One of the popular buzzwords these days is disruption. For example, Zillow came along and, through the aggressive marketing of leads, disrupted the ways in which many mortgages were originated. According to some reports, the Consumer Financial Protection Bureau is now disrupting Zillow’s tactics. Lead purchasers can protect themselves in several ways.

In the past month, at least two bloggers, MortgageShots.com and Rob Chrisman, have reported that CFPB investigators have sought information about Zillow lead purchases and then informed the subjects that the way Zillow sells its leads creates paid referrals and therefore violates the Real Estate Settlement Procedures Act (RESPA). Zillow’s sales procedures supposedly amount to endorsements.

These reports have not been independently verified, so it is best to view them critically. But, from the CFPB’s enforcement action against Prospect Mortgage, LLC, we know that the bureau believes that certain features of a lead arrangement—like active encouragement, financial incentives, and exclusivity provisions—can constitute RESPA violations. We also know that the CFPB does not take into consideration whether the lead payment was for actual services rendered, which should trigger a statutory safe-harbor under RESPA Section 8(c)(2). Nonetheless, the CFPB has not yet taken any public action with regard to Zillow leads.

Online lead purchases are not going away anytime soon. The line between a prohibited referral and a permissible lead purchase can be thin. Nevertheless, things that you should consider when agreeing to purchase leads include:

  • Make that the sale is only for raw information (name, address, email address, and phone number) and NOT for the seller’s endorsement or recommendation that the consumer hire you. As Erik Benny, Jay Varon and Jennifer Keas of Foley & Lardner, LLP, advise, “Sold leads should be cold leads.” They also point out that paying only for leads that result in closed loans could be problematic because it suggests an implied incentive to recommend the lead buyer. According to them, “many lead sharing agreements pay for each lead generated, usually with some cognizance and estimation of whether the payments made will likely be profitable.”
  • Avoid exclusive contractual arrangements, in which the seller promises not to market leads to any competing business.
  • Do not enter into contracts that allow the seller to share lead money with its agents or employees based on successful or attempted referrals.
  • Do not permit the seller to introduce you to lead targets. At least one broker got into trouble with Prospect Mortgage because its agents earned lead fees by introducing prospective customers to loan officers at Prospect Mortgage.
  • Do not allow the seller to attach certain descriptions, like “preferred provider,” to your business.
  • Be careful about establishing any other business dealings with the lead seller. The totality of the relationship may cause the cost-benefit analysis to shift in favor of referrals and away from lead sales.
  • Parties to co-marketing agreements should not divide the costs of leads obtained through joint advertising. Instead, each party should pay fair value for the leads it purchases.