VIDEO: APR in Lending Advertisements
In this Compliance Clip (video), Adam talks about using an APR in a lending advertisement. Specifically, he discusses when an APR is and is not a trigger term for an advertisement, triggering additional disclosures.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk briefly about using the APR in lending advertisements. The question we have is this: Is including an APR in a lending advertisement a “trigger term”?
In Regulation Z, there is something called a trigger term. Multiple trigger terms, in fact, where if you use a certain trigger term in an advertisement, it triggers additional disclosures. The trigger term trips a wire that essentially requires additional disclosures that have to be included in that advertisement as required by Regulation Z.
So the question is, is an APR a trigger term?
Well, in Regulation Z, we actually have two different advertising rules. We have one set of rules for closed-end loans and one set of rules for open-end loans. Closed-end loans are our term loans like our automobile loans and 30-year fixed mortgages, where our open-end loans are things like credit cards and home equity lines of credit. And so there's actually a different set of rules for both of those and for closed-end loans like our 30-year fixed mortgages or automobile loans, stating the APR is not considered a trigger term. So if you include the APR, it is not considered a trigger term, but under open-end credit and open-end rules under Regulation Z, stating an APR is a trigger term that requires additional disclosure. That's the brief overview.
There's actually a lot of different nuances in Regulation Z as it relates to using APR in lending advertising. For example, if we're talking about a finance charge under closed-end credit, Regulation Z restricts how rates can be included in the advertisement. So what we're talking about here is listing a rate. Can we just list the simple interest rate, the base rate, or do we have to list the APR?
What Regulation Z tells us in the closed-end credit rules is the APR must always be listed. And you must state that the APR is subject to increase after consummation if that applies. So under closed-end rules you can list the base interest rate, the actual interest rate. But you also have to list the APR and the interest rate can't be bigger or more conspicuous than the APR. They have to be in close proximity. And basically, the APR has to be the most prevalent thing. The interest rate can be equal, but they have to at least be most prevalent and the APR always has to be there. So the interest rate can be listed but not be more conspicuous than the APR.
Now, the question,too, is do we have to use the term “annual percentage rate” in an advertisement? In the old days, we actually had to use that term because under closed-end credit it says using that term, “annual percentage rate”. So in the old days, we had ads where we put APR, we had an asterisk at the top and then down below in our disclosures we had an asterisk that said APR equals annual percentage rate.
Well, the commentary for both closed-end credit and open-end credit now says that we can either use the term annual percentage rate or the commonly known abbreviation of APR. For example, the commentary to 1026.16 that governs the advertising rules for open-end credit says whenever the annual percentage rate is used in an advertisement for open-end credit, it may be expressed using a readily understandable abbreviation such as APR.
So we no longer have to actually use the term “annual percentage rate" because the commentary for both closed-end credit and open-end credit tells us that using the commonly noted abbreviation of APR is appropriate.
That's all I have time for this Compliance Clip but again, lending advertising requirements are very, very complicated. There's a lot to them and even the pieces relating to the APR are actually much more in depth than what we just talked about and had time to review in this Compliance Clip.
So if you're looking for more resources for lending advertising requirements, we have a class called Lending Advertising Requirements in our store that runs three hours long. So we talk about all the different rules and there's more than just Regulation Z that apply to advertising of loans and you can find more information about that in our store at compliancecohort.com/store.