Advertising Credit And Lease Arrangements: How To Comply With The Truth In Lending Act

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1 Advertising Credit And Lease Arrangements: How To Comply With The Truth In Lending Act The federal Truth in Lending Act ("TILA") governs most consumer credit transactions. Its companion law the Consumer Leasing Act ("CLA") regulates consumer lease arrangements. Two federal agencies have jurisdiction over these measures. The Federal Reserve Board ("the Fed") promulgates the rules that implement the TILA and CLA, while the Federal Trade Commission ("FTC") enforces their rules and provisions. One of the purposes of these Acts is to protect consumers by enabling them to make informed choices of consumer credit plans and consumer lease agreements. To this end, Regulations Z and M require advertisers to disclose certain crucial information if certain "triggering terms" are mentioned in an advertisement. Coverage of The Laws When an advertisement contains any one of a list of terms specified in these laws, the advertisement must include a number of specific disclosures. Certain words trigger certain disclosures. Essentially, the required disclosures reflect the lease and credit terms to which the parties are legally bound at the outset of the transaction. These disclosures must be made clearly and conspicuously in a reasonably understandable form. Advertisements covered under these laws include commercial messages that offer consumer credit or consumer lease agreements. Consumer credit is any credit extended primarily for personal, family or household purposes. A consumer lease is a lease of personal property to a private individual. Messages inviting, offering or otherwise announcing the availability of credit transactions or lease terms generally to prospective customers are probably covered by the regulation. The TILA and the CLA do not cover transactions between businesses. Regulation Z and Consumer Credit Two different types of consumer credit are regulated: open-end credit and closed-end credit. Regulation Z treats each differently, and, therefore, it is important to distinguish between these two types of credit transactions. Open-End Credit Defined In open-end credit, there is a contractual arrangement between the creditor and the consumer. The creditor must contemplate future

2 transactions. This means that the credit plan must be usable periodically and the creditor must expect that there will be additional business rather than a one-time credit extension. Furthermore, specific approval for each credit extension is unnecessary. The creditor may impose a charge on unpaid balances, and as the customer pays outstanding balances, the amount of credit is again available to the customer. The amount of credit that can be extended is therefore unlimited because credit is generally replenished as earlier advances are repaid. Examples of open-end credit are: gas and bank credit cards, revolving charge accounts at stores, and cash advance checking accounts. This aspect of "unlimited credit" distinguishes open-end credit from closed-end credit. Moreover, any other consumer credit that does not fit the definition of open-end credit should be treated as closed-end credit. Closed-End Credit Defined In closed-end credit, credit is advanced for a specific period of time. The creditor and the consumer agree to the amount financed, the payment schedule and the finance charge. The creditor and the customer go through the same process and make a new agreement each time credit is extended. However, this does not mean that the creditor must establish a specific credit limit or extend new credit in a particular case. Typically, closed-end credit arrangements appear in the form of the sale or financing of real estate, automobiles or appliances. Watch out for arrangements that may seem to be open-end in nature but are really closed-end. Closed-end credit includes both sales credit and loans. For example, under a closed-credit commitment the creditor might agree to lend a total of $10,000 in a series of advances as needed by the borrower. When a consumer has borrowed the full $10,000 no more is advanced under that particular agreement even if there has been repayment of a portion of that debt. A Checklist for Open-End Credit Advertisements Examine the advertisement to see if open-end consumer credit is being advertised. If it is, check to see if any of the following triggering terms are included in the language. If they are, you must make the necessary disclosures listed below. Here are some examples of terms that do not trigger any disclosures: "charge accounts available"; "just say 'charge it'"; "pay monthly"; "charge some cash." Triggering Terms: 1. A statement of when finance charges accrue. For example: "interest charged from date of purchase." This includes any free ride period: "up to 30 days credit if you pay in full each month."

3 2. A statement of any charges other than a finance charge that may be imposed as part of the plan. For example: "an annual charge of $5.00 will be assessed to cover billing costs." 3. The fact that the creditor will acquire a security interest in the property purchased under the plan. For example: "secure your credit with a $100 certificate of deposit." CAUTION: The phrase "the equity in your home becomes spendable with an XYZ line of credit" implies that the creditor will take a security interest in the consumer's home. This phrase triggers the mandatory disclosures. 4. The method of determining the balance on which a finance charge is imposed. For example: "interest will be charged on your average daily balance each month." 5. The periodic rate or annual percentage rate. For example: "less than five percent each month." Necessary Disclosures: 1. Any minimum, fixed transaction or activity, or similar charge that could be imposed. 2. Any periodic rate that may be applied, expressed as an "annual percentage rate" ("APR"). Typically, the APR is found by multiplying the periodic rate by the number of periods in a year, but in some instances (such as discounted variable rate transactions") the calculation is more complex. If the plan provides for a variable period rate, that fact should be disclosed and special care should be taken in calculating the APR. 3. Any membership or participation fee that may be imposed. A Checklist for Closed-End Credit Advertisements Examine the advertisement to see if closed-end consumer credit is being advertised. If it is, check to see if any of the following triggering terms are included in the language. If they are, you must make the necessary disclosures listed below. Here are some examples of terms that do not trigger any disclosures: "no downpayment"; "pay only five percent per month"; "financing available"; "pay weekly." Triggering Terms: 1. The amount or percentage of any downpayment. For example: "only five percent down"; "as low as $100 down"; "total move-in costs of $800." (Caution: The phrase "80 percent financing available" implies that a 20 percent down payment is required. Therefore, this phrase triggers the mandatory disclosures.) 2. The number of any payments. For example: "50 payments are all you make." 3. The amount of any payment. For example: "pay just $25 a week"; "payable in installments of $103"; "$1,200 balance payable in ten equal installments."

4 4. The time period of repayment. For example: "seven years to pay"; "48- month payment terms"; "30-year mortgage"; "repayment in as many as 36 monthly installments." 5. The amount of any finance charges. For example: "$200 financing"; "$500 total cost of credit"; $2.00 monthly carrying charge"; "$50,000 mortgages, two points to the borrower." Necessary Disclosures: 1. The amount or percentage of down payment. The total downpayment as a dollar amount must be stated, but use of the word "downpayment" is not required. 2. "The terms of repayment." While the phrase "terms of repayment" generally has the same meaning as the "payment schedule," the advertiser has considerable discretion in the way this information is presented. 3. The annual percentage rate or "APR." The advertisement must state that the rate is subject to increase, if that is the case, but the ad need not describe the rate increase, its limits, or how it would affect the payment schedule. Regulation M and Consumer Leases The original Consumer Leasing Act was passed in 1976, and contains detailed disclosure requirements if certain triggering terms are mentioned in an ad. In September 1994, the Riegle Community Development and Regulatory Improvement Act became law. Section 336 of this broad-ranging banking bill revises the rules for advertising of consumer leases on radio. This section, which was proposed and promoted by NAB, recognizes the time constraints inherent to radio and allows some of the detailed disclosures required by the Consumer Leasing Act to be made by reference to a toll-free telephone number or a newspaper ad where the information can be obtained. This simplified procedure has recently been extended to television. Coverage Under the CLA, disclosure requirements are applicable to leases or "bailments" for the use of personal property, primarily for personal, family or household purposes. Disclosures are required where a lease transaction includes incidental services or when a prior lease or credit balance is part of a single lease transaction. Excluded are leases for agricultural, business or commercial purposes, or to a government, government agency or instrumentality, or an organization. The lease must be for greater than four months and must not contain a total contractual obligation (including nonrefundable downpayments) exceeding $25,000. Leases of personal property which are incidental to a service are not subject to regulation: 1. Home entertainment systems requiring the consumer to lease equipment that enables a television to receive the transmitted programming. 2. Security alarm systems requiring the installation of leased equipment.

5 3. Propane gas service where the consumer must lease a propane tank to receive the service. Triggering Terms Once a triggering term is mentioned in a consumer leasing ad, then all the required disclosures must be made. Therefore, it is important to recognize the triggering terms. Under the statute, a consumer leasing advertisement triggers the disclosure requirement if it mentions: 1. The amount of any payment or 2. That any or no downpayment or other payment is required prior to or at consummation or by delivery, if delivery occurs after consummation. * Stating the number of required payments has been eliminated as a triggering term Examples of triggering terms include: 1. "Pay a mere $128 a month." 2. "Lease now and make no payments for three months." 3. "Only a small downpayment." 4. "Leave your pocketbook behind and lease a car today." Some statements that do not trigger the required disclosures are: 1. "Low monthly payments." 2. "Lease for less than it costs to buy." 3. "We lease to anyone." 4. "Lease today and drive it away." Remember, if a spot contains any one triggering term, then all the required disclosures must be made. A lessor is not required to disclose the cost of a lease expressed as a percentage rate; however, if a rate is disclosed or advertised, a special notice must accompany the rate stating that it may not measure the overall cost of financing the lease. The notice must be placed in close proximity to the rate without any other intervening language or symbols. Further, the rate in an advertisement cannot be more prominent than any other Regulation M disclosure. A lessor advertising or disclosing a lease rate is also precluded from calling the rate an "annual percentage rate" or any equivalent term to avoid the inference that the rate is directly comparable to the APR. The General Disclosure Requirements Advertisements that do not follow the simplified disclosure format must follow the general disclosure requirements contained in the CLA. The statute states that if one of the triggering terms is mentioned in a consumer lease spot, the spot must also make the following disclosures:

6 1. That the transaction is a lease; 2. The total amount due prior to or at consummation or by delivery, if delivery occurs after consummation; The disclosure of the total amount due at lease signing or delivery may: a. Exclude third-party fees, such as taxes, licenses, and registration fees and disclose that fact; or b. Provide a total that includes third-party fees based on a particular state or locality as long as that fact and the fact that fees may vary by state or locality are disclosed. *The requirement to disclose that no payment is required has been eliminated 3. The number, amounts, and due dates or periods of scheduled payments; 4. *The requirement to disclose the total of scheduled payments under the lease has been eliminated 5. A statement of whether or not a security deposit is required; and 6. A statement that an extra charge may be imposed at the end of the lease term where the lessee s liability (if any) is based on the difference between the residual value of the leased property and its realized value at the end of the lease term. Two disclosures have been eliminated entirely from the rule. It is no longer required to disclose: A statement of whether or not the lessee has the option to purchase the leased property, and where the lessee has the option to purchase at the end of the lease term, the purchase-option price. A statement of the amount, or the method for determining the amount, or the lessee s liability (if any) at the end of the lease term. The required disclosures can be made in television advertisements either visually or aurally. Simplified Disclosures In enacting Section 336 of the Riegle Act, Congress has recognized the problems with making detailed disclosures on radio, and has allowed an alternative means for making the required disclosures. These simplified disclosures have been expanded to include television spots as well. Now, if a spot for consumer leasing contains one of the triggering terms, the spot must disclose: 1. That the transaction is a lease; 2. The total amount due prior to or at consummation or by delivery, if delivery occurs after consummation. The amount of any payment required at the inception of the lease or that no such payment is required, if that is the case;

7 3. The number, amounts, and due dates or periods of scheduled payments; and 4. A reference to a toll-free telephone number or written advertisement where consumers may obtain all general disclosures required by the CLA, and discussed above. Examples of disclosures that appear to meet the statutory requirements include: 1. "Lease for $1,000 down and $300 a month for a total of $10,800. Call 555- CARS for more information." 2. "Our no money down, 24-month lease will cost you just $1,200. See Sunday s Herald for details." 3. "Call QUIKRENT for the scoop on our monthly lease program. Just $500 down and total payments of $7,200." The Reference Points The statute sets out parameters for the medium used to disseminate all the required disclosures: Toll-free Numbers A toll-free number (or a number allowing a consumer to reverse the phone charges when calling) referenced in a leasing spot must be established no later than the broadcast date of the spot referencing the number. Because the advertiser is liable for making the required disclosures, it appears that the advertiser is therefore responsible for ensuring that the toll-free number is functional. However, the advertiser, the station or a third party (such as a commercial toll-free number service) may operate the number. The number must be maintained no less than ten days, beginning on the date of any such broadcast. Although this point is not clear, it would seemingly require that the number be maintained at least ten days past the last airdate of the spot referencing the number. There is no requirement as to the coverage area of the toll-free number. Consumers calling the toll-free number must be sent the required disclosure information in writing, if requested. Language in the ad must indicate that disclosures are available by calling the toll-free number. When an advertised toll-free number responds with a recording, lease disclosures must be provided early in the sequence to ensure that the consumer receives the required disclosures. Written Advertisements

8 The broadcast ad must give the name of the publication in which the written advertisement appears and the publication date(s) of the advertisement. The publication must be in general circulation in the community served by the radio station (which includes nationally circulated newspapers), and The written ad referenced in the spot must appear at least three days before and ending at least ten days after the broadcast. Thus, it appears that, for example, a leasing spot that airs on September 30th could not refer listeners to a September 25th newspaper ad for disclosures, even though the spot schedule may have begun on September 15th. Clear and Conspicuous Standard The disclosures in both radio and television spots must be made "clearly and conspicuously." The Fed s "clear and conspicuous" standard calls for the information to be legible and reasonably understandable. There are no requirements as to the size of type or length of time that the image is required to be on the screen, or the audio level of aural disclosures. However, very fine print in a television advertisement or detailed and rapidly stated information in a radio advertisement does not meet the clear and conspicuous standard if consumers cannot see and read or comprehend all of the information required to be disclosed. Specifically, the rule states that any reference to a charge that is part of the total amount due at lease signing or delivery may not be more prominent than the disclosure of the total amount due at lease signing or delivery. Prohibited Ads The Act prohibits "bait and switch" advertising of both consumer credit and consumer leases. This means that an advertiser cannot promote credit or lease terms that are not available. It may state only those terms that the creditor is actually prepared to offer. For example, a creditor may not advertise a very low annual percentage rate that will not in fact be available at any time. This prohibition is not intended to inhibit the promotion of new credit programs, or terms that will be offered for a limited period or that will become available at a future date. Broadcasters Liability for Violations of The Regulations Although broadcasters are not subject to civil liability for advertisements not in compliance with the provisions of the Truth in Lending Act and the Consumer Leasing Act, the FTC has authority under the Federal Trade Commission Act to take action against any medium that disseminates deceptive advertising. The FTC generally does not pursue the media, but, instead, holds advertisers responsible for the content of their copy. Thus, deceptive advertising is controlled at its source.

9 Nonetheless, the Federal Communications Commission has stated in the past that licensees who broadcast advertisements deemed false, misleading, or deceptive by the FTC, call into question their ability to operate in the public interest. Generally, broadcasters must act responsibly with regard to all material that is broadcast through their facilities. This includes taking all reasonable measures to eliminate any false, misleading or deceptive advertising. In addition, if the station produces the spot, state law may impose the same liability on the station as is imposed on the advertiser. Stations should check with their own attorneys regarding liability imposed under state law. Check State Law Because the Truth in Lending Act and the Consumer Leasing Act (as well as the new legislation) do not preempt state law, states may have other triggering terms and more extensive disclosure requirements than those required by federal law. Before determining whether a spot contains the proper disclosures, be sure to check with your state s attorney general or office of consumer affairs, or your own attorney. Additionally, states may apply for exemption from the Federal Consumer Leasing Act. Both Maine and Oklahoma are exempt from Regulation M.