not to participate in this co-marketing program due to RESPA concerns).”
Zillow Group doesn’t know what the CFPB expects the company to do with its co-marketing product, Philips told investors. She expects the settlement talks will “move pretty quickly,” regardless of their outcome.
According to Philips, the co-marketing program accounts for “a small portion” of Premier Agent revenue and of Zillow Group’s overall revenue, but she declined to specify further.
When asked whether co-marketing revenue is immaterial in that it makes up less than 10 percent of overall revenue, she again declined to say anything other than, “It’s small. We don’t share any specific numbers there.”
Susquehanna’s Claps said he believed Zillow Group was understating the importance of the co-marketing program to its overall earnings.
He estimated that if the CFPB does take action against Zillow Group, “a significant amount of EBITDA could be at risk.” EBITDA is a measure of a company’s operating performance and stands for “earnings before interest, tax, depreciation and amortization.”
Fellow SFG analyst Shyam Patil estimated that more than 10 percent of total revenue “is exposed to co-marketing.” If that figure is between 10 percent and 15 percent, an “adverse ruling” against Zillow impacting the company’s ability to derive revenue from the co-marketing program would put about 20 percent to 50 percent of 2018 EBITDA at risk, according to Patil.
The CFPB declined to comment for this story.
Editor’s note: This story has been updated with comments from Susquehanna Financial Group.