February 11, 2015 Zillow Co-marketing Program: Mid-2015 Represents Earliest Timeframe for Potential CFPB Enforcement Related to Zillow Co-marketing Program; A Close Look at the CFPB s Enforcement Action against NewDay Financial CFPB More Likely to Target Participating Agents and Lenders; Earliest Timeframe for Enforcement Would be Mid-2015 CFPB likely to act on Zillow s co-marketing program. FTC clearance for Zillow s acquisition of Trulia is essentially a done deal. Zillow s co-marketing program, however, faces risk of CFPB enforcement due to the strong probability of RESPA violations arising from the program. The Bureau s recent focus on improper marketing and advertising agreements including a September 2014 enforcement action against Lighthouse Title and a January 2015 action against Wells Fargo/JPMorgan Chase is very likely to put Zillow s program on the CFPB s radar. Enforcement against participating agents and lenders in mid-2015 would be earliest timeframe. Sources inform us that potentially improper MSAs are prevalent throughout the industry, making the Bureau s prioritization difficult to predict. Other RESPA violations could take priority over Zillow s program, making it unclear when potential regulatory action could occur. The Bureau is most likely to target participating agents and lenders, as the Bureau has clear authority over these entities as well as expertise from similar investigations and settlements. Such a case could come as early as mid-2015, given the program s June 2013 launch and the typical timeline for CFPB action. Enforcement against Zillow itself is less likely due to jurisdictional questions. Alternatively, the CFPB could pursue an innovative enforcement theory against Zillow itself, which is unlikely given that the CFPB s jurisdiction over a company like Zillow is unclear. For this article, we interviewed several sources, including two RESPA attorneys who are familiar with CFPB priorities as well as Zillow s co-marketing program. At the bottom of this article we present a convenient snapshot outlining the reasons for and against potential regulatory action. In Depth: February 10 CFPB Enforcement Action against NewDay Financial On February 10, the CFPB filed a consent order against NewDay Financial, a Maryland-based mortgage lender, for alleged kickbacks in connection with fees paid under a marketing agreement formed with a veteran s organization. Under the marketing agreement, which was undisclosed to the public, NewDay was designated and endorsed as the preferred lender of the organization. The CFPB also alleged that NewDay additionally paid a monthly licensing fee to an unnamed broker company facilitating the agreement. Marx Sterbcow, a RESPA attorney with the Sterbcow Law Group, told The Capitol Forum that yesterday s enforcement action has several implications for Zillow. First, the CFPB is indicating that the use of language such as preferred lender or recommended lender will be considered a paid endorsement that is, something of value in violation of RESPA Section 8. Paid endorsements involving settlement service providers are now considered something of value under RESPA for the referral of business. Second, Sterbcow believes that the broker company implicated in yesterday s action may be a lead generation company, which raises new questions for Zillow s co-marketing program and the CFPB s scope for enforcement. 1
The CFPB has basically expanded its scope by raising UDAAP [the prohibition against unfair or deceptive acts or practices] in connection with RESPA for the first time, and by requiring a higher level of disclosure to consumers. Sterbcow explains that if the broker company from yesterday s action is indeed a lead generation company, the CFPB could possibly deem a company like Zillow to be a broker or loan originator raising the likelihood that it may claim enforcement authority over the company itself. In Depth: Factors Influencing Timing and Focus of CFPB Action The CFPB is likely to find significant harm in Zillow s co-marketing program, as it presents a high risk of RESPA Section 8 violations and undermines the Bureau s efforts to discourage steering in the settlement services industry. Zillow s program, which allows participating lenders to subsidize agents monthly Zillow fees, appears at odds with RESPA Section 8 s prohibition of kickbacks in exchange for referrals. If the Bureau wishes to address this conduct, it has two potential avenues for enforcement: (a) enforcement against the service providers participating in the program, or (b) enforcement against Zillow. The most likely option for the CFPB is an enforcement action against the agents and/or lenders participating in Zillow s program, which could come as early as mid-2015. The Bureau has clear regulatory authority over these entities and has been successful with similar actions in the past. Todd Ewing, founder of Federal Title & Escrow Company and an attorney who actively monitors CFPB oversight of marketing and advertising agreements, believes that the CFPB is now well equipped to handle these types of cases and may be more aggressive towards participants in the future. These agreements are incredibly risk prone, and the CFPB finally seems to have the wherewithal to go after these agreements. Ewing perceives a particular risk for participants in Zillow s program in that there are so many big players participating with deep pockets. In particular, on the preferred lender side of the arrangement, some of the largest banks in the U.S. such as Wells Fargo and Citigroup have loan originators participating in Zillow s program. And Premier Agents who can afford to dish out several hundred dollars per month just for advertising on Zillow are likely bigger players in that space as well. This aspect could potentially attract the CFPB s attention. The CFPB relies on deep pockets, which is one reason why things are so different from when HUD was charged with enforcement, says Ewing. If the CFPB were to pursue an enforcement action against agents or lenders co-marketing through Zillow s program, the timeframe for an enforcement action could be as early as mid- to late-2015, given the June 2013 launch of Zillow s program. At that point in time, the Bureau was likely already interested in MSAs, based on the September 2014 settlement of the bureau s first MSA-related case (and allowing for the investigation that would have preceded that case). The typical time frame from investigation to consent order has been about two years for CFPB enforcement actions. Examples include that the CFPB notified PHH Corporation of an investigation in January 2012 and settled that case in January 2014, and that the CFPB issued a CID to ITT Tech in May 2014 and settled that case in late February 2014. Further, an investigation into Zillow-related RESPA violations would fit easily within this two-year timeframe. Sterbcow told The Capitol Forum that these violations are generally extremely easy to prove. You look at marketing and advertising materials and operating accounts, and that s typically more than enough evidence needed to prove a violation. In addition to the relative ease of proving improper marketing or advertising practices, the Bureau s growing expertise in looking at such relationships heightens the plausibility of near-term action. 2
Stakeholders should also note that the program could potentially face scrutiny as part of a broader enforcement action alleging additional, non-zillow-related advertising agreements between settlement service providers. Typically, the agents and lenders who share marketing costs already have an established professional relationship, according to Zillow s website. This makes other agreements between the parties much more likely, and raises the possibility that other such agreements could draw the CFPB s attention. The Bureau could then address Zillow s program in the context of the larger enforcement action. A much less likely alternative for the CFPB is enforcement against Zillow itself; formulation of such a novel enforcement theory would significantly prolong the timeframe for action. While the CFPB likely wants to put an end to Zillow s program and other similar risk-prone schemes, its direct reach over an online lead aggregation platform like Zillow is unclear. Under Dodd-Frank, the CFPB has examination and enforcement authority only over certain enumerated entities. This authority clearly includes settlement service providers (i.e., real estate agents and brokerages) and entities that provide mortgage-related products or services (i.e., lenders and loan originators). Zillow, however, does not squarely fit into either of these boxes. To establish enforcement authority, Sterbcow explains that the Bureau will first need to determine whether Zillow, by virtue of its lead aggregation methodology and offering of other services, can be considered a covered entity under Dodd-Frank. Notably, in addition to covered entities, the Bureau is granted authority over service providers to those covered entities; to claim authority over Zillow as a service provider, the Bureau would be required to demonstrate that Zillow provides a material service to a covered person in connection with the offering or provision of a consumer financial product or service. [12 USC 5481(26)] Because Section 5481 goes on to state that solely providing time or space for an advertisement will not meet this requirement, the Bureau would be required to show that Zillow does more than just provide advertising space. The CFPB would have to demonstrate that, by facilitating the formation of various preferred partner advertising agreements, Zillow is providing some other material service to agents and lenders. In the unlikely case that the Bureau should choose to target Zillow under such an innovative enforcement theory, the timeframe for action would likely be prolonged significantly compared to the relatively easy case to be made against agents or lenders. The Bureau lacked the expertise for such an inquiry before gaining familiarity with MSAs in a more traditional advertising setting, and preparing a solid case under a new enforcement theory could present even more internal delays. The CFPB s full enforcement agenda could delay action against Zillow s program. Notwithstanding the RESPA-related risks posed by Zillow s program, CFPB action against Zillow s program could be delayed in light of more pressing regulatory and enforcement concerns. Both Sterbcow and Ewing emphasized that improper marketing and advertising agreements are prevalent throughout the industry, making it difficult to predict if and when the CFPB might get around to tackling something like Zillow s program. The subsidization of fees in advertising programs are low-hanging fruit for the CFPB, and I think they re easy cases to prove, says Sterbcow. The problem is that there s millions of low-hanging fruit across the country. I don t think the Bureau can possibly take hold of all of it. Even if the CFPB were to find Zillow s program problematic, it may view other marketing issues as more pressing or appealing targets for enforcement. This could include situations where (a) an unlawful practice is even more widespread than participation in co-marketing programs; (b) an unlawful practice is even more flagrantly in violation of RESPA; or (c) those engaging in the unlawful practice are more culpable or knowledgeable about their wrongdoing. That said, stakeholders should bear in mind that the CFPB s interest in the program and in the 3
practice of co-marketing through sites such as Zillow will only increase as the program expands, whether in terms of the number of participating agents and lenders or the amount of fees collected from those participants. Further, Zillow s prominence, especially following the Zillow/Trulia merger, makes the co-marketing program an even more likely target. Issue Snapshot Outlook: CFPB Likely to Address Zillow Co-marketing Program, with Mid-2015 Representing the Earliest Timeframe for Action Reasons for Potential Regulatory Action Most Compelling Narrative Zillow s co-marketing program presents a high risk of RESPA Section 8 issues and involves the mortgage origination industry, both of which are high priorities for the CFPB. The Bureau has recently ramped up focus on improper marketing services agreements (MSAs) as a violation of RESPA, and its definition appears to include arrangements such as Zillow s co-marketing program. Analysis of Legal & Market Factors - Zillow s co-marketing program is very likely to facilitate improper MSAs between real estate agents and comarketing loan originators. - Zillow appears to understand that program participants are concerned about RESPA compliance. - Even if the CFPB is unable to target Zillow directly, and pursues regulatory action against participating agents and loan originators instead, a significant portion of Zillow s revenue is at risk. Political and Other Factors - State regulators and licensing boards also have authority to take regulatory action over industry participants. - The FTC (jointly with the CFPB) has taken an interest in online advertising and lead generation. Reasons against Regulatory Action Most Compelling Narrative The Bureau has other priorities, potentially leading to significant delay of enforcement related to the co-marketing program. Analysis of Legal & Market Factors - Zillow is not a traditional real estate settlement service provider (SSP) as defined by RESPA and may therefore be outside of CFPB s reach. - There may be too many other RESPA violations for the CFPB to take a hold of, or violations that the Bureau perceives to be more egregious than those potentially stemming from services like Zillow. Political and Other Factors - The real estate industry has significant influence in Congress, and the shift to Republican control may dampen CFPB oversight. Timeline - Enforcement in mid-2015 at the earliest. If the CFPB were to pursue an enforcement action against participants in Zillow s co-marketing program, the earliest possible time frame would be mid-2015, given the program s June 2013 launch and the Bureau s rough two year timeline from investigation to consent order. 4
- RESPA settlements require monitoring, could occur at any time. The CFPB could potentially, at any time, file a consent order implicating Zillow s co-marketing program as part of a larger RESPA-related enforcement action. 5