Jonathan Foxx
President & Managing Director
Lenders Compliance Group
In Part One of this two-part series, I noted that “the
regulator will determine whether advertisements and promotional materials
provide timely, clear, and understandable information about the existence of
costs, payment terms, penalties, or other terms and charges, the reasons for
their imposition, and the salesperson’s compensation from cross-sales.”[i]
Just as an examiner will review the advertising
materials using various metrics and means, so also should the mortgage loan
originator use three tools to ensure compliance with advertising rules.
The tools are:
- Advertising Manual, with a host of supporting
forms;
- Record Retention, containing all advertisements
and reviews thereof; and
- Forms and Checklists, constituting all loan
products and origination methods.
In this article, we are going to explore these
three tools. While the considerations do not encompass all the requirements and
conditions relating to each tool, I hope to provide a general understanding of
how these should be designed and, most importantly, how they must be interfaced
with one another.
Advertising
Manual
At the outset, let me clarify the importance of
distinguishing advertising policy and procedure from an advertising manual.
While the former often does not contain the latter, the latter most certainly
contains the former. That is to say, a policy and procedure may or may not be
actively given to employees; however, a manual is always given to them. The
advertising policy may set forth rules and philosophy, but the manual is the
actual implementation guidelines that an employee consults to find decisive
standards.
Many companies have an advertising policy and
procedure document, sometimes relying on it to serve the purpose of an
advertising manual. However, employees – such as loan officers – need to know
not only policies and procedures but also the whole gamut of potential
conditions that affect their advertising campaigns. Only an advertising manual
satisfies this overall need.
Every employee that receives the advertising manual
must sign an attestation of receipt. This document has several purposes. It
confirms that the employee has been put on notice about the company’s
advertising rules and guidelines; it may be used as proof that the document is
expected to be complied with or, if not, the employee will be disciplined; it
demonstrates to an examiner that the company proactively provides such
guidance; and, finally, it affirms the company’s commitment to on-going
monitoring of advertising compliance. A signed attestation should be a
requirement of employment.
There are three fundamental purposes of the
advertising manual:
- The
employee must sign for receiving it. The reason for such receipt is to ensure
that the employee has proven receipt and will be held responsible for meeting
the requirements therein.
- The
company must set forth its advertising standards. This means not just training
on the manual or learning the company’s advertising rules. It means also empowering
the employee to seek immediate guidance at all times, irrespective of
availability to compliance personnel.
- Interaction
between employees and compliance department. As part of the process toward
approval by the compliance department, the manual provides forms that serve as
a firm record of advertising that is duly and properly authorized by the
company.
At a minimum, the advertising manual should provide
rules and guidance in regulatory risks and advertising restrictions. However, a
comprehensive document contains far more than statements of policy. It begins
with concise definitions of advertisements and promotional materials.
Furthermore, the manual should set forth the applicable regulations that frame
advertising compliance. Most importantly, there must be a written set of
approval procedures, which contain corresponding forms and checklists.
Certain sections must be included, such as the
following:
- Electronic Media
- Telemarketing
- Do Not Call
- Do Not Fax
- Do Not Email
- Prescreening
- Firm Offers of Credit
- Published Rates
- Rate Sheets
- Third Party Advertisements
If the company offers special programs, such as
loan products designed for senior citizens, these must be outlined and given
some depth as to the target audience and restrictions.
An important inclusion in the advertising manual is
a set of reference terms, which ought to be in a separate section of its own. Examples
should be given for “triggering terms,” the advertised words or phrases that
“trigger” the need for additional disclosures.
Record
Retention
Whereas the subject of record retention often comes
last in an outline of regulatory compliance policies, it actually holds second
place with respect to advertising compliance, after the advertising manual and
before the forms and checklists. This priority is due to the critical need to
retain all advertisements.
A company must keep copies of printed
advertisements, as well as the text of advertisements that are conveyed by
electronic or broadcast media, for a two (2) year period from the date issued
by the advertiser. Let me be as clear as possible here: retain copies of printed
advertisements (including transcripts of non-print media) and marketing
materials used, including all materially different advertising, marketing and
promotional media regarding any mortgage credit product.
As a policy position, the company should impose a
uniform two (2) year record retention rule to be enforced through the latter of
the two year retention period or through at least one regulatory examination. As
a practical matter, retain advertisements in perpetuity, if possible. Furthermore,
I suggest the company maintain any advertisements that apply to evidence of
required actions.
Checklists
and forms
There are many checklist categories that are used
in advertising compliance. I am going to provide a brief outline of three of
them for you. These are the General, FHA, and Online checklists. I have outlined
below a checklist for each category, with an expanded checklist for online,
given that online is a large source of marketing and loan origination
activities.
The list is deliberately brief and by no means
comprehensive, so view them with the proviso that you must develop a checklist
that is specific to your company’s loan products and risk profile.
You may not know the implications of some of these
checklist items; however, please assume that the very fact that these items are
on the lists indicates they impute important inferences associated with
advertising compliance.
GENERAL CHECKLIST – ADVERTISING COMPLIANCE (Partial Sample)
- Does the advertising include the HUD logo or
legend?
- Does the advertising include the Fair Housing
logotype?
- Does the advertising have any tendency or
capacity to deceive?
- Is the advertising accurate?
- If the advertising describes a benefit, does it
also describe any conditions that must be satisfied to obtain the benefit?
- Does the advertising include any
Truth-in-Lending Act triggering terms? (Note: if you do not have a list of
these trigger terms, please consult a compliance professional. The list is
extensive, long, and requires careful review.)
- Does the “®” or “SM” symbol appear with any
service mark?
- If a service mark appears, does the following
language appear: “[Mark] is a service mark of [name of owner of the mark]?”
- If the advertisement is for a home equity credit
line, does it comply with the Truth-in-Lending Act’s special home equity credit
line requirements?
- Does the advertising include any references to
tax deductibility?
- Does the advertising make any “guarantees?
- Are any applicable state-specific rules
satisfied?
- Have all statements of fact been substantiated?
- For telemarketing activities, have the
telemarketing requirements been satisfied?
FHA CHECKLIST – ADVERTISING COMPLIANCE (Partial
Sample)
- Advertising patterns or practices that a
reasonable person would believe indicate prohibited-basis customers are less
desirable.
- Advertising only in media serving non-minority
areas of the market.
- Marketing through brokers or other agents that
the lender knows (or has reason to know) would serve only one racial or ethnic
group in the market (unless part of an effort to attract minorities not
otherwise being reached).
- Use of marketing programs or procedures for
residential loan products that exclude one or more regions or geographies
within the lender’s assessment or marketing area that have significantly higher
percentages of minority group residents than does the remainder of the
assessment or marketing area.
- Using mailing or other distribution lists or
other marketing techniques for pre-screened or other offerings of residential
loan products that:
- Explicitly exclude groups of prospective
borrowers on a prohibited basis.
- Exclude geographies (i.e., census tracts and zip
codes) within the institution’s marketing area that have significantly higher
percentages of minority group residents than the remainder of the marketing
area.
- Proportion of monitored prohibited-basis
applicants is significantly lower than that group’s representation in the total
population of the market area.
- Consumer complaints alleging discrimination in
advertising or marketing loans.
ONLINE CHECKLIST – ADVERTISING COMPLIANCE (Partial
Sample)
- A lender that advertises online credit products
subject to the Fair Housing Act must display the equal housing lender logotype
and legend or other permissible disclosure of its nondiscrimination policy if
required by the rules of its regulator.
- In some cases, regulations contain special rules
for multiple-page advertisements. For online advertisements that may be deemed
to contain more than a single page; thus, lenders should comply with the
applicable sections of Regulation Z,[ii]
which describe the requirements for multiple-page advertisements). (Note: It is
not yet clear what would constitute a single “page” in the context of the
Internet or online text.)
- Internet or other systems in which a credit
application can be made online may be considered “places of business” under
HUD’s rules prescribing lobby notices.
- Ensure that online products are offered and
evaluated on a non-discriminatory basis and that no illegal discouragement
exists.
- Place any required disclosure as close as
possible to the advertising claim.
- View disclosures on the same platform as the
advertisement and be sure to include any disclosures necessary to prevent the
advertisement from being misleading.
- Incorporate disclosures into advertisements
whenever possible. If including sufficient disclosure is not possible because
of space constraints, consider putting he disclosures clearly and conspicuously
on a page to which the advertisement links (if allowed by applicable law).
- When using hyperlinks:
- Appropriately label the link to convey its
importance, nature and relevance.
- Use hyperlinks consistently, so customers know
when they are available.
- Place the link as close as possible to the
relevant information.
- Take customers directly to the disclosure on the
click-through page.
- Assess the effectiveness of the link by
monitoring click-through rates and other information about customer use; make
changes as appropriate.
- Use the “reasonable person rule” and assume that
each page of the website is not going to be read by the viewer nor every word -
nor visit every web page.
- Design advertisements so scrolling is not
necessary to find a disclosure. When scrolling is necessary, use text or visual
cues to encourage scrolling.
- Research about where consumers may look on the
screen for information.
- Recognize and respond to technical limitations
or unique characteristics of a communication method when making disclosures.
- Display disclosures before customers make a
decision to buy.
- Repeat disclosures as needed on lengthy websites
and for repeated advertising claims.
- Be on the lookout for multiple routes through the
website and be sure disclosures are repeated as necessary.
- Prominently display disclosures; be aware of
color, size and graphics.
- Review the entire advertisement (as a whole) to
address the effectiveness of disclosures in light of other elements (viz., text,
graphics, hyperlinks, and sound).
- If using audio disclosures with audio claims,
present them in a volume and cadence consumers can hear and understand.
- Use plain language and syntax.
- If a disclosure cannot be made clearly and
conspicuously so as to prevent an advertisement from being deceptive, do not
use the advertisement.
- To determine whether a particular disclosure is
clear and conspicuous, consider:
- Its placement in the ad and its proximity to the
claim it qualifies.
- Whether seeing the disclosure is unavoidable.
- Whether other items in the advertisement might
distract attention from the disclosure.
- Whether the disclosure should be repeated
several times to be effectively communicated, or because consumers may enter
the site at different locations or travel on paths that might cause them to
miss it.
- Whether audio messages have adequate volume and
cadence.
- Whether the language of the disclosure is
understandable to the intended audience.
- Monitor and analyze data for indications that
disclosures were or were not comprehended, and make necessary adjustments.
- Pay close attention to technological limitations. (For example, a disclosure that requires Adobe Flash Player will not be displayed on certain mobile devices.)
- Deactivate pop-up disclosures that can be
blocked. Using ‘unblockable’ pop-ups may be problematic.
- For audio claims, use audio disclosures. For
written claims, use written disclosures.
Other advertising checklists that should be
included are, as applicable:
- Closed End Credit
- Open End Credit
- Reverse Mortgages
- Home Equity Lines of Credit
- Fair Lending
- UDAAP
In addition, consider providing a set of Reference
Guide or Quick Reference Guide with the following sections:
·
Close End Credit – Triggering Terms
o
General Phrases: Do Not Trigger Full Disclosure
·
Closed End Credit Triggering Terms
o
General Phrases: Do Trigger Full Disclosure
·
HELOC – Triggering Terms
o
General Phrases That DO Trigger Full Disclosure
·
Advertising Descriptions and Phrases (i.e., Terms
of Offer)
A form should be provided in the advertising manual
in order to ensure that a request has been made to the compliance department
for approval of the advertisement. Such a form may be called “Advertising
Request Approval Form,” or some other title, but the purpose of the form is to
provide the following information and documentation:
- Name of requester and date of request
- Summary of the advertisement
- Media
- Date(s) of publication
- Specimen of advertisement
- Audience
- Approval or Denial (viz., with management
signature and date)
The form and all revisions to the advertisement
prior to and at publication are kept together for future use as well as to
maintain supporting proof of the review process.
Triggering
Terms
Certain advertising terms, known as “triggering terms,”
cause the need for additional disclosure. The presence of these terms in an
advertisement can lead to TILA violations, among other things. There are
triggering terms associated with different loan products, such as home equity
credit lines, closed end credit, HELOCs, and many other loan products.
For instance, a few terms for closed end credit that
trigger the need for additional disclosure are:
o
“Up to 48 months to pay”
o
“90% financing”
o
“As low as $50 a month”
o
“36 equal payments”
o
$500
total cost of credit”
Of course, there are triggering terms that do not
trigger additional disclosure.
Some examples of terms for closed end credit that
do not trigger the need for additional disclosure are:
o
“Defer your first monthly installment until
July”
o
“Pay monthly”
o
“Regular monthly payments”
o
“5% Annual Percentage Rate Loans”
o
“Qualify at 1.00% below prime.”
Virtually all aspects of advertising must be
evaluated in an advertisement. Depending on the advertisement or campaign’s
loan product, advertising compliance should consider such categories as the
term of the offer or promotion, the limitations on use or scope of the offer,
general limitations and restrictions on the offer, limitations on geographical
scope, limitations as to choice of loan products or availability, limitations
of liability, qualifications or prerequisites to availability, and many more
factors.
Fair
Lending
Advertisements are a minefield of potential fair
lending violations. There are some rudimentary indicators of potential
Disparate Treatment in marketing of residential loan products. Disparate
treatment occurs when a company treats a credit applicant differently based on
one of several prohibited bases, such as race or color, national origin,
religion, and several other bases.
Importantly, an allegation of a fair lending
violation does not require any showing that the treatment was motivated by
prejudice or a conscious intention to discriminate against a person beyond the
difference in treatment itself. [iii]
When a company applies a racially or otherwise
neutral policy or practice equally to all credit applicants, but the policy or
practice disproportionately excludes or burdens certain persons on a prohibited
basis, the policy or practice is described as having a Disparate Impact. The fact
that a policy or practice creates a disparity on a prohibited basis is not
alone proof of a violation. According to the interagency examination procedures
set forth by Federal Financial Institutions Examination Council (FFIEC), “when
an examiner finds that a lender’s policy or practice has a disparate impact,
the next step is to seek to determine whether the policy or practice is
justified by ‘business necessity.’ The justification must be manifest and may
not be hypothetical or speculative.”[iv]
Factors that may be relevant to the justification
could include cost and profitability. Even if a policy or practice that has a
disparate impact on a prohibited basis can be justified by business necessity,
it still may be found to be in violation if an alternative policy or practice
could serve the same purpose with less discriminatory effect. But, as stated
above in the case of disparate treatment, so also evidence of discriminatory
intent is not necessary to establish that a lender's adoption or implementation
of a policy or practice that has a disparate impact is in violation of the Fair
Housing Act or Equal Credit Opportunity Act.
In evaluating whether there is a potential for a
fair lending violation in an advertisement, FFIEC has also offered several
factors to consider, amongst which are:[v]
- Advertising patterns or practices that a
reasonable person would believe indicate prohibited basis customers are less
desirable.
- Advertising only in media serving non-minority
areas of the market.
- Marketing through brokers or other agents that
the institution knows (or has reason to know) would serve only one racial or
ethnic group in the market.
- Use of marketing programs or procedures for
residential loan products that exclude one or more regions or geographies within
the institutions assessment or marketing area that have significantly higher
percentages of minority group residents than does the remainder of the
assessment or marketing area.
- Using mailing or other distribution lists or
other marketing techniques for pre-screened or other offerings of residential
loan products that:
- Explicitly exclude groups of prospective
borrowers on a prohibited basis; or
- Exclude geographies (i.e., census tracts, ZIP
codes, etc.) within the institution's marketing area that have significantly
higher percentages of minority group residents than does the remainder of the
marketing area.
- Proportion of prohibited basis applicants is
significantly lower than that group's representation in the total population of
the market area.
- Consumer complaints alleging discrimination in
advertising or marketing loans.
With respect to media usage, the follow steps
should be undertaken:[vi]
- Determine in which newspapers and broadcast
media the institution advertises.
- Identify any racial or national origin identity
associated with those media.
- Determine whether those media focus on
geographical communities of a particular racial or national origin character.
- Learn the institution's strategies for
geographic and demographic distribution of advertisements.
- Obtain and review copies of the institution's
printed advertising and promotional materials.
- Determine what criteria the institution
communicates to media about what is an attractive customer or an attractive
area to cultivate business.
- Determine whether advertising and marketing are
the same to racial and national origin minority areas as compared to
non-minority areas.
UDAAP
A marketing campaign, whether consisting of one or
numerous advertisements and promotional opportunities, must be scrutinized for potential
UDAAP (Unfair, Deceptive, or Abusive Acts or Practices) and fair lending
violations. Nearly any kind of “puffery” can cause a UDAAP violation, the
classic example being over-promising and under-delivering! Another classic is
up-selling or down-selling to less attractive products or products unsuitable
for the audience of prospective applicants.
An act or practice is deceptive if there is a
representation, omission of information, or practice that is likely to mislead
consumers who are acting reasonably under the circumstances, and the
representation, omission, or practice is one that is material, for instance,
likely to affect consumers’ decisions to purchase or use the product or service
at issue.[vii]
There is a two-prong rule for determining if an act
or practice is deceptive.[viii]
- There is a representation, omission of
information, or practice that is likely to mislead consumers acting reasonably
under the circumstances; and
- That representation, omission, or practice is
material to consumers.
Violations of UDAAP easily abound if applicable
disclosures are not clear and unambiguous, such as where material information
is omitted from the marketing campaign, information is contradicted by laws or
regulations, all fees are not disclosed or their timing not given, use of the
word “Free” is misleading, fake images and testimonials are used, so-called
“guarantees” are misleading, and, in general, insufficient information causes a
consumer to not reasonably understand the terms of the campaign.
Here is a three-part test recommended by the FTC[ix]
as a tool to avoid UDAAP violations in advertising:
- The
practice must be one that causes or is likely to cause substantial injury to
consumers.
- The
injury must not be outweighed by countervailing benefits to consumers or to
competition.
- The
injury must be one that consumers could not reasonably have avoided.
This three-part formula may be taken as a
rule-of-thumb method toward screening advertisements for potential UDAAP
violations. The fact is that there is a distinct prohibition or restriction on
unfair or deceptive advertising and all due efforts must be undertaken toward
the goal of preventing unfair or deceptive practices.
Keep in mind that a representation may be express
or implied. An “express claim” directly represents the fact at issue, while an
“implied claim” does so in an oblique or indirect way.[x]
Whether an implied claim is made depends on the overall net impression that
consumers take away from an advertisement, based on all of its elements (language,
pictures, graphics, and so forth).[xi]
Therefore, the examiner is going to evaluate whether consumers’ impressions or
interpretations of a representation or omission are reasonable.
In Part One of this two-part series, I mentioned
the “reasonable person” rule. I stated that one of my colleagues often refers
to the “reasonable person rule” as the “village idiot rule;” that is, if the
village idiot can be expected to understand the message, the “reasonable person
rule” test may be passed. Be forewarned, if there is a claim, challenge or
examination finding to whether a consumer is in any way misled or may be misled
by an advertisement, the onus will be on the company to prove otherwise!
Indeed, reasonableness is evaluated based on the
sophistication and understanding of consumers in the group to which the
representation is targeted, which may be a general audience or a specific group,
such as senior citizens.[xii]
But a claim may be susceptible to more than one reasonable interpretation, and
if one such interpretation is misleading, then the advertisement is deceptive,
even if other, non-deceptive interpretations are possible.[xiii]
[i] “Advertising
Compliance: Getting Ready for the Banking Examination,” by Jonathan Foxx,
National Mortgage Professional Magazine, May 2016, Volume 8, Issue 5, p 94
[ii] For
instance, § 1026.16(c), § 1026.24(d)
[iii] Interagency Fair Lending Examination
Procedures, August 2009, p iii, Office of the Comptroller of the Currency
Federal Deposit Insurance Corporation, Federal Reserve Board Office of Thrift
Supervision, National Credit Union Administration
[vii] Section
5 of the FTC Act broadly proscribes unfair or deceptive acts or practices in or
affecting commerce.
[viii]
Deception Policy Statement, at
176–77, Federal Trade Commission Policy Statement on Deception, appended to In
re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174–84 (1984) (Deception Policy
Statement). See also FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir. 2003); FTC
v. Gill, 265 F.3d 944, 950 (9th Cir. 2001); FTC v. QT, Inc., 448 F. Supp. 2d
908, 957 (N.D. Ill. 2006), aff’d, 512 F.3d 858 (7th Cir. 2008); FTC v. Think
Achievement Corp., 144 F. Supp. 2d 993, 1009 (N.D. Ind. 2000); FTC v. Minuteman
Press, 53 F. Supp. 2d 248, 258 (E.D.N.Y. 1998)
[ix] Section
5(n) of the FTC Act sets forth a three-part test to determine whether an act or
practice is unfair.
[x] FTC
v. QT, Inc., 448 F. Supp. 2d at 957
[xi]
See FTC v. Cyberspace.com, LLC, 453 F.3d 1196, 1200 (9th Cir. 2006) (‘‘A
solicitation may be likely to mislead by virtue of the net impression it
creates even though the solicitation also contains truthful disclosures.’’);
FTC v. Gill, 265 F.3d at 956 (affirming deception finding based on ‘‘overall
‘net impression’’’ of statements); Removatron Int’l Corp. v. FTC, 884 F.2d
1489, 1497 (1st Cir. 1989)
(advertisement was deceptive despite written
qualification); Thompson Med. Co. v. FTC, 791 F.2d 189, 197 (DC Cir. 1986)
(literally true statements may nonetheless be deceptive); FTC v. QT, Inc., 448
F. Supp. 2d at 958.
[xii]
Op. cit. 4, pp 177-179
