By Howard Lax and Melissa Bridges
After more than a decade of loan advertisements that would make a snake oil salesman proud, the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) are taking enforcement action against a handful of lenders that largely ignored advertising rules. Mortgage lenders and brokers need to heed the lessons buried in these enforcement actions.
FTC Enforcement
In the Matter of Finance Select, Inc. (Finance Select), and In the Matter of First American Title Lending of Georgia, LLC (FATLG), the FTC entered into Consent Orders requiring these auto title loan companies to stop their deceptive advertising practices and to provide clear and conspicuous TILA (Truth in Lending Act) disclosures. The FTC seemed offended by puffery that was once common in the subprime mortgage industry. Finance Select advertisements contained statements such as “no credit check loans,” “1st 30 days 0%,” “cash now,” and “we loan more” to attract, bless their hearts, consumers with little or no financial acumen. FATLG advertisements employed terms such as “drive away with all the help you need,” “0% interest for 30 days,” “get the most money,” “9.5% or lower,” and “lowest rates in town.” Advertisements written half in English and half in Spanish were common, advertisements did not reveal that lower rates were only available to new borrowers and not to borrowers refinancing title loans, and advertisements did not mention that rates were higher if a loan was not repaid within 30 days. The FTC cited these lenders for not disclosing the full effect of failing to repay these loans on time and for omitting a notice that advertised terms were only available for new customers. The FTC also cited these lenders for failing to clearly and conspicuously disclose the Annual Percentage Rate with the interest rate. The FTC imposed no fines, ordered no restitution, imposed no corporate integrity agreements, and issued no prohibition order in relation to these advertisements. The Consent Orders simply told Finance Select and FATLG to quit breaking the law and to keep records of advertisements for five years.
Important lessons are buried in these FTC Consent Orders. The FTC defined what it considers a “clear and conspicuous” financial disclosure. The language highlighted below is the FTC’s definition of what is and is not a clear and conspicuous disclosure.
Lesson 1. Disclosures should contrast with the advertisement.
“In a print advertisement, the disclosure shall be in a type size, location, and in print that contrasts with the background against which it appears, sufficient for an ordinary consumer to notice, read, and comprehend it.”
It is no longer sufficient that the disclosure print size be similar to the advertisement and that the disclosure be in close proximity to the advertisement. The disclosure must contrast with the background to draw the consumer’s attention to the disclosure.
Lesson 2. Speedy Gonzales is a cartoon character, not your spokesperson.
“In an electronic medium, an audio disclosure shall be delivered in a volume and cadence sufficient for an ordinary consumer to hear and comprehend it. A video disclosure shall be of a size and shade, and appear on the screen for a duration, and in a location, sufficient for an ordinary consumer to read and comprehend it.”
Audio advertising disclosures may not be rushed, and visual disclosures may not scroll at the bottom of a screen at a speed that the average consumer cannot read.
Lesson 3. Disclosures are not subliminal messages.
“In a television or video advertisement, an audio disclosure shall be delivered in a volume and cadence sufficient for an ordinary consumer to hear and comprehend it. A video disclosure shall be of a size and shade, and appear on the screen for a duration, and in a location, sufficient for an ordinary consumer to read and comprehend it.”
The audio portion of a disclosure may not be “clipped” to speed up the delivery, the video portion of a disclosure cannot be so low in the picture that it appears below the bottom of the viewer’s screen, and the size of the print on the screen cannot be so small or of a limited resolution that the viewer needs to squint to read the text.
Lesson 4. Rhythm and intonation are important to get your message across.
“In a radio advertisement, the disclosure shall be delivered in a volume and cadence sufficient for an ordinary consumer to hear and comprehend it.”
Audio disclosures should not be delivered in a flat monotone. Normal accented conversational speech should be used so that the audience may easily comprehend the message.
Lesson 5. Supercalifragilisticexpialidocious is not a recognized disclosure.
“In all advertisements, the disclosure shall be in understandable language and syntax. Nothing contrary to, inconsistent with, or in mitigation of the disclosure shall be used in any advertisement or promotion.”
Disclosures should not be written in language best comprehended by persons with advanced educational backgrounds. Visual displays that present a calm, worry-free image should not be used to distract attention away from audio or typed disclosures in order to dissuade the consumer from recognizing worrisome issues.
CFPB Enforcement
The CFPB was not so kind to mortgage lenders deemed to have published deceptive advertisements, although the fines doled out recently pale in comparison to the almost fifteen million dollars collected from Amerisave Mortgage last summer. NewDay Financial, LLC (NewDay) allegedly parlayed its relationship with a veterans’ organization and a mortgage broker to funnel referral fees through the broker to the veterans’ organization by paying $15 or $25 for each member of the veterans’ organization that responded to its advertising. NewDay advertisements stated that the organizations endorsed NewDay, but did not disclose the financial benefit paid to these organizations. For this RESPA infraction, the CFPB levied a two million dollar fine. The Consent Order misses a few salient points that could have made things much worse for NewDay. First, HUD (Department of Housing and Urban Development) considered payments based on the number of applications or loans (a success fee) to be a split of the origination fee in violation of Section 8(b) of RESPA. Second, advertisements sent to veterans’ organization members stated that the organization endorsed the lender. An organization’s endorsement must be reached by a process sufficient to ensure that the endorsement reflects the collective judgment of the organization. 16 CFR §255.4. It does not appear from the facts stated in the CFPB Consent Order that the veterans’ organization and the lender followed this requirement.
The CFPB also sued All Financial Services, LLC (AFS) in federal court, asking for unspecified penalties, disgorgement of revenue, and payment of costs, because AFS hired a marketing company to mail advertisements for HECM (Home Equity Conversion Mortgage) reverse mortgage loans that appeared to be government notices. AFS did not include a disclaimer that it was not government affiliated. The Mortgage Advertising Practices (MAP) Rule and TILA advertising rules prohibit advertisements that imply government sponsorship of a lender. AFS advertisements also stated that (i) no monthly payment would be required, without qualifying that the homeowner would still need to pay taxes and insurance premiums, and (ii) the HECM loan program had an expiration date (a false statement). AFS also failed to maintain copies of advertisements as required by law.
Flagship Financial Group, LLC was fined $225,000 for mailing advertisements for VA and FHA streamline refinance loans that appeared to come from a government agency. The company falsely advertised that it was a HUD approved lender. The advertisement contained a disclaimer that the company was not a federal agency or affiliated with the homeowner’s current lender; however, the disclaimer was on the back of the advertisement. Another company, American Preferred Lending, Inc., was also fined $85,000 for mailing advertisements that appeared to be government notices.
These Consent Orders teach us several important lessons. First, finding RESPA violations is easier than shooting fish in a barrel. Too many lenders insist on living (and sometimes dying) through incentives that constitute illegal referral fees. Labeling the incentive with a different name does not change the fact that, if it walks and quacks like a duck, it is probably a duck, and the CFPB likes to hunt ducks. Second, any endorsement, whether by a consumer, a public figure, or an organization, must comply with FTC endorsement guidelines. Third, never use a nexus to a government loan program to promote your company. Formatting an advertisement as a government notice, especially when the identity of the lender is not front and center, is a deceptive marketing practice that will awaken the wrath of the CFPB. Any mention that your company is an FHA approved lender must be limited, and any government relationship must be disclaimed as required by FHA Mortgagee Letter 2011-17.
The Moral of the Story
There are several pearls of wisdom for lenders to take away from these cases, even if your advertising appears compliant. First, your marketing company and your brokers’ marketing companies may know little, if anything, about mortgage advertising rules. Do not rely on a marketing company to provide compliance services. Second, do not even think about using misleading advertising ploys. If you are relying on the shape, size, or appearance of a mailer to influence consumers to respond, you are probably violating advertising rules. Third, size does matter. Your advertisements need to be large enough or long enough to include clear and conspicuous disclosures. You cannot squeeze all of the disclosures required by federal and state laws into a postcard or a fifteen second advertisement and make disclosures clear and conspicuous. Finally, if a lender ignores advertising rules, it should try to surrender to the FTC rather than suffer the slings, arrows, and fines that the CFPB is likely to impose.
This article is not intended to provide legal advice. This is simply a discussion of general principals of certain CFPB and other agency rules. Additional information is needed to address any specific issues that you may raise. This article is not intended to and does not establish an attorney client relationship with Bodman PLC. You are advised to consult an attorney regarding your specific issues, and not rely on hypothetical discussions to guide your decisions and actions.
Melissa Bridges
Howard Lax
Howard Lax and Melissa Bridges, Members at Bodman PLC, concentrate their practices in financial institutions consumer compliance and regulatory affairs and real property law. Their clients include banks, credit unions, mortgage lenders, real estate developers, and title insurance companies. Howard Lax can be reached at HLax@bodmanlaw.com, and Melissa Bridges can be reached at MBridges@Bodmanlaw.com.
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