Consumer Compliance Outlook > 2021 > First Issue 2021

Consumer Compliance Outlook: First Issue 2021

Understanding Regulation Z’s Advertising Requirements

By Allison Burns, Senior Examiner, Federal Reserve Bank of Minneapolis

Federal Reserve System examination data for state member banks indicate that Regulation Z advertising requirements continue to be a challenge for financial institutions. To facilitate compliance, this article discusses the key advertising provisions in Regulation Z for open- and closed-end credit, provides examples from recent examinations, and highlights sound practices for managing compliance risks associated with marketing and advertising.¹

Coverage

Regulation Z broadly defines advertisements as commercial messages provided in any medium that promote ― directly or indirectly ― a credit transaction.² This definition encompasses messages in newspapers, magazines, leaflets, promotional fliers, radio announcements, television commercials, Internet advertisements, direct mailers, interior and exterior signage, point-of-sale displays, and telephone solicitations. However, advertisements do not include direct, personal contacts such as follow-up letters to customers about specific transactions (including oral or written negotiations).³

Advertising Requirements for Both Open- and Closed-End Credit

Regulation Z has separate advertising requirements for open- and closed-end credit, but two key provisions apply to both types of credit: (1) advertised terms must actually be available⁴ and (2) required disclosures must be clear and conspicuous.⁵

Actually Available Terms

The actually available terms provision prohibits creditors from enticing an applicant to apply for credit with an offer that is not available as advertised. Accordingly, if an advertisement mentions specific credit terms, the creditor must provide those terms to applicants qualifying for the offer. Comment 24(a)-1 clarifies this:

For example, a creditor may not advertise a very low annual percentage rate that will not in fact be available at any time. This provision is not intended to inhibit the promotion of new credit programs, but to bar the advertising of terms that are not and will not be available. For example, a creditor may advertise terms that will be offered for only a limited period, or terms that will become available at a future date.

The following example from an examination illustrates the requirement that when an advertisement states specific terms, the terms must be available to qualified applicants.

A financial institution began offering a new home equity line of credit (HELOC) product with a discounted floor rate. Marketing materials advertised the discounted floor rate but borrowers did not actually receive that rate. Account parameters and periodic statements were not set up properly to reflect the advertised rate. While the financial institution did not intend to advertise a term it did not offer, staff turnover within the loan administration area, human error, and misinterpreting procedures surrounding the HELOC discount contributed to the violation.

Clear and Conspicuous Advertisements

The clear and conspicuous standard applies to all Regulation Z disclosures, including advertisements subject to the open- and closed-end rules.⁶ It requires that disclosures be in a “reasonably understandable form.”⁷ While a specific format generally is not required for advertisements, they should not make it difficult for borrowers to understand the terms.

Advertising Requirements for Open-End Credit (12 C.F.R. §1026.16)

Triggering Terms and Additional Disclosures

The open-end credit advertising rules specify that when certain terms are used in advertisements (triggering terms), additional disclosures are required for both non-home secured loans and home-secured, open-end credit plans (i.e., HELOCs). Additional disclosure requirements apply to television and radio advertisements.

Finance and other charges. When the finance charge and other charges required to be disclosed at account opening are included in an advertisement for open-end credit,⁸ the advertisement must also clearly and conspicuously state the following additional disclosures:

• Minimum, fixed, transaction, activity, or similar charge that is a finance charge under §1026.4 that could be imposed;
• Periodic rate that may be applied expressed as an annual percentage rate (APR). If the plan provides for variable rates, that must also be disclosed; and
• Membership or participation fees that could be imposed.⁹

Account opening disclosures that would trigger the additional disclosures include, but are not limited to, information about the finance charge (such as the APR and the balance computation method), and the amount of other charges that may be imposed as part of the plan or how they will be determined.

Keep in mind that negative as well as affirmative statements trigger the requirement for additional information. For example, stating that a plan has no interest or no annual membership fee in an advertisement would require additional disclosures.¹⁰

Periodic payment amounts. Payment information in an advertisement is also a triggering term requiring additional disclosures. Specifically, if an advertisement for credit to finance the purchase of goods or services states the amount of the periodic payment, the advertisement must also disclose the total of payments (i.e., the total amount of payments made over the term of the loan) and the time period to repay the obligation, assuming the consumer pays only the periodic payment amount advertised. These disclosures must be equally prominent to the statement of the periodic payment amount.¹¹

Misleading terms. Regulation Z prohibits misleading terms in open-end credit advertisements. For example, an advertisement may not refer to APRs as fixed unless the advertisement also specifies a time period in which the rate will not change or that the rate will not increase while the plan is open.¹²

Additional Disclosures for Home-Equity Plans

If any of the previously mentioned open-end triggering terms (finance and other charges or payment terms) are included ― affirmatively or negatively ― in an advertisement for a HELOC, the advertisement must also clearly and conspicuously set forth:

• Any loan fee that is a percentage of the credit limit under the plan and an estimate or any other fees imposed for opening the plan, stated as a single-dollar amount or a reasonable range;
• Any periodic rate used to compute the finance charge, expressed as an APR; and
• The maximum APR that may be imposed in a variable-rate plan.¹³

HELOC advertisements have other triggering terms requiring additional disclosures. Table 1 (Regulation Z’s Triggering Requirements for HELOCs) lists the triggering term, when it applies, as well as the additional required disclosures.¹⁴

Table 1: Regulation Z’s Triggering Requirements for HELOCs

*Must be stated with equal prominence and within close proximity to the triggering term.

Additional Disclosures for Non-Home Secured Plans

For non-home secured plans, special rules apply when advertisements include promotional rates or fees¹⁵ and deferred interest or similar offers:¹⁶

• For promotional rates or fees, when APRs or fees are introductory, the term introductory must be immediately proximate to each rate or fee listed.¹⁷
• When APRs or fees are promotional, the advertisement must indicate when the promotional period will end and the APR or fee that will apply after the promotional period. ¹⁸
• For deferred interest, if a deferred interest offer is advertised, it should include the period in a clear and conspicuous manner.¹⁹
• In addition, if the advertisement includes the phrase no interest, it should include the phrase if paid in full in a clear and conspicuous manner.²⁰

Alternative Disclosures for Television and Radio Advertisements

For television or radio advertisements of either HELOCs or non-home secured open-end credit that include triggering terms, the creditor has two options to provide the additional disclosures: (1) clearly and conspicuously state the additional required disclosure, or (2) state the APR and whether it may increase, as well as a toll-free telephone number the consumer can call for additional cost information.²¹

Advertising Requirements for Closed-End Credit (12 C.F.R. §1026.24)

For closed-end credit advertising, the regulation has several different requirements for dwelling-secured loans versus nondwelling-secured loans. The regulation also incorporates the same special rules for television and radio advertisements previously discussed that apply to advertisements for open-end credit.

Finance Charge

Regulation Z restricts how rates can be included in advertisements for closed-end credit.²² The APR must always be listed (and must state that the APR is subject to increase after consummation, if applicable).²³ The interest rate may also be listed but not more conspicuously than the APR. Table 2 (Closed-End Credit Disclosures When Advertising the Finance Charge or Interest Rate) summarizes the finance charge requirements for nondwelling- and dwelling-secured closed-end loans.

Table 2: Closed-End Credit Disclosures When Advertising the Finance Charge or Interest Rate

In a recent examination, a financial institution mailed an advertisement for a fixed-rate mortgage loan to a prescreened group. The advertisement included both an interest rate and an APR at the top; however, the interest rate was displayed in a larger and more conspicuous font than the APR. This advertisement violated Reg. Z because the interest rate cannot be more conspicuous than the APR.

Triggering Terms and Additional Disclosures

The following terms in closed-end credit advertisements trigger the requirement for additional disclosures:²⁴

• Down payment: A reference to a down payment in an advertisement acts as a triggering term only if a down payment is actually required for the credit product. For example, stating that no down payment is required does not trigger additional disclosures.²⁵
• Payment period: Including the payment period requires referencing the number of payments required or the total period of repayment. However, statements such as pay weekly or take years to repay do not trigger additional disclosures because they do not indicate a time period over which the loan may be financed.²⁶
• Payment amount: The payment amount means including the dollar amount of any payment. Statements such as monthly payment to suit your needs or regular monthly payments do not trigger additional disclosures because they do not include statements of the amount of any payment.²⁷
• Finance charge amount: Mentioning the finance charge amount includes stating the dollar amount of the finance charge or any portion of it. However, disclosing the APR or stating there is no particular charge for credit (such as no closing costs) is not a triggering term.²⁸

Triggering terms need not be stated explicitly; additional disclosures are still required if the term may be readily determined from the advertisement. For example, if the advertisement says “80 percent financing available,” the statement is indicating a 20 percent down payment is required (a triggering term).²⁹ For closed-end credit, Table 3 (Triggering Terms for Closed-End Credit Advertising) identifies the triggering terms, including some examples of these terms, as well as the required additional disclosures.

Table 3. Triggering Terms for Closed-End Credit Advertising

Formatting and Related Requirements for Additional Disclosures

Generally, creditors can use illustrative credit transactions to make necessary disclosures. The examples must be labeled and reflect representative credit terms made available by the creditor to present and prospective customers.³⁴ For example, when a range of possible combinations of credit terms is offered, the advertisement may use examples of typical transactions as long as each example contains all of the applicable terms required by §1026.24(d)(2).

• Amount of down payment: The down-payment disclosure should include the total amount as a dollar amount or percentage; the word down payment is not required, however.³⁵ For example, 10 percent cash required from buyer or credit terms require minimum $100 trade-in would suffice.
• Repayment terms: Repayment terms disclosures have some flexibility and may be expressed in a variety of ways in addition to an exact payment schedule. However, the disclosures must reflect the borrower’s repayment obligations over the full term of the loan, not just repayment terms that will apply for a limited period of time. For example, 48 monthly payments of $27.83 per $1,000 borrowed.³⁶ If applicable, the creditor must also disclose any balloon payment that may be due if a borrower only makes the minimum payments. The advertisement must state with equal prominence and in close proximity to the minimum payment statement the amount and timing of the balloon payment.³⁷

Advertising Requirements for Dwelling-Secured Credit

Under Regulation Z, advertisements for closed-end credit secured by a dwelling are subject not only to the requirements discussed previously but to several other requirements as well.

Disclosure of rates and payments. When an advertisement of a dwelling-secured loan includes an interest rate, and more than one rate will apply over the term of the loan, it must also disclose in a clear and conspicuous manner each interest rate that will apply. For variable-rate loans, the creditor should disclose a reasonably current index and margin. In addition, the advertisement should include the period of time each rate will apply and the APR for the loan. ³⁸

Further, when an advertisement for a dwelling-secured loan includes payments, it must include the amount of each payment that will apply over the term of the loan, including any balloon payments.³⁹ For advertisements of variable-rate loans, a reasonably current index and margin used to determine the payment must be disclosed. In addition, the advertisement must include the period of time each payment will apply. In advertisements for credit secured by a first lien on a dwelling, it must include a statement that payments do not include amounts for taxes and insurance.

When disclosing rates or payments, the additional required information should be disclosed with equal prominence and in close proximity to the term triggering the additional disclosure.⁴⁰

In one recent example, a financial institution was cited for not providing a reasonably current index and margin (it used an April index rate when the loan was originated in December) and for not displaying additional information in close proximity or with equal prominence when the disclosure was contained in a smaller footnote.

Tax implications. Similar to the HELOC advertising requirements; see Table 1 (Regulation Z’s Triggering Requirements for HELOCs), if a printed or online advertisement for dwelling-secured credit states that the advertised extension of credit may exceed the fair market value of the dwelling, the advertisement must clearly and conspicuously state that:

• the interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for federal income tax purposes, and
• the consumer should consult a tax adviser for further information regarding the deductibility of interest and charges.⁴¹

Prohibited acts or practices in advertisements for credit secured by a dwelling. Regulation Z includes several specific prohibited acts or practices in advertisements for closed-end credit secured by a dwelling. This list provides a high-level summary of the prohibited practices.⁴²

• Misleading advertisements of fixed rates and payments when the payment will increase.
• Misleading comparisons in advertisements between actual and hypothetical credit transactions.
• Misrepresenting government endorsements unless an actual government endorsement was made.
• Misleading use of the current lender’s name if the advertisement is not sent by or on behalf of the lender.
• Misleading claims for a lender’s mortgage product suggesting it will eliminate debt or result in waiving or forgiving the consumer’s debt with another lender.
• Misleading use of the term counselor when mortgage brokers, the creditor, or its employees are for-profit.
• Misleading foreign-language advertisements when part of the advertisement provides information about triggering terms or disclosures only in a foreign language but provides other triggering terms or disclosures only in English.

Alternative Disclosures for Television and Radio Advertisements

Similar to the requirements for open-end credit, when television or radio advertisements for closed-end credit (dwelling- or nondwelling-secured) have triggering terms, the financial institution has two options for providing the additional disclosures: (1) clearly and conspicuously state the additional required disclosure⁴³ or (2) state the APR, whether it may increase, and provide a toll-free telephone number the consumer can call for additional cost information.⁴⁴

Websites

Examiners often identify violations in advertisements on financial institutions’ websites. This can result when a third-party vendor is retained to design the website and the vendor is unaware of the advertising rules. This example illustrates why it is important to include websites in advertising reviews:

A financial institution updated its website and included the current interest rate for a consumer closed-end product but failed to disclose the APR. In addition, the webpage included a repayment period of up to two years (which is a triggering term under Regulation Z) but did not include the required additional disclosures. These violations resulted from oversight issues, as the financial institution had not intended to disclose rates or include triggering terms on its webpages for these products. Further, the external auditor identified a similar triggering term issue on the webpage of an advertisement for a different loan product. While action was taken to correct the webpage the auditor flagged, management failed to review the webpage advertisements for other loan product to verify they were complying with the advertising requirements.

Sound Practices to Manage Regulation Z Advertising Risks

The sound practices financial institutions can implement to manage advertising risks are similar to the practices for an effective compliance management system. In both instances, these practices should be tailored to the size and complexity of the institution. Here are examples of sound practices financial institutions can use to comply with Regulation Z’s advertising requirements.

Effective Oversight from the Board and Senior Management

The board of directors and senior management are ultimately responsible for overseeing the financial institution’s compliance management system; it is therefore important they clearly understand the compliance risks to the institution and establish appropriate controls to mitigate those risks. As such, the board and senior management will want to understand the various advertising methods the institution uses to ensure appropriate allocation of compliance resources.

For financial institutions that use third parties to create advertising content, oversight is key. First, the board and senior management may consider taking steps to appropriately select and oversee the third party.⁴⁵ Second, senior management will want to ensure that processes and procedures are in place for the compliance department to review third-party advertisements. This review acts as a safeguard for confirming that the advertisements meet the financial institution’s requirements and comply with Regulation Z.

Policies, Procedures, and Tools

Financial institutions with strong compliance management systems have policies, procedures, and tools in place to ensure the institution is complying with the advertising requirements of Regulation Z. Examples include: (1) creating worksheets or checklists for staff who create advertisements to help them understand the advertising requirements, (2) ensuring the compliance department completes a secondary review (with a checklist), and approves any advertisements prior to use, and (3) ensuring the compliance department reviews and verifies any changes made to the website to ensure that all of the changes were made as intended and there are no unintentional compliance implications.

While smaller financial institutions may rely on knowledgeable and long-tenured staff to ensure compliance with the advertising requirements, strong policies, procedures, and tools are beneficial to address staff turnover. As noted in an earlier example, staff turnover was the root cause of Regulation Z violations. As the saying goes, the only constant in life is change; financial institutions with strong compliance systems proactively prepare for eventual staff turnover instead of reacting to changes when they happen to avoid losing important institutional knowledge.⁴⁶

Training

As Outlook discussed in a prior article, training programs are one of the most important investments a financial institution can make in its employees.⁴⁷ The benefits to the financial institution include mitigating compliance risk, promoting a proactive compliance culture, facilitating effective change management, and improving the customer experience. Providing periodic training to staff who are in charge of Regulation Z advertising requirements helps the financial institution mitigate its compliance risk by ensuring that staff understand the nuances of the rules.

One theme throughout our examples was that financial institutions did not intend to advertise triggering terms or to violate the equal prominence rules. One way institutions can avoid similar errors is to have well-trained staff who can (1) avoid inadvertently including these terms in the advertisements and (2) identify any disclosure errors during a second review. This includes providing training to anyone who creates advertisements for the institution and those reviewing advertisements. It is important to understand employee roles to tailor training appropriately. For example, some financial institutions allow individual lenders to create advertisements while others have a centralized marketing department.

Audits and Corrective Action

Audits are an important tool in a financial institution’s compliance management system. For advertising requirements, the scope of the audit is key. Effective compliance audits incorporate the different advertising mediums used by the financial institution in the scope of review. As the examination violation examples show, examiners continue to find violations related to rate sheets, print advertisements, and web pages in particular.

When advertising issues are identified, management will want to ensure that corrective action is implemented effectively. Appropriate resolution should correct identified errors and, more importantly, address their root cause.⁴⁸ Failing to correct the underlying cause of an issue, or to partially correct an issue, could contribute to advertising violations similar to the examples previously discussed.

Conclusion

This article reviewed the technical requirements under Regulation Z for credit advertising. Training appropriate staff on these requirements, combined with other aspects of a strong compliance management system, such as policies, procedures and controls, will help financial institutions maintain compliance with these requirements. Specific issues or questions should be discussed with your primary regulator.

ENDNOTES

¹ Compliance requirements of §5(a) of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices (UDAP), are beyond the scope of this article. However, institutions should recognize that UDAP also applies to financial institution’s advertising and marketing campaigns.

² See 12 C.F.R. §1026.2(a)(2).

³ See Comment 2(a)(2)-1(ii)(A).

⁴ See 12 C.F.R. §1026.16(a) and 12 C.F.R. §1026.24(a).

⁵ See 12 C.F.R. §1026.5(a)(1)(i) (imposing clear and conspicuous standard on all open-end disclosures in subpart B of Regulation Z) and §1026.24(b)(imposing clear and conspicuous standard on disclosures required for closed-end advertisements).

⁶ See Endnote 5.

⁷ Comment 17(a)(1)-1 clarifies this requirement: “For example, while the regulation requires no mathematical progression or format, the disclosures must be presented in a way that does not obscure the relationship of the terms to each other. In addition, although no minimum type size is mandated (except for the interest rate and payment summary for mortgage transactions required by §1026.18(s)), the disclosures must be legible, whether typewritten, handwritten, or printed by computer.”

⁸ See 12 C.F.R. §1026.6(b)(3) (non‒home secured); 12 C.F.R. §1026.6(a)(1) and (a)(2) (home-secured).

⁹ See 12 C.F.R. §1026.16(b)(1)(i)-(iii).

¹⁰ See Comment 16(b)(1)-1.

¹¹ See 12 C.F.R. §1026.16(b)(2).

¹² See 12 C.F.R. §1026.16(f).

¹³ See 12 C.F.R. §1026.16(d)(1).

¹⁴ See 12 C.F.R. §1026.16(d)(2)-(6).

¹⁵ See 12 C.F.R. §1026.16(g).

¹⁶ See 12 C.F.R. §1026.16(h).

¹⁷ See 12 C.F.R. §1026.16(g)(3).

¹⁸ See 12 C.F.R. §1026.16(g)(4).

¹⁹ See 12 C.F.R. §1026.16(h)(3).

²⁰ See 12 C.F.R. §1026.16(h)(4).

²¹ See 12 C.F.R. §1026.16(e).

²² See 12 C.F.R. §1026.24(c),(d),(f),(g), and (i).

²³ See Comment 24(d)(2)-4.

²⁴ See 12 C.F.R. §1026.24(d).

²⁵ See Comment 24(d)(1)-1(ii).

²⁶See Comment 24(d)(1)-2(ii).

²⁷See Comment 24(d)(1)-3(ii).

²⁸ See Comment 24(d)(1)-4(ii).

²⁹ See Comment 24(d)(1)-1.

³⁰ See Comment 24(d)(1)-1(i).

³¹ See Comment 24(d)(1)-2(i).

³² See Comment 24(d)(1)-3(i).

³³ See Comment 24(d)(1)-4(i).

³⁴ See Comment 24(d)(1)-5.

³⁵See Comment 24(d)(2)-1.

³⁶ See Comment 24(d)(2)-2(i).

³⁷ See Comment 24(d)(2)-3.

³⁸ See 12 C.F.R. §1026.24(f)(2)(i)(A).

³⁹ See 12 C.F.R. §1026.24(f)(3)(i)(A).

⁴⁰ See 12 C.F.R. §1026.24(f)(2)(ii) and (f)(3)(ii).

⁴¹ See 12 C.F.R. §1026.24(h).

⁴² See 12 C.F.R. §1026.24(i).

⁴³ See 12 C.F.R. §1026.24(g)(1).

⁴⁴ See 12 C.F.R. §1026.24(g)(2).

⁴⁵ See Allison Burns, “Compliance Risk Management Considerations for Vendors,” Banking in the Ninth (Federal Reserve Bank of Minneapolis, January 22, 2020).

⁴⁶ See Kathleen Benson, “The Benefits of a Proactive Compliance Program,” Consumer Compliance Outlook (Third Issue 2020).

⁴⁷ See Kathleen Benson, “Enhancing Your Compliance Training Program,” Consumer Compliance Outlook (First Issue 2019).

⁴⁸ See Mark D. Serlo, “The Importance of the Consumer Compliance Internal Audit Function,” Consumer Compliance Outlook (Third Quarter 2013).