I want to extend appreciation to Howard Lax, a principal with Lipson, Neilson, Cole, Seltzer & Garin, P.C., in Bloomfield Hills. He specializes in financial institutions consumer compliance and regulatory affairs, and real property law. Lax is a frequent presenter on a wide range of seminar topics to statewide and national associations within the banking, lending and mortgage industries. His guest column appears in the April issue of Michigan Banker and I am also posting on our blog, too. He can be reached at email@example.com.
By HOWARD LAX
Advertising regulations are often overlooked as a compliance issue. Nearly a dozen laws directly or indirectly regulate loan term advertising, including TILA, RESPA, FCRA, CFPB MAP and MARS rules, FHA and ECOA, Do Not Call, Do Not Fax, and Do Not Spam laws, FTC endorsement rules, and a plethora of state laws.
Financial institutions must comply with the new reality in which puffing and misleading advertising have been outlawed. Common catch phrases such as “easy credit,” “no credit, no problem,” and “save your home,” and mailers that hide the true nature of the promotion, are illegal when advertising mortgage credit, and questionable for other consumer credit.
The regulatory framework will expand as the CFPB identifies and outlaws abusive marketing practices.
Commonly ignored compliance issues are listed:
1) Loan Term Disclosures
Lenders and brokers must be entirely forthright when advertising loan terms. Ask the following questions:
- Is the APR noted prominently and closely to the advertised interest rate, and is the advertised rate a simple interest rate?
- If the advertisement includes a “trigger term” are the APR, down payment, periodic payment amount(s), number of periodic payments, and other related charges stated clearly and conspicuously?
- Does the advertisement disclose that the rate may increase, and are the time periods and payment amounts for the various rates disclosed?
- For mortgage credit, does the advertisement state that the payment amounts do not include taxes and insurance premiums?
- Are the advertised terms generally available to the public?
- Does the advertisement state how long the terms are available, and are the terms available to a reasonable number of borrowers?
2) Prohibition Against Misleading Advertising
Put yourself in the position of the least sophisticated consumer when reviewing an advertisement.
- Could an uneducated or gullible consumer be misled by the advertisement?
- Is the term “fixed” used in relation to a variable rate loan?
- Does the advertisement use terms such as “official”? Does it feature a HUD, FNMA, FHLMC or other GSE or government logo, symbol, landmark, or a facsimile thereof that might mislead a person to believe that the loan or the lender is sponsored or approved by the government or a GSE?
- Is the advertisement designed to lead a person to believe it is from their current lender?
- Does the advertisement imply that the lender may fix or repair credit, consolidate or waive obligations, or avoid default in a current loan?
- If housing counseling is offered, is the counselor HUD approved?
- Does the advertisement “puff” the capacity of the lender to deliver the best product, expert service, or quick approval, imply tax benefits, or downplay the conditions for credit approval?
- If the advertisement implies that approval is likely, are all of the material conditions for approval stated?
- Does the advertisement castigate the terms or benefits of the borrower’s current loan?
- Are claimed benefits of the loan product or lender backed by reliable statistical data?
- Are endorsements supported by statistical evidence and use of the product?
- Are payments for endorsements disclosed?
3) Fair Housing and Equal Credit Opportunity
Business practices that result in a disparate impact based on some protected classification remain illegal if other means are available to achieve the legitimate goal of the business practice with less of a disparate impact. Advertisements should demonstrate the lender’s commitment to providing credit on an equal basis to all by including an equal housing or equal credit opportunity logo. Advertisements should be published in a broad array of forums to reach members of the community equally.
Solicitations based on information obtained from a credit bureau must include a firm offer of credit. The material conditions to obtain credit and specific disclosures must be included in the advertisement.
RESPA prohibits referral fees and sharing of income from settlement services when services are not provided. Employment compensation for one-on-one solicitations is acceptable, but compensation paid to independent contractors may be a kickback. Compensation of referral sources should be based on justifiable market rates for true business services, so that none of the payment is for the referral of settlement service business. Success fees are an unearned split of settlement services fees, and cannot be paid for marketing.
6) Electronic Communication
Twitter, Facebook, LinkedIn, and other social networks are subject to Do Not Fax, Do Not Spam, and Do Not Call rules. Plaintiffs’ attorneys are making a good living by recovering statutory damages for unsolicited electronic communications.
7) SAFE Act
The first communication with a consumer seeking a mortgage loan must include an NMLS registration number. Hence, The NMLS identification number of the entity and any mortgage loan originator named in the advertisement must be listed in the advertisement.
Business units do a poor job of policing advertising because the rules hinder sales. Compliance staff should always review the gauntlet of regulations governing advertising before publication. Once an advertisement is published, there is no recall button to prevent regulatory liability.
Knowing what is and isn’t allowed by law in terms of loan advertising is critical. You and your compliance professionals will need to be aware of these issues to ensure that your message can be hard by potential clients.