The following is a summarized report of the Truth in Lending Act and how it applies to real estate advertisements. These provisions have been selected from a manual published by the Federal Trade Commission entitled "How to Advertise Consumer Credit."
The main purpose of the Truth in Lending Act is to insure the meaningful disclosure of consumer credit and lease terms so that consumers can compare those terms and shop wisely. Prior to the passage of the Act, an advertiser might have disclosed only the most attractive credit (or lease) terms, thus distorting the true cost. The Act requires that the advertisement tell the whole story.
The Act's advertising provisions are simple. If an advertisement contains any one of a list of terms specified in the Act, then that advertisement must also include a number of prescribed disclosures. In other words, the specified terms "trigger" the disclosures.
Thus, If you choose to use a "triggering" advertising claim, you must use the disclosures.
CLEAR AND CONSPICUOUS DISCLOSURE - All disclosures required by the Truth in Lending Act must be printed "clearly and conspicuously."
LIABILITY FOR VIOLATIONS - The FTC may (1) rule that an advertiser has violated the law and (2) order the advertiser to cease and desist from further violations. Each violation of that order may result in a $10,000 civil penalty each day the violation continues.
In addition, if advertisers engage in advertising practices which they know the Commission has previously determined to be unfair or deceptive, the Commission may file a court action seeking penalties.
Finally, anyone who is actually harmed by an illegal consumer lease advertisement may sue the advertiser for:
(1) actual damages; (2) 25% of the total amount of monthly payments under the lease (but not less than $100 nor more than $1,000); and (3) court costs and a reasonable attorney's fee.
TRIGGERING TERMS - If an advertisement promoting "closed-end credit" contains any of the following triggering terms, three specific disclosures must also be Included In the advertisement. The triggering terms are:
1. The amount of the downpayment (expressed either as a percentage or as a dollar amount).
Examples: “10% down", “25,000 down", “90% financing"
2. The amount of any payment (expressed either as a percentage or as a dollar amount).
Example: "Monthly payments less than $500”
3. The number of payments. Example: “60 monthly payments and you're all paid up"
4. The period of repayment (the total time required to repay). Example: “15 years to pay”
5. The amount of any finance charge. Example: "Financing costs less than $300”
The following are examples of terms which do not trigger the required disclosures: "No downpayment", “18% Annual Percentage Rate loans available here", "Easy monthly payments" , "Loans available at 5% below our standard annual percentage rate", "Low downpayment accepted", "Terms to fit your budget", "Financing available".
REQUIRED DISCLOSURES - If any triggering term is used in a closed-end credit advertisement, then the following three disclosures must also be Included in that advertisement: (1) the amount or percentage of the downpayment; (2) the terms of repayment; and (3) the "annual percentage rate”, using that term spelled out In full. If the annual percentage rate may be Increased after consummation of the credit transaction, that fact must be disclosed.
RATE DISCLOSURES - If the finance charge In a real estate advertisement is expressed as a rate, it must be stated as an "annual percentage rate", using that term. If only the annual percentage rate is disclosed, additional disclosures are not required. An advertisement may simply state, "Assume 12% annual percentage rate mortgage" or “14% annual percentage rate mortgages available".
If only the annual percentage rate is disclosed, additional disclosures are not required. An advertisement may simply state, "Assume 12% annual percentage rate mortgage" or “14% annual percentage rate mortgages available".
If the annual percentage rate offered may be increased after consummation of the transaction, the advertisement must state that fact. An advertisement for a variable rate mortgage with an initial annual percentage rate of 14% that may vary after settlement without any limit could be advertised as “14% annual percentage rate, subject to increase after settlement". This disclosure may be used for any type of mortgage instrument with a variable interest rate, including a renegotiable rate mortgage and a shared appreciation mortgage.
It may not be used In advertisements or graduated payment mortgages which have a fixed interest rate and payments which may Increase during the loan.
Fixed-rate "buy-downs" and "step-rate“ mortgages are also not variable rate mortgages. These mortgages involve different interest rates in effect during the life of the loan, all of which are known at settlement. A variable rate transaction involves future interest rates unknown at settlement.
The simple interest rate may never be displayed In lieu of the annual percentage rate. Where more than one simple interest rate is applied to the transaction (such as in a step-rate or buy-down mortgage), these rates may be advertised if all the interest rates and the limited term during which each rate applies are disclosed and the annual percentage rate is stated. For example, assume a step-rate mortgage in which the credit contract provides for 13% Interest the first year, 14% the second year, 15% the third year, and 16% for the remainder of the term. In this transaction, the following is an acceptable rate disclosure: “13% 1st year, 14% 2nd year, 15% 3rd year, 16% remainder of loan”.
15% annual percentage rate - Although an advertiser may disclose the different interest rates which are in effect during the loan, each loan has only one annual percentage rate. Thus, In the above example, it would not be proper to disclose any annual percentage rate other than 15%.
1. Triggering Terms - (terms which require prescribed disclosures) The following are examples of triggering terms that might be used in real estate advertisements: “20% down", "Pay only $550 per month", "Only 360 monthly payments", "Pay less than $600 per month", “30-year mortgage available". The following are examples of terms which do not trigger the required disclosures: "No downpayment", “12% annual percentage rate mortgage available”, "Easy monthly payment", "Graduated payment mortgages available", "Terms to fit your budget", "VA and FHA financing available", “100% VA financing available". The following example, for a house with a $55,000 sales price, illustrates the required disclosures for a real estate advertisement which would comply with the Truth in Lending Act if printed clearly and conspicuously: "Downpayment--$5,000”, “360 monthly payment of $592.44”, “14% annual percentage rate."
2. Graduate Payment Loans and Mortgage Insurance - If an advertisement requiring disclosures promotes a mortgage in which the payments vary (either due to the inclusion of mortgage insurance premiums or because of a graduated payment feature), it Is not necessary to disclose all of the different payments that will be required during the term of the mortgage.
However, the advertisement must state the number and timing of the payments the largest and smallest payments, and that other payments will vary between those amounts. The following example, for a house with a $60,000 sales price, illustrates the required disclosures which would comply with the Truth in Lending Act if printed clearly and conspicuously: Downpayment— “$10,000, Annual Percentage Rate”,“9%, “360 monthly payments”, “The first 60 payments vary from $303.94 to $405.96. The remaining 300 payments are $436.35.
3. Wraparound Loans - If an advertisement promoting a wraparound mortgage states the annual percentage rate, that rate should be determined by treating the transaction as a refinancing. If triggering terms are advertised, the required disclosures should also be calculated based upon an amount financed which equals the principal balance remaining on the initial obligation plus the new amounts advanced.
For example, assume a borrower has a first mortgage for $36,800 at 7% for 30 years with monthly payments of $245. The borrower wants an additional $20,000 loan. (At this time, the balance remaining on the first loan Is $30,000). The wraparound lender would require the borrower to sign a note for $50,000 to mature in 30 years at the current 15% interest rate with equal monthly payments of $632.22. The wraparound lender would agree to make each monthly payment on the first mortgage. In an advertisement, disclosures for this transaction would be based upon a $50,000 amount financed, a 30-year term, and a 15% amount financed, a 30-year term, and a 15% annual percentage rate (assuming no credit costs in addition to Interest), and the monthly payments would be determined accordingly.
For example, assume a borrower has a first mortgage for $36,800 at 7% for 30 years with monthly payments of $245. The borrower wants an additional $20,000 loan. (At this time, the balance remaining on the first loan Is $30,000). The wraparound lender would require the borrower to sign a note for $50,000 to mature In 30 years at the current 15% interest rate with equal monthly payments of $632.22. The wraparound lender would agree to make each monthly payment on the first mortgage. In an advertisement, disclosures for this transaction would be based upon a $50,000 amount financed, a 30-year term, and a 15% amount financed, a 30-year term, and a 15% annual percentage rate (assuming no credit costs in addition to Interest), and the monthly payments would be determined accordingly.
OTHER CONSIDERATIONS - Even though advertising the period of repayment or the amount of the downpayment will trigger disclosure, statements such as "take years to pay" or "no closing costs" do not trigger further disclosure because they do not specifically state or imply the period of repayment or downpayment cost. However, the statement "Move-in costs $600”, does trigger full disclosure. Similarly, "up to 48 months to pay" limits the period of repayment and thus trigger disclosure. In general, the more specific a particular statement, the more likely it is to trigger disclosure.