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Is It Illegal To Advertise Loan Terms and Down Payments?

Written by Robert Fore on Thursday, 04 January 2001 6:00 pm
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There's a myth out there that advertising terms and down payment is illegal.

Advertising down payment, monthly payments and the annual percentage rate in your property ads is a very powerful, very profitable marketing strategy that helps prospects come to the realization they can actually afford to own. Yet many agents hesitate to embrace this concept because they have been told it is against the law or that it somehow violates Regulation Z. Let's put the rumors to rest and start making some money, shall we?

The Concept

When people are shopping for a home, they are not buying a house they are buying the best lifestyle they can afford. And when you state the location of the property, make mention of the fireplace and the mature, tree-line streets... you're painting a lifestyle picture. Now the idea is to complete the portrait by making sure your prospects understand they can afford that lifestyle. Here's how to combine the two for a winning ad:

South Carson - $3,200 down, $848/mo! Gorgeous family home. Lovely modern kitchen. 3 bedrooms, 2 new baths. 7.25% APR. Call 555-1212.

But wait! Doesn't that violate Regulation Z? Let's take a look...

Advertising Terms & Regulation Z

There is only one Truth In Lending Act, only one Regulation Z, and only one way to accurately interpret it. The Federal Trade Commission has published a comprehensive manual titled, How to Advertise Consumer Credit and Lease Terms to... "help you, the advertiser, comply with requirements in federal law for advertising consumer credit and consumer leases. These requirements apply whenever you use specific terms in an advertisement promoting consumer credit or consumer leases and the law applies to all kinds of media advertisements for consumer credit and consumer leases." Here are some excepts from the publication.

The Truth in Lending Act and Advertising

The main purpose of the Truth in Lending Act is to assure the meaningful disclosure of consumer credit and lease terms, including those in advertisements, so that consumers can easily compare terms and shop wisely for credit.

Before passage of the Act, an advertiser might have used only the most attractive credit or lease terms, thus distorting the true cost of the credit or lease. For example, an advertisement might have read, "'63 Chevy, only $30 per month." Whether this is a bargain depends upon information missing from the advertisement, such as the down payment and the number of payments. The ad also omits the annual percentage rate and does not state whether the transaction is a credit sale or a lease. The Act requires that the advertisement tell the whole story.

For example, if an advertisement contains any of a number of terms specified in the Act, then that advertisement must also include certain prescribed disclosures. In other words, the specified terms "trigger" the disclosures. If, on the other hand, the ad does not use "triggering" terms, it need not make the disclosures. The type of transaction you advertise—closed-end credit, open-end credit, or a consumer lease—determines whether a term is a "triggering term" and, if so, what disclosures are required.

If you, as an advertiser, are unclear about what type of plan is being advertised, or about any of the specific terms of the plan — including the annual percentage rate—you may want to contact the creditor directly to obtain this information. This may help ensure that the credit terms you advertise are accurate.

Who Must Comply

If you place an advertisement that promotes "consumer credit" or a "consumer lease" as defined in the Act, you must comply with the law. Thus, advertisers, not just creditors and lessors, must comply, including associations, manufacturers, real estate brokers, builders, and government agencies.

Closed-End Credit Disclosures

The main requirements governing advertising of closed-end credit concern "triggering terms" and "finance rates." These requirements may apply to a single ad. This section of the manual explains these basic requirements and offers additional guidance for special compliance issues.

Triggering Terms

If you advertise closed-end credit with a "triggering term," you also must disclose other major terms, including the annual percentage rate. This rule is intended to ensure that all important terms of a credit plan, not just the most attractive ones, appear in an ad.

The triggering terms for closed-end credit are: The amount of the downpayment, in a "credit sale" transaction ($3,987 Down).

The amount of any payment ($976 mo).

The number of payments or the period of repayment (30 years).

The amount of any finance charge (7.7% APR).

Some statements about credit terms are too general to trigger additional disclosures. Examples of terms that do not trigger the required disclosures are: "No downpayment" "Easy monthly payments" "Loans available at 5% below our standard APR" "Low downpayment accepted" "Pay weekly" "Terms to fit your budget" "Financing available." General statements, such as "take years to pay" or "no closing costs," do not trigger further disclosures because they do not state or suggest the period of repayment or downpayment cost. In contrast, the statement "drive it home for $199," which implies that the required cash downpayment is no more than $199, does trigger full disclosure. Similarly, a statement such as "up to 48 months to pay" lists the period of repayment and triggers disclosure. In general, the more specific the statement, the more likely it is to trigger additional disclosures.

Required Disclosures

If your ad for closed-end credit uses a triggering term, it also must include the following information: The amount or percentage of the down-payment; The terms of repayment; and The "annual percentage rate," using that term or the abbreviation "APR." If the annual percentage raw may be increased after consummation of the credit transaction, that fact also must be stated.

The amount or percentage of the "downpayment" need not be shown directly, as long as it can be determined from the ad. For example, "10% cash required from buyer" or "credit terms require minimum $1000 trade-in" would satisfy the disclosure requirement.

The "terms of repayment" may be expressed in a variety of ways, as long as they convey the required information. For example, an automobile finance company might use unit cost to disclose repayment terms: "48 monthly payments of $23.44 for each $1000 borrowed." Similarly, the length of the loan can be expressed as the number of payments or the time period of the loan.

Advertising Finance Rates

The second basic requirement for advertising closed-end credit is this: if your ad shows the finance charge as a rate, that rate must be stated as an "annual percentage rate," using that term or the abbreviation "APR." Your ad must state the annual percentage rate, even if it is the same as the simple interest rate. So, if you are a car dealer who wants to advertise low-rate financing made available by the manufacturer, your advertisement would read, for example, "5.9% annual percentage rate" or "5.9%APR." If you want to show only a rate, and the APR is stated in the ad, no other credit information need be included: the "triggering term" requirement does not apply because the rate and APR are not triggering terms.

Thus, an advertisement could simply state, "Assume 10% annual percentage rate" or "10% annual percentage rate mortgages available." You must state the annual percentage rate accurately. For example, some transactions, especially real estate loans, include other components in the finance charge besides interest, such as "points" and mortgage insurance premiums paid by the buyer. As a result, the annual percentage rate may be higher than the simple interest rate, because the APR reflects the total cost of credit, including interest and other credit charges.

As long as you include the annual percentage rate in the ad, you also may state a simple annual rate or a periodic rate or both, applicable to an unpaid balance. However, the simple annual or periodic rate may not be more conspicuous in the advertisement than the annual percentage rate. For example, an advertisement for mortgage credit may include the contract rate of interest together with the annual percentage rate, as long as the contract rate is not more prominent than the APR.

The Myth Shattered

The requirements of Regulation Z apply whenever you use specific terms in an advertisement promoting consumer credit.

The Act requires that the advertisement tell the whole story.

If an advertisement contains any of a number of terms specified in the Act, then that advertisement must also include certain prescribed disclosures. In other words, the specified terms "trigger" the disclosures. If, on the other hand, the ad does not use "triggering" terms, it need not make the disclosures. The type of transaction you advertise—closed-end credit, open-end credit, or a consumer lease—determines whether a term is a "triggering term" and, if so, what disclosures are required.

You may advertise only credit or lease terms that are actually available to the consumer.

Closed-end credit consists of both sales credit and loans.

The main requirements governing advertising of closed-end credit concern "triggering terms" and "finance rates." If you advertise closed-end credit with a "triggering term," you also must disclose other major terms, including: 1. The amount or percentage of the down-payment; 2. The terms of repayment; and 3. The "annual percentage rate," using that term or the abbreviation "APR." If the annual percentage raw may be increased after consummation of the credit transaction, that fact also must be stated.

There are misconceptions galore about Regulation Z. But, as you now understand, the rules are pretty cut-n-dry. So let the regulations be your guide and act accordingly - start advertising terms and make your phone ring off the hook! Who knows, it might just be the shot in the arm your business needs.

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