In a new report, the Federal Trade Commission expressed concern about lead generation, particularly in the context of the payday lending industry.

What happened

Last October, the Federal Trade Commission (FTC) hosted a public workshop entitled "Follow the Lead," where stakeholders and experts discussed online lead generation practices and consumer protection issues.

To summarize the event, the agency published a Staff Perspective on the workshop. "Online lead generation is nearly ubiquitous in the modern marketplace, connecting consumers who are interested in goods or services with the merchants or providers who can offer them," the FTC wrote. "But because lead generators often operate behind the scenes in complex ways, consumers and many businesses may know little about what they do and how they do it."

The mechanics of online lead generation begin with a consumer expressing interest in a product or service, typically completing a website form. That information becomes a lead that is then sold directly to a merchant, collected with other leads and sold to an aggregator, or perhaps supplemented with additional information (often from data brokers).

A significant part of the lead marketplace, payday lending lead generation takes this process to another level with a "ping tree," the FTC explained. To immediately underwrite small-dollar, short-term loans, payday lenders ask their lead generators to collect detailed personal and financial information for a loan application, including data about the borrower's employment, financial accounts, and Social Security number.

Once the leads are collected and passed on to aggregators, the aggregators use an "automated, instantaneous, auction-style process" known as a ping tree to sell the leads, the agency said. Lenders with access to the ping tree provide specific criteria for borrowers and the prices they are willing to pay. "Using this information, the ping tree transmits leads through the automated lender network in real time—presenting leads to potential buyers electronically until the lead is matched with, and accepted by, a lender," according to the Staff Perspective.

The purchasing lender then presents the consumer with an offer for a loan or, if no lender expresses interest, the remnant lead may be sold to a client with alternative products, such as credit cards or debt relief programs, the FTC said.

While acknowledging potential benefits to consumers—such as quicker matchmaking with a broader range of businesses and more accurate underwriting decisions—the Staff Perspective expressed concern about the lack of transparency involved, aggressive or possibly deceptive marketing, and the potential misuse of consumers' sensitive information.

Consumers may have no idea that their information "can be sold and re-sold multiple times—and further that, as a result, they may be contacted by numerous marketers that are unfamiliar to them," the FTC wrote. "Additionally, consumers may not be aware that lead generators sometimes sell their information to the companies willing to pay for it (or pay the most for it), as opposed to those best suited to offering them the products or services they seek."

To combat this problem, companies "should disclose this type of information to consumers clearly and conspicuously to add transparency to the lead generation process, and allow consumers to make informed choices about when and how to share their personal information," the agency recommended.

The online lead generation marketplace also presents the potential for aggressive or potentially deceptive marketing, the FTC said. Lead buyers should review claims to consumers and keep an eye on consumer complaints to link specific entities to problematic practices, the agency advised, especially companies that deal in sensitive information such as Social Security or financial account numbers.

Specific to payday lending, the FTC noted "significant concern" that the collection and sharing of such sensitive information "increases the risk of misuse and harm to consumers. At the workshop, some speakers suggested that lead aggregators may be failing to ensure the companies purchasing their leads do not use the information for unauthorized or other unlawful purposes.

"Indeed, the FTC has filed several law enforcement actions alleging that fraudulent operators have been able to obtain payday loan leads for nefarious purposes, such as making fake debt collection calls or charging consumers' financial accounts without authorization," the Staff Perspective noted.

In addition, some lead generators are suspected of selling remnant leads to non-lenders that unlawfully target consumers, the agency said.

Lead sellers should be cautious when selling remnant leads, the FTC cautioned, as depending on the circumstances, "they could be liable under the FTC Act if the buyer has no legitimate need for the information. This is especially important given that participants also pointed out that the privacy policies on many publisher websites provide few restrictions on the use or sale of the consumer information they collect, leaving consumers vulnerable."

Further, publishers and aggregators should vet potential lead buyers before doing business with them, the agency added, and monitor their lead buyers for any misuse of consumer data. "Such vetting could include making sure that lead buyers have not been subject to an FTC action or other legal action for misusing consumer information," the FTC said. "Ignoring warning signs that third parties are violating the law and pleading ignorance will not shield companies from FTC actions."

To read the FTC Staff Perspective on the "Follow the Lead" Workshop, click here.

Why it matters

Online lead generation may be common in the marketplace, but the FTC is clearly keeping a close eye on the role of payday lending in the industry. Lenders should consider the Staff Perspective a warning, with recommendations from the agency to increase transparency in the lead generation process, avoid the sale of remnant leads to buyers with no legitimate need for sensitive data, and vet potential lead buyers and monitor them for misuse of consumer data. As the FTC cautioned, "[i]gnoring warning signs that third parties are violating the law and pleading ignorance will not shield companies from FTC actions," and the workshop discussion and resulting paper will "inform our ongoing law enforcement work to protect consumers from unlawful conduct."