Mortgage concepts: does my mortgage ad comply with Reg N?
Mortgage Concepts is a recurring video series covering best practices and compliance training for mortgage originators in California. This video discusses the rules applicable to mortgage advertisements under Regulation N and provides an example. To get course credit for renewing your NMLS license, visit firsttuesday.us.
Who does the law protect?
Regulation N was created to protect consumers from mortgage products. The law is designed to protect all people who are approached by or who do business with:
- mortgage brokers or lenders;
- real estate agents;
- home builders; and
- lead generators offering all types of mortgage credit products. [12 Code of Federal Regulations §§1014.2-3]
A mortgage loan product is a loan guaranteed by housing and used for personal, family or household purposes. [12 CFR §1014.2]
In the context of Regulation N, a dwelling is a residential property of one to four units. Housing includes single condominium units, co-op units, mobile homes, manufactured homes and trailers. [12 CFR §1014.2]
Collecting or attempting to collect a waiver of protections under Regulation N from a consumer is illegal. [12 CFR §1014.4]
Note that there is no minimum threshold requirement for the application of Regulation N. Any advertisement of a mortgage loan product from any of the above entities is subject to Regulation N.
Forms of communication and regulated media
Regulation N applies to virtually all forms of mortgage related advertising, known as commercial communication. All written or oral statements, visual creations, illustrations or representations, regardless of language, are commercial communications, including:
- labels, packaging and package inserts;
- radio, television, cable television, movies and infomercials;
- newspapers, magazines and catalogs;
- brochures, leaflets and leaflets;
- circulars, direct mail and letters;
- book inserts, free-standing inserts and point-of-sale displays;
- posters, graphics, notice boards, transit maps and slides;
- audio programs transmitted via a telephone system;
- telemarketing scripts, hold scripts and upselling scripts;
- training material provided to telemarketing firms; and
- Internet and cellular networks. [12 CFR §1014.2]
What constitutes a false statement?
Mortgage advertisements are not required to provide complete information about the loan product being offered. Neither the FTC nor the CFPB have issued guidelines for an “ideal” mortgage ad. However, the general prohibition is to provide selective information which leads an applicant or a consumer to believe that the product is something that it is not.
Inaccurate and partial claims, whether manifest or implied, by an individual, group, limited or general partnership, company or other business entity are prohibited by Regulation N. Conditions, such as fees , the costs, obligations and features associated with the mortgage loan product must be openly provided to consumers. [12 CFR §§1014.2-3]
Interest rate and APR
Compliant ads will disclose to consumers the interest charged on mortgage products. If the advertisement discusses interest rates, but does not mention the monthly interest included in the customer’s payments, the loan amount, or the total amount owed, the advertisement is not compliant. In addition, lenders should indicate whether the difference between interest due and interest paid is added to the total amount owed, that is, if the loan depreciates negatively. [12 CFR §1014.3(a)]
If the interest rates, payments or other terms of the mortgage product are variable, this variability should be transparent. Lenders cannot use the word “fixed” to mislead consumers. If an interest rate is advertised as “fixed”, the interest rate must be either:
- fixed for the term of the loan; Where
- disclosed is only set for an introductory period.
For example, to advertise a “fixed interest rate” without specifying that the interest rate is only fixed for an introductory period is a violation of Regulation N. [12 CFR §1014.3(g)]
Likewise, an advertisement cannot distort the annual percentage rate of charge (APR), the simple annual rate, the periodic rate or any other rate. [12 CFR §1014.3(b)]
Fees and conditions
An advertisement infringes regulation N if it distorts:
- the existence, nature or amount of any charges or costs to the consumer associated with the mortgage loan product; Where
- the existence, cost, terms of payment or other terms associated with any additional product or feature that is or may be sold with the mortgage product. [12 CFR §§1014.3(c)-(d)]
For example, an advertisement cannot claim that a mortgage product has “no fees!” If the fees are simply billed and lumped into the loan amount.
Taxes and insurance
All tax or insurance requirements related to a mortgage product, such as terms, amounts and payments, should be provided honestly. Advertisements should state whether separate payment of taxes or insurance is required and to what extent payment of taxes or insurance is included in loan payments, loan amount, or total amount owed. [12 CFR §1014.3(e)]
Penalties and prepayments
The consumer has the right to a precise explanation of any prepayment penalties relating to the advertised mortgage product. Lenders must disclose the existence, nature, amount and terms of the penalty. [12 CFR §1014.3(f)]
In addition, consumers should be informed of the existence, number, amount and timing of any minimum or required payments. Misleading comparisons between any rate or payment that will be available for less than the full term of the mortgage credit product and any actual or hypothetical rate or payment is a violation of Regulation N. [12 CFR §1014.3(h); 12 CFR §1014.3(k)]
Type of product
Distorting a loan product as a fully amortizing loan product when it is not is a violation of Regulation N. [12 CFR §1014.3(i)]
Availability of money and credit
Ads must not misrepresent the receipt or the amount of money or credit available through the credit transaction. [12 CFR §1014.3(j)]
For example, an advertisement may not guarantee certain loan amounts or monthly payments without specifying conditions and qualifying criteria associated with the loan amount or monthly payments advertised.
Regulation N is also addressed to companies which do not disclose additional credit terms in advertisements to consumers. The use of certain words or phrases in consumer mortgage advertisements results in the need to include additional information in the advertisement. Called trigger terms, these words and phrases requiring disclosure include:
- the amount or percentage of any down payment, for example “For as little as 3.5% down payment!” “;
- the number of payments or the repayment period, for example “30-year mortgage”;
- the amount of any payment, for example “$ 500,000 mortgage for only $ 1,650 per month”; Where
- the amount of all finance charges, for example “$ 50,000 mortgage, two points for borrower”. [12 CFR §1026.24(d)]
If any of the trigger terms are present in the consumer mortgage advertisement, the following information must be included in the advertisement:
- the amount or percentage of the down payment (eg “10% down payment required from buyer”);
- the number, amount and timing of payments over the term of the consumer mortgage, including any qualifying lump sum payment;
- the “annual percentage rate”, using that term; and
- whether the rate can be increased after closing. [12 CFR § 1026.24(d)]
An advertisement should not distort the possibility or the reasons for a default in the mortgage product. The circumstances in which the consumer could default include:
- non-payment of taxes;
- non-payment of insurance;
- failure to perform maintenance; Where
- breach of other obligations. [12 CFR §1014.3(l)]
Advantage for the consumer
Claims that a mortgage product will benefit the consumer must be true and correct. Marketing communications should not make unfounded claims about the effectiveness of the mortgage product in helping the consumer reduce, eliminate or restructure consumer debt. False claims that any mortgage credit product can provide a waiver for the cancellation of existing consumer debts are illegal. [12 CFR §1014.3(m)]
All advertisements must accurately identify their sponsor and not give the impression that they are owned or affiliated with parties or agencies with which they have no relevant association.
The offenses include:
- create a false sense of affiliation with a government entity or organization;
- claiming the loan proceeds provides a government benefit;
- seek approval or sponsorship by a government or other program;
- use formats, symbols or logos that resemble a government entity or other organization; and
- trick consumers into believing that an advertisement or other form of communication is being done by or on behalf of the consumer’s current lender or real estate agent. [12 CFR §1014.3(n); 12 CFR §1014.3(o)]
Right to reside
Advertisements should not mislead consumers as to their ability to reside in a home that is the subject of a mortgage product. Advertisements for reverse mortgages should not distort the terms under which a consumer with a reverse mortgage may reside in the accommodation, or the length of stay in the accommodation. [12 CFR §1014.3(p)]
Advertisements that distort the likelihood of a consumer’s pre-approval for a product or term of mortgage credit violate Regulation N. Ads cannot misinterpret a consumer’s ability to obtain or the likelihood of obtain a mortgage loan product or refinance or modify any mortgage loan. product. [12 CFR §1014.3(q); 12 CFR §1014.3(r)]
Advertisements may not distort the availability, nature or substance of the advisory services regarding mortgage products or terms. In addition, advertisements should not distort the qualifications of those offering the service or advice. [12 CFR §1014.3(s)]
For example, an ad may not say “Government housing advisors are ready!” From the advertiser.