Truth in Lending Advertising: Who is Covered?
When it comes to Truth in Lending, the advertising rules sometimes stick in the craw. The regulation requires certain minimum information in advertisements whenever certain terms are included and it also sets standards for how that information can be presented.
For a financial institution developing its own advertisements, these rules can be frustrating enough. But when advertisements are developed by others - such as a car dealer or a realty firm promoting their product and your credit - the rules can get you into trouble fast.
Combined advertisements are becoming increasingly popular. They save money because both parties get an ad for half the price. They also communicate that getting credit for the transaction will be easier. But the question becomes whether these ads must comply with Regulation Z even if the creditor is not placing the ad and even if the creditor is not specifically named.
The answer to these questions is not immediately obvious. This is one of the tricky areas of Regulation Z. It is tricky because reasonable compliers might assume that the advertising rules apply to creditors. Since the car dealer or the realty firm is not the creditor, why should they worry about Regulation Z? The answer is that they should worry because there is a trick.
The starting point is coverage. Ordinarily, coverage would be triggered by being or not being a creditor. However, for advertising purposes, it isn't that simple. The trick is that you must look farther than the definition of creditor.
The first clue to do this is the fact that the provision on advertising itself, §226.24, does not use the term creditor. It simply says: "If an advertisement states a rate of finance charge, it shall state the rate as an "annual percentage rate," using that term. If the annual percentage rate may be increased after consummation, the advertisement shall state that fact. The advertisement shall not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the annual percentage rate." [Regulation Z §226.24(b)]
When regulators don't tie a provision to a definition of coverage, it is time to get nervous. Nervousness is justified here. The advertising provisions are intended to cover more than creditors. The commentary to the advertising definition explains that the advertising requirements apply not simply to "creditors" but more broadly to "persons." §226.2(a)(2)-2 states that "all "persons" must comply with the advertising provisions in sections 226.16 and 226.24, not just those that meet the definition of creditor in §226.2(a)-(17). Thus, home builders, merchants, and others who are not themselves creditors must comply with the advertising provisions of the regulation if they advertise consumer credit transactions. However, under section 145 of the act, the owner and the personnel of the medium in which an advertisement appears, or through which it is disseminated, are not subject to civil liability for violations."
The definition of person in §226.2(a)(22) is broadly inclusive. Person means a natural person or an organization, including a corporation, partnership, proprietorship, association, cooperative, estate, trust, or government unit.
By this rather back-door method, those advertising credit who are not originators of the loan are still covered by the advertising rules of Regulation Z. This makes sense if you consider that the purpose of Truth in Lending is to enable consumers to shop for credit by comparing terms and costs. The APR and other trigger terms are critical disclosures for the cost of credit.
There are other reasons to comply with both the letter and the spirit of Truth in Lending's advertising rules. Loan pricing and the cost of credit are getting much more attention than in the past. The release of new HMDA data will include pricing and this will provide a basis for comparing lender products by lender, location, loan type, and borrower. Consumer groups are increasingly paying attention to pricing and to issues of possible deception.
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 5, 4/05
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