Almost a year ago, on October 30, 2015, the FTC conducted a workshop on lead generation entitled to “Follow the Lead.” We published a three-part series on the workshop highlighting the key takeaways. On September 15, 2016, the FTC published its own staff paper discussing the workshop and providing its own analysis. The paper appears intended to serve as a warning to lead buyers and sellers about FTC expectations. Indeed, the staff states that the workshop and paper will “Inform our ongoing law enforcement work.” The paper is also likely to inform the CFPB’s ongoing supervisory and enforcement activities.

While the staff paper acknowledges some of the many positive aspects of lead generation, it focuses on what regulators are likely to view as the negatives:

  • Complexity and Lack of Transparency: The FTC staff recognized that the online lead generation process is complex and often not transparent to consumers. They suggest that consumers may not understand the process, specifically:
    • That their information may be going to a lead generator not a lender,
    • That their information can be sold multiple times leading to multiple offers from lenders and marketers,
    • That the offer they receive may be coming from the company that bid the most to get their information, and
    • That lenders who buy their information may supplement it with additional information about the consumer obtained from other sources.The staff stated that all of these issues should be prominently disclosed to consumers.

The staff stated that all of these issues should be prominently disclosed to consumers.

  • Aggressive or Potentially Deceptive Marketing: The staff also called attention to lead generators who engage in blatantly misleading advertising. One example cited was a lead generator that disguised loan applications to look like job applications.
  • Potential Abuse of Sensitive Consumer Information: The staff further highlighted that bad actors may purchase or obtain consumer information from lead generators and aggregators and use it to commit acts of fraud. In one recent FTC enforcement action the staff noted, a company was accused of purchasing consumer information and using it to debit funds from consumers’ accounts without authorization.

The staff issued stern warnings to lead buyers and sellers alike that neither will be permitted to benefit from this kind of misconduct and avoid liability.

Lead buyers are warned that “companies who choose to ignore warning signs [of the above misconduct] and look the other way may be at risk of violating the law themselves.”  The staff acknowledged that many lead buyers are taking increasingly sophisticated steps to identify and reject leads potentially obtained through misleading advertising. For example, at least one company has developed an online tool that assigns unique identifiers to leads allowing them to be tracked throughout the lead generation ecosystem. Lead buyers can also carefully monitor and audit the sites of companies that they buy leads from. The staff’s warning makes clear that these and other steps are not options for lead buyers who wish to avoid violating the law.

To lead sellers, the staff warns that “ignoring warning signs that third parties are violating the law and pleading ignorance will not shield companies from FTC liability.” The staff explained that self-regulatory bodies such as the Better Business Bureau and the Online Lenders Alliance can help sellers in preventing fraud, if the bodies publish clear guidance and follow-it up with robust monitoring and enforcement. The staff also stated that lead sellers have an obligation to vet and monitor the companies they sell leads to. The staff paper indicates that FTC enforcement in this area will not let up. Thus, following industry best practices and the careful vetting and monitoring of lead buyers are essential for lead sellers to avoid liability.

As we’ve noted previously, we’re seeing an uptick in CFPB enforcement in this area even though the FTC seems to have taken primary responsibility for enforcement actions against lead generators. The FTC staff paper will likely inform the CFPB’s own expectations in its increasingly common enforcement activity in the lead generation ecosystem.

The CFPB announced last week that it has entered into a consent order with an individual who had operated a defunct business that resold consumer leads to settle charges that the business sold leads to debt collectors who used the information to deceive and threaten consumers into paying debts they did not owe.  The debt collectors had been named as defendants in a complaint filed by the CFPB in federal district court in Atlanta in March 2015.

The leads sold by the reseller were purchased from lead generators.  According to the CFPB, the reseller undertook no reasonable due diligence to check whether one of the debt collectors purchasing the leads “offered a legitimate product or service to consumers” and the debt collector “could not have perpetrated its fraud on consumers without [the reseller’s] assistance.”  The CFPB claimed the reseller’s conduct was reckless and charged the reseller with violating Section 1036(a)(3) of the CFPA.  Section 1036(a)(3) provides that it is unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 5531 [which prohibit unfair, deceptive or abusive acts or practices]…and notwithstanding any provision of this title, the provider of such substantial assistance shall be deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.”

The consent order requires the operator of the reseller to disgorge $21,151 and permanently bans him from offering or providing any “consumer financial product or service” within the meaning of the CFPA, “including engaging in any business involving the purchase or sale of consumer leads, or facilitating any such conduct.”

In its complaint against the debt collectors, the CFPB also named as defendants three other companies.  One of the companies processed payments for the debt collectors and the two others were independent sales organizations that marketed the processor’s services to merchants and were responsible for screening and underwriting merchants.  The CFPB alleged that the three companies had violated Section 1036(a)(3) of the CFPA by providing “substantial assistance” to the debt collectors.

In September 2015, the court issued an opinion denying the companies’ motion to dismiss.  n their motion, the companies argued that the substantial assistance claim should be dismissed because the CFPB had not adequately alleged that they acted knowingly or recklessly.  While the court agreed with the companies that a “severe recklessness” standard should apply, it found that the CFPB had alleged facts that satisfied the higher standard.  It also rejected the companies’ argument that even if they acted knowingly or recklessly, they still did not provide substantial assistance under the allegations in the complaint because the CFPB’s allegations did not establish that the companies’ conduct was the proximate cause of consumer harm or even a substantial causal connection.  The court ruled that while proximate cause is relevant to establishing a substantial assistance claim, it is not required.

This post is the third in a series we’re writing on the FTC’s workshop on online lead generation entitled Follow the Lead. In our first post, we explored how online lead generation works. In our second, we covered the role that disclosures can and should play. Here, we will discuss the allegation the CFPB and certain consumer groups raise that the industry is “inherently deceptive.”

At the FTC workshop, certain panelists asserted that online lead generation in the financial services and education markets is inherently deceptive. Their theory was not entirely clear. But they seemed to suggest that the deception lies in the fact that the results that consumers get back after entering their data into the online forms are not necessarily the results that are “best” for them. For example, if a consumer were to fill out a form for an online loan, the lender that he or she would be matched with may not be the one with the lowest interest rate or best loan terms. Instead, consumers will be matched with the lender that was willing to pay the most for the opportunity to make the loan through the ping tree reverse auction process described in our first post on this topic. This, they claim, is inherently deceptive.

If that’s so, then all marketing is deceptive, especially in the online world, because all marketing works that way. Companies pay for access to consumers. If you run an internet search for “online loan” the first results on most search pages are for the companies that paid to be on the top. All of the banner advertisements we see when browsing the internet are put there by companies who have analyzed our online behavior, used algorithms to guess at what we may be interested in buying, and found someone to make us an offer. There’s no promise that the ad is for the product that is the cheapest, the “best” value, or that otherwise meets our needs.

The same is true of a television ad. When a product or service is advertised on television, no consumer believes that the mere fact of the advertisements means that the product or service is the best one available for their needs or budget. Consumers understand and expect that they have the power and the responsibility to evaluate a product or service for themselves. Doing so on the internet through comparison shopping is extremely easy.

Of course, that’s exactly what consumers do in the online lending space. Even after they enter information into one online form, they often enter their information into other forms and then compare the results. In addition to using lead generators, they can also interact with online lenders directly by clicking on any of the many search results that come up in searches for online loans. Even consumers who don’t comparison shop do so for reasons of their own. Perhaps they don’t want the trouble of entering their information into many different websites to find a lender that will accept them. Perhaps speed is important. We don’t know. But, given the competitiveness of the industry, and the thousands upon thousands of results that come up in searches, there is no argument that consumers cannot comparison shop.

In making arguments like the ones we are discussing, consumer advocates point out that not all lead generators operate under the “ping tree” model. Some operate more like popular travel websites, where they provide consumers with a list of lenders to choose from with key loan-level information prominently displayed so that consumers can comparison shop. Why, they argue, can’t other online lead generators use the same model?

There are three problems with this argument: The first is with the question itself. Shouldn’t the market decide what kinds of businesses work? If it were commercially feasible to operate a travel website of online loans, wouldn’t someone have done it? Second, there is a real answer to the consumer advocates’ question, namely, speed. Online loans, unlike mortgages, student loans, auto loans, etc., are made quickly. That is their prime advantage over other forms of borrowing. Lenders have limited capital to lend out, and borrowers want their loans quickly, often to pay for emergencies. By the time a borrower takes time to look at the lending terms and select a lender, the loan may no longer be available. One consumer advocate proposed that fast lending was inherently bad and that the government should slow the whole process down. Query whether she would say that, if she found herself in need of a loan quickly to cover an emergency expense. Third, even these travel websites of loans only display loans from lenders that pay to be listed. There may still be loans with better terms that are not displayed. Thus, the alternate model still does not overcome the primary objections of these consumer groups because they still may not be seeing the “best” deal available.

For all these reasons, there is no credible argument that online lead generation or the ping tree model is inherently deceptive. If they are inherently deceptive, then so is all online advertising, especially advertising that makes use of consumer data. As everyone freely admits, there have been and may still be bad actors in the online lead generation space, and these bad actors may have caused consumer harm. But, there is no argument that the model itself is to blame.

In our next post, we will explore the self-regulatory model as applied to online lead generation.

This post is the second in a series we’re writing on the FTC’s workshop on online lead generation entitled Follow the Lead. In our first post, we explored how online lead generation works. Here, we will discuss two fundamental questions surrounding the role that disclosures can and should play in the industry: What should be disclosed to consumers? What’s the best way to ensure disclosure?

What should be disclosed?

As to the first question, the workshop panelists pointed to several facts  that they believed were inadequately disclosed to consumers. Chief among them was the fact that lead generators are distinct from the lenders, retailers, employers, or other entities that they may serve.  Participants also faulted some lead generators for failing to disclose the nature of the products. A few pointed to the example of a lead generator for online payday loans that “disguised itself” to look like an online job application. Another key theme was that lead generators often failed to adequately disclose how widely the data that consumers submit to them may be disseminated. Of course, most lead generators don’t engage in these practices. Yet, because this market has heretofore been largely unregulated, it should not be surprising that some bad actors have thrived.

What disclosures can’t accomplish?

Panelists also discussed how disclosures can be structured so they accomplish their primary purposes – to help consumers understand the implications of their actions and make decisions accordingly. Central to this discussion was whether a subsequent disclosure could cure an initial deception. To take the loan-disguised-as-job-application example above, the question was raised: Could a disclosure on the landing page cure the deception caused by including a link to a loan application among a list of job openings? The answer that the panelists reached, and with which we agree: probably not.

Is a “reasonable expectation of consumers” standard the answer?

Looking at this problem, one panelist suggested that no amount of disclosure could cure the “fundamental” deceptiveness of the lead generation market because the website’s use of the information, among other practices, did not comport with the “reasonable expectations of consumers.” It’s unclear what the panelists that used this phrase meant. But, if it was more “know-it-when-you-see-it” regulation, many industry members believe that’s not the answer.

According to industry members, a “reasonable expectations” standard, while reasonable-sounding, is likely to be unreasonable and unworkable in practice for several reasons. Over time, it would likely devolve into a “least sophisticated consumer” standard.  Under that standard, if any consumer misunderstands a product or service, however willfully blind he or she may be to obvious signposts, the business is liable for having violated UDAAP. This creates uncertainty and increases costs for consumers and businesses alike. Such a standard may also lead businesses to chase their tails over issues that are exceedingly unlikely to ever cause a problem.

To its credit, the FTC opened the workshop by discussing a study finding that the ability to sell consumer information led to lower costs for consumers and higher quality financial products being offered. So, the destructiveness that a “reasonable expectations standard” may have on the marketplace is real and has the potential to deprive consumers of the benefits of this valuable service.

Industry Suggestions for Achieving Appropriate Disclosure

How then do we ensure appropriate disclosure? It’s a difficult question, especially given two facts that other panelists pointed out: First, consumers don’t generally read existing disclosures. Second, the industry is fragmented, making regulation of the whole process exceedingly difficult. While there are no easy solutions to this problem, panelists suggested that there are some commonsense readily-available tools that industry and government can use to dramatically improve the lead generation marketplace for consumers and businesses alike:

  • One Step Up and One Step Down: Each player in the lead generation process can take the time to look upstream and downstream to see, for example, from whom they are purchasing leads and to whom they are selling leads. They can take the time to audit the affiliate websites of the sellers and the buyers. For the affiliates from whom they purchase leads, they can ask to see copies of their websites and review the content periodically. For sellers who are lenders, check licenses, check websites and disclosure forms, and check loan terms, among other things. A panelist from Lending Tree described the company’s efforts in this regard as being remarkably successful.

 

  • Let Consumers Help: Most websites already contain “report abuse” or “flag problem” boxes or general complaint portals. Web advertisers such as job posting sites can monitor these responses and make changes to posts that consumers actually find to be misleading. This gets around the problem of constantly getting into consumers’ heads and guessing about whether they were deceived. Instead, let’s focus on what they actually find to be problematic.

 

  • Standardized Disclosures: From a regulatory perspective, government can work with industry to develop standardized plain-language disclosures, as exists with nutrition labels, tobacco warnings, or TILA interest rate disclosures. That way, both consumers and businesses could enjoy certainty and the efficiencies and cost-savings that would follow. When it comes to privacy disclosures, better yet would be a government-approved menu of form disclosures that a business could choose from, to provide the clarity and flexibility needed to make the marketplace work effectively.

To go back to our main theme, none of the problems that the panelists identified are caused by lead generation in and of itself. The deception is caused by a combination of bad actors and consumers who aren’t devoting full attention to the road. Many in the industry believe that it would be better to structure the solution around those problems: let the government create a few standardized “bright light” disclosures about the key issues that consumers care about to keep them alert; require industry participants to take reasonable steps to make sure they aren’t benefitting from reckless conduct; and keep consumers behind the wheel of deciding what works best for them.

In our next post, we’ll discuss the allegation that lead generation is “inherently deceptive” and contrast it with the FTC’s own findings that the ability to sell data results in better financial products at lower prices for consumers.

On October 30, the FTC presented a workshop on lead generation entitled Follow the Lead. Online lead generation is an area receiving increased regulatory scrutiny by the FTC and other regulators, including the CFPB. Over the next several days, we will be presenting a series of posts highlighting key issues in the industry and likely targets for CFPB and FTC enforcement activity. In this first entry, we provide a high-level overview of online lead generation’s five-stage process.

Stage One: A Consumer “Raises Her Hand

In Stage One, a consumer takes some concrete action online expressing interest in a product or service. Often, this consumer interest is first reflected in an online search. Various players in the online advertising market work to optimize what consumers see when they enter particular search terms. Upon viewing the search results and targeted advertisements that appear alongside or embedded within the search results, a consumer then clicks, allowing anyone with access to the click data to get a better sense of what the consumer is interested in. The consumer’s expression of interest, by itself, is not enough to generate a marketable lead, however. The interest data must be combined with a way of contacting the consumer.

Stage Two: Converting Interest into a Lead

There are several ways that this may occur. For example, after clicking an online advertisement, a consumer may be redirected to an affiliate website containing a form to fill out. An advertisement may also allow a consumer to “click to call” a live salesperson.

Online leads may also be created by aggregating data about consumer behavior in different online spheres. For instance, a consumer may visit a shopping website and search for socks. A third party may purchase the click data, incorporate personal contact information obtained from another source such as an online retailer that can link the consumer’s IP address to contact information,  and create a lead that can be followed-up on by a specialty sock retailer.

Each of these different aspects of lead creation is often handled by a different company that specializes in hosting web forms, managing “click to call” phone centers, or aggregating data, for example. Once these entities have created the lead, they work to sell or otherwise monetize it to earn a profit, often through resellers.

Stage Three: Lead Resellers Package and Auction Leads

In Stage Three, lead resellers connect lead creators with lead purchasers. Lead resellers maintain networks of lead creators whose leads they buy at prearranged prices.  Lead resellers also maintain networks of companies interested in purchasing leads with certain characteristics. When leads come in from the creators, the resellers filter them and present lead purchasers with leads matching their specifications.

Stage Four: Selling the Lead or Lead Data to a Purchaser

In Stage Four, purchasers buy the leads from resellers, often through a reverse auction process referred to as a “ping tree.” In the reverse auction, various purchasers set prices that they are willing to pay for leads. The reseller then presents leads matching the purchasers’ specifications to the list of purchasers with the high bidder being given the first opportunity to buy the lead and so on until the lead is sold or the buyer list has been exhausted.

After a lead is purchased, lead creators, resellers, and even purchasers may sell the lead or some data from the lead to other purchasers through a practice known as “re-marketing.” Critics of this practice say that it causes consumers to be bombarded by “unwanted” advertisements. Proponents argue that it gives consumers more choices and information which helps them make better decisions.

Stage Five: The Lead Purchaser Reaches Out to the Consumer

Stages One though Four often happen within seconds of a consumer expressing interest in the product or service. In Stage Five, the purchaser reaches out to the consumer in an attempt to close the deal. Lead purchasers do so in several ways. Some simply call or email the consumer. Others present the consumers with a series of targeted offers or buying choices through a website or “landing page.”

Potential Problems

Participants in the FTC workshop raised several consumer protection issues with this process, which we will explore in subsequent blog posts. Some view the process as inherently deceptive. They argue that the information that consumers receive from the lead purchasers is not an accurate reflection of the consumers’ buying choices because the information pertains only to a limited subset of products or services offered by the lead purchaser. Of course, by this standard, any advertisement  would fail, given that none of them present consumers with the full range of choices on the products or services that could potentially fulfill the consumers’ needs. Rather, most advertisers market their own products exclusively.

Other participants raised questions about the role consumer disclosures should play in lead generation. Some said that disclosures should be made more robust and prominent. Others argued that too many disclosures cause information overload.  Still others said that disclosures don’t matter because consumers don’t read them. There does not appear to be any consensus on this issue.

More fundamentally, if a balance needs to be struck on any of these issues, who should decide how that happens? Currently, the lead generation industry is largely unregulated by the government, except through a handful of federal and state laws, highlighted a few years ago in a GAO report, and a patchwork of federal and state agencies. Right now, many lead generators submit to industry regulation through membership in the Online Lenders Alliance and its “best practices” or other organizations such as the Better Business Bureau. We know that the CFPB is stepping in to this area and will doubtless take a leading role in defining whether certain conduct is deceptive, the proper role of disclosures, and how the industry will be regulated going forward.

In our next post, we will explore the disclosure-related issues that came up in the FTC workshop and how those issues are likely to play out as the industry evolves.