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Home > Bank Resources > Bank Resources Publications > Compliance Corner > 2006 > Second Quarter

Compliance Corner: Second Quarter 2006

Website Compliance for Banks, Part I

by Kenneth J. Benton, Consumer Regulations Specialist

While most banks are diligent in complying with banking laws and regulations for their brick-and-mortar facilities, some may devote less attention to compliance issues related to loan and deposit advertisements on their websites. This article is the first of a two-part series reviewing the requirements for consumer regulation website compliance. Part I discusses compliance for loan products, and Part II will discuss compliance for deposit products and will appear in the Third Quarter 2006 issue of Compliance Corner.

This article focuses on Regulation Z and the Board’s Order on Fair Housing Advertising.  Regulation Z contains two provisions that regulate advertisements covering both closed- and open-end credit, as well as credit card applications and solicitations. The Board’s Order on Fair Housing Advertising sets forth requirements for banks that advertise loans secured by dwellings. It should be noted that while Regulation M, the implementing regulation for the consumer leasing provisions of the Truth in Lending Act, contains requirements for the advertisement of consumer leases, it will not be covered in this article.

Regulation Z defines an advertisement as “a commercial message in any medium that promotes, directly or indirectly, a credit transaction.¹” Because of the broad definition of advertisement, any bank website that promotes a credit product, such as a car or mortgage loan, must comply with the advertising provisions of Regulation Z.

Regulation Z violations are some of the more common compliance weaknesses cited by examiners. This reflects both the complexity and breadth of the regulation and the popularity of bank products within the scope of Regulation Z, including mortgages, auto loans, home equity plans, and credit cards. Banks should therefore pay particular attention to verifying that their websites comply with Regulation Z.

Closed-End Advertising Rules
If a creditor uses any “trigger” terms in a closed-end credit advertisement, it must make additional disclosures. The trigger terms are:

1. the amount or percentage of any downpayment
2. the number of payments or period of repayment
3. the amount of any payment, and
4. the amount of any finance charge.

The use of any one of these terms requires the creditor to also disclose the following additional terms in the advertisement:

1. the amount or percentage of the downpayment
2. the terms of repayment, and
3. the annual percentage rate (APR), using that term.²

If the rate may be increased after consummation, that fact must also be disclosed. For example, if a bank advertises an auto loan on its website and mentions the monthly payment, it must also disclose the APR, the repayment terms, and the amount or percentage of the downpayment if one is required. If the interest rate can change, the bank must also disclose that possibility.

Advertising the rate of the finance charge. If an advertisement states a rate of finance charge, it must state the rate as an “annual percentage rate,” using that term or the abbreviation “APR.” If the APR can increase after the loan closes, the advertisement must disclose that as well. However, the advertisement does not have to describe the new rate or its effect on the payment schedule. Also, the higher rate disclosure does not apply if it takes effect as a result of a delinquency, late payment, default, acceleration, assumption, or transfer of collateral. The advertisement cannot disclose any other rate, except a simple annual or periodic rate that is applied to an unpaid balance, which may be stated in conjunction with the APR, but which cannot be more conspicuous than the APR.

Actual available terms. Advertisements for credit, stating specific credit terms, can only state terms that are actually offered by the creditor. In other words, the product advertised on the website must match the terms and conditions of the credit product itself. Examiners have encountered instances where credit advertisements, both in printed form and on bank websites, do not match the actual terms and conditions of the bank’s contractual agreement for the product. It is therefore important that banks compare their credit advertisements against the written customer agreements for these products to ensure that they match.

Open-End Credit Advertising Rules
The advertising requirements for open-end credit closely mirror those for closed-end credit. Creditors can only advertise products that are actually available or will be available, and open-end credit advertisements are also subject to a trigger. That is, if a creditor uses any terms required for disclosure—such as finance charges, other charges, security interests, and statement of billing rights—the creditor must also clearly and conspicuously disclose the following: 1) any minimum, fixed, transaction, activity, or similar charge that may be imposed; 2) any applicable periodic rate (and if the plan provides for a variable periodic rate, that fact must be disclosed); and 3) any membership or participation fee that could be imposed.

Regulation Z imposes a “clear and conspicuous” standard for some of its open-end credit advertising disclosures. The Official Staff Commentary clarifies the advertiser’s obligation in meeting this requirement: “Section 226.16 is subject to the general ‘clear and conspicuous’ standard for subpart B [see §226.5(a)(1)] but prescribes no specific rules for the format of the necessary disclosures. The credit terms need not be printed in a certain type size nor need they appear in any particular place in the advertisement.”³

Home equity plans. Regulation Z has a number of restrictions on advertisements for home equity plans, which are outlined below:

1. If an advertisement for a home equity plan contains any of the terms required to be disclosed, which includes finance and other charges, the advertisement must also clearly and conspicuously disclose: 1) loan fees that are a percentage of the credit limit under the plan and an estimate of any other fees imposed for opening the plan (if property insurance is required by the creditor, the creditor may disclose the amount of the premium or may state that property insurance is required); 2) periodic rates used to compute the finance charge, expressed as APRs; and 3) the maximum APR that can be imposed in a variable-rate plan.
2. If an advertisement states an initial APR that is not based on the index and margin used to make later rate adjustments, it must also state the time period the rate will be in effect and a reasonably current APR that would have been in effect using the index and margin.
3. If an advertisement contains a statement about any minimum periodic payment, the advertisement must also disclose, if applicable, that a balloon payment can result.
4. An advertisement that references the tax deductibility of interest expense cannot be misleading.
5. An advertisement cannot refer to a home equity plan as “free money” or contain a similarly misleading term.

Website solicitations or applications for credit cards. Regulation Z has a specific provision that regulates credit card applications and solicitations.⁴ Banks that offer credit card applications or solicitations on their websites must pay careful attention to the requirements of section 226.5a, as it clearly applies to bank websites. Subsection 226.5a(c) states: “The card issuer shall disclose the applicable items in paragraph (b) of this section on or with an application or solicitation that is mailed to consumers or provided by electronic communication.” This point is also reinforced by the Official Staff Commentary for Regulation Z: “In all cases, a consumer must be able to access the disclosures (including the brochure) at the time the blank application or reply form is made available by electronic communication, such as on a creditor's Internet website.”

Creditors have flexibility in satisfying this requirement. For example, if a link is not used, the application or reply form must clearly and conspicuously refer the consumer to the fact that rate, fee, and other cost information either precedes or follows the application or reply form. Alternatively, creditors may provide a link to electronic disclosures as long as consumers cannot bypass the disclosures before submitting the application or reply form.
           
This section of Regulation Z requires eleven specific disclosures for credit card solicitations or applications; however, only the disclosures that actually apply to the card issuer’s product have to be disclosed. The eleven required disclosures are:

1. the APR
2. any annual or periodic fee that can be imposed to open or maintain the account (including inactivity fee)
3. any minimum finance charges
4. any transaction charges imposed for using the card for purchases
5. the date by which payment must be received to avoid a finance charge, or, if no grace period is available, that must be disclosed
6. the balance computation method that is used to determine the customer’s balance⁵
7. a statement that charges incurred during a period are due when the customer receives the periodic statement
8. the fees imposed for a cash advance
9. the fees imposed for a late payment
10. the fees imposed for exceeding the credit limit
11. the fees imposed for transferring a balance

It is also important to note that the famous Schumer Box, named after New York Senator Charles Schumer for his involvement with amending the Truth in Lending Act to require certain credit card disclosures in a tabular format, should contain the first seven disclosures set forth above.  Two model forms for the Schumer Box disclosures are included in Appendix G-10(a) and G-10(b) of Regulation Z. The creditor can also include the remaining disclosures in the Schumer Box, or, alternatively, can include them clearly and conspicuously elsewhere in the application or solicitation. One final requirement for credit card disclosures is that if a creditor makes a credit card available to a consumer through a home-equity plan, then the creditor is exempt from the disclosure requirements of section 226.5a for credit cards and solicitations.

Board Order on Fair Housing Advertising and Poster Requirements
Banks engaging in any form of advertising of any loan for the purpose of purchasing, constructing, improving, repairing, or maintaining a dwelling or any loan secured by a dwelling must prominently indicate in such an advertisement, in a manner appropriate to the advertising format, that the bank makes loans without regard to race, color, religion, sex, national origin, handicap, or familial status (having children under the age of 18). With respect to electronic advertisements, this requirement may be satisfied by including in the advertisement a facsimile of the logotype with the equal housing lender legend contained in the Equal Housing Lender Poster in section 2 of the Board’s order.

Closing Comments
The Internet has provided banks with an additional medium in which to market their products and services. However, the use of the Internet also gives rise to additional compliance issues for banks, and they must be vigilant in ensuring that their websites are in compliance with all relevant banking laws and regulations. The complete text of Regulation Z is available online on the Board of Governors website at www.federalreserve.gov/regulations/default.htm. If you have any questions about this article, please contact Consumer Regulations Specialist Kenneth J. Benton or Supervising Examiner John D. Fields through the Regulations Assistance Line at (215) 574-6568.

• ¹ 12 C.F.R. §226.2(a)(2).
• ² Section 24(c) of the Official Staff Commentary clarifies that the abbreviation “APR” can be used instead of “Annual Percentage Rate.” Banks should always consult the Official Staff Commentary for clarifying an issue related to Regulation Z.
• ³ The Bankruptcy Reform Act of 2005 directed the Board of Governors of the Federal Reserve System to amend Regulation Z to define specifically the meaning of “clear and conspicuous.” The Board is currently in the process of drafting amendments to Regulation Z to accomplish this. Thus, the definition of “clear and conspicuous” will likely change at some point in the future.
• ⁴ A solicitation, in the context of Regulation Z, means an offer to open a credit card account that does not require the completion of an application. In other words, a solicitation occurs when a bank is merely telling a consumer about the features of a card, without requiring the consumer to complete an application.
• ⁵ The four approved methods for computing the balance—average daily balance, two-cycle average daily balance, adjusted balance, and previous balance—are set forth in section 226.5a(g).

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.