By: Jonathan Direnfeld and Sulina Gabale
On March 21, 2018 the Federal Reserve lifted its federal funds rate by a quarter percentage point to a range of 1.5% to 1.75%, the highest level since 2008. The Fed also significantly boosted its economic forecast and hinted that it may be more aggressive in its plan to continue to raise rates, signaling that the market should prepare for higher interest rates. For consumers with variable rate loan products, the rise in interest rates will result in the first substantial increase in loan payments in more than 10 years.
If history is our guide, the increase in interest rates will lead to an increase in consumer complaints of deceptive marketing for variable rate loan products. The Federal Trade Commission ("FTC") takes such complaints seriously and has a history of investigations and enforcement actions based on deceptive marketing of financial products. For newer lenders who entered the lending marketplace after 2008, this may be the first time their variable rate marketing is scrutinized by the FTC. It's a good time for all lenders to perform a "check-up" of variable rate marketing campaigns for compliance with the FTC's rules and regulations and avoid allegations of deceptive or misleading ad copy.
Previous FTC Variable Rate Enforcement Actions
Following the last run-up in interest rates in the mid-2000s, the FTC brought a number of enforcement actions relating to the deceptive marketing of variable rate loan products under Section 5 of the FTC Act, which prohibits "unfair or deceptive practices," i.e. marketing practices which are likely to mislead a "reasonable" consumer. The FTC also published guidance on "Deceptive Mortgage Ads" in 2012 to educate consumers on common "buzzwords" used in home loan advertisements and the importance of understanding all terms and conditions of a proposed loan offer.
The FTC's variable interest rate enforcement history reveals common themes and patterns of behavior that are ripe for regulatory investigation:
- Misrepresenting a variable rate as a fixed rate. In 2009 the FTC charged three mortgage lenders (American Nationwide Mortgage Company, Good Life Funding and Innova Financial Group) for advertising low interest-rate loans without clearly and conspicuously disclosing that the advertised loans were not fixed-rate mortgages for the full term of the loan, but rather adjustable-rate mortgages that could become more expensive for borrowers over time. For instance, American Nationwide Mortgage advertised a "fixed rate," but the fine print stated that deferred interest will accrue. The FTC found that the lenders' ads failed to adequately disclose that the advertised low payment amounts and rates applied only for a limited time, after which they would increase, and that the advertised payment amounts and rates did not include the interest owed each month because the interest was added to the total loan balance.
- Advertising simple interest rates instead of the APRs. The FTC's enforcement action against American Nationwide Mortgage Company, Good Life Funding and Innova Financial Group also alleged that the lenders failed to disclose APRs at least as conspicuously as simple annual rates. "Simple" rates do not account for declining principal balances and can be significantly lower than APRs.
- Failing to disclose material terms and conditions relating to the adjustment of rates. In 2015 the FTC charged two car title lenders (First American Title Lending of Georgia and Fast Cash Title Pawn) with advertising interest rates and lease payment amounts without disclosing increased finance charges imposed after an introductory period ended and rates increased, as well as other material conditions to the offer. For instance, in the case of First American Title Lending, the FTC found that the lender failed to disclose material terms and conditions, such as the amount of the finance charge that consumers have to pay for a 30-day introductory period if certain terms and conditions are not met and the conditions to get the advertised "0%" rate.
While these cases did not result in monetary penalties, most negotiated orders or consent decrees include burdensome reporting requirements and proscriptions on deceptive conduct for 20 years. For example, a consent order will require a company to maintain all documents relating to its marketing practices as well as any consumer complaints. At the FTC's request, the company must provide compliance reports and produce documents to demonstrate its compliance with the order.
Furthermore, the FTC can impose civil penalties of up to $42,000 per violation if the company is found to have violated the terms of the order by engaging in deceptive marketing, a prospect that forces many companies subject to a consent decree to take a more conservative (and potentially less effective) approach to marketing for the foreseeable future.
Avoiding Deception in Variable Rate Marketing
Lenders should consider the following key questions in evaluating their variable rate advertisements and marketing materials:
- Is the advertised variable rate clearly identified as a variable rate? If the advertised rate is not clearly and conspicuously identified as a variable rate, then consumers are likely to assume that it is a fixed rate.
- Does the advertisement include a comparison to a competitor's loan product? Comparisons to a competitor should include an "apples to apples" comparison of similar loan products and include a comparison of APRs as opposed to simply interest. For instance, comparing a variable rate loan product to a competitor's fixed rate loan product is likely to be viewed as misleading.
- Are APRs advertised at least as conspicuously as simple annual rates? APRs include all costs of the credit such as points and processing fees, unlike simple interest rates. Lenders should ensure that advertisements featuring simple interest rates for variable rate products also advertise APRs clearly and conspicuously.
- Does the advertisement disclose all material terms relating to variable rates such as the reset period and maximum interest rate? Lenders should ensure that variable rate advertisements contain a conspicuously placed link to the material terms of the variable rate loan product, including any additional closing fees, rate reset period, and maximum interest rate. FTC guidance states that the placement of the link to the terms should be obvious (i.e. as close as possible to the advertised rate) and labeled appropriately to convey to consumers the information contained in the disclosure (i.e. view variable rate terms).
- Does the advertisement include all applicable disclosures required under the Truth in Lending Act and Consumer Leasing Act? These statutes have specific disclosure requirements that are triggered when advertisements contain specific terms. For example, under TILA, if the amount of down payment, number of payments/period of repayment, amount of any payment, and/or amount of finance charge are set forth in an advertisement, additional disclosures are required.