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 Show
CoverageRegulation 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 CreditRegulation 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 TermsThe 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:
The following example from an examination illustrates the requirement that when an advertisement states specific terms, the terms must be available to qualified applicants.
Clear and Conspicuous AdvertisementsThe 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 DisclosuresThe 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:
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 PlansIf 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:
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 PlansFor non-home secured plans, special rules apply when advertisements include promotional rates or fees15 and deferred interest or similar offers:16
Alternative Disclosures for Television and Radio AdvertisementsFor 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 ChargeRegulation 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 DisclosuresThe following terms in closed-end credit advertisements trigger the requirement for additional disclosures:24
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 DisclosuresGenerally, 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).
Advertising Requirements for Dwelling-Secured CreditUnder 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:
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
Alternative Disclosures for Television and Radio AdvertisementsSimilar 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 WebsitesExaminers 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:
Sound Practices to Manage Regulation Z Advertising RisksThe 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 ManagementThe 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 ToolsFinancial 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 TrainingAs 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 ActionAudits 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. ConclusionThis 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. ENDNOTES1 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). |