LenderNews by Rob Chrisman
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May 13: Note on coal jobs; Zillow admits it is under CFPB investigation – LOs and real estate agents beware

May 13, 2017

Recently my commentary stated that “the number of coal mining jobs roughly equals that of florists in the U.S.” The statement prompted Wyoming’s Ward Anderson to send, “Your comparison of the much-discussed coal jobs roughly equaling florist’s jobs in the U.S. was disturbingly misleading. There are many areas that ‘coal jobs’ are substantially different than ‘florist jobs’ and I am not discussing the physical differences in the job duties but more importantly the economic differences. 
 
“To start with ‘coal jobs’ lead to many other jobs in the economy that simple don’t compare to the number of jobs created by the ‘florist jobs.’ You have entire dedicated staffs at equipment manufacturers, railroad companies, shipping companies and power plants. Even with the big days of Valentine’s day and Mother’s Day combined, the shipping and delivery of flowers for these special days don’t come close to providing the same number of jobs.
 
“The next very crucial economic issue would be the average annual salaries for the ‘coal jobs’ and all that tie to them versus the ‘florist jobs’: coal versus florist jobs. While this group of jobs seems to be narrowly confined as you put it, that couldn’t be farther from the truth in our industry of mortgage lending. I would hope that next time you plan a visit to Wyoming you might consider the real facts before making such a statement and then trying to hide your true feelings by throwing on the cover phrase of ‘Nothing against either profession.’ We are lucky that here in Wyoming there is still a strong work ethic and a desire to improve oneself. We do ‘Take pride in our work.’ Thank you Ward.
 
Zillow saga continues & heats up
 
With state after state knocking down Ocwen, it has had better months. And Zillow has had better weeks. First off, Zillow is being sued for its Zestimate product which calculates a house’s worth. Of course, Zillow has never been inside an actual house, but no matter, right? And anyone can sue anyone for anything. But it made the news.
 
But more importantly, the CFPB is investigating Zillow. That’s a call you don’t want to have. “Uh, Mr. Rascoff, the CFPB is holding on line 2.” Of course, an investigation doesn’t mean any company is guilty of anything, right? But given the limited CFPB resources, many believe it is unlikely if some of those resources were being spent just for practice. The news garnered attention by Brian Chapelle’s Potomac Partners and Inman.
 
I’ve had a few previous commentaries where I brought up the question of Zillow, RESPA violations, and the CFPB: March 13th and March 25th. Zillow obviously has plenty of attorneys who pass judgement on legal issues, but this could be yet another example for LOs and real estate agents where just because Zillow, or any other large company, is doing something doesn’t make it legal. And, of course, a situation where a real estate agent is paying nothing for an ad and a loan officer is paying all of it, and that is a supposed “split,” is not legal. Anything stating “fair share” is subjective.
 
Susquehanna Financial Group, LLLP’s Shyam Patil did a thorough write-up of Zillow last week, and about how the “CFPB investigation revelation adds significant risk to the story and will move fundamentals to the ‘rear seat’.” “The 2017 picture got much worse…with the CFPB revelation, which we see as adding significant risk to the story. We believe enforcement actions could potentially be filed, >10% of revenue could be exposed, and additional damages could be possible…”
 
Last week Patil noted, “ZG disclosed that the CFPB has been investigating the company for potential RESPA violations with its mortgage co-marketing product. Based on commentary from our checks, we estimate revenue exposure could be at least 10%, and any damages would likely be incremental. The CFPB has made three documented inquiries into this matter with ZG (2015 – initial CID, 2/2017 – NORA, 4/2017 – 2nd CID), and from what we understand the NORA letter suggests that the CFPB could be prepared to potentially issue formal charges against the company. We find it odd that ZG disclosed the matter last night after withholding the previous inquiries for about 2 years, and we think ZG may be trying to get in front of a potential announcement from the CFPB in the coming weeks. In terms of next steps, based on our understanding we could potentially see a settlement or litigation, neither of which are good options, especially considering the legal disaster last year with Move.”
 
The analyst’s report noted some additional key points about Zillow. The first concerned its market-based pricing model. “1Q was ZG’s first full quarter under its new self-serve pricing model, following the nationwide rollout in 4Q. In the company’s most important markets, ZG saw a 10% increase in revenue independent of traffic growth. Moving forward, management indicated the company’s ability to increase pricing will largely depend on the platforms ability to generate greater ROI for premier agents.”
 
The second point was that traffic growth continues to decelerate. “UVs were 167 million, up 7% y/y, a six point deceleration from 4Q, and 5% below our estimate.” The third is that Zillow is “changing its KPIs…Again. Zillow once again changed the key metrics, this time from leads to visits. The company will no longer report leads, premier agents or ARPA. Moving forward the company will focus on visits, which the ZG defines as a group of interactions by users on Zillow, Trulia, and StreetEasy’s mobile app and/or website.”
 
And in its 10-Q filed for the first quarter of 2017, Zillow Group, Inc. announced that it was being investigated by the CFPB for possible RESPA violations and that Zillow had received a Notice and Opportunity to Respond and Advise (NORA) letter in February.
 
Zillow also acknowledged in the 10-Q that it had received another Civil Investigative Demand in April after they provided the response to the CFPB’s NORA request in February. Zillow concludes that “there is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.”
 
Going to its 10-Q and pressing “control F” and entering “CFPB” will yield you the results. But Zillow states, “In April 2017, we received a Civil Investigative Demand from the Consumer Financial Protection Bureau (“CFPB”) requesting information related to our March 2017 response to the CFPB’s February 2017 Notice and Opportunity to Respond and Advise (“NORA”) letter. The NORA letter notified us that the CFPB’s Office of Enforcement is considering whether to recommend that the CFPB take legal action against us, alleging that we violated Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) and Section 1036 of the Consumer Financial Protection Act.
 
“The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action may be recommended or commenced. This notice stems from an inquiry that commenced in 2015 when we received and responded to an initial Civil Investigative Demand from the CFPB containing a broad request for information. We believe our response to the NORA letter addresses the CFPB’s concerns related to our co-marketing program under which a lender pays us to appear in advertising alongside a real estate agent.”
 
From a real estate agent’s perspective, they need to be aware of this. Author Andrea Brambila did a piece in Inman titled, “CFPB investigates Zillow’s co-marketing program: What agents should know.” “…At the very end of its earnings call remarks, the real estate giant announced that for the last two years, the CFPB has been investigating its co-marketing program for compliance with the Real Estate Settlement Procedures Act (RESPA). 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. The CFPB’s Office of Enforcement is 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.”
 
The article goes on. “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. Agents may also find themselves with less ad buying power if lenders pull back from portal co-marketing programs or if sites alter or eliminate their programs following the CFPB’s investigation of Zillow Group’s program.”
 
LOs and real estate agents should be well-versed in Section 8(a) of RESPA. It forbids settlement service providers (lenders, real estate agents & brokers, etc.) from paying or receiving any fees or other items with the understanding or agreement that business will be sent their way. And RESPA’s Section 8(b), prohibits settlement service providers from splitting charges made or received for performing a real estate settlement service other than for services actually performed.
 
Inman’s article points out that, “Section 1036 of the Consumer Financial Protection Act prohibits those offering or providing a consumer financial product or service from engaging in ‘any unfair, deceptive, or abusive act or practice.’ It also forbids anyone from ‘knowingly or recklessly’ providing ‘substantial assistance’ to service providers engaging in such acts or practices.
There is an exception to this rule, however: Solely ‘providing or selling time or space to a covered person or service provider placing an advertisement’ is not a violation. In its SEC filing, Zillow Group said it believed its March response to the NORA letter addressed the CFPB’s concerns related to its co-marketing program.
 
In the CFPB’s recent consent order against Prospect Mortgage, the agency alleged Prospect violated RESPA by using a third-party’s website ads to pay for referrals. The order did not identify the website. “In return for subsidizing a portion of these agents’ third-party website advertising, Respondent’s loan officers required them to exclusively promote Respondent in all the agent’s advertisements on that third-party website.”
 
In January this commentary contained a letter from attorney Marx Sterbcow who weighed in on whether an LO buying a hot dog for a real estate agent is a RESPA violation. Mr. Sterbcow also had some thoughts for Ms. Brambila’s article on fair market value. “It’s the general market value for a good or service that a non-settlement service provider would pay for that good or service. When demonstrating to attorneys, compliance experts, and regulators that you are providing a thing of value at fair market value, you must show that the value of the good or service is commensurate with what anyone would expect to pay for it today. The idea is that providers aren’t paying you a higher or lower rate for goods or services with the expectation that you will be referring business to each other as a reward.”
 
“’If [agents] participate in a program that’s illegal and where someone else is subsidizing more than their fair market value or their pro rata share, then the agents have exposure from both federal laws under RESPA, state laws, even civil litigation, class action litigation,’ Sterbcow said.”
 
“’You really have to be careful with these programs.’ The most important thing agents can do before they enter into co-marketing agreements is to talk to their broker and their broker’s in-house counsel for their legal opinion, Sterbcow said. Agents should also talk to in-house counsel about whether what they’re paying for advertising is fair market value.”
 
Agents should not rely on a company’s affirmation that a program is RESPA compliant, according to Sterbcow. ‘[Agents are] professionals. They have a responsibility to the consumers to do what is best for the consumer, not themselves. And that’s the way the government looks at it,’ he said. Besides that, the ‘single most important thing that agents and lenders need to know’ is that their emails to each other can be used as evidence, Sterbcow said. ‘No matter how compliant you set it up, the email can sink the entire thing,’ he said. A loan officer or an agent typing something as simple as ‘Hey, did you get these people? I sent them over to you’ could indicate an illegal referral arrangement, he added.”
 
 
A yellow Labrador walks into a job referral agency and asks if they have any openings for him. After the astounded receptionist picks herself up off the floor, she asks the dog to come back in an hour. The dog agrees and walks out. As soon as the dog leaves she calls the circus and asks if they can use a talking dog. "Of course," says the owner, "send him down." An hour later, the dog walks back into the agency and the receptionist yells that she has a job for the dog in the circus. To which the dog replies, "What does the circus want with a carpenter?"
 
 
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Does Everyone Want a Job?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
Rob
 
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2017 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)