A Primer for MAPs

In our corner of the woods, here in Western Washington State, the snow is uncharacteristically high, and life has entered a Slow Zone. Cars and trucks ply the freeways at about 35 miles per hour, if they're able to make it to the freeways at all. The rest of us remain at home, thankful that our electricity is still working and throwing several more logs on the fire. My wife, who teaches in a local high school, has had an unexpected vacation this week, as have her students. The school buses simply can't handle the snow- and ice-covered roads.

The trees, with their branches outlined by snow, look like magical crystalline creations. Now and then, a branch will drop its accumulated snow or simply crack and break. The pine needles of sturdier trees have collected fistfuls of snow. It is all quite beautiful, though it restricts our activities greatly. I make the trek out to the woodshed every few hours and our supply of seasoned logs is dwindling, Further, our food supply is gradually disappearing, and we get more and more creative with our recipes. Thank goodness for canned tuna.

The government, revving up the engine of its new consumer protection agency, has released new rules governing the marketing of mortgages. The idea is simple. Let's avoid deceptive practices; let's not confuse consumers as they decide which loan will best suit their needs and plans. Good idea, in theory; but it raises all sorts of issues. The restrictions on those of us in this trade--yes, it includes companies like ours that write and distribute materials explaining mortgage programs--need to be as clear as are the resulting marketing and advertising copy. And that isn't exactly possible.

You will, for example, find the word "reasonable" sprinkled throughout the texts composed by federal agencies. It's a great legal word that means, in the end, the court will decide on this specific problem as relevant cases arise. What, for example, is a reasonable presumption of understanding on the part of the public? According to a study I looked at yesterday, the students graduating from our high schools and colleges don't necessarily understand a complex use of the English language. (This is both because our schools have not done a great job of teaching students to read, especially to read material that is beyond the eighth grade level...and because so much of the relevant material here is written in legalese and is therefore quite dense and sleep-provoking.)

In any case, we look in this issue at the basics of the marketing rules that became law in the middle of August, 2011. These words are meant to raise issues you'll want to explore further. They are very, very far from the last word on any of these subjects.

MAPs: A Quick Analysis

Several fairly recently created laws and governmental organizations are resulting in new restrictions on mortgage advertising, and they deserve our close attention. Let me say immediately that this very brief analysis does not and cannot attempt to cover all aspects of the changes, nor can or should it be mistaken for legal advice, which it is definitely not. Instead, this little essay simply wishes to point out the general outlines of what we should know about the new rules and regulations, and to ease most unwarranted of the fears that the often unspecific wording and frustrating legalese often inspire in us all.

The intention of the changes is clear, as the FTC states it. (We'll be using FTC wording throughout this small report.) “Preventing and deterring deception in advertisements for mortgages…is a primary objective of FTC law enforcement and of the Final Rule.” (The “Final Rule” is, as the name implies, the set of restrictions that remained after a process of drawing hundreds of people into working on and revising the rules and their precise wording.)

The restrictions comprise a response to the alleged misinformation that many consumers acted on in the recent past regarding mortgages that, as it turned out, they were unable to afford. “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.” In other words, the act or practice—including the wording in advertisements and promotional pieces—are deceptive if they keep consumers from acting reasonably (which we may likely see as their own best interests, though the word, “reasonably” is a favorite in legalese, and its meaning can be stretched even further than I just did).

Here we have what is perhaps the  primary problem posed by the new MAP rules. They wish to catch such a wide variety of deceptions in their net that their definitions sometimes become vague and very open to differing interpretations. Still, we can generally assume that the enforcement of these restrictions will itself be reasonable, though we should take great care to avoid any appearance of advocating for a particular loan program—or even for a view of the future movements of interest rates—based on false information about that program or about interest rates. We are not in the interest rate prediction business; we are in the interest rate/credit market explanation business…so that clients and potential clients are well-armed with accurate information that will help them reach their own conclusions. (For us, nothing new here.)

Deceptions in marketing and advertising materials may be explicit and/or implied. “Whether an implied claim is made depends on the overall net impression that consumers take away from an advertisement, based on all of its elements (language, pictures, graphics, etc.). The FTC evaluates whether consumers’ impressions or interpretations of a representation or omission are reasonable.” Here, the room for judgment broadens, but the intention is to find deceptions that are implied but intended. Unintended deceptions, for the most part, are not culpable. The agencies involved, as recent documents assert many times, are not seeking to catch and punish individuals or groups who make unintended mistakes that could mislead clients. Again, though, great care is undoubtedly advisable.

Many alleged violations have been cited.  “The alleged violations have included deceptive claims—often made to subprime borrowers—about key terms and other aspects of the loans, such as:

• Misrepresentations of the loan amount or the amount of cash disbursed;

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

• Claims of low ‘teaser’ rates and payment amounts, without disclosing that the rates and payments would increase substantially after a limited period of time;

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

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

• Claims 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;

Claims that the loans were amortizing, when, in fact, they involved interest-only transactions;

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

• False or misleading savings claims in high loan-to-value loans;

• False or misleading claims regarding the terms or nature of interest rate lock-ins;

• False claims that an entity was a national mortgage lender;

• Failure to disclose adequately that the advertiser, not the consumer’s current lender, was offering the mortgage; and

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

It's a fairly familiar ghoul's gallery of misrepresentations and it should give us a clearer idea of what the FTC and consumer protection agency are trying to stop.

“Numerous states also have brought enforcement actions under state laws alleging deceptive mortgage advertising and marketing, challenging misrepresentations about: (1) The lack of closing costs; (2) low fixed or teaser rates or payments; (3) the advertiser’s affiliation with the consumer’s current lender; (4) the availability of government grants for home repairs; (5) the savings available by refinancing; (6) reverse mortgage terms and government affiliation; (7) the availability of rates compared to competitors; and (8) the advertiser’s self-description as a ‘bank.’”

The relevant advertising or marketing pieces are known as ‘‘commercial communications’’:

"any written or oral 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 term ‘commercial communication.’"

Anyone disseminating such “commercial communications” must retain copies for at least 24 months—partly for self-protection, so that you have the actual materials in question, should you need them. This is not legal advice, just a statement of personal preference: I think it is good to retain any marketing piece you send to anyone or any people, partly so that you can look up the piece a client might refer to, even when it’s many years old, and so that you can better track the effectiveness of your marketing materials. This will include printed and Internet materials that might not ordinarily be considered marketing pieces. Any descriptions or explanations of loan programs and lender services should be in your paper and/or electronic files.

And there it is. Not really worthy of great fear. It’s just another attempt to protect consumers (i.e., borrowers) and to make business run a bit more smoothly. And, as with all such attempts, there are inevitable problems that arise from the obvious fact that legislators cannot anticipate all problems and, even if they could, they wouldn’t be able to come up with truly workable solutions until the market gave the problems a specific context and character.