[Federal Register Volume 75, Number 189 (Thursday, September 30, 2010)]
[Proposed Rules]
[Pages 60352-60371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24353]
=======================================================================
-----------------------------------------------------------------------
FEDERAL TRADE COMMISSION
16 CFR Part 321
[RIN 3084-AB18]
Notice of Proposed Rulemaking: Mortgage Acts and Practices -
Advertising Rule
AGENCY: Federal Trade Commission (FTC or Commission).
ACTION: Notice of proposed rulemaking; request for comment.
-----------------------------------------------------------------------
SUMMARY: Pursuant to the 2009 Omnibus Appropriations Act (Omnibus
Appropriations Act), as clarified by the Credit Card Accountability,
Responsibility and Disclosure Act of 2009 (Credit CARD Act), the
Commission issues a Notice of Proposed Rulemaking (NPRM) relating to
unfair or deceptive acts and practices that may occur with regard to
mortgage advertising, the Mortgage Acts and Practices (MAP) -
Advertising Rule (proposed rule). The proposed rule published for
comment, among other things, would prohibit any misrepresentation in
any commercial communication regarding any term of any mortgage credit
product; and impose recordkeeping requirements.
DATES: Comments must be received by November 15, 2010.
ADDRESSES: Interested parties are invited to submit written comments
[[Page 60353]]
electronically or in paper form by following the instructions in the
Requests for Comments part of the SUPPLEMENTARY INFORMATION section
below. Comments in electronic form should be submitted at (https://ftcpublic.commentworks.com/ftc/mapadrulenprm) (and following the
instructions on the web-based form). Comments in paper form should be
mailed or delivered to the following address: Federal Trade Commission,
Office of the Secretary, Room H-135 (Annex W), 600 Pennsylvania Avenue,
NW, Washington, DC 20580, in the manner detailed in Part IV of the
SUPPLEMENTARY INFORMATION section below.
FOR FURTHER INFORMATION CONTACT: Laura Johnson or Carole Reynolds,
Attorneys, Division of Financial Practices, Federal Trade Commission,
600 Pennsylvania Avenue, NW, Washington, DC 20580, (202) 326-3224.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Authority
On March 11, 2009, President Obama signed the Omnibus
Appropriations Act.\1\ Section 626 of this Act directed the Commission
to commence, within 90 days of enactment, a rulemaking proceeding with
respect to mortgage loans.\2\ Section 626 also directed the FTC to use
the notice and comment rulemaking procedures specified by Section 553
of the Administrative Procedure Act,\3\ in this proceeding, rather than
the rulemaking procedures set forth in Section 18 of the Federal Trade
Commission Act (FTC Act).\4\
---------------------------------------------------------------------------
\1\ 2009 Omnibus Appropriations Act, Pub. L. 111-8, 123 Stat.
524 (2009).
\2\ Section 626(a), Pub. L. 111-8, 123 Stat. 524, 678 (2009)
(codified at 15 U.S.C. 1638 note).
\3\ 5 U.S.C. 553.
\4\ 15 U.S.C. 57a.
---------------------------------------------------------------------------
On May 22, 2009, President Obama signed the Credit Card
Accountability Responsibility and Disclosure Act of 2009 (Credit CARD
Act).\5\ Section 511 of the Credit CARD Act clarified the conduct and
types of entities for which the Commission may promulgate rules to
implement the Omnibus Appropriations Act.\6\
---------------------------------------------------------------------------
\5\ Pub. L. 111-24, 123 Stat. 1734 (2009) (codified in scattered
sections of 15 U.S.C.).
\6\ Pub. L. 111-24, 123 Stat. 1734, 1763-64 (2009) (codified at
15 U.S.C. 1638 note).
---------------------------------------------------------------------------
1. Covered Acts and Practices
Section 511 of the CARD Act specified that the FTC rulemaking
``shall relate to unfair or deceptive acts or practices regarding
mortgage loans, which may include unfair or deceptive acts or practices
involving loan modification and foreclosure rescue services.''\7\ The
Omnibus Appropriations Act, as clarified by the Credit CARD Act, does
not otherwise specify what the Commission should include in, or exclude
from, a rule, but rather directs the FTC to issue mortgage rules that
``relate to'' unfairness or deception.\8\
---------------------------------------------------------------------------
\7\ Section 511(a)(1)(B), Pub. L. 111-24, 123 Stat. 1734, 1763
(2009) (codified at 15 U.S.C. 1638 note). The Commission is
conducting a separate rulemaking with respect to mortgage assistance
relief services. See infra note 19.
\8\ Section 511(a)(1)(B), Pub. L. 111-24, 123 Stat. 1734, 1763
(2009) (codified at 15 U.S.C. 1638 note).
---------------------------------------------------------------------------
Section 5 of the FTC Act broadly proscribes unfair or deceptive
acts or practices in or affecting commerce. 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, i.e., likely to affect consumers' decisions to
purchase or use the product or service at issue.\9\ Section 5(n) of the
FTC Act sets forth a three-part test to determine whether an act or
practice is unfair. First, the practice must be one that causes or is
likely to cause substantial injury to consumers. Second, the injury
must not be outweighed by countervailing benefits to consumers or to
competition. Third, the injury must be one that consumers could not
reasonably have avoided.\10\
---------------------------------------------------------------------------
\9\ 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).
\10\ 15 U.S.C. 45(n). Section 5(n) of the FTC Act also provides
that ``[i]n determining whether an act or practice is unfair, the
Commission may consider established public policies as evidence to
be considered with all other evidence. Such public policy
considerations may not serve as a primary basis for such
determination.''
---------------------------------------------------------------------------
The express statutory language of the Credit CARD Act allows the
FTC to promulgate rules that ``relate to'' unfairness or deception. The
Commission interprets this language to allow it to issue rules that
prohibit or restrict unfair or deceptive conduct or that are reasonably
related to the goal of preventing unfair or deceptive practices. The
FTC, however, also notes that all of the conduct prohibited by the
proposed rule is itself deceptive.
2. Covered Entities
Section 511 of the Credit CARD Act also clarified that the
Commission's rulemaking authority is limited to entities over which the
FTC has jurisdiction under the FTC Act.\11\ Under the FTC Act, the
Commission has jurisdiction over any person, partnership, or
corporation that engages in unfair or deceptive acts or practices in or
affecting commerce, except, among others:\12\ banks,\13\ savings and
loan institutions, federal credit unions,\14\ non-profits,\15\ and
common carriers. The proposed rule does not cover the practices of
entities that are excluded from the FTC's jurisdiction.
---------------------------------------------------------------------------
\11\ Credit CARD Act Sec. 511(a)(1)(C).
\12\ See 15 U.S.C. 44, 45(a)(2).
\13\ The FTC Act defines ``banks'' by reference to a listing of
certain distinct types of depository institutions. See 15 U.S.C. 44,
57a(f)(2). That list includes: national banks, federal branches of
foreign banks, member banks of the Federal Reserve System, branches
and agencies of foreign banks, commercial lending companies owned or
controlled by foreign banks, banks insured by the Federal Deposit
Insurance Corporation (FDIC), and insured state branches of foreign
banks. The Commission has jurisdiction over entities that are
affiliated with banks, such as parent or subsidiary companies, that
are not themselves banks. This jurisdiction is held concurrently
with the federal bank regulatory agencies (the Board of Governors of
the Federal Reserve System (Federal Reserve Board or Board), the
Office of the Comptroller of the Currency (OCC), the FDIC, and the
Office of Thrift Supervision (OTS)) and the National Credit Union
Administration (NCUA) as to their respective institutions. See
Section 133(a) of the Gramm-Leach-Bliley Act, Pub. L. 106-102, 113
Stat. 1383 (1999) (codified at 15 U.S.C. 41 note (a)); Minnesota v.
Fleet Mortg. Corp., 181 F. Supp. 2d 995 (D. Minn. 2001). The FTC
also has jurisdiction over non-bank entities that provide services
to or on behalf of a bank, such as credit card marketing. See, e.g.,
FTC v. CompuCredit Corp., No. 08-1976, at 6-15 (N.D. Ga. Oct. 8,
2008) (magistrate judge's non-final report and recommendation)
(finding that the FTC has jurisdiction under FTC Act against entity
that contracted to provide services to a bank); FTC v. Am. Std.
Credit Sys., 874 F. Supp. 1080, 1086 (C.D. Cal. 1994) (dismissing
argument that entity that contracted to perform credit card
marketing and other services for a bank is not subject to FTC Act).
\14\ The exclusion is limited to federal credit unions; thus,
the FTC has jurisdiction over state-chartered credit unions, among
others. See infra notes 116-118 and accompanying text.
\15\ Section 4 of the FTC Act, 15 U.S.C. 44, specifies that the
Commission's jurisdiction over ``corporations'' is limited to
entities that are organized to carry on business for their own
profit or that of their members. Thus, the non-profit exemption does
not apply to ostensible non-profits that operate for the profit of
their ``members,'' a term that courts have interpreted to include
affiliates and corporate officials. See, e.g., FTC v. AmeriDebt,
Inc., 343 F. Supp. 2d 451 (D. Md. 2004); Am. Med. Ass'n v. FTC, 638
F.2d 443 (2d Cir. 1980), aff'd by an equally divided court, 455 U.S.
676 (1982).
---------------------------------------------------------------------------
3. Enforcement
The Omnibus Appropriations Act, as clarified by the Credit CARD
Act, also permits both the Commission and the states to enforce the
rules the FTC issues.\16\ The Commission can use its powers under the
FTC Act to conduct investigations and bring law enforcement actions
against those who violate FTC rules. In such actions, the Commission
may seek injunctive relief, as well as civil penalties if the defendant
committed the violations
[[Page 60354]]
with actual knowledge or knowledge fairly implied on the basis of
objective circumstances that its practices were unfair or deceptive and
violated the rule.\17\ In addition, states can enforce the rules by
bringing civil actions in federal district court or another court of
competent jurisdiction to obtain civil penalties and other relief.
Before bringing such an action, however, a state must give 60 days
advance notice to the ``primary federal regulator'' of the proposed
defendant (unless such notice is not feasible), and the regulator has
the right to intervene in the action.
---------------------------------------------------------------------------
\16\ Omnibus Appropriations Act Sec. 626; Credit CARD Act Sec.
511(a)(1)(C) and (a)(2).
\17\ See 15 U.S.C. 45(m)(1)(A). The Commission must refer any
action for civil penalties to the Department of Justice, which may
file the case or return it to the Commission for filing. See 15
U.S.C. 56.
---------------------------------------------------------------------------
B. Advance Notice of Proposed Rulemaking
On June 1, 2009, the Commission published in the Federal Register
an Advance Notice of Proposed Rulemaking (ANPR) soliciting comments on
the contours of a possible rule that would prohibit or restrict unfair
and deceptive acts and practices that may occur throughout the life-
cycle of a mortgage loan,\18\ i.e., in the advertising and marketing of
the loan, at the time of loan origination, in the home appraisal
process, and during the servicing of the loan.\19\ The ANPR described
these services generically as ``Mortgage Acts and Practices,'' and the
rulemaking proceeding was entitled the Mortgages Acts and Practices
(MAP) Rulemaking. In response to the ANPR, the Commission received a
total of 55 comments, of which 46 were germane.\20\ About half of the
comments were from individuals, with the rest from industry trade
associations or groups, consumer advocacy groups, credit unions, a
government-sponsored enterprise (GSE), a state attorney general, a
group of state credit union regulators, and a labor union. Most of the
comments express support for FTC regulatory action regarding various
aspects of the mortgage loan life-cycle.\21\ Several comments, however,
urge the FTC to focus its resources on enforcement or wait to gauge the
effectiveness of other mortgage-related rules promulgated recently by
other federal agencies before proceeding with its own regulations.\22\
---------------------------------------------------------------------------
\18\ The Omnibus Appropriations Act and the Credit CARD Act use
the term ``loan'' in referring to mortgage credit generally and do
not limit that term in any way. Accordingly, this NPRM and the
proposed rule use the term ``loan'' to refer to any form of mortgage
credit.
\19\ Mortgage Acts and Practices, ANPR, 74 FR 26118 (June 1,
2009). On the same date, the Commission issued another ANPR, the
Mortgage Assistance Relief Services Rulemaking, addressing the acts
and practices of for-profit companies that offer to work with
lenders or servicers on behalf of consumers seeking to modify the
terms of their loans or to avoid foreclosure on their loans.
Mortgage Assistance Relief Services (MARS), ANPR, 74 FR 26130 (June
1, 2009). The Commission has issued an NPRM on the MARS Rule. 75 FR
10707 (Mar. 9, 2010).
\20\ The other nine comments are duplicates, replacements,
blank, or ``test'' submissions. Public comments associated with the
MAP ANPR are available at (http://www.ftc.gov/os/comments/map/index.shtm). In addition, a list of commenters cited in this NPRM,
along with their short citation names or acronyms used throughout
the NPRM, is attached to this document. See Table A - List of
Commenters and Short-names/Acronyms, infra.
\21\ See, e.g., MICA at 9; NAR at 2; AG Mass. at 1; NCLC at 1;
NCRC at 1; CRL at 1.
\22\ See, e.g., MBA at 1; ABA at 6.
---------------------------------------------------------------------------
The Commission received several comments that focus specifically on
mortgage advertising; these are addressed below.\23\ Six of these
discuss various advertising issues,\24\ while three additional comments
refer to other federal advertising regulations.\25\ Several commenters
expressed various degrees of support for FTC rules on mortgage
advertising generally or specific aspects of mortgage advertising or
marketing.\26\ Others urged the Commission to incorporate through this
rulemaking aspects of Regulation Z under the Truth in Lending Act
(TILA)\27\ to enable the Commission to obtain civil penalties for
violations of those provisions.\28\ Commenters representing banks and
credit unions, and a group of state credit union regulators, raised
questions about the application of the prospective rules to banking
subsidiaries or affiliates,\29\ or to state-chartered credit
unions.\30\
---------------------------------------------------------------------------
\23\ See infra Parts III and IV.
\24\ See CMC/AFSA at 7; HPC at 3; ABA at 5; MBA at 5; MICA at 3;
CUNA at 2.
\25\ See BECU at 3; NASCUS at 2; GCUA at 2.
\26\ See, e.g., HPC at 3; MICA at 3; CMC/AFSA at 7; ABA at 6.
\27\ 12 CFR 226. The Federal Reserve Board issued Regulation Z,
which implements TILA, 15 U.S.C. 1601-1666j. The Home Ownership and
Equity Protection Act (HOEPA), 15 U.S.C. 1639, is part of TILA.
\28\ See, e.g., ABA at 6 (certain aspects of advertising rules
for nonbank entities); CRL at 19.
The Commission has authority to obtain civil penalties for
violations of rules that the Board promulgates under Section
129(l)(2) of TILA (part of HOEPA), 15 U.S.C. 1639(l)(2). See Omnibus
Appropriations Act Sec. 626(c). As discussed further below, see
infra note 56, the Board issued mortgage-related rules in July 2008,
some of which were promulgated under Section 129(l)(2) of TILA. See
generally 73 FR 44522 (July 30, 2008).
In contrast, the Commission does not have specific authority to
obtain civil penalties for violations of rules that the Board
promulgates under Section 105 of TILA. 15 U.S.C. 1604. See generally
Omnibus Appropriations Act Sec. 626(c). Some provisions of the
Board's July 2008 mortgage rules were promulgated under Section 105.
See 73 FR 44522-23. Incorporating the Board's Section 105 rules into
the proposed MAP - Advertising Rule would give the Commission
authority to seek civil penalties for violations of the Section 105
rules. The advantages and disadvantages of incorporating the Section
105 rules, which include technical and complex advertising
requirements, are discussed below. See infra Parts III.C.2 and
IV.C.2.
\29\ See, e.g., CMC/AFSA at 3; ABA at 4-5. For a discussion of
the FTC's jurisdiction, see supra Part I.A.2.
\30\ See generally CUNA; NASCUS; BECU; Zager; GCUA. Among other
things, various comments note that the Commission lacks jurisdiction
to issue rules for federally-chartered credit unions. Some comments
assert that credit union advertising is already regulated.
---------------------------------------------------------------------------
As discussed more fully below, advertising is the initial step and
often a crucial part of the mortgage process. Consumers may not make
well-informed decisions if the information they receive through
advertising is deceptive. The Commission therefore has determined to
issue this NPRM focused exclusively on mortgage advertising practices.
The Commission may issue additional proposed rules regarding other
aspects of the mortgage process in the future.
II. Mortgage Advertising Practices
A. Overview
As discussed in the ANPR, the mortgage life-cycle begins when a
consumer initially shops for a mortgage, whether to purchase a home or
real property,\31\ refinance an existing mortgage, or obtain a home
equity loan or line of credit (known as a HELOC) based on the
consumer's equity in the home.\32\ In this process, the consumer may
encounter diverse types of mortgage products. The loan may either be a
forward mortgage, the most prevalent type of loan, where the homeowner
borrows funds and remits payments for principal, interest, and in some
cases other charges; or a reverse mortgage, a home-secured loan
typically offered to senior citizens which the borrower is not required
to repay as long as he or she remains in the home and which only
becomes due when the homeowner moves out of or sells the home, dies, or
fails to satisfy certain loan conditions.\33\ Forward mortgages may be
traditional, such as 30-year
[[Page 60355]]
fixed-rate or adjustable rate amortizing mortgages (ARMs),\34\ or
nontraditional,\35\ the latter having proliferated in the mortgage
marketplace in recent years.
---------------------------------------------------------------------------
\31\ Traditional mortgages are considered ``closed-end credit,''
generally consisting of installment financing where the amount
borrowed and repayment schedule are set at the transaction's outset.
TILA and Regulation Z set various advertising and other requirements
for closed-end credit. See, e.g., 12 CFR 226.17-.24.
\32\ HELOCs typically are ``open-end credit,'' which TILA
defines as credit extended to a consumer under a plan in which: (1)
the consumer reasonably contemplates repeated transactions; (2) the
creditor may impose a finance charge from time to time on the
outstanding unpaid balance; and (3) the amount of credit that may be
extended to the consumer during the plan's term is generally made
available to the extent that any unpaid balance is repaid. See 15
U.S.C. 1602(i); 12 CFR 226.2(a)(10) and (20).
\33\ See generally 12 CFR 226.33 (reverse mortgages under
Regulation Z), and U.S. Department of Housing and Urban Development
(HUD), Glossary, definition of ``reverse mortgage,'' available at
(http://www.hud.gov/offices/hsg/sfh/buying/glossary.cfm).
\34\ In an amortizing loan, the borrower pays principal and the
full amount of interest that is due each month throughout the life
of the loan.
\35\ Nontraditional mortgages include loan products that may
offer consumers financial options but also pose substantial risk.
These include, for example, interest-only (I/O) loans and payment
option ARMs (option ARMs). I/O loans involve an initial loan period
in which the borrower pays only the interest accruing on the loan
balance; after the initial period, the borrower either makes
increased payments of principal and interest and/or remits a large
payment, sometimes referred to as a ``balloon payment.'' Option ARMs
offer borrowers several choices each month during the loan's
introductory period, including a minimum payment that is smaller
than the interest accruing on the principal. After the introductory
period, the loan is recast, and the borrower's payments increase to
amortize and repay principal and the adjustable interest rate over
the remaining loan term. See generally FTC, Comment To Jennifer L.
Johnson, Secretary, Board of Governors of the Federal Reserve System
(Sept. 14, 2006), at 5-13 (providing comments on the home equity
lending market and summarizing the Commission's May 2006 alternative
mortgage workshop, Protecting Consumers in the New Mortgage
Marketplace), available at (http://www.ftc.gov/opa/2006/09/fyi0661.shtm) (FTC Comment on Home Equity Lending and Alternative
Mortgage Workshop).
---------------------------------------------------------------------------
Consumers receive information about mortgages through many
different channels of communication. Some consumers seek out mortgage
information on their own, for example, on the Internet or by contacting
a real estate broker, mortgage lender, mortgage broker, or others.
Marketers and advertisers widely disseminate mortgage advertisements to
consumers through print media (such as newspapers and magazines),
television, radio, the Internet, billboards, and other methods.
Marketers and advertisers also send targeted information to particular
consumers through direct mail or electronic communications such as e-
mail or text messages.
Many types of entities market and advertise mortgage products.
Mortgage lenders, mortgage brokers, mortgage servicers, and real estate
brokers advertise and market mortgage products. In addition,
advertising agencies, home builders, lead generators,\36\ rate
aggregators,\37\ and others also may market and advertise mortgage
products to consumers. Mortgage lenders and servicers in particular may
market products to their current customers, in addition to prospective
customers.
---------------------------------------------------------------------------
\36\ Lead generators are business entities that provide, in
exchange for consideration, consumer information to a seller or
telemarketer for use in the marketing of goods or services. See,
e.g., Quik Payday, Inc. v. Stork, 549 F.3d 1302, 1304 (10th Cir.
2008); FTC v. Connelly, No. SA CV 06-701 DOC (RNBx), 2006 U.S. Dist.
LEXIS 98263, at *11 (C.D. Cal. Dec. 20, 2006); United States v.
Ameriquest Mortg. Co., No. 8:07-cv-01304 CJC-MLG (C.D. Cal. 2007)
(stipulated judgment and order).
\37\ Rate aggregators regularly collect and publish rates and
other information from numerous mortgage lenders, mortgage brokers,
or other sources. Consumers typically can compare mortgage credit
product terms for free by searching or viewing this information
sorted by rate, loan amount, mortgage credit product, or other
criteria. Rate aggregators may supply the lenders' or brokers'
contact information, so the consumer can reach them directly, or
they may act as a lead generator and provide the consumer's
information to lenders or brokers.
---------------------------------------------------------------------------
B. Deception in Mortgage Advertising
Advertising and marketing can provide consumers with valuable
information about mortgage options, costs, and features. This
information is critical to the decisions consumers make throughout the
mortgage origination process and is especially important because
mortgage products typically are complex.\38\ Information is useful for
decision making, however, only if it is truthful and non-
misleading.\39\ Preventing and deterring deception in advertisements
for mortgages, therefore, is a primary objective of FTC law enforcement
and of the proposed rule.
---------------------------------------------------------------------------
\38\ This is particularly true for nontraditional mortgages, the
terms of which are often unfamiliar to consumers. See generally FTC
Comment on Home Equity Lending and Alternative Mortgage Workshop,
supra note 35.
\39\ Conversely, deceptive claims in marketing information
undermine the ability of consumers to make well-informed decisions.
See generally Prepared Statement of the Federal Trade Commission:
Hearing Before the Senate Committee on Commerce, Science, and
Transportation, Subcommittee on Consumer Protection, Product Safety,
and Insurance, July 14, 2009, available at (http://www.ftc.gov/os/2009/07/P094492antifraudlawtest.pdf); Prepared Statement of the
Federal Trade Commission on ``Foreclosure Rescue and Loan
Modification Scams'': Hearing Before the House Committee on
Financial Services, Subcommittee on Housing and Community
Opportunity, May 6, 2009, available at (http://www.ftc.gov/os/2009/05/P064814foreclosuretescue.pdf); see also Interagency Guidance on
Nontraditional Mortgage Products Risks (Interagency Nontraditional
Mortgage Guidance), 71 FR 58609 (Oct. 4, 2006) (federal bank
regulatory agencies' guidance to address risks associated with
growing use of mortgage products that allow borrowers to defer
payment of principal and sometimes interest); Interagency Statement
on Subprime Mortgage Lending (Interagency Subprime Mortgage
Statement), 72 FR 37569 (July 10, 2007) (federal bank regulatory
agencies' guidance to address risks with subprime mortgage products
and lending practices, including adjustable rate mortgages with low
initial payments that expire after a short period and could result
in payment shock); Federal Financial Institutions Examination
Council (FFIEC); Reverse Mortgage Products: Guidance for Managing
Compliance and Reputation Risks (FFIEC Reverse Mortgage Guidance),
75 FR 50801 (Aug. 17, 2010) (guidance issued by federal and state
bank regulatory agencies on need for adequate information and other
consumer protections regarding reverse mortgage products); and Press
Release, FTC, FTC Warns Mortgage Advertisers and Media That Ads May
Be Deceptive, Sept. 11, 2007, available at (http://www.ftc.gov/opa/2007/09/mortsurf.shtm).
---------------------------------------------------------------------------
In 1984, the FTC issued its Deception Policy Statement, setting
forth the elements of deception. An act or practice is deceptive if:
(1) there is a representation, omission of information, or practice
that is likely to mislead consumers acting reasonably under the
circumstances; and (2) that representation, omission, or practice is
material to consumers.\40\
---------------------------------------------------------------------------
\40\ See Deception Policy Statement, supra note 9, at 175-183;
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).
---------------------------------------------------------------------------
A representation may be express or implied. ``Express claims
directly represent the fact at issue, while implied claims do so in an
oblique or indirect way.''\41\ Whether an implied claim is made depends
on the overall net impression that consumers take away from an
advertisement or other representation based on all its elements
(language, pictures, graphics, etc.).\42\ The FTC evaluates whether
consumers' impression or interpretation of a representation or omission
is reasonable. 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 children or the elderly.\43\ 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.\44\
---------------------------------------------------------------------------
\41\ FTC v. QT, Inc., 448 F. Supp. 2d at 957.
\42\ See FTC v. Cyberspace.com, 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 (D.C.
Cir. 1986) (literally true statements may nonetheless be deceptive);
FTC v. QT, Inc., 448 F. Supp. 2d at 958.
\43\ See Deception Policy Statement, supra note 9, at 177-79.
\44\ See id. at 178.
---------------------------------------------------------------------------
A disclaimer or qualifying statement may correct a misleading
impression, but only if it is sufficiently clear and prominent to
convey the qualifying information effectively, i.e., it is both noticed
and understood by consumers. ``[I]n many circumstances, reasonable
consumers do not read the entirety of an ad or are directed away from
the importance of the qualifying phrase by
[[Page 60356]]
the acts or statements of the seller;''\45\ thus, a fine print
disclosure at the bottom of a print advertisement or a brief video
superscript in a television advertisement is unlikely to qualify a
claim effectively.\46\ Similarly, because consumers ``may glance only
at the headline'' of an advertisement, ``accurate information in the
text may not remedy a false headline.''\47\
---------------------------------------------------------------------------
\45\ Id. at 181.
\46\ See, e.g., id. at 180; see also In re Stouffer Food Corp.,
118 F.T.C. 746 (1994); In re Kraft, Inc., 114 F.T.C. 40, 124 (1991),
aff'd, 970 F.2d 311 (7thCir. 1992).
\47\ Deception Policy Statement, supra note 9, at 180.
---------------------------------------------------------------------------
A representation, omission, or practice is material if it is likely
to affect a consumer's choice of or conduct regarding a product.\48\ If
consumers are likely to have chosen differently but for the claim, the
claim is likely to have caused consumer injury.\49\ Express claims are
presumed material.\50\ Similarly, information regarding the cost of a
product or service is presumed material.\51\ Intentional implied
claims,\52\ and claims about the purpose and efficacy of a product or
service,\53\ are also presumed material.
---------------------------------------------------------------------------
\48\ See Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992);
In re Cliffdale Assocs., Inc.,103 F.T.C. 110, 165 (1984); see also
FTC v. SlimAmerica, Inc., 77 F. Supp. 2d 1263, 1272 (S.D. Fla.
1999).
\49\ See Deception Policy Statement, supra note 9, at 183.
\50\ See FTC v. Pantron I Corp., 33 F.3d 1088, 1095-96 (9th Cir.
1994).
\51\ See In re Peacock Buick, 86 F.T.C. 1532, 1562 (1975),
aff'd, 553 F.2d 97 (4th Cir. 1977); Deception Policy Statement,
supra note 9, at 182-83.
\52\ See In re Thompson Med. Co., Inc., 104 F.T.C. 648, 816
(1984), aff'd, 791 F.2d 189 (D.C. Cir. 1986).
\53\ Novartis Corp. v. FTC, 223 F.3d 783, 786-87 (D.C. Cir.
2000).
---------------------------------------------------------------------------
C. Other Mortgage Advertising Requirements\54\
---------------------------------------------------------------------------
\54\ This discussion is not intended as a comprehensive list of
all potentially applicable mortgage advertising and marketing laws.
---------------------------------------------------------------------------
In addition to the FTC Act, mortgage advertisers and marketers are
subject to TILA (including HOEPA) and Regulation Z, among other legal
requirements.\55\ In July 2008, the Federal Reserve Board issued many
new mortgage advertising rules under Regulation Z; these rules took
effect on October 1, 2009.\56\
---------------------------------------------------------------------------
\55\ These other requirements include mortgage advertising
mandates under the Helping Families Save Their Homes Act of 2009,
Pub. L. 111-22, Sec. 203, 123 Stat. 1632 (2009) (codified at 12
U.S.C. 5201 note), which HUD enforces, and advertising regulations
and guidance for Federal Housing Administration programs, which HUD
has issued. For example, FHA-approved lenders or mortgagees must use
their HUD-registered business names in advertisements and
promotional materials for FHA programs and maintain copies of their
materials for two years. See 75 FR 20718 (Apr. 20, 2010), to be
codified at 24 CFR 202. Lenders and others are permitted to
distribute the FHA and fair housing logos in marketing materials to
prospective FHA borrowers. HUD-approved mortgagees are required to
establish procedures for compliance with FHA program requirements,
including to avoid engaging in false or misrepresentative
advertising. See HUD Mortgagee Letters 2009-02 and 2009-12,
available at (http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2009ml.cfm); see also infra note 116 (discussing NCUA and
OTS advertising regulations).
\56\ See 73 FR at 44599-602, codified generally at 12 CFR
226.16, 226.24; see also supra note 28. On August 16, 2010, the
Board proposed additional protections and disclosure requirements
for mortgage advertisements. See Press Release, Board, Federal
Reserve Board Proposes Enhanced Consumer Protections and Disclosures
for Home Mortgage Transactions, (http://www.federalreserve.gov/newsevents/press/bcreg/20100816e.htm) (Aug. 16, 2010).
---------------------------------------------------------------------------
For example, for closed-end credit, TILA and Regulation Z contain
four basic requirements for mortgage advertisements.\57\ First, an
advertisement must reflect terms actually available to the
consumer.\58\ Second, required disclosures must be made clearly and
conspicuously in the advertisement.\59\ Third, any advertisement that
includes any credit rate must state the annual percentage rate, or
``APR.''\60\ The APR must be stated at least as conspicuously as a
stated interest rate.\61\ Fourth, if any major triggering loan term
(e.g., a monthly payment amount) is advertised, other major terms,
including the APR, must also be advertised.\62\
---------------------------------------------------------------------------
\57\ See 15 U.S.C. 1661-62, 1664-65a; 12 CFR 226.24. For TILA
and Regulation Z open-end credit advertising requirements, see 15
U.S.C. 1661-63, 1665-65b; 12 CFR 226.16.
\58\ See 15 U.S.C. 1662; 12 CFR 226.24(a).
\59\ See 15 U.S.C. 1664; 12 CFR 226.24(b).
\60\ See 15 U.S.C. 1664; 12 CFR 226.24(c). For closed-end credit
advertisements, the Board also expressly prohibits advertising any
rate that is lower than the rate at which interest is accruing, such
as an effective rate, payment rate, or qualifying rate. See 74 FR
44581-82, 44608, codified at Federal Reserve Board Official Staff
Commentary (Regulation Z Commentary), 12 CFR 226.24(c)-2, Supp. I.
The Board promulgated this rule using its authority under TILA
Section 105. Id. In some circumstances, for closed-end credit
secured by a dwelling, advertisements must provide other disclosures
relating to rates. See, e.g., 12 CFR 226.24(f).
\61\ See 15 U.S.C. 1664; 12 CFR 226.24(c).
\62\ See 15 U.S.C. 1664; 12 CFR 226.24(d). In some
circumstances, for closed-end credit secured by a dwelling,
advertisements must provide other disclosures relating to payments.
See, e.g., 12 CFR 226.24(f).
---------------------------------------------------------------------------
For closed-end credit secured by a dwelling, Regulation Z also
prohibits the following advertising claims based on the Board's
conclusion that they are misleading or deceptive: (1) advertising as
``fixed'' a rate or payment that will change after a period of time,
unless the advertisement meets certain criteria, such as having an
equally prominent and closely proximate disclosure that the rate or
payment is ``fixed'' for only a limited period of time; (2) comparing
actual or hypothetical rates or payments to the rates or payments on an
advertised loan, unless the advertisement discloses the rates or
payments that will apply over the full term of the advertised loan; (3)
misrepresenting an advertised loan as part of a ``government loan
program'' or otherwise endorsed or sponsored by a government entity;
(4) using the name of the consumer's current lender, unless the
advertisement has an equally prominent disclosure of the person
actually disseminating the advertisement and includes a clear and
conspicuous statement that the advertiser is not associated with the
consumer's current lender; (5) making any misleading claim that an
advertised loan will eliminate debt or result in a waiver or
forgiveness of a consumer's existing loan terms with, or obligations
to, another creditor; (6) using the term ``counselor'' in an
advertisement to refer to a for-profit mortgage broker or mortgage
lender; and (7) advertising mortgages in a language other than English
while providing critical advertising disclosures only in English.\63\
---------------------------------------------------------------------------
\63\ See 12 CFR 226.24(i); see also 73 FR at 44586-590, 44602,
44610. As noted above, the Board promulgated these rules using its
authority under TILA Section 129(l)(2), which is part of HOEPA. See
supra note 28.
---------------------------------------------------------------------------
TILA and Regulation Z require certain other advertising disclosures
for HELOCs, a type of open-end credit.\64\ HELOC advertisements may not
refer to a home equity plan as ``free money'' or contain a similarly
misleading term.\65\ For example, such an advertisement could not state
``no closing costs'' or ``we waive closing costs'' if consumers may be
required to pay any closing costs.\66\
---------------------------------------------------------------------------
\64\ See, e.g., 12 CFR 226.16(d). The Board promulgated these
rules using its authority under TILA Section 105(a). See supra note
28.
\65\ See 16 CFR 226.16(d)(5).
\66\ See Regulation Z Commentary, 12 CFR 226.16(d)-4, Supp. I;
75 FR 7658, 7898 (Feb. 22, 2010); see also 12 CFR 226.16(f).
---------------------------------------------------------------------------
The states also have enacted various laws or regulations that
address aspects of deceptive mortgage advertising practices,\67\
including laws implementing the federal Secure and Fair Enforcement for
Mortgage Licensing Act of 2008 (SAFE Act), which requires a nationwide
licensing and/or registration system for mortgage loan originators.\68\
---------------------------------------------------------------------------
\67\ State advertising requirements differ from one another in
the practices, types of credit, and entities covered. See, e.g., Me.
Rev. Stat. Ann. tit. 9-A, 9-301 (2009); Md. Code Regs. 09.03.06.05
(2009); Nev. Rev. Stat. Ann. 645B.196 (2009); N.Y. Bank. Law 595-a
(Consol. 2010).
\68\ Title V of the Housing and Economic Recovery Act of 2008,
Pub. L. 110-289 (2008) (codified at 12 U.S.C. 5101). Since the SAFE
Act's enactment on July 30, 2008, the states have been moving to
enact or amend laws to license mortgage loan originators. See
generally (http://www.csbs.org); see also HUD SAFE Mortgage
Licensing Act, available at (http://hud.gov/offices/hsg/rmra/safe/sfea.cfm). Various new state SAFE laws address advertising in
different ways. See, e.g., H.B. 1085, 67th Gen. Assem., Reg. Sess.
(Colo. 2009); S.B. 948, 2009 Gen. Assem., Reg. Sess. (Conn. 2009);
S.B. 1218, 25th Leg., 1st Spec. Sess. (Haw. 2009); H.B. 4011, 96th
Gen. Assem., Reg. Sess. (Ill. 2009); A.B. 3816, 213th Leg., 2nd Ann.
Sess. (N.J. 2009). The federal banking agencies and Farm Credit
Administration also are implementing a registration system and other
requirements for mortgage loan originators. See 74 FR 27386 (June 9,
2009).
---------------------------------------------------------------------------
[[Page 60357]]
None of these federal or state measures duplicates the specificity
and breadth of practices, and diversity of entities\69\ covered in the
proposed rule.
---------------------------------------------------------------------------
\69\ See infra Part III.B.4.
---------------------------------------------------------------------------
D. Consumer Protection Problems in Mortgage Advertising
The FTC has substantial law enforcement experience with mortgage
advertising practices. Since 1995, the Commission has brought 18 law
enforcement actions, including three in 2009, against individuals or
companies that allegedly engaged in unfair or deceptive practices and/
or violations of TILA in connection with mortgage advertising.\70\
These actions have targeted large and small mortgage lenders, mortgage
brokers, and others, located throughout the country.\71\ The cases have
involved advertisements and marketing materials in various media,
including print advertisements,\72\ unsolicited emails,\73\ direct mail
marketing,\74\ Internet advertisements and websites,\75\
telemarketing,\76\ and in-person sales presentations.\77\ The alleged
violations have included deceptive claims - often made to subprime
borrowers - about key terms and other aspects of the loans, such as:
---------------------------------------------------------------------------
\70\ See Table B - List of FTC Mortgage Advertising Enforcement
Actions, infra.
\71\ See, e.g., FTC v. Mortgages Para Hispanos.com Corp., No.
4:06-cv-19 (E.D. Tex. 2006); FTC v. Ranney, No. 04-F-1065 (MJW) (D.
Colo. 2004); FTC v. Chase Fin. Funding, Inc., No. SACV04-549 GLT
(ANx) (C.D. Cal. 2004); FTC v. OSI Fin. Servs., Inc., No. 02-C-5078
(N.D. Ill. 2002); United States v. Mercantile Mortg. Co., No. 02-C-
5079 (N.D. Ill. 2002); FTC v. Assocs. First Capital Corp., No. 1:01-
00606 JTC (N.D. Ga. 2001); FTC v. First Alliance Mortg. Co., No.
SACV 00-964 DOC (EEx) (C.D. Cal. 2000).
\72\ See, e.g., FTC v. Safe Harbour Found. of Fla., Inc., No.
08-C-1185 (N.D. Ill. 2008); FTC v. Ranney, No. 04-F-1065 (MJW) (D.
Colo. 2004).
\73\ See, e.g., FTC v. 30 Minute Mortg., Inc., No. 03-60021
(S.D. Fla. 2003); FTC v. Chase Fin. Funding, Inc., No. SACV04-549
GLT (ANx) (C.D. Cal. 2004).
\74\ See, e.g., In re Am. Nationwide Mortg. Co., Inc., F.T.C.
Dkt. No. C-4249 (2009); In re Michael Gendrolis, F.T.C. Dkt. No. C-
4248 (2009); FTC v. Chase Fin. Funding, Inc., No. SACV04-549 GLT
(ANx) (C.D. Cal. 2004); FTC v. First Alliance Mortg. Co., No. SACV
00-964 DOC (EEx) (C.D. Cal. 2000); United States v. Unicor Funding,
Inc., No. SACV99-1228 (C.D. Cal. 1999); FTC v. Assocs. First Capital
Corp., No. 1:01-00606 JTC (N.D. Ga. 2001); FTC v. Safe Harbour
Found. of Fla., Inc., No. 08-C-1185 (N.D. Ill. 2008); In re
FirstPlus Fin. Group, Inc., F.T.C. Dkt. No. C-3984 (2000).
\75\ See, e.g., In re Shiva Venture Group, Inc., F.T.C. Dkt. No.
C-4250 (2009); FTC v. Ranney, No. 04-F-1065 (MJW) (D. Colo. 2004).
\76\ See, e.g., FTC v. First Alliance Mortg. Co., No. SACV 00-
964 DOC (EEx) (C.D. Cal. 2000).
\77\ See, e.g., id.; FTC v. Assocs. First Capital Corp., No.
1:01-00606 JTC (N.D. Ga. 2001).
---------------------------------------------------------------------------
misrepresentations of the loan amount or the amount of
cash disbursed;\78\
---------------------------------------------------------------------------
\78\ See, e.g., id.; FTC v. OSI Fin. Servs., Inc., No. 02-C-5078
(N.D. Ill. 2002); United States v. Mercantile Mortg. Co., No. 02-C-
5079 (N.D. Ill. 2002); In re FirstPlus Fin. Group, Inc., F.T.C. Dkt.
No. C-3984 (2000).
---------------------------------------------------------------------------
claims for loans with specified terms, when no loans with
those terms were available from the advertiser;\79\
---------------------------------------------------------------------------
\79\ See, e.g., FTC v. 30 Minute Mortg., Inc., No. 03-60021
(S.D. Fla. 2003).
---------------------------------------------------------------------------
claims of low ``teaser'' rates and payment amounts,
without disclosing that the rates and payments would increase
substantially after a limited period of time;\80\
---------------------------------------------------------------------------
\80\ See, e.g., In re Am. Nationwide Mortg. Co., Inc., F.T.C.
Dkt. No. C-4249 (2009); In re Shiva Venture Group, Inc., F.T.C. Dkt.
No. C-4250 (2009); In re Michael Gendrolis, F.T.C. Dkt. No. C-4248
(2009). The FTC also sent over 200 warning letters in 2007 to
mortgage lenders, mortgage brokers, and media outlets regarding
mortgage advertising claims, including teaser rates, that could be
deceptive or violate TILA. See Press Release, FTC, FTC Warns
Mortgage Advertisers and Media That Ads May Be Deceptive (Sept. 11,
2007), available at (http://www.ftc.gov/opa/2007/09/mortsurf.shtm).
---------------------------------------------------------------------------
misrepresentations that rates were fixed for the full term
of the loan;\81\
---------------------------------------------------------------------------
\81\ See, e.g., In re Am. Nationwide Mortg. Co., Inc., F.T.C.
Dkt. No. C-4249 (2009).
---------------------------------------------------------------------------
misrepresentations about, or failure to adequately
disclose, the existence of a prepayment penalty\82\ or large balloon
payment due at the end of the loan;\83\
---------------------------------------------------------------------------
\82\ See, e.g., FTC v. Chase Fin. Funding, Inc., No. SACV04-549
(GLT (ANx) C.D. Cal. 2004); FTC v. OSI Fin. Servs., Inc., No. 02-C-
5078 (N.D. Ill. 2002).
\83\ See, e.g., FTC v. OSI Fin. Servs., Inc., No. 02-C-5078
(N.D. Ill. 2002).
---------------------------------------------------------------------------
claims about the monthly payment amounts that the borrower
would owe, without disclosing the existence, cost, and terms of credit
insurance products ``packed'' into the loan;\84\
---------------------------------------------------------------------------
\84\ See, e.g., FTC v. Assocs. First Capital Corp., No. 1:01-
00606 JTC (N.D. Ga. 2001). The complaint in that case alleged, among
other things, that the defendants included credit insurance products
in the loan package without the borrower's knowledge.
---------------------------------------------------------------------------
claims that the loans were amortizing, when, in fact, they
involved interest-only transactions;\85\
---------------------------------------------------------------------------
\85\ See, e.g., FTC v. Capital City Mortg. Corp., No. 1:98CV237
(D.D.C. 1998).
---------------------------------------------------------------------------
claims of mortgage payment amounts that failed to include
loan fees and closing costs of the kind typically included in loan
amounts; \86\
---------------------------------------------------------------------------
\86\ See, e.g., FTC v. Assocs. First Capital Corp., No. 1:01-
00606 JTC (N.D. Ga. 2001). In addition, in making these statements,
the lender allegedly did not reveal that the loans were interest-
only and that borrowers would owe the entire principal amount in a
large balloon payment at the end of the loan term.
---------------------------------------------------------------------------
false or misleading savings claims in high loan-to-value
loans;\87\
---------------------------------------------------------------------------
\87\ See, e.g., In re FirstPlus Fin. Group, Inc., F.T.C. Dkt.
No. C-3984 (2000).
---------------------------------------------------------------------------
false or misleading claims regarding the terms or nature
of interest rate lock-ins;\88\
---------------------------------------------------------------------------
\88\ See, e.g., In re Lomas Mortg. U.S.A., Inc., 116 F.T.C. 1062
(1993).
---------------------------------------------------------------------------
false claims that an entity was a national mortgage
lender;\89\
---------------------------------------------------------------------------
\89\ See, e.g., FTC v. 30 Minute Mortg. Inc., No. 03-60021 (S.D.
Fla. 2003).
---------------------------------------------------------------------------
failure to disclose adequately that the advertiser, not
the consumer's current lender, was offering the mortgage;\90\ and
---------------------------------------------------------------------------
\90\ See, e.g., In re Michael Gendrolis, F.T.C. Dkt. No. C-4248
(2009).
---------------------------------------------------------------------------
false or misleading claims that consumers were ``pre-
approved'' for mortgage loans.\91\
---------------------------------------------------------------------------
\91\ See, e.g., United States v. Unicor Funding, Inc., No.
SACV99-1228 (C.D. Cal. 1999).
---------------------------------------------------------------------------
In addition, the Commission has brought actions against mortgage
companies that allegedly deceptively offered loans to consumers whose
primary language was a language other than English. One action
challenged as deceptive a mortgage company's alleged practice of
stating loan terms orally to Spanish-speaking consumers in Spanish,
only to provide loan documents with different and less favorable terms
in English.\92\ In a second case, the company allegedly offered certain
mortgage terms in both Chinese and English advertisements, but failed
to disclose a large balloon payment.\93\
---------------------------------------------------------------------------
\92\ See FTC v. Mortgages Para Hispanos.com Corp., No. 4:06-cv19
(E.D. Tex. 2006).
\93\ See In re Felson Builders, Inc., 119 F.T.C. 652 (1995).
---------------------------------------------------------------------------
Numerous states have brought enforcement actions under state laws
alleging deceptive mortgage advertising and marketing, challenging
misrepresentations about: (1) the lack of closing costs;\94\ (2) low
fixed or teaser rates or payments;\95\ (3) the advertiser's
[[Page 60358]]
affiliation with the consumer's current lender;\96\ (4) the
availability of government grants for home repairs;\97\ (5) the savings
available by refinancing;\98\
---------------------------------------------------------------------------
\94\ See, e.g., In re Lenox Fin. Mortg., LLC, No. 2007-017383
(Ariz. Sup. Ct. 2007) (assurance of discontinuance), available at
(http://www.azag.gov/press_releases/sept/2007)/
LenoxFinancialAssurance&Approval.pdf.
\95\ See, e.g., State v. Lifetime Fin., Inc., No. LC080829 (Cal.
Super. Ct. 2008), available at (http://www.ag.ca.gov/cms_attachments/press/pdfs/n1533_complaint_for_civil_penalties.pdf);
State v. Green River Mortg., No. 2009CV89 (Colo. Dist. Ct. 2009),
press release available at (http://www.coloradoattorneygeneral.gov/press/news/2009/05/12/attorney_general_announces_settlement_barring_mortgage_broker_operating_inside); State v. One Source
Mortg., Inc., No. 07CH34450 (Ill. Cir. Ct. 2007), press release
available at (http://www.ag.state.il.us/pressroom/2007_11/20071126.html); In re Paramount Equity Mortg., Inc., No. C-07-405-
08-SC01 (Wash. Dep't of Fin. Inst. 2008), available at (http://www.dfi.wa.gov/CS%20Orders/C-07-405-08-SC01.pdf).
\96\ See, e.g., State v. Sroka, No. 2007-16-61 (Idaho Dep't of
Fin. 2007), available at (http://finance.idaho.gov/ConsumerFinance/Actions/Administrative/2007-16-61_Sroka_Terrazas_Order_Cease_and_Desist.pdf); State v. Sage, No. 2007-8-45 (Idaho Dep't of
Finance 2007), press release available at (http://finance.idaho.gov/PR/2007/PressRel_Sage_CDOrder.pdf);State v. Goldstar Home Mortg.,
No. 09AB-CV02310 (Mo. Cir. Ct. 2009) press release available at
(http://ago.mo.gov/newsreleases/2009/AG_Koster_files_lawsuits_after_mortgage_fraud/).
\97\ See, e.g., State v. Ellis, No. 07CH34451 (Ill. Cir. Ct.
2007), press release available at (http://www.ag.state.il.us/pressroom/2007_11/20071126.html).
\98\ See, e.g., State v. Advantage Mortg. Serv., Inc., No. C107
(Neb. Dist. Ct. 2007), available at (http://www.ndbf.ne.gov/forms/Advantage_Mortgage_Complaint.pdf).
---------------------------------------------------------------------------
(6) reverse mortgage terms and government affiliation;\99\ (7) the
availability of rates compared to competitors;\100\ and (8) the
advertiser's self-description as a ``bank.''\101\
---------------------------------------------------------------------------
\99\ See, e.g., State v. Upstate Capital, Inc., No. 08-036 (N.Y.
Office of Att'y Gen. 2008), press release available at (http://www.ag.ny.gov/media_center/2008/apr/apr24a_08.html). Other cases
have charged other entities with deceptive advertising, including
using the words ``United States of America'' or an image of the
Statute of Liberty, when the advertiser had no affiliation with the
government (see State v. Island Equity Mortg., Inc., (N.Y. Banking
Dep't 2007), available at (http://www.banking.state.ny.us/ea070412.htm), and falsely representing that the advertisers were
affiliated with a government program (see In re Assurity Fin.
Servs., LLC, No. C-07-320-08-SC01 (Wash. Dep't of Fin. Inst. 2008),
available at (http://www.dfi.wa.gov/CS%20Orders/C-07-320-08-SC01.pdf); see also State v. Am. Advisors Group, Inc., No.
2010CH00158 (Ill Cir. Ct. filed Feb. 8, 2010), available at (http://www.scribd.com/doc/33748621/People-Illinois-v-American-Advisors-Group-Complaint); State v. Hartland Mortg. Ctrs., Inc., No.
10CH05339 (Ill. Cir. Ct. filed Feb. 8, 2010), press release
available at (http://www.ag.state.il.us/pressroom/2010_02/20100208.html). HUD also recently took action against two lenders
for deceptive advertising of HUD-insured reverse mortgages. See
Press Release, HUD, FHA Withdraws Three Lenders, Suspends a Fourth
(Feb. 25, 2010), available at (http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-019).
\100\ See, e.g., In re Paramount Equity Mortg., Inc., No. C-07-
405-08-SC01 (Wash. Dep't of Fin. Inst. 2008), available at (http://www.dfi.wa.gov/CS%20Orders/C-07-405-08-SC01.pdf).
\101\ See, e.g., id.
---------------------------------------------------------------------------
III. Discussion of the Proposed Rule
The Commission's law enforcement experience, state law enforcement
activities and legislation, and the comments received in response to
the ANPR demonstrate that deceptive claims in mortgage advertising and
marketing pose a risk of significant harm to consumers. In addition to
continuing to engage in aggressive law enforcement against those who
make such claims, the FTC believes that a rule prohibiting
misrepresentations in mortgage advertising would enable the agency to
protect prospective borrowers more effectively by establishing clear
standards for advertisers, increasing the efficiency of law enforcement
efforts, and serving as a deterrent to unlawful behavior. In
particular, as discussed above, the proposed rule would allow the
Commission to seek civil penalties for violations, thereby enhancing
the effect of the Commission's law enforcement actions. Civil penalties
may be an especially useful deterrent in cases in which consumer
redress or disgorgement is not available or not feasible.
A. Section 321.1: Scope
As detailed in Part I.A, the scope of this rulemaking is set forth
in the Omnibus Appropriations Act, as clarified by the Credit CARD Act.
These statutes direct the Commission to commence a rulemaking
proceeding to issue rules ``related to unfair or deceptive acts or
practices.'' The Commission's rulemaking authority also is limited by
the Credit CARD Act to persons over whom the FTC has enforcement power
under the FTC Act.
B. Section 321.2: Definitions
1. Sections 321.2(e): ``mortgage credit product;'' 321.2(d):
``dwelling;'' and 321.2(b): ``consumer''
The proposed rule would prohibit any person from making any
material misrepresentation in any commercial communication regarding
any term of any mortgage credit product. Proposed Sec. 321.2(f)
defines ``mortgage credit product.'' To fall within that definition,
the product must meet three criteria. First, it must be a form of
``credit.'' The term ``credit'' is defined as ``the right to defer
payment of debt or to incur debt and defer its payment.''\102\ Second,
the credit must be secured either by real property or a dwelling. The
term ``dwelling'' is defined as ``a residential structure that contains
one to four units, whether or not that structure is attached to real
property'' and includes ``an individual condominium unit, cooperative
unit, mobile home, and trailer, if it is used as a residence.''\103\
Third, the credit must be offered to a consumer primarily for personal,
family, or household purposes. ``Consumer'' is defined as a ``natural
person to whom a mortgage credit product is offered or extended.''\104\
Personal, family or household purposes would include, for example, home
purchase or improvement loans, debt consolidation or home equity
transactions, credit for medical or dental expenses, and educational
loans. Credit offered or extended primarily for a business purpose
would not be covered, even if it is secured by a lien on a dwelling.
The determination of whether the credit is ``primarily'' for personal,
family, or household use, rather than ``primarily'' for business use,
requires an assessment of all of the facts of a particular transaction.
---------------------------------------------------------------------------
\102\ Proposed Sec. 321.2(c). This definition is largely based
on that in Regulation Z. See 12 CFR 226.2(a)(14). One difference is
that the proposed rule covers all shared equity and shared
appreciation mortgages offered to consumers, whereas certain types
of such mortgages may not be considered ``credit'' under Regulation
Z. See Regulation Z Commentary, 12 CFR 226.2(a)(14)-1 and
226.17(c)(1)-11, Supp. I. In shared equity and shared appreciation
mortgages, the consumer receives cash, a lower interest rate, or
other favorable terms in exchange for agreeing to share with the
lender or other company all or part of the consumer's total equity
or the appreciation in the consumer's equity when the loan comes
due, or at some other point during the loan.
\103\ Proposed Sec. 321.2(e). Both primary and secondary (or
vacation) homes are covered if they are used as collateral for the
loan. The term ``dwelling'' in the proposed rule is based on that
used in TILA and Regulation Z. See 15 U.S.C. 1602(v) and 12 CFR
226.2(a)(19).
Note that some aspects of the Regulation Z advertising rules
apply only to credit secured by a dwelling and not by real property.
See 12 CFR 226.16(d); 12 CFR 226.24(f) and (i).
\104\ Proposed Sec. 321.2(b). Thus, credit offered or extended
to an organization or governmental entity is not covered.
---------------------------------------------------------------------------
Assuming they meet the above criteria, the proposed definition
covers both closed-end credit (e.g., installment financing) \105\ and
open-end credit (e.g., HELOCs);\106\ traditional, fully amortizing
loans and nontraditional or
[[Page 60359]]
alternative financing;\107\ and forward and reverse mortgages.\108\
---------------------------------------------------------------------------
\105\ Construction financing and other forms of credit in which
multiple advances may be common are also covered. In these
transactions, some or all of the advances may be estimates (as to
their dollar amount or the date on which they will occur).
\106\ The proposed rule's prohibitions apply uniformly to
closed-end and open-end credit. In contrast, the Regulation Z
advertising provisions (including restrictions on deceptive claims)
are different for closed-end and open-end credit. See, e.g.,12 CFR
226.24(i) and 12 CFR 226.16(d)(5) and (f).
\107\ Covered alternative loans include, for example, hybrid
ARMs, teaser rate or teaser payment loans with low rates or payments
that expire after a short period, interest-only and balloon
mortgages, negative amortization mortgages, shared equity and shared
appreciation mortgages, buydowns, and payment option ARMs. For a
discussion of the various types of mortgage loans and their
features, see generally Interagency Subprime Mortgage Statement and
Interagency Nontraditional Mortgage Guidance, supra note 39;
Conference of State Bank Supervisors (CSBS), Guidance on
Nontraditional Mortgage Product Risks for State-Licensed Entities
(Nov. 14, 2006), available at (http://www.banking.mt.gov/content/pdf/CSBS-AARMR_FINAL_GUIDANCE.pdf) (issuing parallel guidance to
federal bank regulatory agencies for residential mortgage brokers
and mortgage bankers); CSBS et al., Statement on Subprime Mortgage
Lending(July 16, 2007), available at (http://www.csbs.org/regulatory/policy/policy-guidelines/Documents/Final_CSBS-AARMR-NACCA_StatementonSubprimeLending.pdf) (issuing similar guidance to
federal bank regulatory agencies for residential mortgage brokers
and mortgage bankers).
\108\ See supra note 33 and accompanying text.
---------------------------------------------------------------------------
2. Section 321.2(g): ``term''
The proposed rule would apply to any ``term'' of any mortgage
credit product. Under the proposal, ``term'' is defined broadly to mean
``any of the fees, costs, obligations, or characteristics of, or
associated with, the product.'' It also includes any of the conditions
on, or related to, the availability of the product. ``Term'' is
intended to cover all aspects of a mortgage credit product without
exception.
3. Section 321.2(a): ``commercial communication''
As discussed above, the proposed rule applies to claims made in any
``commercial communication,'' which is defined as follows:
any written or verbal statement, illustration, or depiction, whether
in English or any other language, that is designed to effect or create
interest in purchasing goods or services, whether it appears on or in a
label, package, package insert, radio, television, cable television,
brochure, newspaper, magazine, pamphlet, leaflet, circular, mailer,
book insert, free standing insert, letter, catalogue, poster, chart,
billboard, public transit card, point of purchase display, film, slide,
audio program transmitted over a telephone system, telemarketing
script, onhold script, upsell script, training materials provided to
telemarketing firms, program-length commercial (``infomercial''), the
Internet, cellular network, or any other medium. Promotional materials
and items and Web pages are included in the phrase ``commercial
communication.'' \109\
---------------------------------------------------------------------------
\109\ See proposed Sec. 321.2(a).
---------------------------------------------------------------------------
This definition encompasses commercial communications\110\ in any
medium and in any language(s).\111\
---------------------------------------------------------------------------
\110\ Based on this definition, the proposed rule has broader
applicability than the Board's advertising rules in Regulation Z,
which exempt personal contacts, communications about existing
accounts, and certain educational materials. See Regulation Z
Commentary, 12 CFR 226.2(a)(2), Supp. I.
\111\ The proposed rule broadly prohibits misleading claims in
any language. In comparison, for closed-end credit, Regulation Z
specifically bans providing information about some trigger terms or
required disclosures only in a foreign language in the advertisement
but, at the same time, providing information about other trigger
terms or required disclosures only in English in that advertisement.
See 12 CFR 226.24(i)(7). As discussed below, see infra Part
IV.B.2(3), the Commission seeks comment on whether the proposed rule
should address the use of multiple languages in marketing mortgages
to consumers whose primary language is not English.
---------------------------------------------------------------------------
4. Section 321.2(f): ``person''
The proposed rule applies to any ``person,'' defined as ``any
individual, group, unincorporated association, limited or general
partnership, corporation, or other business entity.''\112\ Thus, any
individual or entity that makes representations in a commercial
communication about a mortgage credit product is a ``person'' for
purposes of the proposed rule. The types of entities the proposed rule
covers include mortgage lenders, mortgage brokers, mortgage servicers,
real estate agents and brokers, advertising agencies, home builders,
lead generators, rate aggregators, and others under the Commission's
jurisdiction.\113\ As mandated by the Omnibus Appropriations Act,
individuals and entities that are excluded from the FTC's jurisdiction
are not covered by the proposed rule.
---------------------------------------------------------------------------
\112\ Id. This definition is based on that used in Regulation Z.
See 12 CFR 226.2(a)(22).
\113\ See supra notes 36-37. One commenter raised the need for
coverage of mortgage rate aggregators, among others, in the
prospective advertising rules. See HPC at 3.
---------------------------------------------------------------------------
Consistent with the FTC's jurisdiction, the proposed rule covers
all credit unions except federally-chartered credit unions.\114\
Several representatives of credit unions (and a group of state credit
union regulators) filed comments on the ANPR.\115\ Some commenters
urged the Commission to exclude state-chartered credit unions so as not
to put them at a competitive disadvantage relative to federally-
chartered credit unions. Commenters also noted that the advertising
practices of state-chartered credit unions that are federally insured
are subject to existing NCUA advertising regulations.\116\
---------------------------------------------------------------------------
\114\ The Commission's jurisdiction includes nonfederally-
insured, state-chartered credit unions, nonfederally-insured credit
unions in Puerto Rico and other U.S. territories, and any credit
unions with no deposit insurance.
\115\ See supra note 30.
\116\ Federally-insured credit unions are prohibited generally
by NCUA's regulations from using advertising or promotional material
that contains inaccurate, misleading, or deceptive claims concerning
their products, services, or financial condition. See 12 CFR 740.2.
In addition, some commenters asserted that subsidiaries of banks
or thrifts should not be covered by the prospective rules or are
subject to rules administered by the federal banking agencies. See
ABA at 3-6; CMC/AFSA at 3-5; see also, e.g., 12 CFR 563.27 (OTS
regulations prohibiting thrifts from using advertisements or other
representations that are inaccurate or misrepresent the services or
contracts offered).
---------------------------------------------------------------------------
The proposed rule does not grant any exemptions beyond those
already provided by the FTC Act. To the extent that other federal
agencies regulate the advertising of certain financial
institutions,\117\ the proposed rule, which simply prohibits
misrepresentations, would not conflict with those regulations.\118\ Nor
does the Commission believe that prohibiting certain financial
institutions from making deceptive claims would establish a competitive
disadvantage. Entities not covered by the proposed rule remain subject
to general federal and state truth-in-advertising laws. The Commission
seeks comment on whether the rule should grant any exemptions beyond
those in the FTC Act.
---------------------------------------------------------------------------
\117\ While there are similarities between the proposed rule and
existing federal and state requirements, none of the existing
requirements duplicate all of the operative provisions of the
proposed rule.
\118\ In other words, nothing in the other agencies' regulations
would require entities to make claims that the proposed rule
prohibits.
---------------------------------------------------------------------------
C. Section 321.3: Prohibited Representations
1. Discussion
Proposed Sec. 321.3 prohibits any material misrepresentation,
whether made expressly or by implication, in any commercial
communication, regarding any term of any mortgage credit product. FTC
and state cases provide numerous examples of misrepresentations made in
mortgage advertising. Proposed Sec. Sec. 321.3(a)-(s) set forth a non-
exclusive list of misrepresentations that would violate the proposed
rule. This list addresses the most common misrepresentations that have
appeared in state and federal enforcement actions over the past several
years and is intended to provide illustrative guidance about the kinds
of claims that are prohibited. For discussion purposes, the list of
representations covered by the proposed rule is informally grouped into
three categories below.
As noted above, a claim is deceptive under Section 5 of the FTC Act
if there
[[Page 60360]]
is a ``representation, omission, or practice that . . . is likely to
mislead consumers acting reasonably under the circumstances, and . . .
the representation, omission, or practice is material.''\119\
Information is ``material'' if it is ``likely to affect [a consumer's]
choice of, or conduct regarding, a product.''\120\ The types of
information in the representations specified in Sec. 321.3 of the
proposed rule involve matters central to consumers' decisions about
mortgage credit products. Thus, the types of misrepresentations the
proposed rule prohibits are ``material.''
---------------------------------------------------------------------------
\119\ Cliffdale, 103 F.T.C. at 165.
\120\ Id.; see also Novartis, 223 F.3d.at 786; supra notes 48-53
and accompanying text.
---------------------------------------------------------------------------
a. Fees or Costs
In general, proposed Sec. Sec. 321.3(a)-(f) address
representations related to fees or costs associated with a mortgage
credit product. Proposed Sec. 321.3(a) covers misrepresentations about
interest charged for the product, including but not limited to
misrepresentations about (1) whether the loan includes a negative
amortization feature;\121\ (2) the amount of interest owed each month
that is included in the consumer's payments, loan amount, or total
amount due; and (3) the interest owed each month that is not included
in the payments but is instead added to the total amount due.
---------------------------------------------------------------------------
\121\ See, e.g., In re Shiva Venture Group, Inc., F.T.C. Dkt.
No. C-4250 (2009); In re Michael Gendrolis, F.T.C. Dkt. No. C-4248
(2009); In re Am. Nationwide Mortg. Co., Inc., F.T.C. Dkt. No. C-
4249 (2009); FTC v. OSI Fin. Servs., Inc., No. 02-C-5078 (N.D. Ill.
2002); United States v. Mercantile Mortg. Co., No. 02-C-5029 (N.D.
Ill. 2002); FTC v. Capital City Mortg. Corp., No. 1:98CV237 (D.D.C.
1998).
---------------------------------------------------------------------------
Proposed Sec. 321.3(b) bars misrepresentations about the APR,
simple annual rate, periodic rate, or any other rate, including but not
limited to a payment rate.\122\ The Commission has challenged deceptive
rate claims in many cases, some of which included allegations that
originators understated the true rate by more than 100 percent.\123\
This provision also is intended to cover false or misleading savings
rate claims in financing promotions. The Commission has challenged, for
example, deceptive claims that consumers will save money (such as at a
particular rate of savings) by accepting the credit offer.\124\
---------------------------------------------------------------------------
\122\ A payment rate is the rate used to calculate the
consumer's monthly payment amount and is not necessarily the same as
the interest rate. If the payment rate is less than the interest
rate, the consumer's monthly payment amount does not include the
full interest owed each month; the difference between the amount the
consumer pays and the amount the consumer owes is added to the total
amount due from the consumer.
The proposed rule prohibits misrepresentations about payment
rates and any other rate, for both closed-end and open-end credit.
In comparison, Regulation Z bans advertising of payment rates for
closed-end credit. See Regulation Z Commentary, 12 CFR 226.24(c)-2,
Supp. I. Regulation Z also bans advertising of effective rates and
qualifying rates (which are similar terms for payment rates) for
closed-end credit. Id; see also 73 FR 44581-82. The Board enacted
this prohibition under Section 105 of TILA. See supra note 28.
\123\ See, e.g., FTC v. Safe Harbour Found. of Fla., Inc., No.
08-C-1185 (N.D. Ill. 2008) (severely understated APR).
Deceptive payment rate claims were at the heart of three
enforcement actions announced in February 2009. See In re Am.
Nationwide Mortg. Co., Inc., F.T.C. Dkt. No. C-4249 (2009); In re
Shiva Venture Group, Inc., F.T.C. Dkt. No. C-4250 (2009); In re
Michael Gendrolis, F.T.C. Dkt. No. C-4248 (2009).
\124\ The Commission has challenged deceptive comparisons in
financing that include, among other things, savings rates in non-
mortgage contexts. See In re Automatic Data Processing, 115 F.T.C.
841 (1992) (alleged deceptive comparisons in automobile financing).
Section 321.3(b) would prohibit these types of promotions when used
in the mortgage context.
---------------------------------------------------------------------------
Proposed Sec. 321.3(c) bars misrepresentations about the
existence, nature, or amount of fees or costs associated with any
mortgage credit product. It also prohibits false or misleading claims
that no fees are charged, for example, if the fees and costs, although
not paid separately, are included in the loan amount or total amount
due from the consumer. This provision covers fees and costs imposed at
any point during the life of the loan.\125\
---------------------------------------------------------------------------
\125\ See, e.g., FTC v. Ranney, No. 04-F-1065 (MJW) (D. Colo.
2004); FTC v. Chase Fin. Funding, Inc., No. SACV04-549 GLT (ANx)
(C.D. Cal. 2004) (allegedly promoting ``NO COSTS . . . NO KIDDING''
and ``no-fee'' loans, when in fact, the loans included such
charges); see also FTC v. Assocs. First Capital Corp., No. 1:01-
00606 JTC (N.D. Ga. 2001); FTC v. First Alliance Mortg. Co., No.
SACV 00-964 DOC (EEx) (C.D. Cal. 2000).
---------------------------------------------------------------------------
Proposed Sec. 321.3(d) covers misrepresentations about terms
associated with additional products or features that may be sold in
conjunction with a mortgage credit product.\126\ Thus, this provision
covers claims made in cross-selling other products or features in
mortgage credit product offers, including but not limited to credit
insurance, credit disability insurance, car clubs, or other ``add-ons''
to the loan.\127\
---------------------------------------------------------------------------
\126\ See, e.g., FTC v. Assocs. First Capital Corp., No. 1:01-
00606 JTC (N.D. Ga. 2001).
\127\ The Commission has alleged deceptive practices involving
add-ons to non-mortgage personal loans as well. See FTC v. Stewart
Fin. Co. Holdings, Civ. No. 1:03-CV-2648-JTC (N.D. Ga. 2003).
---------------------------------------------------------------------------
Proposed Sec. 321.3(e) covers misrepresentations relating to the
taxes on or insurance for the dwelling associated with a mortgage
credit product, for example, claims about whether tax or insurance
charges are included in the overall monthly payment or are made
separately. Prior Commission cases have challenged claims that the
advertised monthly payment included tax and insurance charges, when in
fact it did not.\128\
---------------------------------------------------------------------------
\128\ See, e.g., United States v. Mercantile Mortg. Co., No. 02-
C-5079 (N.D. Ill. 2002); FTC v. OSI Fin. Servs., Inc., No. 02-C-5078
(N.D. Ill. 2002); FTC v. Assocs. First Capital Corp., No. 1:01-00606
JTC (N.D. Ga. 2001).
---------------------------------------------------------------------------
Proposed Sec. 321.3(f) bars misrepresentations about the existence
or amount of any penalty for making prepayments on the mortgage. The
Commission has brought several cases against entities that allegedly
deceived consumers about prepayment penalties.\129\
---------------------------------------------------------------------------
\129\ See, e.g., United States v. Mercantile Mortg. Co., No. 02-
C-5079 (N.D. Ill. 2002); FTC v. OSI Fin. Servs., Inc., No. 02-C-5078
(N.D. Ill. 2002); FTC v. Chase Fin. Funding Inc., No. SACV 04-549
GLT (ANx) (C.D. Cal. 2004); see also FTC Bureau of Consumer
Protection, Bureau of Economics, and Office of Policy Planning,
Comments before Board of Governors of Federal Reserve System, Dkt.
No. R-1305, Apr. 8, 2008, n.11, available at (http://www.ftc.gov/os/2008/04/V080008frb.pdf).
---------------------------------------------------------------------------
b. Obligations or Characteristics
Proposed Sec. Sec. 321.3(g)-(p) generally address representations
related to obligations or characteristics associated with a mortgage
credit product. Proposed Sec. 321.3(g) prohibits misrepresentations
pertaining to the variability of interest, payments, or other terms of
mortgage credit products, including but not limited to, for example,
misrepresentations using the word ``fixed'' when terms are variable or
limited in duration.\130\ Proposed Sec. 321.3(h) bars false or
misleading comparisons between rates or payments,\131\ including but
not limited to comparisons involving savings. It also bars false or
misleading comparisons between rates or payments available for
different parts of the loan term.\132\
[[Page 60361]]
Proposed Sec. 321.3(i) prohibits misrepresentations about the type of
mortgage credit product that is offered, e.g., false claims that a
mortgage is fully amortizing.\133\ Proposed Sec. 321.3(j) bars
misrepresentations about the amount of the obligation or the existence,
nature, or amount of cash or credit the consumer could receive.\134\
This would include, for example, false claims that the consumer will
receive a certain amount of cash by obtaining a home equity loan, or
will receive a certain amount of credit through a purchase money loan.
Proposed Sec. 321.3(k) prohibits misrepresentations about the
existence, number, amount, or timing of any minimum or required
payments.\135\
---------------------------------------------------------------------------
\130\ The Commission has charged mortgage brokers and other
entities with falsely promising consumers low fixed payments and
rates on their mortgage loans, including promising ``30 year fixed.
1.95%,'' ``3.5% fixed payment loan,'' and other rates that were not,
in fact, fixed. See, e.g., In re Am. Nationwide Mortg. Co., Inc.,
F.T.C. Dkt. No. C-4249 (2009); FTC v. Chase Fin. Funding, Inc., No.
SACV 04-549 GLT (ANx) (C.D. Cal. 2004); see also FTC v. 30 Minute
Mortg., Inc., No. 03-60021 (S.D. Fla. 2003); Andrews v. Chevy Chase
Bank, 240 F.R.D. 612 (E.D. Wis. 2007) (describing payment option ARM
sold as ``fixed rate'' when interest was only fixed for one month,
although payments were fixed for a year).
Proposed Sec. 321.3(g) has broader applicability than a similar
provision in Regulation Z, which applies only to closed-end
dwelling-secured credit and requires specific advertising
disclosures. See 12 CFR 226.24(i)(1).
\131\ Proposed Sec. 321.3(h) has broader applicability than a
similar provision in Regulation Z, which applies only to closed-end
dwelling-secured credit and requires specific advertising
disclosures. See 12 CFR 226.24(i)(2).
\132\ See, e.g., In re FirstPlus Fin. Group, Inc., F.T.C. Dkt.
No. C-3984 (2000).
\133\ For example, the FTC charged a company with
misrepresenting that a loan was fully amortizing when, in fact, it
consisted of interest-only payments with a large balloon payment.
FTC v. Capital City Mortg. Corp., No. 1:98CV237 (D.D.C. 1998).
\134\ See FTC v. Assocs. First Capital Corp., No. 1:01-00606 JTC
(N.D. Ga. 2001) (alleging deceptive representations about loan
amounts in home equity mortgages); FTC v. First Alliance Mortg. Co.,
No. SACV 00-964 DOC (EEx) (C.D. Cal. 2000) (same as above); see also
United States v. Mercantile Mortg. Co., No. 02-C-5079 (N.D. Ill.
2002) (alleging deceptive representations about cash dispersal
amounts in home equity loans or refinances); FTC v. OSI Fin. Servs.,
Inc., No. 02-C-5078 (N.D. Ill. 2002) (same as above).
\135\ This provision covers, for example: (1) misrepresentations
about whether certain payments are part of the loan (see, e.g., FTC
v. OSI Fin. Servs., Inc., No. 02-C-5078 (N.D. Ill. 2002); United
States v. Mercantile Mortg. Co., No. 02-C-5079 (N.D. Ill. 2002));
(2) false claims that an aspect of the loan would cover the payments
due (see FTC v. Ranney, No. 04-F-1065 (MJW) (D. Colo. 2004)); and
(3) claims that ``no payments'' are required on a reverse mortgage
that falsely imply that consumers never have to repay the loan or
make related tax and insurance payments. See FFIEC Reverse Mortgage
Guidance, supra note 39, at 50809 (although reverse mortgages
generally do not require the consumer to remit payments for
principal, interest, and related loan costs during the time the
consumer remains in the home, repayment of these amounts can become
due if the consumer moves out of the home; also, reverse mortgages
generally do not include escrow accounts for taxes and property
insurance, and if the consumer does not remit payments separately
for these amounts, the consumer could lose the home).
---------------------------------------------------------------------------
Proposed Sec. 321.3(l) prohibits misrepresentations about the
potential for default on the mortgage credit product, including but not
limited to misrepresentations about the circumstances under which the
consumer could default for nonpayment of taxes or insurance, failure to
maintain the property, or not complying with other obligations.\136\
Proposed Sec. 321.3(m) bars misrepresentations about the effectiveness
of the mortgage credit product in helping consumers resolve problems in
paying debts.\137\ This section covers false or misleading claims that
the lender's or servicer's product (through a waiver, forgiveness, or
otherwise) will reduce, eliminate, or restructure a debt or any other
obligation of any person.\138\ Proposed Sec. 321.3(n) prohibits
misrepresentations about the association between a mortgage credit
product or a provider of such product and any other person or program,
including but not limited to any affiliation with an organizational or
governmental program, benefit, or entity.\139\ Proposed Sec. 321.3(o)
covers misrepresentations about the source of the mortgage credit
product and the commercial communications for it, including but not
limited to claims that the communication is made by or on behalf of the
consumer's current mortgage lender or servicer.\140\ Proposed Sec.
321.3(p) prohibits misrepresentations about the consumer's right to
reside in the dwelling that is the subject of the mortgage credit
product, including but not limited to false or misleading claims about
how long or under what conditions a consumer can stay in the
dwelling.\141\
---------------------------------------------------------------------------
\136\ For example, it would violate this section for a reverse
mortgage lender to represent that ``no matter what, you can stay in
your home for life,'' when the lender can force the sale of the
property if the consumer does not adequately maintain the property.
\137\ Proposed Sec. 321.3(m) has broader applicability than a
similar provision in Regulation Z, which applies only to closed-end
dwelling-secured credit. See 12 CFR 226.24(i)(5).
\138\ Thus, this provision covers false or misleading claims of
debt elimination, debt forgiveness, or savings associated with
mortgage credit products. See, e.g., In re FirstPlus Fin. Group,
Inc., F.T.C. Dkt. No. C-3984 (2000); FTC v. Safe Harbour Found. of
Fla., Inc., No. 08-C-1185 (D.C. Ill. 2008).
\139\ The FTC has challenged many of these types of claims in
its loan modification cases, including in cases where the defendants
allegedly claimed, in part through the use of names, seals, or
symbols, that the mortgage credit product was a government benefit
or that the lender was affiliated with the government. See, e.g.,
FTC v. Ryan, No. 1:09-cv-00535-HHK (D.D.C. 2009).
Proposed Sec. 321.3(n) has broader applicability than a similar
provision in Regulation Z, which applies only to closed-end
dwelling-secured credit and is limited to claims about the loan
program advertised. See 12 CFR 226.24(i)(3). In comparison, the
Commission's proposed rule applies to both closed-end and open-end
credit secured either by real property or a dwelling, covers claims
about the loan program as well as the provider of the advertisement,
and expressly references use of symbolic representations.
\140\ See, e.g., In re Michael Gendrolis, F.T.C. Dkt. No. C-4248
(2009). This section also covers false or misleading ``trigger
lead'' solicitations, in which entities: (1) obtain information
about the consumer from sources such as prescreened lists sold by
consumer reporting agencies; (2) based on that information, contact
the consumer to promote a mortgage credit product or term; and (3)
misrepresent their identity as the consumer's current lender or
servicer. See CMC/AFSA at 2, 7.
Proposed Sec. 321.3(o) has broader applicability than a similar
provision in Regulation Z, which applies only to closed-end
dwelling-secured credit and is limited to representations about
lenders. See 12 CFR 226.24(i)(4). In comparison, the Commission's
proposed rule applies to both closed-end and open-end credit secured
either by real property or a dwelling and bars misrepresentations
about both servicers and lenders.
\141\ Issues concerning the consumer's right to reside in the
dwelling have frequently arisen in the sale of reverse mortgages.
See generally, U.S. Gov't Accountability Office (GAO), GAO-09-606,
Reverse Mortgages: Product Complexity and Consumer Protection Issues
Underscore Need for Improved Controls over Counseling for Borrowers
(2009) (GAO Reverse Mortgage Report).
---------------------------------------------------------------------------
c. Conditions on or Related to Availability
Proposed Sec. Sec. 321.3(q)-(s) address representations that
pertain to the availability of the mortgage credit product and related
advice. Proposed Sec. Sec. 321.3(q) and 321.3(r) bar
misrepresentations about the consumer's ability to obtain, or
likelihood of obtaining, any mortgage credit product or term thereof,
or any refinancing or modification of a mortgage credit product or term
thereof. This includes false or misleading claims about whether the
consumer or the consumer's property has been preapproved or guaranteed
for any such product or term.\142\ Proposed Sec. 321.3(s) bars
misrepresentations about the availability, nature, or substance of
counseling services or any other expert advice offered to the consumer
regarding any mortgage credit product term, including but not limited
to the qualifications of those offering the services or advice.\143\
---------------------------------------------------------------------------
\142\ See, e.g., United States v. Unicor Funding, Inc., No. 99-
1228 (C.D. Cal. 1999); In re Lomas Mortg. U.S.A., Inc., 116 F.T.C.
1062 (1993) ; FTC v. Safe Harbour Found. of Fla., Inc., No. 08-C-
1185 (D.C. Ill. 2008); FTC v. Assocs. First Capital Corp., No. 1:01-
00606 JTC (N.D. Ga. 2001).
\143\ Such misrepresentations have been identified as
problematic in the offering of reverse mortgages, see, e.g., FFIEC
Reverse Mortgage Guidance, supra note 39,and GAO Reverse Mortgage
Report, supra note 141, and of loan modifications, see generally
MARS NPRM, supra note 19.
Proposed Sec. 321.3(s) has broader applicability than a similar
provision in Regulation Z, which applies only to closed-end
dwelling-secured credit and addresses advertisements that use the
term ``counselor'' to refer to a for-profit mortgage broker or
creditor, its employees, or others working for the broker or
creditor in offering, originating, or selling mortgages. See 12 CFR
226.24(i)(6). In comparison, the Commission's proposed rule applies
to both closed-end and open-end credit secured either by real
property or a dwelling and bans misrepresentations regardless of the
type of for-profit entity involved.
---------------------------------------------------------------------------
2. Advertising Disclosures
The proposed rule does not include any affirmative advertising
disclosure requirements. The Commission tentatively concludes that it
is unnecessary to mandate advertising disclosures in the proposed rule
and that not doing so will eliminate the possibility of inconsistencies
with other federally- or state-mandated disclosure requirements for
mortgage advertising.
[[Page 60362]]
Under Section 5 of the FTC Act, it is a deceptive practice to omit
qualifying information when making a literally truthful claim, if the
omission of that information is likely to mislead reasonable consumers
in a material way.\144\ For example, a closed-end mortgage
advertisement likely would be deceptive if it represented that a loan
has a very low interest rate, but failed to disclose that the rate
would substantially increase after a few months. Such claims often are
referred to as ``half truths.'' Mortgage advertisements that include
half truths in most cases also would be considered to have made implied
misrepresentations that would fit into the specific categories of
misrepresentations in the proposed rule. Continuing with the above
example, a claim that a loan has a very low interest rate, in the
absence of any qualifying information, is likely to imply to reasonable
consumers that the rate lasts at least for longer than a few months.
Thus, the proposed rule's prohibition on misrepresentations likely will
cover the sorts of half truths that arise when mortgage advertisers
fail to make material disclosures.\145\
---------------------------------------------------------------------------
\144\ See Deception Policy Statement, supra note 9, at 176-77.
\145\ A failure to disclose also can be an unfair practice if it
causes or is likely to cause substantial consumer injury that is not
outweighed by countervailing benefits and is not reasonably
avoidable. See, e.g., In re Int'l Harvester Co., 104 F.T.C. 949,
1062 (1984). Omissions may be unfair in the mortgage advertising
context if the information that is not disclosed concerns aspects of
the transaction that are so central to making an informed decision
that its omission is likely to be injurious. See id. Much of this
information is already required to be disclosed by TILA and
Regulation Z.
---------------------------------------------------------------------------
In addition, there are already substantial federal and state
regulations applicable to mortgage advertisements. Mandating
advertising disclosures in this rule would create potential conflicts
and inconsistencies with the disclosure provisions of these other
requirements to which covered entities are also subject, particularly
TILA and Regulation Z. For example, under TILA and Regulation Z, the
APR must be calculated following certain procedures, and it must be
disclosed in mortgage advertisements in some circumstances.\146\ If the
Commission were to determine that, under the proposed rule, the APR to
be disclosed in advertisements must be calculated using different costs
and procedures than those established by TILA and Regulation Z, that
determination would result in inconsistent federal requirements and
inconsistent disclosures, leading to consumer confusion and increased
burden on business.
---------------------------------------------------------------------------
\146\ See, e.g.,12 CFR 226.4; 226.14; 226.16(b) and (d)(1), (2)
and (6); 226.22; and 226.24(d) and (f)(2).
---------------------------------------------------------------------------
Although the proposed rule does not include affirmative advertising
disclosure requirements, the Commission specifically requests comment
on whether there are any advertising disclosures that the Commission
should consider mandating.
D. Section 321.4: Waiver Not Permitted
Proposed Sec. 321.4 provides that ``[a]ny attempt by any person to
obtain a waiver from any consumer of any protection provided by or any
right of the consumer under this rule constitutes a violation of this
rule.'' The Commission intends the proposed rule to protect consumers
from being deceived in making decisions about the most important
financial product most of them will obtain in their lifetimes. The
Commission is unaware of any circumstances under which advertisers of
mortgage loans should be able to circumvent the proposed rule - i.e.,
to make misrepresentations - by placing purported waivers in their
contracts or other agreements with consumers.\147\
---------------------------------------------------------------------------
\147\ Other consumer protection laws also include prohibitions
on requiring consumers to waive their statutory rights. See, e.g.,
15 U.S.C. 1693l (Electronic Fund Transfer Act).
---------------------------------------------------------------------------
E. Section 321.5: Recordkeeping Requirements
Proposed Sec. 321.5 sets forth specific categories of records that
persons covered by the proposed rule would be required to retain.\148\
A failure to keep such records would be an independent violation of the
rule.\149\
---------------------------------------------------------------------------
\148\ This provision is similar in many respects to the
recordkeeping requirements set forth in the FTC's Telemarketing
Sales Rule (TSR), including the mandate to retain scripts,
advertisements, and promotional materials. See 16 CFR 310.5. The
Telemarketing Sales Act expressly authorized the Commission to
impose recordkeeping requirements. 15 U.S.C. 6102(a)(3). Although
the Omnibus Appropriations Act, as clarified by the Credit CARD Act,
does not contain a specific provision on recordkeeping, the proposed
recordkeeping requirements are reasonably related to the statutory
goal of preventing deception.
\149\ Proposed Sec. 321.5(b); see also 16 CFR 310.5(b) (TSR).
---------------------------------------------------------------------------
Specifically, for a period of 24 months from the last date of
dissemination of the applicable commercial communication, covered
persons would have to retain the following information:
(1) Copies of all materially different commercial communications
disseminated, including but not limited to sales scripts, training
materials, related marketing materials, websites, and weblogs;
(2) Documents describing or evidencing all mortgage credit products
available to consumers during the time period in which each commercial
communication was disseminated, including but not limited to the names
and terms of each such mortgage credit product available to consumers;
and
(3) Documents describing or evidencing all additional products or
services (such as credit insurance or credit disability insurance) that
are or may be offered or provided with the mortgage credit products
available to consumers during the time period in which each commercial
communication was disseminated, including but not limited to the names
and terms of each such additional product or service available to
consumers.
The Commission believes that a record retention requirement is
necessary to ensure that covered persons are complying with the
requirements of the proposed rule.\150\ Specifically, the requirement
that covered persons retain copies of their commercial communications
would enable the FTC to review those communications for any
misrepresentations that violate the rule and to bring law enforcement
actions as appropriate. Moreover, covered persons may offer consumers
many different mortgage credit products, and may also offer or provide
additional products or services with the mortgage credit products.
Therefore, it is important for covered persons to maintain copies of
documents describing all of those products and services, so that the
Commission and state enforcement agencies can review those items in
assessing whether the claims being made for them violate the rule.
---------------------------------------------------------------------------
\150\ As noted in Part I.A.3, supra, the Omnibus Appropriations
Act, as clarified by the Credit CARD Act, permits both the
Commission and states to enforce the rules issued in connection with
this rulemaking. See Credit CARD Act Sec. 511(a)(1)(C) and (a)(2).
---------------------------------------------------------------------------
The Commission recognizes that recordkeeping provisions impose
compliance costs; however, many covered persons already retain in the
ordinary course of their business the types of documents that the
proposed rule would require be retained. To further reduce any burden,
the proposed rule would permit entities to keep the records in any
legible form and in the same manner, format, or place as they keep such
records in the ordinary course of business.
The proposed rule also seeks to limit the retention requirements to
avoid imposing any unnecessary burden. For example, covered entities
must retain only ``materially different'' commercial
[[Page 60363]]
communications. The proposed rule imposes a 24-month record retention
period, which the Commission believes would strike an appropriate
balance between ensuring efficient and effective compliance efforts,
while avoiding the imposition of unnecessary costs.
F. Section 321.6: Actions by States
The Omnibus Appropriations Act, as clarified by the Credit CARD
Act, permits states to enforce the rules issued in connection with this
rulemaking.\151\ States may enforce the rules, subject to the notice
requirements of the Omnibus Appropriations Act, by bringing civil
actions in federal district court or another court of competent
jurisdiction. Section 321.6 of the proposed rule provides that states
have the authority to file actions against those who violate the rule.
---------------------------------------------------------------------------
\151\ Credit CARD Act Sec. 511(a)(2).
---------------------------------------------------------------------------
G. Section 321.7: Severability
Proposed Sec. 321.6 states that the provisions of this rule are
separate and severable from one another. This provision, which is
modeled after a similar provision in the TSR,\152\ also states that if
a court stays or invalidates any provisions in the proposed rule, the
Commission intends the remaining provisions to continue in effect.
---------------------------------------------------------------------------
\152\ See 16 CFR 310.9.
---------------------------------------------------------------------------
IV. Requests for Comment
The Commission seeks comment on the proposed rule. Without limiting
the scope of issues on which it seeks comments, the FTC is particularly
interested in receiving comments on the questions that follow. In
responding to these questions, please include detailed factual
supporting information if possible.
A. General Questions for Comment
(1) How would the proposed rule affect commercial communications
about mortgage credit products? Useful comments would include
information about the types of commercial communications provided by
particular persons, how these persons provide commercial
communications, and the impact of the proposed rule on them.
(2) What types of mortgage credit products currently are being
offered to consumers or may be offered in the future? In what ways do
the fees, costs, obligations, characteristics of, conditions on, or
availability associated with the different types of mortgage credit
products vary?
(3) What would be the effects of the proposed rule (including any
benefits and costs) on consumers? Would the costs and benefits to
consumers differ depending on the coverage of the proposed rule? How?
(4) In addition to the evidence cited in this NPRM, what evidence
is there that consumers are likely to be misled by claims made relating
to mortgage credit products? Are consumers likely to be misled by
particular covered persons? Which ones? Are consumers likely to be
misled by specific types of claims? Which ones?
(5) What would be the effects of the proposed rule (including any
benefits and costs) on covered persons?
(6) What changes, if any, should be made to the proposed rule to
increase benefits to consumers and competition?
(7) What changes, if any, should be made to the proposed rule to
decrease costs to industry or consumers?
(8) How would the proposed rule affect small business entities with
respect to costs, profitability, competitiveness, and employment?
B. Specific Questions for Comment on Proposed Provisions
1. Section 321.2; Definitions
(1) Does the definition of ``mortgage credit product'' in proposed
Sec. 321.2(e) adequately describe the products the proposed rule
should cover? If not, how should it be modified? In particular, should
the definition be modified to include credit in addition to that which
``is offered or extended to a consumer primarily for personal, family,
or household purposes''? If so, what additional credit should be
covered? What would be the costs and benefits of the modified
definition?
(2) Does the definition of ``term'' in proposed Sec. 321.2(g)
adequately describe the various aspects of mortgage credit products
that the proposed rule should cover? If not, how should it be modified?
What would be the costs and benefits of the modified definition?
(3) Does the definition of ``commercial communication'' in Sec.
321.2(a) adequately describe the conduct the proposed rule should
cover? If not, how should it be modified? What would be the costs and
benefits of the modified definition?
Does the definition adequately address communications made in
languages other than English that the proposed rule should cover? If
not, how should it be modified? What would be the costs and benefits of
the modified definition?
(4) Does the definition of ``person'' in Sec. 321.2(f) adequately
describe those whom the proposed rule should cover? If not, how should
it be modified? For example, should any other entities be covered? What
would be the costs and benefits of the modified definition?
(i) Should state-chartered credit unions be excluded from coverage?
Why or why not? Should such an exclusion apply to all forms of state-
chartered credit unions, or only to some of these entities? Why or why
not?
(ii) Should subsidiaries or affiliates of banks and thrifts be
excluded from coverage? Why or why not?
2. Section 321.3: Prohibited Representations
(1) Proposed Sec. 321.3 bans persons from making
misrepresentations in commercial communications regarding any term of
any mortgage credit product and provides numerous non-exclusive
examples pertaining to fees, costs, obligations, or characteristics of,
or associated with, the product. It also includes misrepresentations of
any of the conditions on or related to the availability of the product.
How widespread is each prohibited misrepresentation? Should any of the
misrepresentations be deleted? Why? Should any other misrepresentations
be added? Is so, what other misrepresentations should be added? Why?
(2) The proposed rule does not specifically address practices
related to persons giving substantial assistance or support to those
who make misrepresentations covered by the proposed rule and who know
or consciously avoid knowing that those they assist are engaging in
such conduct. Some individuals and companies engaged in unlawful
practices may rely on the support and assistance of other persons. In
some nonmortgage transaction cases, for example, the Commission has
charged lead generators - who obtained information from consumers for
use by third parties - with providing knowing, substantial assistance
in violation of the TSR.\153\
---------------------------------------------------------------------------
\153\ The Commission has previously included ``assisting and
facilitating'' counts in at least two dozen cases filed under the
TSR. See, e.g., FTC v. Assail, Inc., No. W03CA007 (W.D. Tex. 2004);
United States v. DirecTV, Inc., No. SACV05 1211 DOC (C.D. Cal.
2005).
---------------------------------------------------------------------------
Should the rule include a specific prohibition on the provision of
substantial assistance or support to others who violate the rule? If
so, what specific conduct should be covered by the rule? What evidence
exists that mortgage entities receive substantial assistance or support
from other persons to deceptively advertise mortgage credit product
terms? What evidence exists about the types of persons who provide such
substantial assistance or support to
[[Page 60364]]
others? For example, is there evidence that lead generators or third-
party vendors provide substantial assistance to mortgage entities, by
identifying potential customers or performing back-room operations, in
support of those who engage in practices that would violate the
proposed rule? What evidence exists that persons may know or
consciously avoid knowing that the mortgage entities they assist are
making misrepresentations covered by the rule? What evidence exists
that consumers are likely to be injured from any such substantial
assistance and support? What would be the costs and benefits of such a
prohibition?
(3) Increasingly, many consumers in our society use languages other
than English as their primary language.\154\ As a result, consumers may
be exposed to more advertisements and offers that ``mix languages'' in
connection with mortgage products.\155\ For example, in a recent FTC
case, the Commission alleged that a mortgage broker engaged in
deception when it offered payments and other mortgage terms in
promotions to Spanish-speaking borrowers in Spanish, but the terms in
the documents at closing, which were provided only in English, were
less favorable.\156\ One comment submitted in response to the MAP ANPR
raises concerns about practices involving non-English speakers. It
notes that, in some instances, sales and loan representatives of some
home builders or their affiliated lenders have conducted transactions
primarily in Spanish, but mortgage documents were provided only in
English, making it difficult for buyers to understand or reject
mortgage terms.\157\
---------------------------------------------------------------------------
\154\ According to the 2000 Census, at least 18% of the
population (47 million people) speak a language other than English
at home. See U.S. Census Bureau, Language Use and English-Speaking
Ability: 2000, at 2 (Oct. 2003), available at (http://www.census.gov/prod/2003pubs/c2kbr-29.pdf).
\155\ See supra note 111.
\156\ See FTC v. Mortgages Para Hispanos.com Corp., No. 4:06-cv-
19 (E.D. Tex. 2006). GAO is currently studying the relationship
between English fluency and financial literacy and whether
individuals whose native language is a language other than English
are impeded in their financial affairs. See Credit CARD Act Sec.
513.
\157\ See Laborers Int'l Union at 4-5.
---------------------------------------------------------------------------
The proposed rule broadly prohibits material misrepresentations in
commercial communications regardless of the language in which the claim
is made. Are more protections warranted to prevent the use of multiple
languages - or ``mixing'' languages - in a way that makes it difficult
for consumers to understand mortgage terms? What evidence exists of the
use of mixed languages in commercial communications for mortgage credit
product terms in a deceptive or unfair manner? Is there evidence of
mortgage brokers or other entities, in marketing to non-English
speaking consumers, using a language other than English to convey a
claim, while contradicting that claim in English - e.g., using the
consumer's primary language to convey a very low interest rate, while
using English to communicate that the rate will increase after only a
few months? Have such practices occurred in both open-end and closed-
end mortgage credit advertisements? What evidence is there of mortgages
being marketed in languages other than English with contradictory
information or additional material terms provided only in English in a
manner that is deceptive or unfair? Should the rule address the mixing
of languages in commercial communications through disclosure
requirements? If so, how should it do so? Should, for example, it
prohibit the use of a foreign language to convey some material terms in
a commercial communication when other material terms are disclosed only
in English? What would be the costs and benefits of doing so?
3. Section 321.5: Recordkeeping
(1) Proposed Sec. 321.5(a) requires a 24-month document retention
period. Should the proposed rule include a record retention
requirement? Is the specified period of time adequate for effective and
efficient law enforcement? Does it impose unnecessary costs on persons
making commercial communications covered by the proposed rule? Should
the Commission consider an alternative retention period - for example,
a time period commensurate with the five-year statute of limitations
for an FTC action for civil penalties? If so, explain what would be the
appropriate time period, and why.
(2) Proposed Sec. 321.5(a) sets forth specific categories of
records that persons covered by the proposed rule are required to
retain. Do these categories adequately describe the records needed to
ensure that covered persons are complying with the requirements of the
proposed rule? If not, how should the categories by modified?
(3) Proposed Sec. 321.5(b) permits persons covered by the proposed
rule to retain documents in any form and in the same manner, format, or
place as they keep such records in the ordinary course of business. Is
this flexibility appropriate? Should the Commission specify how
documents should be retained? If so, explain what would be the
appropriate standard for retaining documents.
C. Other Issues
1. Effective Dates
The proposed rule generally prohibits misrepresentations in
commercial communications about the terms of mortgage credit products,
consistent with the prohibition on deceptive claims that would violate
Section 5 of the FTC Act. The persons subject to the proposed rule are
within the Commission's jurisdiction under the FTC Act, and thus are
already prohibited from such conduct. Nonetheless, to afford affected
persons time to adjust to the proposed rule's new recordkeeping
requirements, the Commission proposes an effective date of 30 days
following publication of the final rule in the Federal Register. Is
this time period appropriate? If yes, why? If not, what period would be
more appropriate, and why? What would be the costs and benefits of any
such modified time period?
2. Advertising Disclosures
The proposed rule does not require affirmative advertising
disclosures. Are affirmative advertising disclosures needed to prevent
deception related to commercial communications for mortgage credit
products? If so, what advertising disclosures are needed, and why is
the failure to provide them unfair or deceptive? Should these
advertising disclosures be triggered by terms that may be included in
the commercial communication, or should they be nontriggered
disclosures that are required in all commercial communications for
mortgage credit products, regardless of the content of the
communication? Should any advertising disclosures vary based on the
types of media in which the commercial communication is made, for
example, direct mail, newspaper, radio, television, or electronic? If
so, how?
Should the rule incorporate any mortgage advertising requirements
that the Board promulgated under Section 105 of TILA?\158\ If so, which
should be incorporated? Should the rule incorporate the requirements
that apply to advertisements for open-end credit, closed-end credit, or
both?\159\ Should the rule incorporate any other requirements from
Regulation Z, such as those pertaining to ``definitions'' or
calculations of terms (that may appear in the advertising requirements,
among
[[Page 60365]]
others), such as the ``finance charge'' and ``APR''?\160\
---------------------------------------------------------------------------
\158\ See supra Parts III.C.2 and IV.C.2 and note 28.
\159\ See, e.g., 12 CFR 226.16 and 226.24(c), (d), (e), (f), and
(g), respectively.
\160\ See, e.g., 12 CFR 226.2 (definitions); 12 CFR 226.4
(finance charge calculation); 12 CFR 226.14 (open-end APR
calculation); and 12 CFR 226.22 (closed-end APR calculation).
---------------------------------------------------------------------------
Is a mortgage advertiser's failure to comply with any of Regulation
Z's requirements an unfair or deceptive act or practice under the FTC
Act? Would requiring mortgage advertisers to comply with any of
Regulation Z's requirements be reasonably related to the prevention of
unfair or deceptive acts or practices? What are the advantages and
disadvantages of incorporating disclosure requirements into the rule?
For any advertising disclosures that should be required, how should
they be reconciled with the disclosures required in mortgage
advertisements under TILA and Regulation Z? In addition, if the rule
were to include advertising disclosure requirements, should all the
disclosure standards be the same as or different from those in
Regulation Z (e.g., ``clear and conspicuous'')?\161\ Should the
analysis differ based on the type of medium, for example, print, radio,
television, or electronic?
---------------------------------------------------------------------------
\161\ See, e.g., 12 CFR 226.24(b). The Commission is aware that
different formulations of the ``clear and conspicuous'' standard are
used in Regulation Z, including, in some instances, requirements for
``equally prominent,'' ``closely proximate,'' or ``proximate''
advertising disclosures. See 12 CFR 226.24(b), Supp. I, and 73 FR
44522.
---------------------------------------------------------------------------
In addition, for any Regulation Z disclosures that should be
incorporated into the rule, how should the rule address changes over
time that occur in disclosures required by Regulation Z or the
Regulation Z Commentary? Would additional requirements be needed to
address this issue? What forms of testing or other empirical evidence,
if any, would be appropriate to measure the effectiveness of any
required advertising disclosures in the rule? What would be the costs
and benefits of such testing?
D. Instructions for Submitting Comments
Interested parties are invited to submit written comments
electronically or in paper form. Comments should refer to ``Mortgage
Acts and Practices - Advertising Rulemaking, Rule No. R011013'' to
facilitate the organization of comments. Please note that your comment
- including your name and your state - will be placed on the public
record of this proceeding, including on the publicly accessible FTC
website, at (http://www.ftc.gov/os/publiccomments.shtm).
Because comments will be made public, they should not include any
sensitive personal information, such as any individual's Social
Security number; date of birth; driver's license number or other state
identification number, or foreign country equivalent; passport number;
financial account number; or credit or debit card number. Comments also
should not include any sensitive health information, such as medical
records or other individually identifiable health information. In
addition, comments should not include any ``[t]rade secrets and
commercial or financial information obtained from a person and
privileged or confidential . . . ,'' as provided in Section 6(f) of the
FTC Act, 15 U.S.C. 46(f), and Commission Rule 4.10(a)(2), 16 CFR
4.10(a)(2). Comments containing material for which confidential
treatment is requested must be filed in paper form, must be clearly
labeled ``Confidential,'' and must comply with FTC Rule 4.9(c), 16 CFR
4.9(c).\162\
---------------------------------------------------------------------------
\162\ The comment must be accompanied by an explicit request for
confidential treatment, including the factual and legal basis for
the request, and must identify the specific portions of the comment
to be withheld from the public record. The request will be granted
or denied by the Commission's General Counsel, consistent with
applicable law and the public interest. See 16 CFR 4.9(c).
---------------------------------------------------------------------------
Because paper mail addressed to the FTC is subject to delay due to
heightened security screening, please consider submitting your comments
in electronic form. Comments filed in electronic form should be
submitted at (https://ftcpublic.commentworks.com/ftc/mapadrulenprm) and
following the instructions on the web-based form. To ensure that the
Commission considers an electronic comment, you must file it on the
web-based form at (https://ftcpublic.commentworks.com/ftc/mapadrulenprm). If this Notice appears at (http://www.regulations.gov/search/Regs/home.html#home), you may also file an electronic comment
through that website. The Commission will consider all comments
forwarded to it by regulations.gov. You may also visit the FTC website
at (http://www.ftc.gov) to read the Notice and the news release
describing it.
A comment filed in paper form should include the reference
``Mortgage Acts and Practices - Advertising Rulemaking, Rule No.
R011013'' both in the text of the comment and on the envelope, and
should be mailed or delivered to the following address: Federal Trade
Commission, Office of the Secretary, Room H-135 (Annex W), 600
Pennsylvania Avenue, NW, Washington, DC 20580. The FTC is requesting
that any comment filed in paper form be sent by courier or overnight
service, if possible, because U.S. postal mail in the Washington, DC
area and at the Commission is subject to delay due to heightened
security precautions.
All comments on any proposed recordkeeping requirements should
additionally be sent to the Office of Management and Budget (OMB).
Comments may be submitted by U.S. Postal Mail to: Office of Information
and Regulatory Affairs, Office of Management and Budget, Attention:
Desk Officer for Federal Trade Commission, New Executive Office
Building, Docket Library, Room 10102, 725 17th Street, NW, Washington,
DC 20503. Comments, however, should be submitted via facsimile to (202)
395-5167 because U.S. Postal Mail is subject to lengthy delays due to
heightened security precautions.
The FTC Act and other laws the Commission administers permit the
collection of public comments to consider and use in this proceeding as
appropriate. The Commission will consider all timely and responsive
public comments it receives, whether filed in paper or electronic form.
Comments received will be available to the public on the FTC website,
to the extent practicable, at (http://www.ftc.gov/os/publiccomments.htm). As a matter of discretion, the Commission makes
every effort to remove home contact information of individuals before
their comments are place on the FTC website. More information,
including routine uses permitted by the Privacy Act, may be found in
the FTC's privacy policy, at (http://www.ftc.gov/ftc/privacy.shtm).
V. Communications by Outside Parties to the Commissioners or Their
Advisors
Written communications and summaries or transcripts of oral
communications respecting the merits of this proceeding from any
outside party to any Commissioner or Commissioner's advisor will be
placed on the public record.\163\
---------------------------------------------------------------------------
\163\ See 16 CFR 1.26(b)(5).
---------------------------------------------------------------------------
VI. Paperwork Reduction Act
The Commission is submitting this proposed rule and a Supporting
Statement to the OMB for review under the Paperwork Reduction Act
(PRA), 44 U.S.C. 3501-21. The recordkeeping requirements\164\ of the
proposed rule constitute a ``collection of information'' for purposes
of the PRA.\165\ The proposed rule does not impose a
[[Page 60366]]
disclosure requirement. The associated PRA burden analysis follows:
---------------------------------------------------------------------------
\164\ Proposed Sec. 321.5 sets forth the recordkeeping
requirements.
\165\ See 44 U.S.C. 3502(3)(a).
---------------------------------------------------------------------------
A. Recordkeeping Requirements
As discussed in the preamble, the proposed rule requires covered
persons to retain copies of materially different commercial
communications disseminated and documents describing or evidencing all
mortgage credit products available to consumers during the relevant
time period and all additional products or services (such as credit
insurance or credit disability insurance) that are or may be offered or
provided with the mortgage credit products.\166\ A failure to keep such
records would be an independent violation of the rule.
---------------------------------------------------------------------------
\166\ See Proposed Sec. 321.5(a)(1)-(3).
---------------------------------------------------------------------------
Commission staff believes these recordkeeping requirements pertain
to records that are usual and customary and kept in the ordinary course
of business for many covered persons, such as mortgage brokers,
lenders, and servicers.\167\ As to these persons, the retention of
these documents does not constitute a ``collection of information,'' as
defined by OMB's regulations that implement the PRA.\168\ Other covered
persons, however, such as real estate agents and brokers, advertising
agencies, home builders, lead generators, rate aggregators, and others,
may not currently maintain these records in the ordinary course of
business. Thus, the recordkeeping requirements for those persons would
constitute a ``collection of information.''
---------------------------------------------------------------------------
\167\ Some covered persons, particularly mortgage brokers and
lenders, are subject to state recordkeeping requirements for
mortgage advertisements. See, e.g., Fla. Stat. 494.00165 (2009);
Ind. Code. Ann. 23-2-5-18 (2009); Minn. Stat. 58.14 (2009); Wash.
Rev. Code 19.146.060 (2010). Many mortgage brokers, lenders, and
servicers are also subject to state recordkeeping requirements for
mortgage transactions and related documents, and these may include
descriptions of mortgage credit products. See, e.g., Mich. Comp.
Laws Serv. 445.1671 (2009); N.Y. Banking Law 597 (Consol. 2010);
Tenn. Code Ann. 45-13-206 (2009).
\168\ See 44 U.S.C. 3502(3)(A); 5 CFR 1320.3(b)(2).
---------------------------------------------------------------------------
B. Estimated Hours Burden and Associated Labor Costs
Commission staff estimates that the proposed rule's recordkeeping
requirements will affect approximately 1.3 million persons\169\ who
would not otherwise retain such records in the ordinary course of
business. As noted, this estimate includes real estate agents and
brokers, advertising agencies, home builders, lead generators, rate
aggregators, and others that may provide commercial communications
regarding mortgage credit product terms.\170\
---------------------------------------------------------------------------
\169\ No general source provides precise numbers of the various
categories of covered persons. Commission staff, therefore, has used
the following sources and inputs to arrive at this estimated total:
(1) 1.1 million real estate brokers and agents - from the National
Association of Realtors, see (http://www.realtor.org) (last visited
June 28, 2010); (2) 175,000 home builders - from the National
Association of Home Builders, see (http://www.NAHB.org) (last
visited June 28, 2010); (3) 350 finance companies - from the
American Financial Services Association, see (http://www.afsaonline.org) (last visited June 28, 2010); (4) 22,170
advertising agencies - from the North American Industry
Classification System Association's database of U.S. businesses, see
(http://www.naics.com/naics54.htm) (last visited June 28, 2010); (5)
1,000 lead generators and rate aggregators - based on staff's
administrative experience. These inputs add to 1,298,520; for
rounding, and to account further for potentially unspecified other
covered persons, however, staff has increased the resulting total to
1.3 million.
\170\ The Commission does not know what percentage of these
persons are, in fact, engaged in covered conduct under the proposed
rule, i.e.,providing commercial communications about mortgage credit
product terms. For purposes of these estimates, the Commission has
assumed all of them are covered by the recordkeeping provisions and
are not retaining these records in the ordinary course of business.
---------------------------------------------------------------------------
Although the Commission cannot estimate with precision the time
required to gather and file the required records, it is reasonable to
assume that covered persons will each spend approximately 3 hours per
year to do these tasks, for a total of 3.9 million hours (1.3 million
persons x 3 hours). Staff further assumes that office support file
clerks will handle the proposed rule's record retention requirements at
an hourly rate of $13.63.\171\ Based upon the above estimates and
assumptions, the total annual labor cost to retain and file documents
is $53,157,000 (3.9 million hours x $13.63 per hour).
---------------------------------------------------------------------------
\171\ This estimate is based on mean hourly wages for office
file clerks provided by the Bureau of Labor Statistics. See U.S.
Bur. of Labor Statistics, National Compensation Survey: Occupational
Earnings in the United States, 2009, Bulletin 2738, June 2010, at 3-
23, tbl. 3, available at (http://www.bls.gov/ncs/ncswage2009.htm).
---------------------------------------------------------------------------
Absent information to the contrary, staff anticipates that existing
storage media and equipment that covered persons use in the ordinary
course of business will satisfactorily accommodate incremental
recordkeeping under the proposed rule. Accordingly, staff does not
anticipate that the proposed rule will require any new capital or other
non-labor expenditures.
C. Questions for Comment
The Commission invites comments that will enable it to: (1)
evaluate whether the proposed record retention requirements are
necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility; (2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used; (3) enhance the
quality, utility, and clarity of the information to be collected; and
(4) minimize the burden of the collection of information on those who
must comply, including through the use of appropriate automated,
electronic, mechanical, or other technological techniques or other
forms of information technology.
VII. Regulatory Flexibility Act
The Regulatory Flexibility Act of 1980\172\ requires the Commission
to provide an Initial Regulatory Flexibility Analysis with a proposed
rule, and a Final Regulatory Flexibility Analysis with a final rule,
unless the Commission certifies that it does not anticipate that the
proposed rule will have a significant economic impact on a substantial
number of small entities.\173\
---------------------------------------------------------------------------
\172\ 5 U.S.C. 601-612.
\173\ 5 U.S.C. 603-605. Covered entities under the proposed rule
will be classified as small entities if they satisfy the Small
Business Administrator's relevant size standards, as determined by
the Small Business Size Standards component of the North American
Industry Classification System (NAICS), available at (http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf). Because a wide range of individuals and companies may
make representations in commercial communications regarding any term
of a mortgage product, no one classification is applicable to this
rulemaking.
The range in size standard for most of the potentially relevant
professional and support services is $7 million or less in annual
receipts. This standard applies to, for example, real estate credit,
mortgage and nonmortgage loan brokers, other nondepository credit
intermediation, other activities related to credit intermediation
(such as servicing), secondary market financing (such as Fannie Mae
and Freddie Mac), marketing consulting services, advertising
agencies, public relations agencies, display advertising, direct
mail advertising, advertising material distribution services, other
services related to advertising, and all other professional,
scientific and technical services.
The range in size standard varies greatly for the following
other types of entities that are potentially covered by the proposed
rule: offices of real estate agents and brokers ($2 million or
less); housing construction/builders ($33.5 million or less); and
credit unions ($175 million or less).
---------------------------------------------------------------------------
The Commission anticipates that the proposed Mortgage Acts and
Practices - Advertising Rule will have no significant economic impact
on a substantial number of small entities. As noted above, the proposed
rule will prevent deceptive mortgage advertising practices by
prohibiting misrepresentations and imposing a related recordkeeping
requirement. The proposed rule's reach is limited to entities that are
within the FTC's jurisdiction under the FTC Act. Under the FTC Act, the
Commission has jurisdiction over any person,
[[Page 60367]]
partnership, or corporation that engages in unfair or deceptive acts or
practices in or affecting commerce, excepting, among others, banks,
savings and loan institutions, federal credit unions, non-profits, and
common carriers. Thus, the proposed rule would broadly apply to any
covered entity that makes representations in a commercial communication
about any term of a mortgage credit product. Although the Commission
does not know the precise number of entities that may be subject to the
proposed rule, it estimates that the proposed rule will cover
approximately 1.35 million entities.\174\ This number includes mortgage
lenders, mortgage brokers, mortgage servicers, real estate agents and
brokers, advertising agencies, home builders, lead generators, rate
aggregators, and others under the Commission's jurisdiction. It is not
known, however, how many of those entities are small entities, and the
Commission welcomes comment on those issues. The Commission nonetheless
believes that the proposed rule will not have a significant economic
impact on any of the small entities subject to it.
---------------------------------------------------------------------------
\174\ No general source provides precise numbers of the various
categories of covered persons. Commission staff, therefore, has used
the following sources and inputs to arrive at this estimated total:
(1) 51,000 mortgage lenders and mortgage brokers - from various
online state regulatory agency resources and the Nationwide Mortgage
Licensing System and Registry Consumer Access, see (http://www.nmlsconsumeraccess.org) (last visited between May 17 - June 28,
2010); (2) 60 mortgage servicers - from several sources including
lists of servicers participating in various federal programs,
available at (http://makinghomeaffordable.gov/contact_servicer.html) and (http://hopenow.com/members.php) (both last
visited June 28, 2010) (excluding lenders who are also servicers
under these programs); and (3) 1.3 million others - see supra note
169 (explaining estimate).
---------------------------------------------------------------------------
The proposed rule generally prohibits misrepresentations,
consistent with the prohibition on deceptive claims that would violate
Section 5 of the FTC Act. The proposed rule elaborates on this
prohibition by including specific examples of types of
misrepresentations covered by the proposed rule, but it does not
require affirmative disclosures. The entities subject to the proposed
rule are within the Commission's jurisdiction under the FTC Act, and
thus are already prohibited from such conduct. The proposed rule
imposes a recordkeeping requirement, but it is limited to a specific
subset of relevant documents that Commission staff believes many
entities covered by the proposed rule already retain in the ordinary
course of business. For those entities that may not already do so,
staff estimates minimal burden and expense for each entity to comply
with the proposed rule's requirements.\175\ For these reasons, the
Commission believes that the proposed rule is not likely to have a
significant economic impact\176\ on a substantial number of small
entities. Accordingly, this document serves as notice to the Small
Business Administration of the Commission's certification that it does
not anticipate the proposed rule will have a significant economic
impact on a substantial number of small entities. Nonetheless, the FTC
has prepared the following analysis.
---------------------------------------------------------------------------
\175\ Staff estimates that the annual labor cost for each
covered person to file or retain documents under the recordkeeping
provisions is $39.72 (3 hours x $13.24 per hour). See supra Part
VI.B.
\176\ Cf. U.S. Small Bus. Admin. Office of Advocacy, A Guide for
Government Agencies - How to Comply with the Regulatory Flexibility
19 (2003), available at (http://www.sba.gov/advo/laws/rfaguide.pdf)
(citing 126 Cong. Rec. S10,938 (Aug. 6, 1980) (identifying 175
annual staff hours for recordkeeping as a ``significant impact'')).
---------------------------------------------------------------------------
A. Description of the Reasons That Action by the Agency is Being
Considered
The Commission proposes, and seeks comment on, a proposed rule to
implement Section 626 of the Omnibus Appropriations Act, as amended by
the Credit CARD Act, which directs the Commission to initiate a
rulemaking related to unfair or deceptive acts or practices with
respect to mortgage loans. Section 511 of the Credit CARD Act clarified
that the rule will cover only those entities over which the FTC has
jurisdiction under the FTC Act. Through this document, the Commission
proposes, and seeks comment on, prohibited misrepresentations and
recordkeeping provisions aimed at mortgage credit product commercial
communications in order to prevent deceptive practices that harm
consumers, consistent with the goals of the Act.
B. Statement of the Objectives of, and Legal Basis for, the Proposed
Rule
The proposed rule is intended to implement Section 626 of the
Omnibus Appropriations Act, as amended by the Credit CARD Act, which
directs the Commission to initiate a rulemaking related to unfair or
deceptive acts or practices with respect to mortgage loans. Through the
rulemaking, the Commission seeks to prevent deceptive acts and
practices in the mortgage advertising industry, which has been the
subject of numerous law enforcement actions under Section 5 of the FTC
Act and TILA.
C. Small Entities to Which the Proposed Rule Will Apply
The proposed rule will apply to any person who makes any
representation in any commercial communication regarding any term of
any mortgage credit product. Based upon its knowledge of the industry,
the Commission believes that a variety of individuals and companies
under its jurisdiction will be covered by the proposed rule, including
but not limited to mortgage lenders, mortgage brokers, mortgage
servicers, real estate agents and brokers, advertising agencies, home
builders, lead generators, rate aggregators, and others.
In response to a request for comments in the ANPR, the Commission
received no empirical data regarding the numbers or revenues of any of
these types of entities. On the basis of other available data, however,
Commission staff estimates that there are approximately 1.35 million
entities subject to the proposed rule.\177\ However, staff does not
have sufficient data to readily estimate the number of such covered
persons, if any, that are small entities. Accordingly, the Commission
specifically requests additional comment on: (1) the number of
individuals and companies that make commercial communications regarding
mortgage credit products; and (2) the number of such entities, if any,
that are small entities.
---------------------------------------------------------------------------
\177\ See supra note 169.
---------------------------------------------------------------------------
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The proposed rule sets forth specific categories of records that
covered persons would be required to retain. The Commission believes
that these recordkeeping requirements are necessary to ensure that
covered entities are complying with the requirements of the proposed
rule. They would enable the Commission to review copies of commercial
communications for any misrepresentations that violate the rule and to
bring law enforcement actions as appropriate. The Commission recognizes
that recordkeeping provisions impose compliance costs; however, many
covered entities already retain in the ordinary course of business the
types of documents that the proposed rule would require be retained.
For those entities that may not already do so, staff estimates minimal
burden and expense for each entity to comply with the
requirements.\178\ To
[[Page 60368]]
further reduce any burden, the proposed rule would permit covered
entities to keep the records in any legible form and in the same
manner, format, or place as they keep such records in the ordinary
course of business. The proposed rule also attempts to avoid imposing
any unnecessary burden by limiting the recordkeeping requirements only
to, for example, ``materially different'' commercial communications. It
also limits the timeframe for recordkeeping to 24 months.
---------------------------------------------------------------------------
\178\ See supra Part VI.B (discussing professional skills and
equipment that staff estimates are needed for compliance).
---------------------------------------------------------------------------
E. Duplicative, Overlapping, or Conflicting Federal Rules
As noted above, TILA (including HOEPA) and Regulation Z regulate
mortgage advertisements. The states have also enacted various laws or
regulations that address aspects of deceptive mortgage advertising
practices. None of the federal or state measures duplicates the
specificity and breadth of practices, or diversity of entities covered
in the proposed rule. In addition, the Commission does not believe that
its proposed rule conflicts with any of these other requirements, but
it invites comment on this issue.\179\
---------------------------------------------------------------------------
\179\ See supra notes 117-118 and accompanying text.
---------------------------------------------------------------------------
As noted above, the Commission is not proposing any affirmative
disclosure requirements, but it is has requested comment on whether any
such disclosures are needed to prevent deception related to commercial
communications for mortgage credit products.\180\ However, such
disclosures could raise substantial conflicts with other mortgage
advertising requirements, including those in TILA and Regulation Z. The
Commission is interested in receiving comments in this area.\181\
---------------------------------------------------------------------------
\180\ See supra Parts III.C.2 and IV.C.2.
\181\ See id.
---------------------------------------------------------------------------
F. Significant Alternatives to the Proposed Rule Amendments
As previously noted, the proposed rule is intended to prevent
deceptive acts and practices in mortgage advertising. The proposed rule
is intended to achieve that goal without creating unnecessary
compliance costs. Thus, the Commission does not propose to impose any
affirmative disclosure requirements for advertisements at this time.
Further, as discussed above, Commission staff believes that many
covered entities already retain in the ordinary course of business the
types of documents that the proposed rule would require be retained. In
addition, proposed Sec. 321.5(b) states that entities may keep such
records in any legible form and in the same manner, format, or place as
they keep such records in the ordinary course of business.
The proposed rule also limits the types of information that must be
retained to avoid imposing any unnecessary burden. For example, covered
persons must retain only ``materially different'' versions of
commercial communications and related materials. Finally, the proposed
rule calls for a 24-month record retention period, which the Commission
believes would strike an appropriate balance between ensuring efficient
and effective compliance efforts, while avoiding the imposition of
unnecessary costs.
Furthermore, the recordkeeping requirements are format-neutral;
they would not preclude the use of electronic methods that might reduce
compliance burdens. In addition, the Commission is not aware of any
feasible or appropriate exemptions for small entities because the
proposed rule attempts to minimize compliance burdens for all entities.
Nonetheless, the Commission seeks additional comment regarding: (1)
the existence of small entities for which the proposed rule would have
a significant economic impact, and (2) suggested alternatives,
including potential exemptions for small entities, that would reduce
the economic impact of the proposed rule on such small entities. If the
comments filed in response to this document identify any small entities
that would be significantly affected by the proposed rule, as well as
alternatives that would reduce compliance costs on such entities, the
Commission will consider the feasibility of such alternatives and
determine whether they should be incorporated into any final rule.
Table A - List of Commenters and Short-names/Acronyms
------------------------------------------------------------------------
Short-name/Acronym Commenter
------------------------------------------------------------------------
Adcock Adcock
ABA American Bankers Association
ASA American Society of
Appraisers
Anderson Anderson, Lisa
AG Mass. Attorney General,
Commonwealth of
Massachusetts
Beasley Beasley
BECU Boeing Employees' Credit
Union
Bracco Bracco, Larry
CRL Center for Responsible
Lending
Ciavarella Ciavarella (3 comments)
CMC/AFSA Consumer Mortgage Coalition
and American Financial
Services Association
CUNA Credit Union National
Association
Crosby Crosby, Tracy
EJF Empire Justice Center
Freddie Mac Federal Home Loan Mortgage
Corporation
Feinman Feinman, Anita
Flaker Flaker
Franciulli Franciulli, Patricia
GCUA Georgia Credit Union
Affiliates
Goodman Goodman, Al
Harris Harris, Kathleen
HPC Housing Policy Council
Howard Howard, Marilyn (2 comments)
Kochanski Kochanski, David
LabLaborers International Union
of North America
MBA Mortgage Bankers Association
MICA Mortgage Insurance Companies
of America
[[Page 60369]]
NAR National Association of
REALTORS
NASCUS National Association of State
Credit Union Supervisors
NCRC National Community
Reinvestment Coalition
NCLC National Consumer Law Center
Norman Norman
Obduskey Obduskey, Dennis (2 comments)
P. P. (Anonymous)
Reid Reid, Harry (United States
Senate)
Rice Rice, Richard
Scheu Scheu, Toni
Smith Smith, J.
Tucker Tucker, James
Yachovich Yackovich, Beverly G. &
Edward
Yoshida Yoshida, Gena
Zager Zager, Jeremy (Sterling Van
Dyke Credit Union)
------------------------------------------------------------------------
Table B - List of FTC Mortgage Advertising Enforcement Actions
FTC v. Assocs. First Capital Corp., No. 1:01-00606 (N.D. Ga.
2001)................................................................
FTC v. Capital City Mortg. Corp., No. 1:98CV237 (D.D.C. 1998)
FTC v. Chase Fin. Funding, Inc., No. SACV04-549 GLT (ANx)
(C.D. Cal. 2004).....................................................
FTC v. First Alliance Mortg. Co., No. SACV 00-964 DOC (EEx)
(C.D. Cal. 2000).....................................................
FTC v. Mortgages Para Hispanos.com Corp., No. 4:06-cv-19
(E.D. Tex. 2006).....................................................
FTC v. Ranney, No. 04-F-1065 (MJW) (D. Colo. 2004)...........
FTC v. Ryan, No. 1:09-cv-00535-HHK (D.D.C. 2009).............
FTC v. OSI Fin. Servs., Inc., No. 02-C-5078 (N.D. Ill. 2002).
FTC v. Safe Harbour Found. of Fla., Inc., No. 08-C-1185 (N.D.
Ill. 2008)...........................................................
FTC v. 30 Minute Mortg., Inc., No. 03-60021 (S.D. Fla. 2003).
In re Am. Nationwide Mortg. Co., Inc., F.T.C. Dkt. No. C-4249
(2009)...............................................................
In re Felson Builders, Inc., 119 F.T.C. 642 (1995)...........
In re FirstPlus Fin. Group, Inc., F.T.C. Dkt. No. C-3984
(2000)...............................................................
In re Lomas Mortg. U.S.A., Inc., 116 F.T.C. 1062 (1993)......
In re Michael Gendrolis, F.T.C. Dkt. No. C-4248 (2009).......
In re Shiva Venture Group, Inc., F.T.C. Dkt. No. C-4250
(2009)...............................................................
United States v. Mercantile Mortg. Co., No. 02-C-5079 (N.D.
Ill. 2002)...........................................................
United States v. Unicor Funding, Inc., No. 9901228 (C.D. Cal.
1999)................................................................
------------------------------------------------------------------------
VIII. Proposed Rule
List of Subjects in 16 CFR part 321
Advertising, Communications, Consumer protection, Credit,
Mortgages, Trade practices
0
For the reasons set forth in the preamble, the Federal Trade Commission
is proposing to amend title 16, Code of Federal Regulations, by adding
a new part 321, to read as follows:
PART 321 - MORTGAGE ACTS AND PRACTICES - ADVERTISING RULE
Section Contents
321.1 Scope of regulations in this part.
321.2 Definitions.
321.3 Prohibited representations.
321.4 Waiver not permitted.
321.5 Recordkeeping requirements.
321.6 Actions by states.
321.7 Severability.
Authority: Sec. 626, Pub. L. 111-8, 123 Stat. 524 (15 U.S.C.
1638 note), as amended by sec. 511, Pub. L. 111-24, 123 Stat. 1734
(15 U.S.C. 1638 note).
Sec. 321.1 Scope of regulations in this part.
This part implements the Omnibus Appropriations Act of 2009, sec.
626, Pub. L. 111-8, 123 Stat. 524 (2009) (15 U.S.C. 1638 note), as
amended by the Credit Card Accountability Responsibility and Disclosure
Act of 2009, sec. 511, Pub. L. 111-24, 123 Stat. 1734 (2009) (15 U.S.C.
1638 note). This part applies to persons over which the Federal Trade
Commission has jurisdiction under the Federal Trade Commission Act.
Sec. 321.2 Definitions.
(a) ``Commercial communication'' means any written or verbal
statement, illustration, or depiction, whether in English or any other
language, that is designed to effect a sale or create interest in
purchasing goods or services, whether it appears on or in a label,
package, package insert, radio, television, cable television, brochure,
newspaper, magazine, pamphlet, leaflet, circular, mailer, book insert,
free standing insert, letter, catalogue, poster, chart, billboard,
public transit card, point of purchase display, film, slide, audio
program transmitted over a telephone system, telemarketing script,
onhold script, upsell script, training materials provided to
telemarketing firms, program-length commercial (``infomercial''), the
Internet, cellular network, or any other medium. ``Commercial
communication'' includes but is not limited to promotional materials
and items as well as Web pages.
(b) ``Consumer'' means a natural person to whom a mortgage credit
product is offered or extended.
(c) ``Credit'' means the right to defer payment of debt or to incur
debt and defer its payment.
(d) ``Dwelling'' means a residential structure that contains one to
four units, whether or not that structure is attached to real property.
The word includes an individual condominium unit, cooperative unit,
mobile home, and trailer, if it is used as a residence.
(e) ``Mortgage credit product'' means any form of credit that is
secured by real property or a dwelling and that is offered or extended
to a consumer
[[Page 60370]]
primarily for personal, family, or household purposes.
(f) ``Person'' means any individual, group, unincorporated
association, limited or general partnership, corporation, or other
business entity.
(g) ``Term'' means any of the fees, costs, obligations, or
characteristics of or associated with the product. It also includes any
of the conditions on or related to the availability of the product.
Sec. 321.3 Prohibited representations.
It is a violation of this rule for any person to make any material
misrepresentation, expressly or by implication, in any commercial
communication, regarding any term of any mortgage credit product,
including but not limited to misrepresentations about:
(a) The interest charged for the mortgage credit product, including
but not limited to misrepresentations concerning: (1) the amount of
interest that the consumer owes each month that is included in the
consumer's payments, loan amount, or total amount due, or (2) whether
the difference between the interest owed and the interest paid is added
to the total amount due from the consumer;
(b) The annual percentage rate, simple annual rate, periodic rate,
or any other rate;
(c) The existence, nature, or amount of fees or costs to the
consumer associated with the mortgage credit product, including but not
limited to misrepresentations that no fees are charged;
(d) The existence, cost, payment terms, or other terms associated
with any additional product or feature that is or may be sold in
conjunction with the mortgage credit product, including but not limited
to credit insurance or credit disability insurance;
(e) The terms, amounts, payments, or other requirements relating to
taxes or insurance associated with the mortgage credit product,
including but not limited to misrepresentations about: (1) whether
separate payment of taxes or insurance is required, or (2) the extent
to which payment for taxes or insurance is included in the loan
payments, loan amount, or total amount due from the consumer;
(f) Any prepayment penalty associated with the mortgage credit
product, including but not limited to misrepresentations concerning the
existence, nature, amount, or terms of such penalty;
(g) The variability of interest, payments, or other terms of the
mortgage credit product, including but not limited to
misrepresentations using the word ``fixed;''
(h) Any comparison between:
(1) Any rate or payment that will be available for a period less than
the full length of the mortgage credit product, and
(2) Any actual or hypothetical rate or payment;
(i) The type of mortgage credit product, including but not limited
to misrepresentations that the product is or involves a fully
amortizing mortgage;
(j) The amount of the obligation, or the existence, nature, or
amount of cash or credit available to the consumer in connection with
the mortgage credit product, including but not limited to
misrepresentations that the consumer will receive a certain amount of
cash or credit as part of a mortgage credit transaction;
(k) The existence, number, amount, or timing of any minimum or
required payments, including but not limited to misrepresentations
about any payments or that no payments are required in a reverse
mortgage or other mortgage credit product;
(l) The potential for default under the mortgage credit product,
including but not limited to misrepresentations concerning the
circumstances under which the consumer could default for nonpayment of
taxes, insurance, or maintenance, or for failure to meet other
obligations;
(m) The effectiveness of the mortgage credit product in helping the
consumer resolve difficulties in paying debts, including but not
limited to misrepresentations that any mortgage credit product can
reduce, eliminate, or restructure debt or result in a waiver or
forgiveness, in whole or in part, of the consumer's existing obligation
with any person;
(n) The association of the mortgage credit product or any provider
of such product with any other person or program, including but not
limited to misrepresentations that:
(1) The provider is, or is affiliated with, any governmental entity or
other organization, or
(2) The product is or relates to a government benefit, or is endorsed,
sponsored by, or affiliated with any government or other program,
including but not limited to through the use of formats, symbols, or
logos that resemble those of such entity, organization, or program;
(o) The source of any commercial communication, including but not
limited to misrepresentations that a commercial communication is made
by or on behalf of the consumer's current mortgage lender or servicer;
(p) The right of the consumer to reside in the dwelling that is the
subject of the mortgage credit product, or the duration of such right,
including but not limited to misrepresentations concerning how long or
under what conditions a consumer with a reverse mortgage can stay in
the dwelling;
(q) The consumer's ability or likelihood to obtain any mortgage
credit product or terms, including but not limited to
misrepresentations concerning whether the consumer has been preapproved
or guaranteed for any such product or terms;
(r) The consumer's ability or likelihood to obtain a refinancing or
modification of any mortgage credit product or terms, including but not
limited to misrepresentations concerning whether the consumer has been
preapproved or guaranteed for any such refinancing or modification; and
(s) The availability, nature, or substance of counseling services
or any other expert advice offered to the consumer regarding any
mortgage credit product term, including but not limited to the
qualifications of those offering the services or advice.
Sec. 321.4 Waiver not permitted.
Any attempt by any person to obtain a waiver from any consumer of
any protection provided by, or any right of the consumer under, this
rule constitutes a violation of this rule.
Sec. 321.5 Recordkeeping requirements.
(a) Any person subject to this rule shall keep, for a period of
twenty-four months from the last date of dissemination of the
applicable commercial communication, the following evidence of
compliance with this rule:
(1) Copies of all materially different commercial communications
disseminated, including but not limited to sales scripts, training
materials, related marketing materials, websites, and weblogs;
(2) Documents describing or evidencing all mortgage credit products
available to consumers during the time period in which each commercial
communication was disseminated, including but not limited to the names
and terms of each such mortgage credit product available to consumers;
and
(3) Documents describing or evidencing all additional products or
services (such as credit insurance or credit disability insurance) that
are or may be offered or provided with the mortgage credit products
available to consumers during the time period in
[[Page 60371]]
which each commercial communication was disseminated, including but not
limited to the names and terms of each such additional product or
service available to consumers.
(b) Any person subject to this rule may keep the records required
by paragraph (a) of this section in any legible form, and in the same
manner, format, or place as they keep such records in the ordinary
course of business. Failure to keep all records required under
paragraph (a) of this section shall be a violation of this rule.
Sec. 321.6 Actions by states.
Any attorney general or other officer of a state authorized by the
state to bring an action under this part may do so pursuant to Section
626(b) of the Omnibus Appropriations Act of 2009, sec. 626, Pub. L.
111-8, 123 Stat. 524 (2009) (15 U.S.C. 1638 note), as amended by the
Credit Card Accountability Responsibility and Disclosure Act of 2009,
sec. 511, Pub. L. 111-24, 123 Stat. 1734 (2009) (15 U.S.C. 1638 note).
Sec. 321.7 Severability.
The provisions of this rule are separate and severable from one
another. If any provision is stayed or determined to be invalid, it is
the Commission's intention that the remaining provisions shall continue
in effect.
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 2010-24353 Filed 9-29-10: 8:45 am]
BILLING CODE 6750-01-S