Prohibited Acts or Practices Violations in Advertisements

QUESTION 

Yesterday, we received the results of an examination. The part dealing with advertisement violations has our Chairman on a major warpath. The examiners found violations of prohibited acts or practices under Regulation Z. He’s already kicked out somebody in the marketing department. But the marketing people always submit their plans and disclosures to the Compliance Department for approval. I think letting go of her was unfair. 

I want to understand how prohibited acts and practices are involved in Regulation Z. I had always thought of it as a straight-out UDAAP issue. Apparently, there are also violations of Regulation Z based on prohibited acts and practices. I hope you can enlighten me since I am confused. 

What are prohibited acts or practices in advertisements under Regulation Z? 

ANSWER 

Getting an adverse report from a banking department can often feel disruptive. Once the corrective measures are put in place to the satisfaction of the regulator, you should be able to feel more sure about implementing protective policies and procedures. Sometimes, practices change over time without updating the process document, or procedures are not properly followed. 

Regulation Z, the implementing regulation of the Truth-in-Lending Act[i] (TILA), imposes restrictions on the advertising of closed-end consumer credit plans.[ii] I can’t tell from your question what aspect of Regulation Z caused your regulator to issue particular adverse findings relating to prohibited acts or practices. However, I think it is valuable to ensure we’re clear about certain aspects that could factor into the analysis. 

As provided in Regulation Z,[iii] all advertisements are subject to the same “clear and conspicuous” standard Regulation Z applies to all disclosures. In July 2008, the Federal Reserve Board amended Regulation Z to expand its standards for this clear and conspicuous standard. Still, TILA and Regulation Z do not prescribe specific rules for the format, such as type size or placement, of the necessary closed-end disclosures,[iv] other than the format requirements that apply to the disclosure of rates and payments.[v] 

Regulation Z addresses electronic advertisements[vi] Internet advertisements[vii] satisfy the clear and conspicuous disclosure standard if the required disclosures are not obscured by techniques such as graphical displays, shading, coloration, or other devices and comply with all the other requirements for clear and conspicuous disclosures applicable to closed-end advertisements generally. 

Television advertisements[viii] comply with the clear and conspicuous disclosure requirement if they are not obscured by techniques such as graphical displays, shading, coloration, or other devices, are displayed in a manner that allows a consumer to read the information required to be disclosed, and comply with all the other requirements for clear and conspicuous disclosures applicable to closed-end advertisements generally, as described in the materials that follow. For example, very fine print in a television advertisement would not meet the clear and conspicuous requirement if consumers cannot “see and read” the information required to be disclosed. 

This brings up the subject of oral advertisements. How the oral advertisement is delivered is critical: clear and conspicuous disclosure in the context of an oral advertisement, whether by radio, television, or other medium, means the required disclosures are given at a speed and volume sufficient for a consumer to hear and comprehend them.[ix] For instance, disclosure of information stated very rapidly at a low volume in a radio or television advertisement would not meet the clear and conspicuous standard if consumers cannot hear and comprehend the information required to be disclosed. 

A little more history is in order. In July 2008, the Federal Reserve Board turned to TILA[x] as the basis for additional authority (sometimes referred to as the Board’s – now the CFPB’s – “unfair trade practice” authority) to impose restrictions on the misleading and deceptive advertising of mortgage loans, including closed-end credit.[xi] The authority is broad,[xii] allowing the CFPB to prohibit acts or practices in connection with mortgage loans it finds unfair, deceptive, or designed to evade the provisions of TILA, and refinancing of mortgage loans it finds to be associated with abusive lending practices or otherwise not in the interest of the borrower. 

Indeed, Regulation Z[xiii] asserts both the CFPB’s authority under the specific advertising provisions of TILA and its unfair trade practice authority regarding mortgage loans under TILA.[xiv] 

The goals of the July 2008 amendments to the advertising requirements, as well as to the other requirements affected by the amendments, were to protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices while preserving responsible lending and sustainable homeownership, ensure that advertisements for mortgage loans provide accurate and balanced information and do not contain misleading or deceptive representations, and provide consumers transaction-specific disclosures early enough to use while shopping. 

I have been asked about the fact that compliance with the July 2008 Regulation Z revisions was not required before specified effective dates raises an interesting question: If the Federal Reserve Board was saying certain practices are unfair or deceptive, presumably they were unfair from the start, were they not? Therefore, can an advertiser afford not to implement them as soon as possible? 

The Board said, in its preamble to the regulations: 

Accordingly, nothing in this rule should be construed or interpreted to be a determination that acts or practices restricted or prohibited under this rule are, or are not, unfair or deceptive before the effective date of this rule.[xv] 

Notice that the Board stated, “are, or are not, unfair or deceptive.” It was conceivable that, prior to the effective date, a court might be asked to consider whether any of the acts or practices were unfair or deceptive. In fact, it was conceivable that a regulatory agency might bring an enforcement action against a specific institution, alleging that the institution had acted unfairly or deceptively based on all the facts and circumstances surrounding that conduct. 

Presumably, in these situations, the Board (now, the CFPB) would be taken at its word, with its statement treated with deference, that is, its adoption of the Regulation Z amendments did not judge the acts or practices as unfair or deceptive prior to their implementation dates. Accordingly, acts or practices occurring before the effective dates of revised rules should be judged on the totality of the circumstances under other applicable laws or regulations, not under the Truth-in-Lending Act. 

Let’s turn to the prohibited acts or practices in advertisements. Seven prohibitions are foundational. 

Specifically, Regulation Z prohibits[xvi] the following seven acts or practices in advertisements for credit secured by a dwelling: 

1. Misleading advertising of “fixed” rates and payments. 

An advertisement for a variable-rate transaction or other transaction in which the payment will increase must not use the word “fixed” to refer to rates, payments, or the credit transaction, unless:

·       In the case of an advertisement solely for one or more variable-rate transactions: 

o   The phrase “Adjustable-Rate Mortgage,” “Variable-Rate Mortgage,” or “ARM” appears in the advertisement before the first use of the word “fixed” and is at least as conspicuous as any use of the word “fixed” in the advertisement; and 

o   Each use of the word “fixed” to refer to a rate or payment is 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. 

·       In the case of an advertisement solely for non-variable-rate transactions where the payment will increase, such as a stepped-rate mortgage transaction with an initial lower payment, each use of the word “fixed” to refer to the payment is accompanied by an equally prominent and closely proximate statement of the time period for which the payment is fixed, and the fact that the payment will increase after that period. 

·       In the case of an advertisement for both variable-rate transactions and non-variable-rate transactions: 

o   The phrase “Adjustable-Rate Mortgage,” “Variable-Rate Mortgage,” or “ARM” appears in the advertisement with equal prominence as any use of the term “fixed,” “Fixed-Rate Mortgage,” or similar terms; and 

o   Each use of the word “fixed” to refer to a rate, payment, or the credit transaction either refers solely to the transactions for which rates are fixed and complies with the second requirement stated above for advertisements solely for one or more variable-rate transactions, if applicable, or, if it refers to the variable-rate transactions, is 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. 

2. Misleading comparisons in advertisements. 

An advertisement must not make any comparison between actual or hypothetical credit payments or rates and any payment or simple annual rate that will be available under the advertised product for a period less than the full term of the loan, unless: 

·       In general. The advertisement includes a clear and conspicuous comparison to the triggered information required to be disclosed regarding rates and payments;[xvii] and 

·       Application to variable-rate transactions. If the advertisement is for a variable-rate transaction, and the advertised payment or simple annual rate is based on the index and margin that will be used to make subsequent rate or payment adjustments over the term of the loan, the advertisement includes an equally prominent statement in close proximity to the payment or rate that the payment or rate is subject to adjustment and the time period when the first adjustment will occur. 

The requirements[xviii] apply to all advertisements for credit secured by a dwelling, including radio and television advertisements. A comparison includes a claim about the amount a consumer may save under the advertised product. For example, a statement such as “save $300 per month on a $300,000 loan” constitutes an implied comparison between the advertised product’s payment and a consumer’s current payment. 

3. Misrepresentations about government endorsement. 

An advertisement must not state that the product offered is a “government loan program,” “government-supported loan,” or is otherwise endorsed or sponsored by any federal, state, or local government entity, unless the advertisement is for an FHA loan, VA loan, or similar loan program that is, in fact, endorsed or sponsored by a federal, state, or local government entity. 

For instance, a statement that the federal Community Reinvestment Act entitles the consumer to refinance their mortgage at the low rate offered in the advertisement is prohibited because it conveys a misleading impression that the advertised product is endorsed or sponsored by the federal government. 

4. Misleading use of the current lender’s name. 

An advertisement must not use the name of the consumer’s current lender if the advertisement is not sent by or on behalf of the consumer’s current lender, unless the advertisement: 

·       Discloses with equal prominence the name of the person or creditor making the advertisement; and 

·       Includes a clear and conspicuous statement that the person making the advertisement is not associated with, or acting on behalf of, the consumer’s current lender. 

5. Misleading claims of debt elimination. 

An advertisement must not make any misleading claim 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. 

The prohibition against misleading claims of debt elimination, waiver, or forgiveness does not apply to legitimate statements that the advertised product may reduce debt payments, consolidate debts, or shorten the term of the debt. But examples of misleading claims of debt elimination or waiver or forgiveness of loan terms with, or obligations to, another creditor of debt include: “Wipe-Out Personal Debts!,” “New DEBT-FREE Payment,” “Set yourself free; get out of debt today,” “Refinance today and wipe your debt clean!,” “Get yourself out of debt Forever!,” and “Pre-payment Penalty Waiver.” 

6. Misleading use of the term “ ‘counselor.” 

An advertisement must not use the term “counselor” to refer to a for-profit mortgage broker or mortgage creditor, its employees, or persons working for the broker or creditor involved in offering, originating, or selling mortgage loans. 

7. Misleading foreign language advertisements. 

An advertisement must not provide information about some trigger terms or required disclosures, such as an initial rate or payment, only in a foreign language, but provide information about other trigger terms or required disclosures, such as information about the fully-indexed rate or fully amortizing payment, only in English in the same advertisement.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

---

[i] § 1026.24, as amended in July 2008.

[ii] Implementing TILA §§ 141, 142, and 144.

[iii] § 1026.5(a)

[iv] See Comment 24(b)-1

[v] As described in Comment 24(b)-2

[vi] § 1026.24(e); and see, for instance, § 6.04[7], Restrictions on Catalogs and Multiple-Page Advertisements

[vii] See Comment 24(b)-3

[viii] See Comment 24(b)-4

[ix] See Comment 24(b)-5

[x] TILA § 129(l), 15 USC § 1639(l)

[xi] 73 Fed. Reg. 44,522, 44529 (July 30, 2008)

[xii] Under Section 129(l)

[xiii] § 1026.24

[xiv] TILA § 129(l)

[xv] 73 Fed. Reg. 44,522, 44,523 (July 30, 2008)

[xvi] § 1026.24(i)

[xvii] See §§ 6.04[4] and 6.04[5]

[xviii] § 1026.24(i)(2)