Do Your Ads Satisfy the Reg Z Patrol?

Reg Z actually helps you attract buyers--and it's the law.

December 1, 1996

You're struggling over the wording of a classified ad. Should you call it a cozy starter or a charming three-bedroom? Getting the wording just right is an art, but did you know it's also a matter of law?

Even experienced agents sometimes have difficulty preparing ads that are both effective and legal. Why? The federal government has one set of requirements, and your state has another. Even your own Code of Ethics lays out guidelines.

The purpose behind all those rules is to protect consumers by providing full disclosure and giving them the chance to make an informed choice. To that end, the federal government has created Regulation Z (commonly known as Reg Z). Established in conjunction with the Truth-in-Lending Act, Reg Z governs the way you advertise mortgage information.

Who Must Comply with Reg Z?

Almost anyone who advertises financing information is subject to Reg Z. That includes you, as well as homebuilders, lenders or creditors, and government agencies.

"But I never put financing information into my classified ads," you say. That doesn't mean you haven't violated Reg Z. The regulation defines advertisements as "any commercial messages that promote consumer credit."

Have you ever given a buyer a listing sheet or flyer containing information about how the sale could be financed? Have you taped a listing with that kind of information to your office window to attract the interest of passing shoppers? Those are considered to be advertisements under the law and must conform to its requirements. Reg Z covers advertising in any of the following media:

The regulation applies only to ads for residential properties that are to be owner-occupied. That may include mobile homes, houseboats, duplexes or separated units on a property with one legal description, co-ops, condos, townhouses, and farms or ranches used primarily for residential purposes. Generally, ads discussing FHA, Department of Veterans Affairs (DVA), and conventional loans must comply.

Get to Know Reg Z

Reg Z may be the most misunderstood law affecting residential real estate. Interestingly, though, observing the law can actually improve the results you get from your advertising.

Some agents find the regulations so intimidating that they avoid publishing financing information--and no wonder. The law is complex, and the penalties for violating it range from public embarrassment to civil damages, from cease-and-desist orders to fines of up to $10,000 per infraction, and even criminal contempt charges.

But a survey of homeowners by the Fort Lauderdale News and Sun-Sentinel newspaper suggests that leaving financing information out of your ads is a big mistake. Survey respondents under the age of 55 consistently ranked financing among the top three factors in choosing which home to buy. The younger the buyers, the more important financing was to their buying decision.

Rather than simply leaving the information out of your ads, it makes more sense to learn how to comply with Reg Z. The law applies to any real property financing that requires four or more payments. It's "triggered" if your ad mentions any of the following terms (called triggering terms):

As with most laws, Reg Z contains a number of gray areas and exceptions. For example, mention of only a down payment in an ad doesn't trigger the need for further disclosures unless the seller of the property is financing the transaction and meets the definition of creditor. A creditor is defined as one who regularly extends credit. In practice, that means someone who has financed at least five transactions secured by mortgages in the prior year.

In addition, ads describing seller financing arrangements are exempt from Reg Z. If you state, "The seller will provide 30-year financing at 9 percent," you need not disclose further information. You may advertise other terms the seller is offering without triggering Reg Z. Finally, subject to financing, such as wraparound mortgages or all-inclusive deeds of trust, is also exempt.

Seller financing is covered, however, when the seller is a creditor. You're most likely to encounter that situation when advertising property that has been repossessed by a lender. If the financing is offered by the lender that owns the property, and the lender meets the definition of a creditor, your ad must comply. Interestingly, in such a situation, down payment also becomes a triggering term that requires further disclosure.

In general, it's far easier to comply all the time than try to figure out when you don't have to comply.

For Fixed-Rate Loans

If the financing options and property you want to advertise are covered according to these rules, pay close attention to what you're doing when you use the triggering terms. The term you use will dictate what other financing information you're required to include. Here are the key requirements for fixed-rate loans:

1. If you include the monthly payment, term, or amount of any finance charges (or down payment if the seller is a creditor), your ad must include all the following:

2. You may give the simple interest rate, but only if you also include the APR.

The APR (which may be abbreviated as APR in the ad) can appear by itself without triggering the need for additional information. That's because the Truth-in-Lending Act's basic goal is to give consumers an easy way to compare financing alternatives. And disclosure of the APRis the primary method used to accomplish that goal.

The APR reflects more than the simple interest rate; it also considers fees the consumers must pay to obtain a loan. The law contains a list of fees used in the APR calculation, and it allows for a margin of error in the calculation. Fixed-rate loans can be off by .125 percent, and variable-rate loans can miss the mark by .25 percent.

Most financial calculators make doing this computation easy. But the easiest way to obtain the APR for a loan is to ask a local lender to perform the calculation.

Once you've determined whether your ad must meet Reg Z requirements, simply plug in the necessary components (See Exhibit I).

Exhibit I
Advertising a Fixed-Rate Loan

You think the affordable monthly payment of this listing will catch first-time buyers' fancy. But you know mentioning the payment will trigger the need for further disclosure. Here's how you could work the Reg Z disclosures into the ad.



$2,000 Down
NW Wooded Retreat

$437.28 payment helps you afford this unique 2 BR 2-story townhome. Picture the privacy
of your end unit snuggled in shade trees. Vaulted ceilings and fireplace create open yet
intimate space. Assumable 23-year fixed-rate loan saves you hundreds in closing costs. 11% APR, $46,000. Please call Dennis today, 555-5555.

Keep these five rules in mind when you write the ad:

  1. A monthly payment may represent either principal and interest or PITI, but it doesn't have to be labeled as one or the other.
  2. The payment must include the cost for mortgage insurance premiums.
  3. The loan length may be presented in years (30-year financing) or months (360 monthly payments).
  4. The simple interest rate may not be shown more conspicuously than the APR. If you use ten point type for the simple interest rate, the type for the numerical portion of the APR should be no smaller than ten point.
  5. The abbreviation APR should appear in capital letters.

Rules for Variables Vary

Reg Z provides specific guidance on advertising buy-downs. Homebuilders have effectively used buy-down financing in ads for years. But agents have been slow to embrace this technique even with its proved success for builders. Concern about added cost and making proper disclosures may cause this reluctance.

It's really rather simple. Under Reg Z, you can advertise the lowered rate if you also show how long the rate will last, what the simple interest rate will be for the remainder of the loan, and what the APR will be. You may also show how much the buy-down lowers the monthly payment without making additional disclosures.

The government also has special rules for variable rates loans. For Reg Z purposes, Uncle Sam defines a variable-rate transaction as one that includes at least one future interest rate change not known at the time of the transaction. That may include an ARM or a variation on an ARM, such as the blended Stable mortgage or the two-step mortgage.

Ads for variable-rate financing, like those for fixed-rate loans, must state the APR. That may seem impossible given that future rate increases or decreases are difficult to predict. However, the law requires that the advertiser make some assumptions about rate changes on the basis of payment caps. The ads must also state that the rate may change. The Federal Trade Commission (FTC) suggests that "rate subject to increase after closing" will satisfy the requirement.

Your ad may show the simple starting rate but, unlike ads for buy-downs, need not show the simple interest rate for the period after the discount. The ad may also show how the starting rate reduces the payment without triggering the need for other disclosures (see Exhibit II).

Exhibit II
Advertising ARMs

These two ads show how to disclosure financing information for variable-rate mortgages.



Emerald Hills
7 1/2% first-year rate makes this low payment possible. Custom home on oak tree--dotted lot. You'll enjoy its oversized master bedroom, screened patio, and Jacuzzi; 2BR, 2 bath with room for expansion. $129,500, 9.12% APR, subject to increase after closing. Please call Dennis, 555-5555.
6 7/8% Assumable Loan

Low first-year rate makes qualifying easy for this executive home on one acre. Inviting glass entry makes all feel welcome. Great room with rock fireplace is perfect for cold evenings at home. 3 BR, 2 bath. Kitchen features island, Jenn-Air, microwave, $74,500, 9.85% APR. Rate subject to increase after closing. Please call Dennis, 555-5555.

Whether you're offering a fixed-rate, variable-rate, or buy-down plan, Reg Z allows you to use simplified disclosures when you advertise many properties with different prices. Grouping ads together cuts your cost and improves the pulling power of your ad. Instead of making separate disclosures for each property, you can make one that covers all the properties. Display and string ads are ideal for this purpose.

When you offer buy-down financing in a group ad, you must watch for two things. First, each seller in the group ad must offer the same buy-down plan. For example, a 2-1 buy-down that reduces the interest rate for the first two years shouldn't be mixed with ads offering 3-2-1 buy-downs that subsidize the rate for three years. Different plans require separate and district disclosure, which increases your cost and can confuse buyers.

Second, the APR must be the same for each property advertised. If the APR is 10.35 percent for three properties and 10.78 percent for a fourth, your ad violates the law.

Single disclosure for multiple properties is called a typical terms disclosure. Let's say you were offering a buy-down on a group of properties approved for DVA financing. The headline could read "8.5 percent DVA Financing" and could be followed by a description of each property. At the bottom of the ad, you'd list the typical terms. In other words, you'd describe financing information for one property that's typical of the whole group. For example, it could state, "Typical terms: $95,000 mortgage; interest in year 1: 8.5 percent, year 2: 9.5 percent, year 3: 10.5 percent, years 4--30: 11.5 percent; 11.95 percent APR."

For a quick guide to Regulation Z compliance, see Exhibit III.

Exhibit III
Quick Guide to Regulation Z Compliance

For Fixed-Rate Loans

If You Advertise You Must Also Advertise

1. APR No other disclosure is necessary

2. Simple interest rate APR

3. Down payment No other disclosure is necessary
unless seller meets the narrow
definition of a creditor (see text
of article)

4. Monthly payment Down payment, loan term, and
APR

5. Loan term Payment, down payment, and
APR

For Buy-downs

If You Advertise You Must Also Advertise

1. Subsidized simple Length of time subsidized rate
interest rate (rate applies advertised is sub-
sized by sellers, and Simple interest rate that applies
buy-down is reflected to balance of term and
in contract between composite APR buyer and lender)

Optional: May show effect of buy-down period without
triggering additional disclosure

2. Reduced payment Reduced simple interest rate,
length of time reduced rate and payment apply, simple interest
rates that apply to balance of term, and APR

3. APR No other disclosure is necessary

4. Down payment No other disclosure is necessary
unless seller meets the narrow definition of a creditor (see text of
article)

Nothing to Lose

Most Reg Z violations are unintentional. Unfortunately, ignorance of the law isn't a defense. The FTC monitors real estate industry compliance. Carole Reynolds, an attorney for the FTC, says both consumers and real estate agents bring violations to the FTC's attention. The commission also conducts random checks.

Violations are usually handled administratively; the FTC simply asks violators to bring their advertising into compliance. But the agency does seek fines for flagrant violations. According to Reynolds, the largest fine assessed against a single violator has been $300,000.

If the prospect of heavy fines makes you bristle, remember the simple approach to Reg Z: When in doubt, comply. When not in doubt, comply. You have nothing to lose and much to gain.

  • Newspapers, leaflets, flyers, catalogues, direct mail, magazines, and other printed materials
  • Radio, television, and public address systems
  • Displays inside or outside he real estate office, including window displays
  • Point-of-sale literature, signs, and billboards

    • Monthly payment
    • Term of the loan
    • Dollar amount of any finance charges
    • Annual percentage rate (APR)
    • Down payment
    • Monthly payment
    • Term

Mr. Creps is president of Success Seminars, a company that trains real estate professionals in the United States and Canada. You can contact him at 7832 North La Canada Drive, Tucson, Arizona, 85704; 602/297-0607.

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