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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2004

Compliance: From A to Z

Mortgage originators (including brokers) must consider various issues when advertising or otherwise promoting their business.  They must follow the technical requirements of federal and state laws as well as the subjective requirements of fair lending and deceptive practice laws.  As a mortgage originator, your advertising is often the first and/or only face that the public sees.  And, perhaps more importantly, your advertising might be the proverbial straw that results in an examination from a regulator.

The primary source of advertising for mortgage originators is the newspaper media.  Unfortunately, I have never read a paper where I have not identified several advertising violations.  These obvious violations would lead one to wonder whether the regulators are enforcing these regulations.  Indeed, they are beginning to do so.  Within the past six months, I have received calls from several originators – all in different states – asking for help with their advertising policies and procedures.  Each of these originators indicated that their new enthusiasm for advertising compliance resulted from regulatory criticisms and/or fines.

Definition of Advertising

The Truth in Lending Act (TIL) via Regulation Z Section 226 defines "advertisement" as "a commercial message in any medium that promotes, directly or indirectly, a credit transaction".  The TIL Staff Commentary further defines advertisements to include "messages inviting, offering, or otherwise announcing generally to prospective customers the availability of credit transactions, whether in visual, oral, or print media".  Examples cited include:

  • Messages in a newspaper, magazine, leaflet, promotional flyer, or catalog.
  • Announcements on radio, television, or public address system.
  • On-line messages, such as on the Internet.
  • Direct mail literature or other printed material on any exterior or interior sign.
  • Point-of-sale displays.
  • Telephone solicitations.
  • Price tags that contain credit information.
  • Letters sent to customers as part of an organized solicitation of business.
  • Messages on checking account statements offering auto loans at a stated annual percentage rate.
  • Communications promoting a new open-end plan or closed-end transaction.

Per the Staff Commentary, advertisements do not include:

  • Direct personal contacts, such as follow-up letters, cost estimates for individual consumers, or oral or written communication relating to the negotiation of a specific transaction.
  • Informational material, for example, interest rate and loan term memos, distributed only to business entities.
  • Notices required by federal or state law, if the law mandates that specific information be displayed and only the information so mandated is included in the notice.
  • News articles, the use of which is controlled by the news medium.
  • Market research or educational materials that do not solicit business.
  • Communications about an existing credit account (for example, a promotion encouraging additional or different uses of an existing credit card account).

Now that we know what is and is not an advertisement, what can we say in our advertisement?

Technical Requirements of Truth in Lending

Truth in Lending (TIL) Act's Regulation Z is the primary federal law providing guidance in the technical aspects of loan advertising.  Regulation Z requires the following:

  • If an interest rate is stated, it must be stated as an "annual percentage rate" or an "APR".  However, a simple interest may also be stated but only if it is not stated in a more conspicuous manner than the APR.
  • If the annual percentage rate may be increased after consummation, the advertisement shall state that fact.
  • If an advertisement states specific credit terms, it shall state only those terms that are actually available.
  • If any of the following trigger terms are reflected in the advertisement:  1) the amount or percentage of any downpayment, 2) the number of payments or period of repayment, 3) the amount of any payment, or 4) the amount of any finance charge; then the following must also be stated:  • the amount or percentage of any downpayment, • the terms of repayment, and • the annual percentage rate.

The first three Reg Z requirements above are relatively straightforward.  The last requirement is usually what trips up the advertiser.  Please carefully reread the last requirement making note of the four trigger terms.  The following comes in part from Regulation Z's Staff Commentary regarding when a triggering term has been used:

  1. Downpayment. The dollar amount of a downpayment or a statement of the downpayment as a percentage of the price requires further information. By virtue of the definition of downpayment, this triggering term is limited to sale transactions. It includes such statements as:  "Only 5% down", "As low as $100 down", and "Total move-in costs of $800".  Interestingly, the Commentary indicates that if no downpayment is required (i.e. “no downpayment" or “100% financing”), then there is not a trigger.
  2. Payment period. The number of payments required or the total period of repayment includes such statements as:  "48-month payment terms" and "30-year mortgage".  However, there appears to be an undocumented regulatory exclusion for advertisements that use the term "30 Year" and "15 Year" when these terms are used to identify rather than describe the product, such as in a heading that supercedes the interest rate.  (I even talked to a former coworker from my regulatory days who acknowledged that regulators had fallen down on the job with regard to this issue.)  Nevertheless, regulators can change their mind at any time since it appears that the term "30 Year" would clearly identify the prepayment period.
  3. Payment amount.  This term is rarely used by mortgage advertisers.
  4. Finance charge. The dollar amount of the finance charge or any portion of it includes statements such as:  “$500 total closing costs" and “$50,000 mortgages, 2 points to the borrower”.  In the last example, the $1,000 prepaid finance charge can be readily determined from the information given.  Had the ad not identified the $50,000 amount, there would be no problem.  Statements of the annual percentage rate or statements that there is no particular charge for credit (such as “no closing costs”) are not triggering terms.

Now that triggering terms are hopefully clarified, we need to look at the three additional disclosure items that must be identified when a triggering term is presented.  Somewhere in the advertisement the amount or percentage of any downpayment must be reflected along with the annual percentage rate if it has not already been indicated.  Also, the terms of repayment must be reflected.  Regulators have stated that the following terminology is acceptable "360 monthly payments of $800.83 per $100,000 borrowed" or "360 monthly payments varying from $400.82 to $900.45 per $100,000 borrowed".

With respect to advertising home equity loans and Regulation Z, be careful.  This topic merits its own article.  There is no problem stating that your company originates home equity loans; however, if you plan to reflect any details, please refer to Regulation Z's Section 226.16 and the accompanying Staff Commentary.

Technical Requirements of State Requirements

States have their own quirky and diverse technical advertising requirements.  Please consult your own state's laws and regulations.  Advertising requirements range from simply having to reflect your license number in your advertisements to having to obtain prior regulatory approval for each advertisement.  My advice is to pay special attention to your state's requirements since your state regulator is probably more familiar with their own regulations than they are with federal regulations.

Next Month

The next article in this series about advertising will address Fair Lending Issues, Deceptive Trade Practices, Telemarketing, Website and Emails, and Record Retention.


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