The Lead Generation Company: Managing the Risks

Jonathan Foxx

President & Managing Director

Generating leads is an important way to reach consumers. It is also fraught with regulatory risk. A lead is consumer information that signals consumer interest or inquiry into products or services offered by a business, such as residential mortgage lenders and originators. There are several factors to be considered, not just licensing. I will list some rudimentary guidelines in this article, specifically with respect to contact with the consumer. Caution is urged to consult with a risk management professional to ensure compliance with federal and state guidelines required by a marketing campaign to generate leads. Although my focus is primarily on the online lead generation process, virtually all the guidelines provided herein may be extrapolated for use in offline lead generation campaigns.

My firm often is requested by clients to vet a lead generator, which I will call a Lead Generation Company. Careful risk management advice should be considered when developing and managing leads, whether obtained from an outsourced entity or a loan originator’s own website, in-house, or through online lead generation advertisements. Certainly, any loan originator that uses leads must have an internal compliance function that accounts for proper licensing of the Lead Generation Company (where required), monitoring of the data integrity derived therefrom, testing conformance with the originator’s policies, and training of staff in the appropriate use of lead generated, consumer data.

Banking departments these days are not just looking at licensing qua licensing. They are looking for loan originator compensation violations that are triggered by lead generation. For instance, they know that loans may have different cost structures depending on how the loans were initially received by the lender. A lead generated by the loan originator may be compensated differently than those generated by the creditor. As long as this doesn’t constitute a proxy for a loan term or condition, it is generally acceptable; that is, the loan officer may also be reimbursed for lead generation and other legitimate business costs, but the creditor must beware of how this may serve as a proxy for terms and conditions. It is up to the lender to make this determination (and properly document it).

Four Rules

In any lead generating marketing, the following four rules should be implemented:

1.     Complete, accessible, and straightforward disclosure of all parties’ intent regarding data collection and usage is essential;

2.     Data should not be brokered or sold without consent (or notice and choice) of all parties involved, including the consumer and the loan originator;

3.     Both the consumer, Lead Generation Company, and the loan originator should be made aware, through clear notices, of all parties involved in data collection and sharing; and,

4.     All parties should be educated and aware of current regulations regarding consumer protection and privacy.

These four rules become the bases of the policies, procedures, contractual arrangements, and protocols that ensure a viable marketing campaign that relies, in whole or in part, on lead generation.

Regulatory Focus

The regulators involved in enforcement of compliance with lead generation rules include, but are not limited to, state banking departments, state Attorneys General, the Federal Trade Commission (“FTC”),[i] and the Consumer Financial Protection Bureau (“Bureau”). We already know that the Bureau examines for whether the lead generator is a third-party provider and reviews the terms and appropriateness of the relationship. The Bureau reviews advertisements and advertising sources. It will review TV, radio, print media, Internet, scripts, recordings, and so forth. It will determine if there was proper consumer disclosure all along the way, from point of contact with the consumer to point of contact with the lender, including any intimation of fees and other terms and conditions. Plus, a review is conducted for online data security and sharing of consumer information.

Although the new loan originator qualification standards do not impose licensing requirements, every lender must ensure that each loan originator in its employ is licensed and registered in compliance with laws related to Secure and Fair Enforcement for Mortgage Licensing Act (SAFE), if applicable. Further, entities engaged in lead generation and marketing activities, as well as the companies that do business with such entities, need to pay particular attention to their activities to ensure that they do not inadvertently engage in loan originator activity. If they do, they’ll need to make sure that they meet the new loan originator qualification standards, including licensing requirements. Failure to meet these standards will give rise to severe civil liability that could impair the collectability of the loan.

The Bureau has stated that anytime a consumer gives out sensitive personal and financial information on the Internet there are risks involved to the consumer. In the context of Pay Day Loans, for instance, the Bureau has already warned consumers that if a consumer applies for a loan online, the consumer could be increasing risk significantly.

The Bureau has expressed concern that an online application or form that consumers fill out could be sold to a loan originator that offers to originate a loan on behalf of the consumer. Indeed, the Bureau also has indicated it has concerns that multiple lenders or other settlement service providers could pay for this information, thereby causing them to contact or email the consumer.

Consumer Advocacy

In a November 11, 2013 announcement to consumers, the Bureau stated, “Lead generators might not find you the lowest cost loans, and you should be cautious of sites that promise they will. Many consumers can also be confused about who actually made the loan, which makes getting help when you need it harder.”[ii] In addition, the Bureau has provided caution regarding key words, tags, and tactics.

Importantly, the Bureau’s view toward the Pay Day lead generator should be applied to residential mortgage lenders and originators that purchase leads from a Lead Generation company. Here’s the point: the Bureau has clearly issued an answer to the question, "What is the difference between an online payday lender and one with a storefront?" Its answer was that consumers need to make sure the online website is licensed to do business in the consumer's state and whether the lead generator follows the state's [payday] lending laws. Consider it a warning to all residential loan originators!

Therefore, when the Bureau starts looking at online lead generation involving residential mortgage loans, it is somewhat certain that it applies an even stricter standard to the Lead Generation Company that solicits mortgage information or a mortgage conversation from consumers and sells it or even passes it on to a loan originator. Questions that the Bureau would resolve, either by promulgating rules or through enforcement action, will likely be: (1) Is the Lead Generation Company violating the SAFE Act if it is not licensed in the state it is operating in?, and (2) If it is licensed under SAFE will it be violating the broadly defined Loan Officer Compensation Rule?

Lead Generation as Advertising

Depending on the advertising used to find a consumer for a loan originator, the Bureau may deem the communication to be an advertisement to generate a lead by using certain phrases, such as “Let us help you find a mortgage! Call us! Or Click Here for More Information!” If deemed an advertisement, the Bureau will move to the view that such advertising is a solicitation for a mortgage conversation from a consumer. The outcome of that position would likely lead to a violation of SAFE, because most states consider such a solicitation a violation of SAFE even if no payment is made by the lender or loan officer to the Lead Generation Company - because this type of solicitation would trigger a license requirement.

Even if the Lead Generation Company is properly licensed under a particular state's SAFE Act, if it sells that lead to an unlicensed loan originator in that state the Bureau could pursue an action against the Lead Generation Company because it assisted or facilitated a consumer’s information to be sold to an unlicensed entity, pursuant to various third party vendor management bulletins.

Some states already require a Lead Generation Company collecting consumer information to be licensed as "mortgage brokers" such as Arizona and Virginia. The licensing requirement varies from state to state. Referencing Pay Day lenders, most of the Pay Day lenders in Ohio, for example, have become Mortgage Brokers under the SAFE Act as it takes them out of the state usury statute for Pay Day lenders.

Three Concerns

What type of online Lead Generation Company could cause issues of concern?

(1) Unlicensed Lead Generation Company that tells consumers, for instance, whether they are "Qualified for a Loan or Not";

(2) Online Lead Generation Company that collects any sort of non-public personal information data (the definition of what is “NPI” may vary from state to state, but is also federally settled in Gramm-Leach-Bliley, et alia) and fails to inform and obtain the consumers consent that their information will be shared with a third party; and,

(3) Online Lead Generation Company where it has spoken directly with the consumer and then transfers the "Live Handoff" over to the loan originator (especially if the Lead Generation Company is not licensed, where required by state law). If the Lead Generation company acts as a special kind of mortgage broker then it may be best to stay away because this could violate the standards associated with the Loan Officer Qualifying Rule, mentioned above, which became effective on January 1, 2014.

Additionally, please note that the Bureau has broad authority to enforce Fair Lending Laws, the Telemarketing Sales Rule, Mortgage Lending and Regulations, Mortgage Acts and Practices Advertising Rule, and most certainly Unfair, Deceptive and Abusive Acts or Practices (UDAAP).[iii]

FTC Adopts New Rules Banning Deceptive Mortgage Advertisements

The Federal Trade Commission (FTC) has adopted the Final Rule (Rule) that bans deceptive claims in mortgage loan advertisements.

According to the FTC, the Rule covers all entities that are under the agency's authority that advertise mortgages, including: mortgage lenders, brokers and servicers; real estate agents and brokers; advertising agencies; and home builders. Financial institutions such as banks, thrifts and credit unions are not covered.

The FTC has substantial law enforcement experience with unfair or deceptive practices involving mortgage advertising practices or violations of Truth in Lending Act mortgage advertising.

Advertising includes, but is not limited to:
Print advertisements
Unsolicited e-mails
Direct mail marketing
Internet advertisements and Web sites
Telemarketing
In-person sales presentations

Effective: August 19, 2011

Claims and Violations

Alleged violations have included deceptive claims - often made to subprime borrowers - about key terms and other aspects of the loans, such as:

• Misrepresentations of the loan amount or the amount of cash disbursed.
• Claims for loans with specified terms, when no loans with those terms were available from the advertiser.
• Claims of low "teaser" rates and payment amounts, without disclosing that the rates and payments would increase substantially after a limited period of time.
• Misrepresentations that rates were fixed for the full term of the loan.
• Misrepresentations about, or failure to adequately disclose, the existence of a prepayment penalty or large balloon payment due at the end of the loan.
• Claims about the monthly payment amounts that the borrower would owe, without disclosing the existence, cost, and terms of credit insurance products "packed" into the loan.
• Claims that the loans were amortizing, when, in fact, they involved interest-only transactions.
• Claims of mortgage payment amounts that failed to include loan fees and closing costs of the kind typically included in loan amounts.
• False or misleading savings claims in high loan-to-value loans.
• False or misleading claims regarding the terms or nature of interest rate lock-ins.
• False claims that an entity was a national mortgage lender.
• Failure to disclose adequately that the advertiser, not the consumer's current lender, was offering the mortgage.
• False or misleading claims to consumers that they were "pre-approved" for mortgage loans.

Outline of Final Rule

• Covers misrepresentations about interest charged for the product, including, but not limited to, misrepresentations about (1) the amount of interest owed each month that is included in the consumer's payments, loan amount, or total amount due; or (2) the interest owed each month that is not included in the payments but is instead added to the total amount due.

• Bars misrepresentations about the APR, simple annual rate, periodic rate, or any other rate, including, but not limited to, a payment rate.

• Bars misrepresentations about the existence, nature, or amount of fees or costs associated with any mortgage credit product. It also prohibits false or misleading claims that no fees are charged.

• Covers misrepresentations about terms associated with additional products or features that may be sold in conjunction with a mortgage credit product.

• Covers misrepresentations relating to the taxes or insurance associated with a mortgage credit product.

• Bars misrepresentations about the existence or amount of any penalty for making prepayments on the mortgage.

• Prohibits misrepresentations pertaining to the variability of interest, payments, or other terms of mortgage credit products, including, but not limited to, misrepresentations using the word "fixed" when terms are, in fact, variable or limited in duration.

• Bars false or misleading comparisons between rates or payments, including, but not limited to, comparisons involving savings.

• Prohibits misrepresentations about the type of mortgage credit product being offered (i.e., false claims that a mortgage is fully amortizing).

• Bars misrepresentations about the amount of the obligation or the existence, nature, or amount of cash or credit the consumer could receive from the loan.

• Prohibits misrepresentations about the existence, number, amount, or timing of any minimum or required payments.

• Prohibits misrepresentations about the potential for default on the mortgage credit product, including, but not limited to, misrepresentations about the circumstances under which the consumer could default for nonpayment of taxes or insurance, failure to maintain the property, or non-compliance with other obligations.

• Bars misrepresentations about the effectiveness of the mortgage credit product in helping consumers resolve problems in paying debts.

• Prohibits misrepresentations about the association between a mortgage credit product or a provider of such product and any other person or program, including, but not limited to, any affiliation with an organizational or governmental program, benefit, or entity.

• Covers misrepresentations about the source of the mortgage credit product and the commercial communications for it, including, but not limited to, claims that the communication is made by or on behalf of the consumer's current mortgage lender or servicer.

• Prohibits misrepresentations about the consumer's right to reside in the dwelling that is the subject of the mortgage credit product, including, but not limited to, false or misleading claims about how long or under what conditions a consumer can stay in the dwelling.

• Bars misrepresentations about the consumer's ability or likelihood to obtain any mortgage credit product or term, or a refinancing or modification of any mortgage credit product or term. This includes false or misleading claims about whether the consumer has been preapproved or guaranteed for any such product or term.

• Bars misrepresentations about the availability, nature, or substance of counseling services or any other expert advice offered to the consumer regarding any mortgage credit product or term, including, but not limited to, the qualifications of those offering the services or advice.