Written by Jennifer Dozier*
When advertising closed-end credit products, lenders and brokers must be mindful of the requirements of Regulation Z. Within the last year, amendments to Regulation Z went into effect that restrict certain practices when advertising closed-end credit secured by a dwelling These same amendments also require additional disclosures when advertising certain loan terms. This article will help guide lenders and brokers through the new "dos" and "don'ts" of closed-end credit advertisements.
The "Dos"
Regulation Z has long required the disclosure of additional, specific information if an advertisement contains a "triggering term" - i.e., the amount of any downpayment, the number of payments or repayment period, the amount of any payment, or the amount of any finance charge. In addition to this long-standing requirement, Regulation Z now imposes additional disclosure requirements specific to advertisements for closed-end credit secured by a dwelling.
First, if an ad for credit secured by a dwelling (i.e., a mortgage ad) includes a simple annual rate of interest and more than one rate of interest may apply during the term of the advertised loan, additional disclosures are required. Specifically, the ad must state each annual rate of interest that will apply, the period of time for which each rate will apply, and the annual percentage rate. These disclosures must be "clear and conspicuous" - meaning the information must be disclosed with equal prominence and in close proximity to the simple annual interest rate triggering the disclosures. Generally, the clear and conspicuous standard will be met if the additional information is disclosed directly above or below or immediately next to and in the same type size as the rate of interest.
Second, if a mortgage ad states any payment amount, additional terms must also be disclosed. The ad must include the amount of each payment that will apply during the loan (including a balloon payment), the period of time for which each payment will apply, and for ads promoting first-lien loans, a statement that the payment does not include taxes and insurance (if applicable) and that the actual payment obligation will be greater. These disclosures again must be "clear and conspicuous," but in this case different standards apply to different disclosures. The statement regarding the exclusion of taxes and insurance from the payment amount must be in close proximity and prominent but not "equally prominent" to the payment amount. All other required disclosures must be equally prominent and in close proximity to the advertised payment. As with the rate disclosures above, this standard will generally be met if the additional information is disclosed directly above or below or immediately next to and in the same type size as the payment amount.
Finally, printed or internet advertisements for loans secured by the consumer's principal dwelling must include additional disclosures if the ad promotes a product with a potential loan-to-value ratio of greater than 100%. Specifically, the ad must include the following statements: (1) the interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal income tax purposes; and (2) the consumer should consult a tax advisor for further information regarding the deductibility of interest and charges.
The "Don'ts"
As revised, Regulation Z also now contains seven prohibited practices - the seven deadly sins - all directed at curbing abuses related to the promotion of consumer home loans.
Fixation on "fixed." It was not uncommon to hear advertisements on the radio for various "fixed" rates or payments used in connection with loans which were not fixed rate fully amortizing loans throughout their term. In order to curb this purported abuse, the regulation restricts use of the word "fixed." It is prohibited to use the word "fixed" when referring to rates, payments, or a credit transaction generally when an ad is promoting a variable-rate product (or other transaction where the payment will increase) unless additional disclosures are made.
If the ad is solely for a variable-rate mortgage, the phrase "adjustable rate mortgage," "variable-rate mortgage," or "ARM" must appear before the first use of the word "fixed" and be at least as conspicuous as any use of the word "fixed" in the entire advertisement. Moreover, each time the word "fixed" is used to apply to the rate or payment, it must be accompanied by an equally prominent and closely proximate statement of the time period for which the rate or payment is fixed, and the fact that the rate may vary or the payment may increase after that period.
If the advertisement is for a non-variable rate mortgage where the payment will increase, rules are similar. For these ads, each use of the word "fixed" when referring to a payment amount must be accompanied by a statement of the time period for which the payment is fixed and that the payment will increase after that period. These disclosures must be equally prominent and closely proximate to each use of the word "fixed."
If the ad includes both variable and non-variable rate transactions, in essence, the creditor must follow the rules applicable to each type of ad.
Careful with comparisons. Advertisements comparing actual or hypothetical payments or rates to payments or rates that are available under the advertised product (for less than the full term of the loan) are prohibited unless specific disclosures are made. Specifically, the ad must include a clear and conspicuous comparison to the rate and/or payment disclosures (required when more than one rate or payment will apply). Additionally, if the ad is for a variable-rate loan and the advertised simple annual rate or payment is based on the index and margin that will be used for later adjustments, the ad must include a statement that the payment or rate may be adjusted and when the first adjustment will occur. This statement must be equally prominent and in close proximity to the advertised payment or rate. For purposes of this restriction, a "comparison" includes a claim regarding how much a consumer may save under the advertised loan.
Don't misuse the government. It is impermissible to make any statement in an advertisement that the credit product offered is a "government loan program," "government supported loan," or is endorsed or sponsored by any government entity, unless the advertisement is for an FHA loan, VA loan, or a similar loan program that is actually government endorsed or sponsored. For example, a statement that the Federal Community Reinvestment Act entitles the consumer to refinance at the low advertised rate is prohibited because it implies that the loan being advertised is sponsored or endorsed by the federal government.
Do not masquerade as the borrower's current lender. It is now impermissible to use the name of the consumer's current lender in an advertisement (when the ad is not sent on behalf of or by the current lender) unless additional disclosures are made. More particularly, the ad must disclose the name of the person making the advertisement (with equal prominence to the name of the current lender), and must include a clear and conspicuous statement that the person making the ad is not acting on behalf of, or is not associated with, the consumer's current lender.
"Debt" Claims. Because of the financial problems many consumers are suffering, the media is still filled with more claims than ever promising elimination, waiver or forgiveness of debt. Now, more than ever, mortgage lenders must be particularly sensitive to such claims in their advertisements, because Regulation Z specifically addresses the issue. It is prohibited to make any misleading claim in an advertisement that the mortgage product offered will eliminate debt or result in a waiver or forgiveness of a consumer's existing loan terms with, or obligations to, another creditor. Examples of misleading (and therefore prohibited) statements include: "Refinance today and wipe your debt clean!" and "New DEBT-FREE payment".
Steer clear of "counselor." While loan originators might counsel their clients regarding mortgages, credit and other financial matters, it is impermissible to use the word "counselor" when referring to a for-profit mortgage broker or lender. This prohibition extends to the employees and other persons working for the broker or creditor that offer, originate, or sell mortgages.
It's Greek to me. While it is permissible for a mortgage advertisement to be in a language in other than English, such advertisements must not be misleading. It is prohibited to disclose within the same ad certain information (such as some trigger terms or required disclosures) only in a foreign language but to provide other information only in English. This is especially troublesome if the triggering terms appear in a foreign language and the additional required disclosures appear only in English. Therefore, a prudent rule-of-thumb is to ensure that the entire advertisement appears in the same language.
Conclusion
While this article doesn't address every factor that must be considered when advertising closed-end credit products, these "dos" and "don'ts" provide a good starting point for drafting compliant advertising.
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