In June 2017 the Connecticut General Assembly passed Public Act 17-38, which establishes a new state license for lead generators. This state license is the first to narrowly focus on lead generators, an industry which is receiving increasing scrutiny from regulatory agencies at both the federal and state levels. The new lead generator license is Connecticut’s second license to apply to lead generating activities. The other license – Connecticut’s small loan company license – has a much broader scope and covers a wide range of small loan and payday lending activities, including lead generation for such loans. Vermont is the only other state to explicitly license lead generators, but does so through its loan solicitation license, which mentions “lead generation” as one of the many activities covered by the license.
Beginning on Jan. 1, 2018, any person acting “directly or indirectly” as a lead generator for residential mortgage loans will be required to obtain a lead generator license from the Connecticut Department of Banking. This means that any person or company that collects information on prospective mortgage customers with the intent to sell that information to someone else will be required to obtain a state license. Additionally, those performing marketing services or “direct[ing] a consumer to another person” for a mortgage loan will be required to obtain this license, so this license could also potentially cover non-data-gathering activities such as advertising mortgages on a website, or acting as a middleman between a borrower and a mortgage lender. This could affect marketplace lenders or even real estate websites that offer to connect potential homebuyers with mortgage lenders.
Those interested in obtaining this new lead generator license can start applying for it now – the license application became available on NMLS on Nov. 1, 2017.
While the Connecticut license is currently limited to lead generation in the residential mortgage industry, the lead generation industry as a whole has been receiving increased attention in recent years from both state and federal agencies. In the broader lead generation space, lead generators gather information from prospective consumers, typically by advertising financial products or services. Interested consumers will contact the lead generator and provide information such as their name, address, and income. The lead generator then sells this information to financial service companies who will contact the consumer to market financial products and services.
Over the past few years, federal and state agencies have sought to rein in bad actors in the lead generation industry through enforcement actions. In 2015, the CFPB brought an enforcement action against a lead broker (a seller of leads who buys the leads from others) for failing to monitor the fraudulent debt collection scheme in which the purchaser of the leads was engaged. The respondent was ordered to pay $21,000 in restitution. More recently, in September 2017, the CFPB issued a consent order against a lead generator that sold its leads to lenders that violated state interest rate limits. The CFPB concluded that the lead generator had committed an “abusive” act or practice and imposed a $100,000 civil money penalty.
At the state level, the New York Department of Financial Services (NYDFS) has been particularly aggressive in this space. In 2013 they sent subpoenas to 16 lead generation firms. Two years later they issued a consent order against one of those firms, Selling Source, finding that Selling Source sold its loans to a network of payday lenders that violated New York law. The NYDFS imposed a civil money penalty of $2.1 million. Another consent order followed in 2016 against a second lead generation firm, Blue Global LLC, finding similar violations and imposing a $1 million penalty.
The compliance concerns are growing for lead generators. In addition to following federal and state UDAAP statutes and other consumer protection laws, several states have laws that specifically impose advertising restrictions and disclosure requirements upon lead generators. Moreover, lead generators must learn from past enforcement actions and monitor the conduct of their business partners. Otherwise, they may find themselves subject to an enforcement action based on the theory of “recklessly” assisting in the illegal actions of the purchaser of their leads. Lead generators must now also pay attention to state licensing requirements in Connecticut and Vermont, obtain the correct licenses, and stay on top of licensing compliance requirements such as recordkeeping, annual reporting, and examinations by the state banking departments.
For more information on state licensing and compliance requirements, Bloomberg Law subscribers can access the Banking & Finance State Law Chart Builders. For more information on CFPB enforcement actions, Bloomberg Law subscribers can access the CFPB Enforcement Tracker and CFPB Enforcement Analytics.
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