Co-marketing can be a powerful way for business owners to raise their profiles while sharing the burden of advertising and the cost of customer acquisition. While this technique is used in many industries, it’s growing popularity in the real estate sector is causing some major concerns.

When you start up partnerships in real estate, certain regulations govern the particulars of an agent-lender relationship. The Consumer Financial Protection Bureau (CFPB) has recently increased its efforts to crack down on co-marketing that ties loan originators and Realtors together, and those who fail to understand the seriousness of even accidental RESPA encroachment could be in for more than just a slap on the wrist.

A Look at Zillow Co-Marketing

One of the most popular co-marketing programs in real estate comes courtesy of Zillow. The massive online real estate marketplace put together a platform designed to connect lenders and agents so they could better advertise and lessen the burden of marketing costs. Agents are urged to choose a “Preferred Lender,” and that lender is then featured on the agent’s page across Zillow’s desktop and mobile network. The result is exposure to a much broader audience than lenders might get on their own. Zillow makes it clear that this partnership is simply for the sake of advertising and does not constitute a referral, but in reality, those lines appear to be easily blurred — and many argue that Zillow knows it.

The Basics of RESPA

The Real Estate Settlement Procedures Act (RESPA) is a law aimed at protecting homeowners by increasing education and eliminating intra-industry perks (think kickbacks and referral fees) that could hike consumer prices in a manner that is often blatantly unethical. RESPA altered how lenders and other real estate professionals could legally interact by mandating fee and relationship disclosures, prohibiting dual tracking (the practice in which predatory lenders simultaneously work with homeowners on a loan modification while also putting their property into foreclosure), and preventing lenders from using escrow accounts in certain ways.

Breaking the Rules

Despite Zillow’s clear-cut declaration that referrals are a no-no, participants soon began exploiting loopholes that took them far beyond acceptable parameters. One potential pitfall is the nebulous rules dictating who pays for what. Zillow automatically charges agents for their monthly subscription, and it’s up to those agents to negotiate reimbursement from their preferred lenders. The second issue is that agents tend to partner with loan originators they already know and trust.

Insiders — including at least one whistle-blower — claim that Zillow’s program is a breeding ground for “pay for play” arrangements, and quite a bit of evidence supports those charges. While Zillow co-marketing by definition may not violate RESPA, in practice it almost certainly does. Now, the CFPB is specifically targeting Zillow-facilitated co-marketers; offending real estate agents could be levied with a fine, while loan originators could lose their license.

In an incredibly competitive industry where an extra ounce of exposure could be worth tons of money, it’s easy to see why professionals would jump at a chance to get ahead, but taking an improper route to greater profits can quickly lead to compromised integrity. If a co-marketing deal would be at odds with the provisions outlined by RESPA, that deal should be automatically out of the question. By being mindful of RESPA’s guidelines, both agents and lenders can ensure they’re behaving in a way that’s ethical and that honors their commitments to clients.