Open-End Loan Advertising Compliance John Zasada Principal CliftonLarsonAllen 218 790 1086
Agenda •Advertising compliance importance •Regulation Z open end loan requirements –APR –Trigger terms –HELOCs –Credit cards •Regulation B •UDAAP
Top Compliance Violations • Regulation Z • RESPA • TIS • HMDA • Flood
Regulatory Changes • Thousands of pages • ATR/QM • TRID • HMDA
Context • Top regulatory compliance risk? • Not advertising compliance BUT…
Managing Advertising Compliance • Wait and see • Clean past exam • New world – CFPB – Unfair, Deceptive or Abusive Acts or Practices
What’s the big deal? • Closer scrutiny • Advertising is indicative of overall compliance • An examiner can look at your advertisements and website and in a few minutes get a good idea of how firm a grasp you have on regulatory compliance
Compliance Integration • Elevation of business line over the compliance function • Get compliance involved • Compliance over the long haul • Risk/reward
Survey Question #1 • Does your credit union periodically test advertisements for compliance? – YES – NO
Closed End vs. Open End • Advertising rules very different for each • Closed-end anything other than open end! • Open -end –Repeated transactions –Creditor may impose finance charge from time to time on outstanding balance –Amount of credit extended is made available to the extent that any outstanding balance is repaid
What is an Advertisement • Regulation Z - A commercial message in any medium that promotes, directly or indirectly, a credit transaction
Truth in Lending – Regulation Z • Before the TIL - “$45 per month for new car!” • True cost unknown • TIL introduced trigger terms
APR • TIL requires specific terminology • APR is fine • No need to spell out “Annual Percentage Rate”
Fixed • Fixed Rate –Cannot use the word “fixed” unless: • You include a specific period of time the rate will be fixed or • The rate will not increase while the plan is open 14
Terms must be available • Bait and switch prohibited • Terms must be attainable • Cannot state “4% HELOCs available” if in fact the currently offered best rate is 5%
Trigger Terms • Any terms initially disclosed: – APR – Variable rate information – Minimum interest charge – Fees – Transaction charges – Grace period – Balance computation method • Implicit terms
Open vs. Closed-End • APR is a trigger term for open- end loans • APR is not a trigger term for closed-end loans
Affirmatively or Negatively • “No fees” • “No transaction charges” • Not: –“check out our low fees” –“ask us about our competitive APR”
Triggered Disclosures • Finance charges • APR • Variable rate • Membership or participation fee
Disclosing the APR • Different options – Disclose current APR – Disclose APR as of a specific date • Variable rate – APR may vary – Variable rate APR
Promotion Rate • Trigger term (APR, etc.) requires: – Finance charges and membership or participation fee – Introductory APR and how long it applies – APR after the introductory period and that it may vary
Promotional Rates and Fees Use the words “Introductory” or “Intro” to describe it Does apply to radio/television Does not apply to HELOCs 22
Compliant Example • “4% APR FOR THE FIRST 12 MONTHS! After first 12 months, APR will be 8.5%, subject to increase"
Compliant Ad • Pay just 14% APR on your credit card from ABC Credit Union!(Annual fee $30; minimum monthly finance charge of $1; $2 service charge on each cash advance.)
Problem: Our Credit Cards have no annual fee!
Solution Our Credit Cards have no annual fee! • 12.00% APR • $25 cash advance fee. 1% Foreign Transaction fee.
Deferred Interest • Deferred interest period must be clear and conspicuous • “No interest” must be preceded by “if paid in full” • “Deferred interest” , the deferred interest period of time and “if paid in full” must be stated next to: – “no payments” – “no interest – similar terms
Disclosures Appearing Apart From Ad • “clearly refer” • Link used for electronic advertisements
Radio and TV Ads • Treated differently –Annual Percentage Rate –If variable rate –A toll free phone number 29
Credit Cards • All of the general Open-End Rules apply • In addition… – Open end rules require you to disclose all applicable finance charges. For credit cards, all transaction fees are finance charges: • Cash advance • Balance Transfer • Foreign Transaction 30
Credit Card Agreements • If CU provides credit cards, then must: –Post copy of credit card agreement –Provide ability for member to request copy
Credit Card Application Disclosures – Annual percentage rate for purchases, balance transfers, cash advances – Penalty APR and when it applies – How to avoid paying interest on purchases – Minimum interest charge – For credit card tips from the federal reserve board – Fees • Annual fee • Transaction fees • Penalty Fees • Other fees – How we will calculate your balance
Credit Card Application / Solicitation
Survey Question #2 • Does your credit union use advertisements that include credit card rates? – YES – NO
HELOCs • Special rules • Disclosures are IN ADDITION to disclosures applicable to general open- end loans • Open-end loan secured by a consumer’s dwelling, vacation or 2 nd home
Trigger Terms • Terms from the initial disclosure: – APR – When the finance charges begin to accrue – Method of determining the balance to be used to compute finance charges – Method of determining the finance charge – The amount of any charge other than a finance charge that may be imposed as part of the plan – Payment terms
Required Disclosures –Finance Charge –APR, variable rate, maximum APR –Membership or participation fee –An estimate of fees for opening plan –Balloon payment information –Tax advisor information
More on Balloon Payments • Additional required disclosures: – If you promote a minimum payment that may result in a balloon payment, you must also disclose: • That a balloon payment will result; and • The amount and timing of the balloon payment that will result if the consumer makes only the minimum payments for the maximum period of time that the consumer is permitted to make such payments. 38
Terms • Affirmative or negative terms • “we waive closing costs” • Misleading – “fixed” better be
Problem: Our HELOCs have no annual fee and no points !!!
Solution 1: Our HELOCs have no annual fee and no points!!! • Low variable rate of 5% APR with maximum rate of 18% APR • Interest paid may be tax deductible, Please consult your tax advisor
Solution 2: We’ve got really good deals on HELOCs; phone us for details
More Rules for HELOCs • Minimum payment – If it could, then state it will • Discounted/premium/promotional rates – Duration and current rate – Close proximity • Promotional payment – Amount and time periods of applicable payments • “Free money” a no-no
Home Equity Lines of Credit WRONG: 1.99% APR HELOC! *initial rate for 6 months 44
Home Equity Lines of Credit CORRECT: 1.99% APR HELOC for 6 months then Prime +2 (Currently 4.99% APR) 45
Home Equity Lines of Credit • HELOC Applications – If you provide an application with written or electronic ad, you must also provide: • HELOC Early Disclosure • HELOC Early Brochure: “What You Should Know About Home Equity Lines of Credit” 46
Survey Question #3 • Does your credit union review advertisements for compliance before they are released? – YES – NO
Equal Credit Opportunity Act- Regulation B • Real estate-related loan advertisements , including HELOCs, must prominently indicate that the credit union makes such loans without regard to race, color, religion, national origin, sex, handicap, or familial status. • Include a copy of the logotype with "Equal Housing Lender" or "Equal Housing Opportunity," • Or use any other method reasonably calculated to satisfy the notice requirement
Problem: Which is correct?
Advertising Discrimination • Indirectly discouraging persons from applying for credit based on a prohibited basis under Regulation B? Suppose an advertisement contains pictures of people. It is possible that someone could allege that by not including persons of a protected class in these pictures, the credit union is discouraging them from applying for credit.
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