The Lead Generation Company: Managing the Risk

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.

Consumers in Foreclosure: Kick’em when they're Down!

On July 23, 2014, the Consumer Financial Protection Bureau (“Bureau”) and the Federal Trade Commission (“FTC”) jointly issued an announcement, entitled “CFPB, FTC and States Announce Sweep Against Foreclosure Relief Scammers” (“Announcement”).[i]

It seems that the perps (aka “perpetrators”) are out in full force, using deception and false promises to “collect more than $25 million in illegal fees from distressed homeowners.”[ii]

The Bureau and the FTC were joined, as well, by 15 states (collectively, the “agencies”), letting the world know about their collective “sweep against foreclosure relief scammers that used deceptive marketing tactics to rip off distressed homeowners across the country.” The Bureau is filing three lawsuits against the perps, those companies and individuals that allegedly collected more than $25 million in illegal advance fees for services that falsely promised to prevent foreclosures or renegotiate troubled mortgages. The CFPB seeks compensation for victims, civil fines, and injunctions against the scammers. The FTC is filing 6 lawsuits of their own, and the states are taking 32 actions.

The first lawsuit names Clausen & Cobb Management Company and its owners Alfred Clausen and Joshua Cobb, as well as Stephen Siringoringo and his Siringoringo Law Firm. The second lawsuit is against The Mortgage Law Group, LLP, the Consumer First Legal Group, LLC, and attorneys Thomas Macey, Jeffrey Aleman, Jason Searns, and Harold Stafford. The third lawsuit is against the Hoffman Law Group, its operators, Michael Harper, Benn Wilcox, and attorney Marc Hoffman, and its affiliated companies, Nationwide Management Solutions, Legal Intake Solutions, File Intake Solutions, and BM Marketing Group.

Here’s the allegation, in brief: the scammers used deceptive marketing to persuade thousands of consumers to pay millions in illegal, upfront fees for promised mortgage modifications. Each of the scammers was a law firm or was associated with one. It is further alleged that the defendants disguised their “false promises of foreclosure relief for struggling homeowners with claims that they were performing legal work.”[iii] The plaintiffs assert that these tactics are used by foreclosure relief scams to attract victims, add credibility to their schemes, or exploit certain legal exemptions for the practice of law.

The applicable Regulation that is cited is Regulation O, previously known as the Mortgage Assistance Relief Services (MARS) Rule. The FTC actually provides a guide on this rule, called “Mortgage Assistance Relief Services Rule: A Compliance Guide for Business” (“Guide”).[iv] Generally, this Regulation bans mortgage assistance relief service providers from requesting or receiving payment from consumers for mortgage modifications before a consumer has signed a mortgage modification agreement from their lender. The Regulation also prohibits deceptive statements and requires certain disclosures when companies market mortgage assistance relief services.

Some highlights of the Guide are worth noting: 

• It's illegal to charge upfront fees.

The foreclosure relief firm can't collect money from a customer unless it delivers – and the customer agrees to – a written offer of mortgage relief from the customer's lender or servicer.

• The foreclosure relief firm must clearly and prominently disclose certain information before it signs people up for your services.

It must tell customers upfront key information about its services, including:

o   the total cost,

o   that they can stop using the firm’s services at any time,

o   that the firm is not associated with the government or their lender, and

o   that their lender may not agree to change the terms of their mortgage.

• If the firm advises someone not to pay his or her mortgage, it must clearly and prominently disclose the negative consequences that could result.

It must warn customers that failure to pay could result in the loss of their home or damage to their credit rating.

Social Media and Networking

When you think of advertising, do you include social media? These days, most of you do!

However, social media compliance - which I shall call "SMC" - is a considerable undertaking, far more involved than just issuing a policy and procedure. Often, implementing SMC includes working with internet technology and information security professionals, collaborating with sales, compliance, legal, marketing, and human resources personnel, and ensuring that virtually all employees understand their own obligations with respect to using internet communications.

We have drafted SMC policy statements that call for constant vigilance by management and appointed staff to monitor for and find the appropriate remedies to transgressions relating to use of a company's name, logo, products, and services, in casual and even formal social media interactions.

Recently, Federal Financial Institutions Examination Council (FFIEC) issued a request for comments, entitled Social Media: Consumer Compliance Risk Management Guidance ("Notice"). FFIEC issued this notice on behalf of its six members, Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System (Board); the Federal Deposit Insurance Corporation (FDIC); the National Credit Union Administration (NCUA); the CFPB (collectively, the "Agencies"); and the State Liaison Committee (SLC). Succinctly put, whatever the federal agencies eventually adopt, the states will issue the final guidance as a supervisory guidance not only to the institutions that are, by extension, under its supervision but also through the State Liaison Committee, thereby encouraging state regulators to adopt the guidance.

This means that institutions will be expected to use the forthcoming guidance in their efforts to ensure that their policies and procedures provide oversight and controls commensurate with the risks posed by their social media activities. State agencies that adopt the guidance will expect the entities that they regulate to use the guidance in their efforts to ensure that their risk management and consumer protection practices adequately address the compliance and reputation risks raised by activities conducted via social media.

In this article, I will consider certain features of FFIEC's social media Notice as well as some important subjects to be addressed in constructing an SMC policy and procedure.*

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IN THIS ARTICLE

Defining Social Media

Use of Social Media

Risks of Social Media

Risk Management

Risk Areas

Laws and Regulations

Major Risks

Policy and Procedures

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Defining Social Media

Social media has been defined in a number of ways. For purposes of the proposed guidance, the Agencies consider social media to be a form of interactive online communication in which users can generate and share content through text, images, audio, and/or video. 

Social media can take many forms, including, but not limited to, micro-blogging sites (i.e., Facebook, Google Plus, MySpace, and Twitter); forums, blogs, customer review Websites and bulletin boards (i.e., Yelp); photo and video sites (i.e., Flickr and YouTube); sites that enable professional networking (i.e., LinkedIn); virtual worlds (i.e., Second Life); and social games (i.e., FarmVille and CityVille).

A simple test to distinguish social media from other online media is that the social media communication tends to be more interactive.

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Use of Social Media

Financial institutions use social media in a variety of ways, including marketing, providing incentives, facilitating applications for new accounts, inviting feedback from the public, and engaging with existing and potential customers.

For instance, social media has been used to receive and respond to complaints. They have been used to provide loan pricing. Since this form of customer interaction tends to be informal and occurs in a less secure environment, it presents some unique challenges to financial institutions.

To manage potential risks to financial institutions and consumers, however, financial institutions should ensure their risk management programs provide oversight and controls commensurate with the risks presented by the types of social media in which the financial institution is engaged.

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Risks of Social Media

The use of social media by a financial institution to attract and interact with customers can impact a financial institution’s risk profile. 

The increased risks can include the risk of harm to consumers, compliance and legal risk, operational risk, and reputation risk. 

Increased risk can arise from a variety of directions, including poor due diligence, oversight, or control on the part of the financial institution. Obviously, procedures must be implemented that help financial institutions to identify potential risk areas and appropriately address as well as ensure that they are aware of their responsibilities to oversee and control these risks within their overall risk management program.

Therefore, financial institutions should address the applicability of existing federal consumer protection and compliance laws, regulations, and policies to activities conducted via social media by banks, savings associations, and credit unions, as well as by nonbank entities supervised by the CFPB.

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Risk Management

A financial institution should have a risk management program that allows it to identify, measure, monitor, and control the risks related to social media. The size and complexity of the risk management program should be commensurate with the breadth of the financial institution’s involvement in this medium. 

FFIEC gives this rule of thumb: a financial institution that relies heavily on social media to attract and acquire new customers should have a more detailed program than one using social media only to a very limited extent. 

The risk management program should be designed with participation from specialists in compliance, technology, information security, legal, human resources, and marketing. FFIEC makes it clear that a financial institution that has chosen not to use social media should still be prepared to address the potential for negative comments or complaints that may arise within the many social media platforms and provide guidance for employee use of social media. 

CFPB and FTC: Warning Letters - Misleading Advertisements

The Consumer Financial Protection Bureau (CFPB), in coordination with the Federal Trade Commission (FTC), has issued warning letters to twelve mortgage lenders and mortgage brokers advising them to remove or revise misleading advertisements. The warnings concern advertisements that target veterans, seniors, and other consumers.*

Additionally, the CFPB announced that it has begun formal investigations of six companies believed to have committed more serious violations of the law.

After reviewing hundreds of mortgage advertisements, the FTC staff has also sent warning letters to twenty companies, warning them that their ads may be deceptive. The FTC sent its warning letters to real estate agents, home builders, and lead generators, urging them to review their advertisements for compliance with the Mortgage Acts and Practices Advertising Rule and the FTC Act.

The collaboration between the CFPB and the FTC are characterized as a "sweep" - a review conducted by these agencies of about 800 "randomly selected mortgage-related ads across the country, including ads for mortgage loans, refinancing, and reverse mortgages." The agencies looked at ads in newspapers, on the Internet, and from mail solicitations, and advertisements that were the subject of consumer complaints.

I really can't emphasize enough how important it is to control all the advertising your firm publishes - and I mean advertisements in any media. Just adopting a policy and procedure is insufficient.

In my view, several components must be included in advertising compliance:

a formally adopted policy and procedure;

an advertising manual that is signed for and attested to by the employee;

checklists, model forms, ad formats, and authorizations;

an easy reference guide for employees;

periodic training;

and auditing.

If you are not implementing at least these risk management practices, you are certainly falling short of the controls you need to manage the regulatory challenges posed in advertising of mortgage loan products.

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IN THIS ARTICLE

The Sweep
The Rule
The Warning
The Remedy

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The Sweep

The following problems were identified by the sweep:

Potential misrepresentations about government affiliation.
For example, some of the ads for mortgage products contained official-looking seals or logos, or have other characteristics that may be interpreted by consumers as indicating a government affiliation (i.e., advertisements containing statements, images, symbols, and abbreviations suggesting that an advertiser is affiliated with a government agency).

Potentially inaccurate information about interest rates. For example, some ads promoted low rates that may have misled consumers about the terms of the product actually offered. These are advertisements offering a very low “fixed” mortgage rate, without discussing significant loan terms (i.e., advertisements “guaranteeing” approval and offering very low monthly payments, without discussing significant conditions on these offers).

Potentially misleading statements concerning the costs of reverse mortgages. For example, some ads for reverse mortgage products claimed that a consumer will have no payments in connection with the product, even though consumers with a reverse mortgage are commonly required to continue to make monthly or other periodic tax or insurance payments, and may risk default if the payments aren’t made.

Potential misrepresentations about the amount of cash or credit available to a consumer. For example, some ads contained a mock check and/or suggested that a consumer has been pre-approved to receive a certain amount of money in connection with refinancing their mortgage or taking out a reverse mortgage, when a number of additional steps would customarily need to be completed before the consumer would qualify for the loan.

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The Rule

The Mortgage Acts and Practices Advertising Rule ("MAP-AD Rule" or "MAP Rule"), known as Regulation N since rulemaking authority for it transferred from the FTC to the CFPB, is applied to advertising compliance relating to mortgage loan products. (We have discussed the MAP Rule previously. See, for instance, our September 2, 2011 newsletter, FTC: Adopts Mortgage Advertising Rule.)

The MAP Rule prohibits material misrepresentations in advertising or any other commercial communication regarding consumer mortgages. The FTC and the CFPB share enforcement authority over non-bank mortgage advertisers such as mortgage lenders, brokers, servicers, and advertising agencies. Mortgage advertisers that violate the MAP Rule may be required to pay civil penalties. HUD mortgagees may be subject to additional sanctions by the Mortgagee Review Board.

The MAP Rule was issued as a Final Rule by the FTC on July 22, 2011 (the day after the CFPB received its enumerated authorities) and given the compliance effective date of August 19, 2011. On July 21, 2011, the Commission’s rulemaking authority for the MAP Rule transferred to the CFPB, but the FTC, the CFPB, and the states all have authority to enforce the MAP Rule.