Compliance Blog

NAFCU receives many questions about advertisements and trigger terms in the context of closed-end mortgage loans. Section 1026.24 of Regulation Z governs the advertising requirements for closed-end mortgage loans. Today’s blog will look at adjustable rate mortgages (ARMs) and a certain additional disclosure that may be triggered depending on the content of an ARM advertisement.

Trigger Terms and Additional Disclosures for All Closed-End Credit

Before we focus on ARMs, let’s examine the general trigger term and additional disclosure requirements that apply to all advertisements for closed-end credit under Regulation Z. Section 1026.24(d)(1) identifies four categories of terms that trigger additional disclosures in all closed-end credit advertisements:

“(i) The amount or percentage of any downpayment.

(ii) The number of payments or period of repayment.

(iii) The amount of any payment.

(iv) The amount of any finance charge.”

The first category of trigger terms will generally not apply unless the credit union is engaged in a transaction in which it is selling something and financing the sale because of how downpayment is defined under Regulation Z. If an advertisement contains the other types of trigger terms, then Regulation Z requires the disclosure of the following information, if applicable:

• Either the amount or percentage of the required downpayment;
• The repayment terms over the life of the loan; and
• The APR, including a statement the APR may increase after consummation, if the APR can increase after consummation of the loan.

For more guidance about these baseline requirements applicable to all closed-end credit advertisements, NAFCU members can download NAFCU’s Credit Union Compliance Advertising Guide.

Additional Requirements for ARMs

Section 1026.24(f) contains additional requirements that apply when a credit union discloses certain information about rates or payments in an advertisement for credit secured by a dwelling. Dwelling is defined as “a residential structure that contains one to four units, whether or not that structure is attached to real property.” If an advertisement relates to credit secured by this kind of residential structure, then the additional rate and payment disclosures may apply depending on the content of the advertisement.

The additional rate disclosures for advertisements for dwelling-secured credit are described in section 1026.24(f)(2), and the additional payment disclosures are explained in section 1026.24(f)(3). For today’s discussion, we will not concern ourselves with the additional payment disclosures because those could apply to any kind of mortgage loan advertisement that “states the amount of any payment.”

The additional rate disclosures in section 1026.24(f)(2) are triggered if an advertisement for dwelling-secured credit (i.e., a mortgage loan) includes a simple annual interest rate and more than one interest rate may apply under the terms of the contract. An ARM advertisement could fall into the scope of this additional requirement if an ARM advertisement included a simple rate of interest. One thing to note here is that the requirements in the rule apply to more than just ARMs. For example, the commentary suggests that the additional disclosures could apply to variable-rate transactions “if a simple annual rate that applies at consummation is not based on the index and margin that will be used to make subsequent rate adjustments over the term of the loan[.]” The commentary to section 17(c)(1) explains what may or may not constitute a variable-rate transaction and provides examples that may be helpful.

Section 1026.24(f)(2) may be triggered if you have an ARM advertisement that includes a simple annual rate of interest. This is because the advertisement of dwelling-secured credit includes a simple annual rate of interest and more than one rate could apply during the life of the loan. In that case, Regulation Z requires these additional disclosures to be made clearly and conspicuously:

• Each simple interest rate under the contract;
• The period of time for which each simple interest rate will apply; and
• The APR.

Under section 1026.24(f)(2)(ii), clear and conspicuous in this context means being disclosed “with equal prominence and in close proximity to any advertised rate that triggered the required disclosures.”

Variable-rate transactions that start with a fixed rate of interest but permit periodic adjustments to the rate based on an index, including ARMs, have additional flexibility in satisfying the requirement to provide each simple interest rate. Because the future simple rates are tied to an index level that will not be known until some future point time, section 1026.24(f)(2)(i)(A) allows ARM advertisements to satisfy the first additional rate disclosure by disclosing a rate “based on a reasonably current index and margin.” The commentary to Regulation Z explains that what constitutes a reasonably current index and margin depends on the type of advertisement:

“i. For direct mail advertisements, it was in effect within 60 days before mailing;

ii. For advertisements in electronic form it was in effect within 30 days before the advertisement is sent to a consumer's email address, or in the case of an advertisement made on an Internet Web site, when viewed by the public; or

iii. For printed advertisements made available to the general public, including ones contained in a catalog, magazine, or other generally available publication, it was in effect within 30 days before printing.”

Unfortunately, Regulation Z does not contain any sample disclosures that can help credit unions determine whether they are complying with these advertising rules. This means that credit unions may have some discretion in how to make these disclosures as long as the additional disclosures satisfy the content and the equal prominence and close proximity requirements described in section 1024.24(f)(2).