Application of Truth and Lending Act to Real Estate Advertising

Legal

Application of Truth and Lending Act to Real Estate Advertising
by Robert  D.  Butters



The Truth in Lending Act is part of the Consumer Credit Protection Act. The purpose of the Act is to require creditors, or persons advertising the availability of credit, to disclose in a meaningful way the true costs and terms of credit to enable a consumer to make an informed choice about the use of credit to finance a particular purchase. Congress authorized the Federal Reserve Board to issue regulations interpreting the provisions of the Truth In Lending Act. These regulations are commonly known as Regulation Z.

The Truth In Lending Act and Regulation Z apply equally to the financing of a refrigerator or a million dollar lake home. The Act and Regulation impose specific disclosure obligations upon providers and "arrangers" of consumer credit, and upon persons who advertise the availability of consumer credit, whether or not they actually provide or arrange for the credit themselves. It is the rules that govern the content of advertisements for consumer credit that apply to real estate brokers and agents.

Consumer credit includes any extension of credit to a "consumer", which means an individual as opposed to a commercial enterprise. An "advertisement" of consumer credit is construed very broadly to mean any message communicated in any manner to the consuming public about the availability of credit to finance a purchase. The term includes newspaper and direct mail advertisements as well as radio or television messages. It also includes price tags or other point of sale materials.

"Advertisement" could also include MLS data if such data is regularly provided to the consuming public to induce them to consider a home purchase. On the other hand, if the MLS data is used only in response to a specific buyer inquiry, it would not be considered to be "advertising". But listing sheets left at Open Houses or otherwise incorporated into brochures or handouts describing a listed property would be construed to be advertising, and therefore subject to Regulation Z, if the sheets or handouts advertised the availability of credit to finance the purchase of the property.

Regulation Z requires that any credit advertisement that refers to the rate of interest or finance charge must express that rate in terms of an annual percentage rate or APR. The "annual percentage rate" is a rate that takes into account all fees and charges associated with a loan, such as points or prepaid interest, rather the interest rate applied to the unpaid balance of the loan.

It is, therefore, ILLEGAL to state simply: "Interest rate 8%", "Assume 7% loan" or "Mortgages available at 8.5%". Rather these rates must be stated as "ANNUAL PERCENTAGE RATE 8%, "Assume mortgage with ANNUAL PERCENTAGE RATE 7%", or "Mortgage available at 8.5% ANNUAL PERCENTAGE RATE". So long as a specific rate is not mentioned, however, it is permissible to use the following phrases: "Assume low rate loan", "liberal terms available" or "small down payment accepted".

Regulation Z also provides that if an advertisement mentions the amount of down payment required or that no down payment is required; the amount of any installment or monthly payment; the dollar amount of any finance charge; the number of installments or the period of repayment; or that there is no charge for credit, which are referred to as "triggering terms", THEN all of the following terms must also be disclosed in the same advertisement:

              l. The cash price or the amount of the loan; and

2. The amount of down payment, or that no down payment is required; and

3. The number, amount and due dates or periods of payments scheduled to repay the loan; and

4. The amount of the finance charge expressed as an annual percentage rate; and

5. Except for first mortgages on dwellings, the total cost of the item being purchased on credit, or the sum of the payments, as appropriate.

As a result, the following statements may not be used in real estate advertising without disclosing all of the other required data (items 1-5 above):

            l. "VA--No money down"

            2. "95% financing available"

            3. "Monthly payments of only $535 moves you in."

            4. "Only $3,600 down; $760 PITI total monthly payment."

                "Only $3,000 down; 6% FHA-ARM."

On the other hand, the following advertisement would comply with Regulation Z requirements:

"Typical VA financing of 30-year loan: Cash price of Brentwood model $75,000; no down payment: 360 monthly payments of $850 (including estimated taxes) at 8.5% Annual Percentage Rate."

The above-referenced advertisement contains all of the required disclosures: the total amount of the loan; that no down payment is required; the number and amount of the monthly payments; and the interest rate expressed as an annual percentage rate.

The Truth In Lending Act and Regulation Z are enforced by federal bank regulatory agencies against the institutions that they regulate. The Bureau of Consumer Protection of the Federal Trade Commission (FTC) enforces the Act and Regulation against entities that are not subject to regulation by a federal banking agency. Therefore, the FTC would be the agency that would enforce the Act and Regulation against real estate brokers and agents, developers, home builders or mortgage brokers. The FTC has authority to conduct investigations, file administrative complaints, and issue cease and desist orders against persons who violate the Act or Regulation. Civil penalties of up to $10,000 per violation per day can be imposed upon any person who violates an FTC cease and desist order.

The key to Truth In Lending Act compliance by real estate brokers or builders is familiarity with the "triggering terms" that result in the obligation to make the additional disclosures required under the Act. It is also important to note that any reference to an interest rate or finance charge must include an expression of the rate or charge as an "annual percentage rate" or the abbreviation "APR". Truth In Lending Act violations can be minimized by avoiding the use of the triggering terms, or by taking care to include all of the mandated information about the terms of any consumer credit being advertised.


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Robert D..Butters. All right reserved. For information contact Frog Pond at 800.704.FROG(3764) or email susie@frogpond.com.