Shares of Zillow (Z) are sliding after Susquehanna analyst Thomas Claps told investors that he believes a lawsuit may be forthcoming from the Consumer Financial Protection Bureau over its co-marketing program. The analyst pointed out that CFPB had “invited” the company to discuss a settlement, but no progress update on the discussions has been announced.
CFPB MAY SUE ZILLOW: In a research note to investors, Susquehanna’s Claps noted that on August 8, Zillow disclosed that the CFPB had concluded its investigation and “invited” the company to discuss a settlement, which was to occur over the past month. However, to date, there has been no progress update on the settlement discussions, the analyst pointed out, adding that the likelihood of a near-term lawsuit being filed is increasing. Currently, Zillow’s co-marketing program allows certain groups of lenders to subsidize up to 90% of an agent’s marketing costs, while other lenders are capped at 50%, Claps said. The analyst argued that this subsidy issue is the primary focus of the CFPB investigation, and that the CFPB is likely demanding a 50% contribution cap across the board, regardless of how many lenders are contributing. Therefore, at a bare minimum, the CFPB will demand that Zillow eliminates its ability to collect more than a 50% co-pay from lenders, he added. The analyst reiterated a Neutral rating on Zillow.
POTENTIAL LAWSUIT IMPLICATIONS: Susquehanna’s Claps also argued that if the CFPB files a lawsuit against Zillow in the near-term, it will be seeking a variety of remedies and monetary fines against Zillow, which could mean total elimination of Zillow’s co-marketing program, reduction in co-marketing contribution amounts that would result in lost revenues/EBITDA, disgorgement of profits, civil monetary penalties, banning single lender agreements, increased consumer disclosures and increased compliance measures.
PRICE ACTION: In late morning trading, shares of Zillow have dropped over 4% to $38.88.
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