Minding Your Ps and Qs

Thursday, 01 October 2009 00:00

Articles - Legal Updates

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Legal Considerations in the Marketing of Reverse Mortgages
 
The marketing of reverse mortgages has become a hot topic of late as the Federal Trade Commission ("FTC"), the Department of Housing and Urban Development ("HUD"), the Office of the Comptroller of the Currency ("OCC”) and the Senate Special Committee on Aging have each either recently commented upon or taken action to stem perceived ills in the marketplace. The National Reverse Mortgage Lenders Association ("NRMLA"), through its Ethics and Standards Committee, has similarly taken a proactive role in both clarifying unacceptable marketing practices and combating abuses. Adding to the confusion, HUD's recent introduction of HECM for purchase and fixed-rate product offerings provide new challenges for lenders and originators marketing a more diverse product menu. All of the foregoing points out the need for industry participants to exercise increased vigilance and careful consideration in the marketing of reverse mortgages to seniors.
In this article, we explore some general legal considerations and recent developments for originators and lenders in the marketing of reverse mortgages. To help you mind your Ps and Qs, we explore the "4Ps of Marketing," the Truth-in-Lending Act's "Seven Deadly Sins," the "4 Ps" of the FTC, and, less you grow weary of Ps, concluding with our firm's not so tongue-in-cheek formulation of the "5 Ps of Reverse Mortgage Marketing.   
 
The 4 Ps of Marketing
We begin with a well-known model formulated by Professor E. Jerome McCarthy, known as the "4 Ps of Marketing" or the “marketing mix“ which is commonly used in developing a successful marketing strategy. It involves the following four elements: Price, Place, Product and Promotion. As lenders are expanding the Product part of their “marketing mix“, we use Professor McCarthy's model to highlight the legal aspects of Promotion, i.e., the advertising and marketing practices that make up the lender's reverse mortgage “marketing mix.“
First and foremost, reverse mortgage loans are fundamentally consumer loans. Therefore, most, if not all, “forward mortgage” rules on advertising also apply to reverse mortgage advertising. Consequently, a number of the alphabet regulations embodying the federal regulatory scheme for consumer loans and a number of state laws impact the advertising of reverse mortgage loans.
 
Federal Rules
 
Federal Truth-in-Lending Act
The federal Truth-in-Lending Act (TILA) and its implementing regulation, Regulation Z, provide rules for creditors when advertising consumer credit transactions. The TILA requires creditors to follow certain rules with respect to adverting depending upon whether the mortgage loan is open- or closed-end credit.

 
The “Clear and Conspicuous” Standard
Under Regulation Z, for both open- and closed-end mortgage loans, advertisements must generally be “clear and conspicuous,” not deceptive or misleading, and creditors may only advertise terms that are actually available.  Last summer, the Federal Reserve Board promulgated significant amendments to Regulation Z (the “New TILA Rule”), which include new advertising requirements for both open- and closed-end mortgage loans. The New TILA Rule generally strengthened the “clear and conspicuous” requirement. Most provisions of the New TILA Rule, including its advertising requirements, became effective on October 1, 2009.  
The New TILA Rule requires advertisements for both open-end and closed-end mortgage loans to provide accurate and balanced information, in a clear and conspicuous manner, about rates, monthly payments, and other loan features.  The New TILA Rule implemented an express “clear and conspicuous” standard that applies to all open-end and closed-end credit advertisements.  The Official Staff Commentary to Regulation Z provides examples (or practice “tips”) on how to comply with the “clear and conspicuous” standard in various scenarios, such as Internet, TV and oral advertisements.  By way of an example, the “clear and conspicuous” standard for visual text advertisements on the Internet for home-equity lines of credit and/or closed-end credit transactions means that the required disclosures may not be obscured by techniques such as graphical displays, shading, coloration, or other devices and must comply with all other requirements for clear and conspicuous advertisement.
 
“Seven Deadly Sins”
As noted above, the New TILA Rule prohibits advertising practices that are deemed to be “deceptive or misleading.” The following seven “deceptive or misleading” advertising practices – the “Seven Deadly Sins” – are specifically prohibited in connection with closed-end mortgage loans (and, therefore, also apply to fixed interest rate HECM loans that lenders structure and originate as closed-end credit):
1.  Using the word “fixed” in advertisement for variable-rate mortgage loans or other transactions where the advertised rate may increase, unless the lender also makes certain disclosures regarding the ability of the rate and/or payment to change and includes the word “ARM” in the advertising, if applicable.
2.   Comparing an actual or hypothetical rate or payment to the rate or payment that will be available under the advertised product without making certain disclosures regarding rates and payments that will apply over the full loan term.
3.  Including any statement in an advertisement that the mortgage loan is a government-endorsed program (e.g., “government loan program”, “government-supported loan”) unless the advertisement in fact is for an FHA loan, VA loan, or similar endorsed or sponsored government program.
4.  Using the name of the borrower’s current lender in an advertisement that is not sent by the current lender, unless the advertisement also discloses the name of the actual advertiser and states that the advertiser is not affiliated with the current lender.
5.  Making a misleading claim that the mortgage product offered will eliminate a debt or result in a waiver or forgiveness of a borrower’s existing loan terms with, or obligations to, another creditor. (In this regard, reverse mortgage originators should be careful in making claims that “reverse mortgages eliminate debt” – while a reverse mortgage eliminates the borrower’s scheduled monthly payment, it replaces the borrower’s prior “forward” mortgage loan(s) and other obligations (such as credit card debt) with a non-recourse loan debt that must be repaid at maturity or upon default.)
6.  Using the term “counselor” to refer to a for-profit mortgage broker or mortgage creditor. (In this regard, note that with reverse mortgages, the word “counselor” is a term of art and should only be used to refer to entities that provide reverse mortgage counseling to borrowers. Note, also, that reverse mortgage originators should be careful when using other “neutral” terms, such as “advisor”, when advertising reverse mortgages.)
7.  Providing information about some trigger terms or required disclosures (e.g., initial rate or payment) only in a foreign language while advertising other trigger terms or required disclosures (e.g., the fully-indexed rate or fully amortizing payment) only in English in the same advertisement.
Importantly, the above advertising “Seven Deadly Sins” were promulgated pursuant to the Federal Reserve Board’s authority under Section 129(l) of the TILA. Section 129(l)(2) of the TILA permits the Federal Reserve Board to prohibit unfair or deceptive practices in connection with mortgage loans.  As such, a violation of the above “Seven Deadly Sins” could subject a lender to the enhanced HOEPA damages equal to the sum of all finance charges and fees paid by the consumer.
 
The FTC Rules – ”Unfair or Deceptive” Acts or Practices  
The FTC has broad powers to combat unfair or deceptive acts or practices, including in connection with advertising of mortgage loans. The Federal Trade Commission Act (“FTC Act“), originally enacted by Congress in 1938, and updated and revised many times since then, makes unlawful unfair methods of competition, or unfair or deceptive acts or practices in or affecting commerce.  Under the FTC Act, the FTC is given authority to issue cease and desist orders if FTC determines that a person is using prohibited unfair or deceptive acts or practices in advertising. The jurisdiction of the FTC extends to non-bank financial institutions, including mortgage lenders and brokers, mortgage servicers and lead generators. However, the FTC's powers do not extend to banks, savings and loan institutions or federal credit unions.
The FTC Act prohibits any ”unfair or deceptive act or practice.”  A representation, omission or practice is ”deceptive” if it is likely to mislead a reasonable consumer under the circumstances. To be considered ”deceptive”, the misrepresentation or omission must also be material. For example, FTC generally considers statements regarding the cost of the mortgage to be material.  Examples of ”deceptive” conduct in the context of reverse mortgages include implying that the reverse mortgage is a “government benefit,” misrepresenting a government affiliation or otherwise making representations likely to mislead the consumer into thinking the transaction is not a loan or does not require repayment. Another example is advertising lower rates and fees only in the Spanish language, while disclosing higher terms only in English.
The focus of the FTC Act is on preventing injury to consumers. The FTC considers an injury to be ”unfair” (and ”unjustified”) if the injury is (1) substantial, (2) is not outweighed by any benefit to the consumer, and (3) the consumer could not reasonably have avoided the injury. The FTC has been taking an active role in the recent years by issuing administrative warnings and enforcement actions in connection with mortgage advertising. The FTC's enforcement actions have targeted deceptive and unfair practices in all stages of mortgage lending, from advertising and marketing through loan servicing, by mortgage lenders, brokers, and loan servicers. 
The FTC has been particularly active in the last few years in enforcing its rules in the area of mortgage advertising. In addition to checking whether an ad “fails” the ”Unfair or Deceptive” standard (see above), the FTC staff pays close attention to whether the ad is “clear and conspicuous.”  In doing so, the FTC looks at the following four (4) factors, or “The Four Ps” of the FTC:  Prominence, Presentation, Placement and Proximity.
To be Prominent, the advertising should be large enough for consumers to notice and read. Presentation means the marketing materials should provide information to consumers in a way that is easy for the consumer to read and understand. Here, the usual offending suspects are the excessive use of “legalese” and “fine print.” Placement means ensuring disclosures are located where the consumer is likely to look. Lenders should avoid “burying” important information about the loan next to insignificant items. Finally, Proximity means information must be located close to the term that it describes or qualifies. When advertising on a web site, for example, making the consumer “click” several times before the consumer can get to information about the loan may be problematic under this standard.
 
Equal Credit Opportunity Act
The federal Equal Credit Opportunity Act (ECOA) and its implementing Regulation B prohibit discrimination on a prohibited basis in the advertisement for credit. A creditor may not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage, on a prohibited basis, a reasonable person from making or pursuing an application.
 
HUD Rules on Advertising
HUD recently issued Mortgagee Letter 2009-31 (”ML 09-31”), dated September 18, 2009, that contains provisions strengthening HUD's oversight of FHA-approved mortgage lenders, including in the area of advertising. ML 09-31 provides notice of several important changes to the FHA program arising from the recent enactment of the Helping Families Save Their Homes Act of 2009 (or the ”HFSH Act”). Among other things, ML 09-31 restricts the use of a mortgagee's name in advertising and promotional materials, and expands FHA’s authority to pursue civil money penalties for violations of FHA requirements.  
The HFSH Act amends Section 202 of the National Housing Act and provides that HUD must issue regulations requiring FHA-approved mortgagees to (1) use their business name that is registered with HUD in all advertisements and promotional materials, and (2) maintain copies of all advertisements and promotional materials in such form and for such period as the Secretary requires. Consistent with these requirements under the HFSH Act, ML 09-31 provides that FHA-approved mortgagees must use their HUD registered business names in all advertisements and promotional materials related to FHA programs. ML 09-31 reminds lenders that the HUD-registered business name includes any alias or “doing business as” (DBA) name on file with the FHA. According to ML 2009-31, FHA-approved mortgagees must keep copies of all advertisements and promotional materials for a period of two (2) years from the date that the materials are circulated or used to advertise.
ML 09-31 also expands the FHA’s authority to pursue civil money penalties for violations of the FHA program requirements. ML 09-31 provides that the FHA can seek civil money penalties against any person, including, among others, sellers of real estate, closing agents, title companies, real estate agents, mortgage brokers, appraisers, loan correspondents, for any use of the words “Federal Housing Administration,“ “Department of Housing and Urban Development,“ “Government National Mortgage Association,“ “Ginnie Mae,“ and the acronyms “HUD, ““FHA, “ or “GNMA,“ or any HUD official seal or logo, except as authorized by the Secretary.
HUD rules and regulations not only provide guidance on what mortgagees can't say in advertisements, but also what they must. By way of example, FHA-approved entities must display the Equal Housing statement, Equal Housing logo, or the Equal Housing slogan on all advertising, brochures, site signs, and other materials. The Equal Housing opportunity slogan reads: “Equal Housing Opportunity.” The Equal Housing opportunity statement reads (in bold type): “HUD properties are offered for sale to qualified purchasers without regard to the prospective purchaser's race, color, religion, sex, disability, familial status, or national origin.“ The Equal Housing logo is a picture of a house in which an equals sign (=) appears inside of a housing, with the title “Equal Housing Opportunity.”
If the Equal Housing logo is used in an advertisement, it must be at least as large as the other logos used in the ad. If no other logos are used, the Equal Housing logo should be clearly visible in a bold display face. Alternatively, when no other logos are used, 3-5% of the advertisement may be devoted to the Equal Housing opportunity policy statement. With respect to the equal housing logo in regularly printed media, such as magazines and newspapers, the FHA regulations require the logo to appear in a size relative to the size of the advertisement. The lenders should also follow specific size requirements provided in the FHA regulations.
 
State Mortgage Lending Laws
Almost every states’ mortgage lender and broker licensing laws contain restrictions and requirements regarding the advertising of mortgage loans. The general rule under most state mortgage lending licensing laws and regulations is that the advertising may not be “unfair, deceptive or misleading.”
 
The “Unfair, Deceptive or Misleading” Standard  
The golden rule is to avoid “Unfair, Deceptive and Misleading” advertising. Unfortunately, this “golden rule” can seem at lot more “grey” than "gold" when applied to real life situations. As anyone who reviews consumer advertisements knows, a critical eye is crucial to assessing whether the specific language used in the piece, or its placement, is likely to be misconstrued and deemed to be deceptive or misleading. Reverse mortgage originators and lenders are advised to closely review their promotional materials on a case-by-case, state-by-state basis, in light of each state's requirements.
Among other examples of states who have adopted either general or specific "Unfair, Deceptive or Misleading" standards, in Florida, it is a violation of the Mortgage Brokerage and Lending Act for any person to falsely advertise or to misuse the names such that the advertising can be viewed as indicating a federal agency is involved in the loan. In California, it is unlawful for any person to advertise statements which are known, or should be known, to be untrue or misleading.  A person who engages in false or misleading advertising in California is guilty of a misdemeanor and can be punished by imprisonment for up to 6 months, by a fine of up to $2,500, or both.  
Under these state rules that prohibit “unfair, deceptive and misleading” advertising, reverse mortgage originators should be very careful, for instance, with the use of superlatives in advertisements, such as “lowest rates in town”, unless the lender can show that its rate is, in fact, the “lowest rate in town.” Lenders should also avoid use of the word “benefit” in advertisements for HECM loans.  With HECM loans, the loan proceeds are not considered to be government benefits since they are loan proceeds and must be repaid upon the occurrence of a maturity event.
 
Pre-Approval by the State Regulator
Several states also require loan originators and lenders to obtain prior approval of advertisements from their state mortgage lending regulator before they can be used by the licensee.  One such prior approval state is California. In California, a licensee under the California Finance Lenders Law (CFLL) must submit two (2) copies of all advertisements that will be used in its lending business to the California Department of Corporations for prior approval.  The CFLL licensee may not use advertising material until the California Department of Corporations notifies the licensee in writing that use of the advertising is not disapproved. In Nevada, under the Nevada Mortgage Broker Act, mortgage brokers who received a license within the past 12 months must submit proposed advertisements to the Nevada Commissioner for approval.
 
“Tag Lines” and “Mouse Print”
Approximately 20 or more states have “tag line” (or “mouse print”) disclosure rules that require a licensee to disclose information about its licensing status in advertising materials and on its web sites. For example, in California, all lenders must include in the printed text of any advertisement, or in the oral text of any radio or television advertisement, the license type under which the advertised loan would be made, the state regulatory body which supervises that type of loan transaction, or if the lender is not licensed, a statement that the loan is being made by an unlicensed party that is not operating under the regulatory supervision of a state agency.
In some states, in addition to the license number, the advertising must contain certain special language or “mouse print.” For example, in New Jersey, the advertisement or broadcast announcement by a licensee must include the name, address and telephone number of the licensee and the words “licensed by the N.J. Department of Banking and Insurance.”
By way of yet another example, in Georgia, all advertisements by licensees, including websites, must contain the name, license number, valid unique Nationwide Mortgage Licensing System and Registry (NMLS) identifier, and an office address of the licensee or registrant. The name, address, and license number of the licensee must conform with the name, license number, valid unique NMLS identifier and office address on record with the Georgia Department of Banking and Finance.
 
Record Keeping Requirements
Many states’ mortgage lending laws require licensees to keep copies of advertising materials for a minimum period of time after the advertisement has run so that the state mortgage lending regulator may review such advertisement upon an exam or audit.  In Florida, for instance, licensees must maintain samples of all advertisements, including scripts of radio or television broadcast, for examination by the Florida Office of Financial Regulation, for 2 years after the date of publication or broadcast. In Georgia, the retention period is 5 years.
 
Other State Advertising Restrictions
Most states impose additional substantive restrictions that affect many aspects of reverse mortgage advertising. More and more states restrict references in advertisings to other lenders’ names and/or trade names. In this regard, California prohibits the use of the name, trade name, logo, or tagline of another lender without the consent of that lender, unless the solicitation clearly and conspicuously states that the person is not sponsored by or affiliated with the lender and that the solicitation is not authorized by the lender, which shall be identified by name.  This statement must be in close proximity and in the same or larger font size used as first and the most prominent use or uses of the name, trade name, logo, or tagline in the advertising.
Some states also restrict the use of simulated “live checks.”  For instance, California Finance Lenders Law licensees may not utilize any “live check” unless the document bears the following phrase printed in 12-point type on the front of the document: “THIS IS A LOAN OR AN EXTENSION OF CREDIT.  YOU WILL PAY CHARGES.”
In addition, many states prohibit non-depository lenders form using the word “bank” or a similar name in their advertising or marketing. Some states also impose specific requirements that apply to the mortgage originator’s websites. For example, in Nevada, a link on the mortgage broker’s or mortgage agent’s website that links the user to a website of another commercial enterprise must provide notification to the user that the user is leaving the website of the mortgage broker or mortgage agent.
 
NRMLA Code of Ethics
Many readers of this article are participants in the reverse mortgage industry and are likely Members of the National Reverse Mortgage Lenders Association (or NRMLA).  NRMLA has adopted a Code of Ethics to which its Members, by virtue of their becoming a member of the organization, agree to adhere.  Through its Ethics and Standards Committee, NRMLA has issued Ethics Advisory Opinions that impact the advertising practices of NRMLA Members. 
 
Ethical Advertising Guidelines
On February 28, 2008, NRMLA issued Ethics Advisory Opinion 2008-1 that provides specific guidance to NRMLA Members about what constitutes “unethical advertising.” In that opinion, NRMLA made clear, among other things, that a NRMLA Member may not market or advertise a particular FHA-insured HECM loan as a “Government Loan Program”, or a “Government Benefit” or as “Government Supported.” Further, such advertising may not state or imply that the communication is from or provided by a “Government Loan division” or as “Official Business”, or “endorsed” or “Approved” by the government, federal government, HUD, the FHA or AARP.
It is a violation of the NRMLA Code of Ethics for a NRMLA Member directly or indirectly to state or suggest that a failure to respond to its marketing or advertising will or may result in a loss to the consumer of any consumer benefit to which the consumer is or may be entitled or enjoying. It is also a violation of the NRMLA Code of Ethics for a NRMLA member to arrange for or make “testimonials” that fail to clearly disclose the nature of the relationship between the party and the member. In this regard, when using prior loan customers, it may be prudent to disclose the consumer’s first name, and indicate their last name by an initial, and give a city and state of residence for the consumer. Such consumer information, of course, must be truthful.
The NRMLA Code of Ethics also prohibits a NRMLA Member from making misleading or unfair or exaggerated claims of benefits to consumers, particularly if coupled with inadequate (or with no) description of related costs or risks.
 
Lead Generators and Ethical Advertising
On June 16, 2009, NRMLA issued Ethics Advisory Opinion 2009-2 regarding reverse mortgage lead generation. Among other things, this Ethics Opinion states that reverse mortgage lead generation is subject to the ethical advertising provisions found in NRMLA’s Ethics Advisory Opinion 2008-1 (see above).
 
GAO Reverse Mortgage Report  
At the request of Senator McCaskill and the U.S. Senate Special Committee on Aging, the Government Accountability Office (“GAO”) recently examined several HECM loan practices, including marketing and advertising of HECM loans. In its report issued on June 29, 2009, the GAO states the review of HECM marketing materials revealed that a number of claims made by lenders in such advertisings were potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics. The GAO identified the following six common “potentially misleading” claims in reverse mortgage advertisings:
·       “Never owe more than the value of your home”
·       Implications that the reverse mortgage is a “government benefit” or otherwise, not a loan
·       “Lifetime income” or “Can’t outlive loan”
·       “Never lose your home”
·       Misrepresenting government affiliation
·       Claims of time and geographic limits
The GAO concluded that some HECM originators may not be maintaining sufficient focus on marketing standards.  Thus, the GAO is concerned that borrowers might pursue HECM loans with misunderstandings about this complex product.  The GAO report therefore recommended that HUD, FTC, and the federal banking regulators (the Federal Reserve, the OCC and the OTS) take steps to strengthen oversight and enhance industry and consumer awareness of such “potentially misleading” marketing tactics.
 
Conclusion:  The “5 Ps” of Reverse Mortgage Marketing
We began this article with the “4 Ps of Marketing“ (as a reminder, they are Price, Place, Product and Promotion). We also described the “The Four Ps” of the FTC (i.e., Prominence, Presentation, Placement and Proximity).  We conclude with the last of your Ps and Qs, our formulation of the “5 Ps” of Reverse Mortgage Marketing, and they are: Proper Planning Prevents Poor Performance. In developing a reverse mortgage marketing strategy and promotional materials, a lender or originator is well advised to always get its legal and/or compliance departments involved early in the process. When promotional materials are developed, give your vendors sufficient time to review, edit (if necessary) and produce such advertising pieces. It is always a good idea to use “dry runs” for video and radio advertisements. Always keep copies of advertising materials and scripts for the required retention period under applicable federal and/or state law, and make sure you properly identify and are able to track all of your company's advertising pieces. And, last but not least, follow the suggestions provided by your legal and/or compliance departments. As your grandmother may have advised, mind your Ps and Qs, but also remember to use common sense and good judgment in developing advertising materials that are fair, accurate and ultimately informative to your senior customers.
 
This article provides only an overview of some of the federal and state laws and regulations that may affect reverse mortgage lending, marketing and finance matters. Although the practice of Weiner Brodsky Sidman Kider P.C. is national in scope, attorneys within our firm do not actively practice law in all jurisdictions, and these materials are not intended to and do not provide legal advice. Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
By Fed Kamensky and Joel Schiffman, of the law firm of Weiner Brodsky Sidman Kider, P.C. The law firm serves as General Counsel to the National Reverse Mortgage Lenders Association and advisor to reverse mortgage lenders and industry participants throughout the nation. The firm has offices in Washington, D.C., Newport Beach and Dallas. Additional information can be found at www.wbsk.com or by telephone at 202.628.2000. Messrs. Schiffman and Kamensky can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
 
 
 
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