Legal experts say RESPA suit against Zillow is ‘going nowhere fast’

Zillow’s legal workload became even heavier on Friday when homebuyer Alucard Taylor filed a class action lawsuit against the real estate behemoth over its Premier Agent and Flex programs. 

The lawsuit, which was filed in U.S. District Court in Seattle, alleges both the Washington Consumer Protection Act and the Real Estate Settlement Procedures Act (RESPA) violations. According to the complaint, by directing consumers to a Zillow-affiliated buyer’s agent instead of a property’s listing agent when they click the “contact agent” button, consumers are forced to pay higher home prices due to the “hidden fee” the buyer’s agent must pay Zillow for the referral. 

While the real estate industry is no stranger to high profile lawsuits, the reaction to the Taylor suit has been mixed. On the one hand, consumer policy advocates, who have been campaigning for clearer disclosures of referral fees agents pay to lead generation sources, are at least pleased to see some action, but legal experts are not optimistic about the lawsuit’s chances. 

Pros for protecting consumers

“The lawsuit makes the valid point that the large ‘contact agent’ button at the top of the page can easily mislead buyers into thinking that they are contacting the listing agent,” Stephen Brobeck, a senior fellow at the Consumer Policy Center (CPC), wrote in an email. “Even though this agent is named — in small print farther down the page — the button would be more accurate if it read, ‘contact a buyer agent.’”

Wendy Gilch, another fellow at the CPC, agrees, adding that the lawsuit is important because it is forcing the industry to ponder whether or not agents are getting “true informed consent” from consumers when sometimes close to 50% of their commission is going to a third-party referral source.

“Every referral program should be asking themselves right now whether their clients really understand where their money is going,” Gilch wrote in an email. “If they truly feel that they are offering consumers something worth thousands of dollars in commission costs, then they should have no problem being upfront about how they make money to their users.”

Despite her support of the premise of the lawsuit, Gilch said she believes that the lawsuit feels a bit targeted. 

“There are probably 50+ other companies running similar undisclosed referral programs, some of which also use listings,” Gilch wrote. “The selective targeting here, especially after Zillow’s pocket listing restrictions, suggests this might be as much about industry politics as consumer protection. If we really care about informed consent, why not go after the whole ecosystem?”

Legal skeptics as law firm “completely forgot the terms of the NAR settlement”

Although the lawsuit may have the support of consumer policy advocates, legal experts are skeptical. 

In a post on LinkedIn, Tanya Monestier, a law professor at the University of Buffalo, wrote that the suit is “going nowhere fast.” 

“I was struck by how the law firm that negotiated the National Association of Realtors’ settlement seemed to completely forget the terms of the NAR settlement. The point of the NAR settlement was to decouple commissions — sellers pay the listing agent, buyers pay the buyer’s agent,” Monestier wrote, referencing the fact that the suit was filed by attorneys at Hagens Berman Sobol Shapiro LLP and Cohen Milstein, who represented plaintiffs in the Moehrl commission lawsuit. “Yet, this Complaint says the opposite. There’s so much wrong with this complaint. But it’s shocking that the lawyers seem to have overlooked the terms of their own settlement.”

According to the complaint, the seller signs a listing agreement with the listing agent that specifies “the total commission that a home seller will pay to the seller broker and also specifies the amount earmarked to be paid to the buyer broker (in the event the buyer has a broker).” 

“When a buyer retains a broker, the buyer enters into a contract with that broker. The contract typically discloses that the buyer will be compensated by receiving a commission from the seller broker. If the buyer has a broker, the seller broker pays the buyer broker a commission out of the total commission paid by the seller,” the complaint states.

False allegations, say experts

Francis X. Riley, a partner at Saul Ewing LLP., takes things a step further, stating that the “complaint makes utterly false allegations that any reasonable investigation would reveal to be untrue.”

One such false allegation Riley, who specializes in RESPA compliance, highlights is the suit’s claim that the referral fee agents pay Zillow for the lead constitutes an illegal kickback under RESPA. While RESPA makes referral fees between real estate agents and settlement services providers illegal, it contains a carve out for fees paid between brokerages, and although Zillow does not have any of its own licensed agents, it is a real estate brokerage. 

“Real estate broker-to-broker cooperative brokerage referral agreements are completely legal,” Marx Sterbcow, the managing attorney at Sterbcow Law Group and a RESPA compliance expert, said. “There is a carve out in RESPA for these fees.” 

Additionally, Sterbcow noted that guidance from federal agencies including the Consumer Financial Protection Bureau (CFPB) and the Department of Housing and Urban Development (HUD) reinforces this.

“Guidance affirms that ‘one real estate broker may freely refer a client to other real estate brokers without violating RESPA, so long as the real estate brokerages do not share a fee or commission.’ Where such a share occurs in a cooperative context — as in success-based cuts tied to the agent’s post-closing efforts — it falls squarely within the exemption, absent evidence of vertical integration or required-use coercion under Section 8(b). Plaintiffs’ failure to grapple with this statutory bulwark renders their Section 8(a) theory untenable on its face,” Sterbcow wrote. “Post-NAR, such suits may serve as clickbait, but they risk chilling lawful innovation without advancing RESPA’s consumer-protection mandate.”

Although this lawsuit may not pass muster in the courtroom, experts still feel it may make some waves in the greater housing industry. 

“I can see this trickling into relocation programs at some point. One broker recently told me that the relocation company they work with has it in their contract that they are not allowed to tell the client how much the relocation company is taking. That same broker also told me that he was exploring different business models in the wake of the settlement and was working with a flat fee,” Gilch wrote. “But when he has relocation clients, he has to increase that flat fee to offset the almost 50% that the relocation company takes.”