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Feds target deceptive mortgage advertising years after ads contributed to crash

by Broderick Perkins

(8/1/2011) A new federal rule targets mortgage advertisers who attempt to pull the wool over consumers' eyes when they shop for a home loan.

Effective August 19, 2011 a federal truth-in-lending law strengthens bans against deceptive advertising offered by mortgage lenders, brokers, and servicers; real estate agents and brokers; advertising agencies; home builders; lead generators; rate aggregators; and others, including on- and off-line publications.

The Federal Trade Commission (FTC) rule does not cover banks, thrifts, federal credit unions, and other entities not regulated by the FTC.

For years, the FTC has been at war with outfits using deceptive mortgage advertisements.

As recently as June this year, the agency sent hundreds of advertisers and media outlets warning letters that some mortgage ads are either potentially deceptive or in violation of the Truth in Lending Act.

The massive missive mailing came following a nationwide review of claims for low monthly mortgage payments or low, low interest rates, without adequate disclosure of other important loan terms.

Some ads claimed rates as low as 1 percent, but failed to disclose adequately:

• That the stated rate was a "payment rate," not the interest rate.

• That the payment rate applied only during the loan's brief initial period.

• The loan's Annual Percentage Rate (APR), the uniform measure of the cost of credit that enables consumers to shop for and compare mortgage offerings.

The fraudulent behavior is not unlike actions used to push toxic mortgages that became the scourge of the economy and helped plunge the nation into recession, the effects of which are still felt today.

Since 1995, the FTC has busted dozens of mortgage operations for a host of infractions, including:

• Claims for loans with specified terms, when no loans with those terms were available from the advertiser.

• Misrepresentations that rates were fixed for the full term of the loan.

• Misrepresentations about, or failure to adequately disclose, the existence of a prepayment penalty or large balloon payment due at the end of the loan.

• Claims of mortgage payment amounts that failed to include loan fees and closing costs of the kind typically included in loan amounts,

• Failure to disclose adequately that the advertiser, not the consumer's current lender, was offering the mortgage.

• False or misleading claims that consumers were "pre-approved" for mortgage loans.

The new rules list 19 examples of prohibited deceptive claims including misrepresentations about:

• The existence, nature, or amount of fees or costs to the consumer associated with the mortgage and other products sold in conjunction with the mortgage, including credit insurance and credit disability insurance.

• The terms, amounts, payments, or other requirements relating to taxes or insurance associated with the mortgage.

• The variability of interest, payments, or other terms of the mortgage.

• The type of mortgage offered.

• The source of an advertisement or other commercial communication.

• The consumer's ability or likelihood of obtaining a refinancing or modification of a mortgage or any of its terms.

New rules also address misrepresentations involving pre-payment penalties; interest rate and payment comparisons; affiliation with government agencies and a consumers likelihood or ability to obtain a home loan.

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