Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators. This video discusses the rules that protect consumers from deceptive mortgage advertising by lenders. For course credit toward renewing your NMLS license, visit firsttuesday.us.
Mortgage advertising standards
A lender’s solicitation of homebuyers and owners originating a mortgage is carried out in some form of advertising. Of course, the advertisement makes statements about contents of the offered mortgage to induce borrowers to apply to the lender for a mortgage.
Some statements in advertising either deliberately or implicitly mislead the reader into believing the offered mortgage is something it is not. To stop lenders from using misleading advertisements, the federal government set standards for the content of mortgage-related advertisements entitled the Federal Mortgage Acts and Practices — Advertising rule, known simply as Regulation N.
The objective of Reg N is to protect consumers from deceptive mortgage advertisements by mortgage lenders.
What is sought by Reg N is the prohibition of incomplete advertising copy, including the use of selective information or deceitfully unclear wording which misleads a consumer to believe the mortgage offered is other than what it is. Inaccurate and partial-truth claims, whether direct or implicit, made by a mortgage loan originator (MLO) or mortgage lender are prohibited.
Advertising offering a mortgage origination must openly provide consumers with the mortgage terms such as fees, costs, repayment and peculiarities of the mortgage offered — not hype and puffery. [12 Code of Federal Regulations §§1014.2-3]
Mortgage advertisements need not be exhaustive about aspects of the mortgage origination offered. However, no guidelines exist for an “ideal” mortgage ad.
Interest rates and APR
When an advertisement discusses interest rates, it will disclose to consumers the interest rate charged that accrues and is included in the consumer’s payments for the mortgage origination offered. When not disclosed, the advertisement is not in compliance.
Particularly, when the mortgage payment results in negative amortization of the principal balance, the advertisement is to communicate that the difference between the interest accrued and the interest paid is added to the principal balance the consumer owes the lender. Also of merit, the interest added to the principal thereafter accrues interest, a process called compounding. [12 CFR §1014.3(a)]
When the advertised interest rates, payments or principal of the mortgage offered are variable, this condition must be made clear to the consumer viewing the advertisement, called transparency. Lenders may not use the word “fixed” to mislead consumers when any aspect of the mortgage has a variable condition – interest, payments, principal or costs.
Further, when an interest rate is advertised as “fixed,” the interest rate must be either:
- fixed for the life of the loan; or
- disclosed to be fixed only for an introductory period.
For example, advertising a “fixed interest rate” without clarifying the interest rate is only fixed for an introductory period is prohibited. [12 CFR §1014.3(g)]
Likewise, an advertisement mentioning interest rates must include the annual percentage rate (APR), simple annual rate, periodic rate or any other rate necessary as a full disclosure, so as to not mislead the reader. [12 CFR §1014.3(b)]
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Fees and terms
An advertisement addressing any of the following mortgage attributes must fully disclose:
- the existence of fees or costs, the purpose of the fees/costs, and their amount incurred by the consumer when originating the mortgage advertised; or
- the existence of other products or mortgage features, the amount of cost, terms of payment required by the lender for the advertised mortgage origination. [12 CFR §§1014.3(c)-(d)]
For example, an advertisement claiming that a mortgage product has “No fees!” when fees will be charged and added to the mortgage principal borrowed is a violation. Further, those fees must be disclosed in the advertisement when fees or costs are mentioned in the advertisement.
Taxes and insurance
All mention in advertising about impounds/escrowing of property taxes or insurance premiums linked to a mortgage origination — such as terms, amounts and payment schedules — must be clearly stated to honestly avoid intentionally or implicitly misleading the reader.
Advertisements mentioning payments must state whether the impounding/escrowing of property taxes or insurance premiums are required and that the payment for taxes or insurance are included in the monthly loan payments or added to the mortgage principal amount. [12 CFR §1014.3(e)]
Prepayment penalties and payments
When a prepayment penalty is commented on as existing in advertising for a mortgage origination, the lender must accurately explain the amount of the penalty, what events trigger the obligation to pay it, and the time period during which it applies. [12 CFR §1014.3(f)]
Additionally, the advertisement of a mortgage origination disclosing that payments exist is to state:
- the total number of payments until principal is fully amortized;
- the payment period (e.g. monthly); and
- the total amount of the payments the consumer will incur.
Any comparisons between rates or payments for periods less than the full duration of the mortgage advertised, or presentation of a hypothetical rate or payment is misleading and a violation of Reg N. [12 CFR §1014.3(h); 12 CFR §1014.3(k)]
Product type
Some mortgages advertised have features that present a negative amortization and thus a buildup in the principal balance. Here, interest accrues unpaid due to an inadequate amount for the monthly payment schedule to pay off principal during the life of the mortgage.
To misrepresent a negative amortization mortgage as fully amortizing is a violation of Reg N. [12 CFR §1014.3(i)]
Availability of cashback and future advances
Advertisements soliciting consumers for a mortgage origination mentioning the availability of cashback or future advances, such a refinance, home equity line of credit (HELOC) or reverse mortgage origination, must disclose the amount of cashback or future advances available through the offered mortgage origination. [12 CFR §1014.3(j)]
For example, an advertisement may not promise or guarantee cash-back amounts on origination or monthly payments in a reverse mortgage without also providing conditions for the consumer to qualify for the advertised cash back or monthly payments the consumer will receive.
Triggering Terms
Mortgage origination adverts sometimes use words or phrases in consumer mortgage advertisements which are deceptive. To avoid misleading a consumer, the lender is required to include additional disclosures in the advertisement.
Called triggering terms, the evasive words and phrases needing further clarification include:
- an illusive amount or percentage of any down payment, e.g., “For as little as 3.5% down!”;
- the lack of the number of monthly payments or period of repayment, e.g., “30-year mortgage”;
- the amount of any payment, e.g., “$500,000 mortgage for just $1,650 per month”; or
- the amount of any finance charge, e.g., “$50,000 mortgages, two points to the borrower.” [12 CFR §1026.24(d)(1)]
When any of the triggering terms are present in the consumer mortgage advertisement, the following disclosures are to be included in the advertisement:
- the amount or percentage of the down payment (e.g. “10% cash required from the buyer”);
- the number of payments, their dollar amount and period of the full term of the mortgage, including any allowable balloon payment;
- the “annual percentage rate,” using that term; and
- whether the interest rate may be increased during the life of the mortgage. [12 CFR § 1026.24(d)(2)]
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Mortgage concepts: MLO telemarketing, deception and FTC regs
