Most compliance folks are only vaguely aware or not aware at all of Regulation N which prohibits misrepresentations in advertising for mortgage credit products. Most of us assume that if we comply with the advertising requirements of Regulation Z and RESPA and the advertisement does not make any false statements, we are good to go. Maybe so, maybe not.
Regulation N prohibits a creditor from making a misrepresentation either expressly or by "implication" in the advertisement of a mortgage loan. Specifically it prohibits a misrepresentation regarding:
- the interest rate and the amount charged
- the APR
- fees charged
- payment terms
- requirements related to taxes and insurance
- a prepayment penalty
- any variable rate features
- the potential for default, particularly relate to non-payment of taxes an insurance and other obligations'
- a few other issues
Until recently is has been generally believed that so long as you did not state something inaccurately in an advertisement, you weren't in violation of Regulation N. For example if you charge a two percent loan fee and your advertisement makes no mention of fees you are fine. Obviously, you could not state in the advertisement that there were no loan fees if you were charging a fee. The question now is how inclusive is the term "implication".
As I reported in a recent newsletter, the Consumer Financial Protection Bureau (CFPB) fined three reverse mortgage lenders because they stated in their advertisements that the borrower could not lose his or her home when in fact if the borrower failed to pay the real estate taxes, failed to keep the property insured, or violated some other covenant of the mortgage agreement the borrower could lose the home. In other words, by saying that the borrower could not lose his or her home, the advertisers implied that the borrower had no other financial obligations relative to the property under the loan contract.
Now let's assume in your advertisement you make a statement about what the monthly payments will be on the mortgage. Let's also assume that you will escrow for taxes and insurance, but you make no mention of that fact. By implication, is your statement about the monthly payment a misrepresentation? Let's say that the loan contract has a very high or very lengthy prepayment penalty. Is your failure to state that fact an implied misrepresentation?
The problem is no one other than the CFPB knows how far they will take the concept of implication in mortgage loan advertising. For the moment, I encourage compliance folks that have a responsibility for advertising review to become familiar with Regulation N. Additionally, they need to make sure that everything said in your advertisements is true and there is nothing that implies something that is false. Beyond that, all we can do is await any further action by the CFPB.
On another topic the CFPB has announced a change in its priorities in investigating fair lending. Going forward, their three top priorities will be redlining, mortgage and student loan servicing, and small business lending relative to minority and female owned businesses. For most community banks, the area most subject to criticism is small lending. As a best practice, documentation of who your calling officers visit to garner more business needs to be documented. Documentation is important because it is the best method to prove that the financial institution is reaching out to all businesses within their area. As we all know, all regulators have a long standing opinion that if you don't write it down, it didn't happen.