"There is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable."
That ominous line is taken directly from Zillow's quarterly report on form 10-Q for the three months ending June 30, 2017 where the company disclosed that it has been under investigation by the Consumer Financial Protection Bureau (CFPB). Zillow holds firm to a belief that its "acts and practices are lawful," but an invitation from a watchdog agency to discuss a possible settlement along with a warning that further action will be taken if one is not reached is a blatant indication that regulators believe they have a strong case.
Ordinary, reputable mortgage and real estate entities are aware of Real Estate Settlement Procedures Act (RESPA) and CFPB guidelines, and certainly try to avoid committing violations, but it's dangerous to think that only large targets with deep pockets like Zillow are at risk. Whether or not it's proven that Zillow violated Section 8 of RESPA and Section 1036 of the Consumer Financial Protection Act (CFPA) as a result of the investigation that began in 2015, companies of all sizes should be concerned about the outcome because it centers around the most fundamental element of all real estate and mortgage transactions: Leads.
Zillow's predicament began with inquiries into the company's Premier Agent and Premier Lenders programs. The inquiry extended beyond the obvious questions as to whether or not advertising costs were shared equally and according to the law into whether or not an improper endorsement was offered or implied and spread further into even murkier territory that questioned whether or not there was equal, consistent access for all parties to purchased leads.
Regulatory compliance was far less complicated for lenders and Realtors before real estate became digitized. The massive role the internet plays in the home shopping process provides as many opportunities to run afoul of the law as it does to grow your business.
How to Safely Engage in Co-Marketing
Some may view co-marketing as merely a last resort for loan officers and Realtors to engage in partnerships after marketing service agreements and methods of the past have been deemed questionable or completely illegal. Mortgage companies and compliance departments should be leery of arrangements between their loan officers and Realtors or any other professionals to align and engage in business development activities when it involves financial expenditures. But co-marketing is a powerful way to build brands and market a custom, boutique consumer experience for home buyers and sellers. It’s possible to deploy and manage co-marketing effectively, legally and profitably. Here's how to engage - safely:
- Disclose relationships and document activity. The appearance of multiple lenders near a Realtor's photo, listing and other information left a lot unclear to consumers browsing on Zillow's site. Regulators likely wanted to know whether or not the featured loan officers paid the appropriate portion of the cost for the impression, and there was no verbiage explaining what the relationship was between a featured agent and the MLOs shown to the public. Furthermore, it's impossible to know - and track - if each party had equal access to any potential borrowers who submitted an inquiry for more information to any of the parties. Zillow has since added language that states that neither Zillow or agents endorse Premier Lenders that appear - presumably as a result of the CFPB investigation.
- Consolidate all leads from all sources into a centralized system. Zillow isn't the only lead engine that can lead MLOs, Realtors and their companies into dicey territory. Other portals such as TigerLead, Kunversion, BoomTown and Commissions, Inc. can also present problems if there's a lack of clarity and proper tracking of how leads are acquired, captured and shared. Your customer relationship management (CRM) system should be robust and provide the ability to house, sort and manage leads so it's clear where they came from, who gets notified when they come in, when all parties have access and archive all marketing sent to consumers.
- Evaluate and audit your current systems. Ask yourself these questions about your systems:
- Does your company have a centralized system of record for all lead sources and marketing communications?
- Does your compliance department or designated manager have the ability to act as a "final step of approval" for all co-marketing your MLOs engage in?
- Do you have the ability to view, verify and prove that co-marketing expenses are shared proportionately according to the law?
If you answered “no” to any of these questions, your organization could be at risk for regulatory scrutiny – or worse. When done lawfully, co-marketing builds and strengthens key industry partnerships and benefits the public.
The Zillow Affect
The Zillow situation isn't just a warning for mortgage companies and real estate brokerages; loan officers and Realtors alike must be more vigilant about their marketing activities. The Zillow situation could open the door to more action taken against individuals that may not make stunning headlines like the $1.85M Wells Fargo settlement, but which will still be damaging - if not devastating - to careers and companies. It could also be argued that CFPB scrutiny is contagious if we discover that the co-marketing program involved in what led to Prospect Mortgage's $3.5-million dollar fine earlier this year was Zillow's. The CFPB order didn't name Zillow in the Prospect matter, but described a portal and quoted language that Zillow and other sites use on their lead forms. In addition to the necessary disclosure in its second quarter filing, Zillow gave investors some encouraging words:
"Although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow."
Zillow is not concerned about its business, financial position or cash flow. Can you afford not to be?