Mortgage Ads On the Straight & Narrow

FTC’s final rule outlines what’s unfair or deceptive in advertisements.

November 22, 2011

In July, the Federal Trade Commission (FTC) issued a final rule relating to unfair or deceptive acts and practices in mortgage loan advertisements.

The rule, which became effective August 19, 2011, applies to state-chartered credit unions (but not to federal credit unions).

While the rule doesn’t specifically mention credit union service
organizations (CUSOs), CUNA believes FTC’s jurisdiction and the final rule would also apply to these organizations.

The FTC will be allowed to enforce the rule and seek civil penalties against violators. The Consumer Financial Protection Bureau and state law enforcement authorities may also bring actions to enforce the rule.

FTC’s rule prohibits any misrepresentation in any advertisement or commercial communication regarding the terms or conditions of any mortgage product (for personal, family, or household purposes) regardless of whether the loan is open- or closed-end.

The agency defines “commercial communication” as any written or oral statement designed to make a sale or create interest in purchasing goods or services regardless of the medium.

Among other things, lenders can’t make misrepresentations about:

  • The annual percentage rate (APR), interest charged, the amount of interest owed each month, and the amount of fees or costs associated with the mortgage;
  • Products sold in conjunction with the mortgage, such as credit life and disability insurance or other add-ons;
  • The variability of interest, payment amounts, or other terms of the mortgage;
  • The type of mortgage being offered, the amount of the loan, and the number, amount, or timing of any payment;
  • The potential for default on the mortgage, the source of the loan, and the consumer’s right to reside in the dwelling;
  • The consumer’s ability to obtain a mortgage, or a refinancing or modification of the current loan; and
  • The availability of counseling services or other expert advice offered to the consumer.

Mortgage advertisements

These examples of mortgage advertisements likely would be deceptive and misleading:

  • A representation that a loan has a very low interest rate but fails to disclose that the rate will increase substantially after a few months;
  • An ad for a low, “fixed-rate” loan that fails to state how long the rate will be fixed. The rate may be fixed for the life of the loan or it may only be fixed for an introductory period;
  • The omission of key terms, such as stating a monthly payment amount but failing to disclose the APR and terms of repayment as required by Regulation Z; and
  • The failure to provide clear and conspicuous terms because they appear in fine print or in an inconspicuous location.

In short, mortgage advertisements must tell the truth and not mislead consumers. An advertisement may be misleading if it omits relevant information or if the ad implies something that isn’t true.

Recordkeeping requirements

The rule requires creditors to keep, for a period of 24 months from the last date of any mortgage advertisement, the following items:

  • Copies of all materially different ads, as well as sales scripts, training materials, and marketing materials regarding any mortgage term;
  • Documents describing all mortgage products available to consumers during the period in which each ad was disseminated; and
  • Documents describing all additional products or services (i.e., credit life or credit disability insurance) that are offered or provided with the mortgages during the period in which the ads ran.

These records may be kept in any legible form, including electronic or hard copy formats. Failure to keep the required records is a violation of the rule.

State-chartered credit unions and CUSOs should become thoroughly familiar with this final rule and establish appropriate policies and procedures to ensure they’re in compliance.

MICHAEL McLAIN is CUNA’s assistant general counsel and senior compliance counsel. Contact him at 608-231-4185.