First, the Consumer Financial Protection Bureau (CFPB) ended its investigation into Zillow Group’s co-marketing program.

Now, a federal judge has ruled that Zillow’s co-marketing program complies with RESPA.

The ruling came in a securities fraud class action lawsuit, which was dismissed, Shotwell v. Zillow Group, Inc. et al. (U.S. District Court, Western Washington District, No. C17-1387).The investors alleged Zillow created the co-marketing program to allow real estate agents to steer prospective home buyers to mortgage lenders, in exchange for the lenders paying a portion of the agent’s advertising costs to Zillow, and that when lenders pay a portion of the agent’s advertising costs to Zillow, they are effectively paying to receive unlawful mortgage referrals.

Zillow argued there was no allegation that Zillow directly provided referrals to lenders, thus there could be no RESPA violation. Judge John C. Coughenour agreed, citing PHH Corp’s case against the CFPB.

“The court need not reach these arguments because plaintiffs have failed to sufficiently allege any RESPA violations, whether by Zillow or third-party agents and lenders participating in the co-marketing program,” Coughenour said in his ruling. “Plaintiffs support this theory of RESPA liability by citing previous enforcement actions taken by the CFPB. Plaintiffs point to a case from 2015, in which the CFPB levied a $109 million disgorgement order against a mortgage lender that it alleged referred customers to mortgage insurers in exchange for illegal payments. That case involved a so-called ‘tying arrangement,’ wherein a mortgage lender refers its clients to certain mortgage insurance companies, who in turn would purchase reinsurance from the referring lender’s subsidiary.”

The judge also noted that in PHH, the CFPB alleged that the tying arrangement violated RESPA because the lender was referring homebuyers to the mortgage insurers in exchange for its reinsurance subsidiary receiving business.

“In this case, plaintiffs allege Zillow’s co-marketing program creates an analogous type of pay-for-referral arrangement,” he stated in the opinion. “As defendants note, however, the D.C. Circuit (in PHH) invalidated the CFPB’s broad theory of RESPA liability. The D.C. Circuit held that RESPA’s safe harbor allows mortgage lenders to make referrals to third parties on the condition that they purchase services from the lender’s affiliate, so long as the third party receives the services at a ‘reasonable market value.’  The D.C. Circuit concluded that RESPA did not prohibit the tying arrangement at issue because it involved ‘bona fide payments for services and not payments for referrals.’ ”

The judge rejected the investors’ first theory of RESPA liability — that the co-marketing program is per se illegal because it allowed agents to make referrals in exchange for lenders paying a portion of their advertising costs — as neither factually nor legally viable.

“In contrast to the tying-arrangement at issue in PHH Corp., which explicitly involved the referral of mortgage insurance business in exchange for the purchase of re-insurance from the referring business, Zillow’s co-marketing program, based on plaintiffs’ allegations, allows agents and lenders to jointly advertise their services without requiring agents to refer business to lenders,” he wrote. “The amended complaint does not contain particularized facts demonstrating that co-marketing agents were actually providing unlawful referrals to lenders. For example, the amended complaint does not contain any allegations that a specific co-marketing agent referred mortgage business to a specific lender in exchange for paying its advertising costs to Zillow.

“But even if the court draws an inference that co-marketing agents were making mortgage referrals, such referrals would fall under the Section 8(c) safe harbor because lenders received advertising services in exchange for paying a portion of their agent’s advertising costs. Therefore, the court rejects plaintiffs’ theory that the co-marketing program, and by extension Zillow, violated RESPA by allowing lenders to pay a portion of agent’s advertising costs. “

The judge also rejected the shareholders’ theory that Zillow’s co-marketing program facilitated RESPA violations by allowing lenders to pay more than fair market value for the advertising services they received from Zillow.

“While plaintiffs assert that a few participating lenders believed 31% of an agent’s advertising spend represented the maximum amount a co-marketing lender should spend, they have not alleged that any specific lenders were paying above that amount or, if they were, that such lender considered the amount to be above fair market value,” he wrote.

Reactions

RESPRO President and Executive Director Ken Trepeta said the decision is not surprising. 

“With the bureau dropping its own investigation into the matter, it is hard to argue that Zillow violated RESPA without providing additional proof that Zillow may have and convincing a judge that the bureau was wrong to drop its investigation,” Trepeta told RESPA News.

Phil Schulman, a partner at Mayer Brown, the Washington, D.C. firm that represented Zillow before the CFPB, agreed.

“The law suit that was dismissed in Washington was a shareholders suit. The fact is, that co-marketing if done properly complies with RESPA,” Schulman told RESPA News. “The burden is on the real estate agent and loan officer to assure that costs are shared based upon each party’s prominence in the ad and access to the electronic leads.”  The CFPB had issued Zillow a Notice and Opportunity to Respond (NORA) letter in February 2017. The letter notified the company that the bureau’s Office of Enforcement was considering whether to recommend legal action against Zillow for allegedly violating Section 8 of RESPA and Section 1026 of the Consumer Financial Protection Act (CFPA).

That bureau’s investigation led many compliance experts to question whether real estate agents could structure deals with lenders and loan officers to pay for most or all of the advertising costs associated with leads it received from Zillow.

“Co-marketing was always likely legal under RESPA if best practices were followed,” Trepeta said. “The argument against Zillow was that co-marketing may have exceeded best practices but the bureau and the court appear to feel differently. As far as affiliates go, Zillow is essentially an advertising platform in this case. In that role, it provides the platform for mortgage, title, or other professionals to co-market with real estate agents. So the way AfBA partners would participate, they would co-market with affiliate real estate agents following best practices.”

Schulman said the same rules apply on AfBAs engaging in co-marketing.

“The real estate broker that owns an interest in a mortgage company can co-market on a third-party Internet site with that lender, so long as each party pays its fair share for the advertising space,” Schulman said. “That’s true whether the lender is affiliated or unaffiliated with the broker.”