Advertising Mistakes

Among the missing terms were rate increases, payment increases and negative amortization. Also missing were annual percentage rates and finance charges.

Some of the alleged advertising practices were directly addressed by Regulation Z amendments under the TILA that the Federal Reserve Board adopted last summer with an effective date of Oct. 1, 2009. As amended, Reg Z will require more clear and conspicuous disclosures for mortgage loan advertisements.

This includes introductory rates and each rate that will apply during the loan term as well as introductory and subsequent payments during the loan term. The amended Reg Z also will prohibit the advertising of a rate for a mortgage loan that is below the rate at which interest accrues, and will regulate the use of the word “fixed” in advertisements for an adjustable-rate mortgages to provide for clearer disclosures of the adjustable feature.

The use of the name of a consumer’s current lender in a mortgage loan advertisement also will be prohibited unless the advertisement discloses the name of the party making the advertisement with equal prominence and includes a clear and conspicuous statement that such party is not associated with, or acting on behalf of, the consumer’s current lender.

Although the express requirements and prohibitions under Reg. Z are not yet effective, this did not deter the FTC from taking the position that the mortgage firms’ advertisements were deceptive and violated the Federal Trade Commission Act because they failed to adequately disclose additional terms pertaining to the advertised mortgage loan.

Among disclosure deficiencies were:

• That the advertised low monthly payment amount: (1) applies only for a limited period of time, after which the monthly payment amount will increase; (2) does not include the amount of interest that the consumer owes each month; and (3) is less than the monthly payment amount (including interest) that the consumer owes, with the difference added to the total amount due from the consumer. 
• That the advertised low rate: (1) applies only for a limited period of time, after which the rate will increase; (2) does not include the amount of interest that the consumer owes each month; and (3) is less than the interest rate that the consumer owes, with the difference added to the total loan balance.

The FTC also asserted that the FTC Act was violated because one of the advertisements represented, expressly or by implication, that the advertised rate was fixed for the life of the loan — even though that was not the case.

The FTC act was also allegedly violated in another advertisement because it represented, expressly or implicitly, that the offer was made by the consumer’s current lender, and did not adequately disclose that the offer was made by the firm.

The agency further asserted that the advertisements violated the TILA because they included terms triggering additional disclosures of loan terms under the TILA, and that the advertisements did not include, or did not appropriately include, the additional disclosures.

Related:
Deceptive ARM Ads Lead to Settlements
Three mortgage firms have settled allegations of deceptive advertising with the Federal Trade Commission.

Richard J. Andreano is a partner at the Washington, D.C.-based law firm of Weiner Brodsky Sidman Kider PC. He focuses on regulatory compliance, transactional and administrative matters for residential housing and financial clients. He graduated with honors from the The George Washington University Law School, J.D., in 1983.
e-mail Rich at andreano@wbsk.com