There continues to exist among real estate brokers widespread confusion, misunderstanding, or sheer lack of knowledge concerning the requirements of the federal Truth in Lending Act as it relates to real estate advertising. Witness the fact that in the space of only three pages of a recent Sunday edition of a large North Carolina newspaper, there were nearly 100 apparent violations of the Truth in Lending Act.
The following article from the Federal Trade Commission has been reprinted for the purpose of better educating real estate brokers as to the requirement for complying with this Act. However, since the North Carolina Real Estate Licensing Board is not the enforcing agency for the Truth in Lending Act, inquiries concerning its provisions should be directed to the Federal Reserve Board, Division of Consumer and Community Affairs, 20th and C Streets, Washington, D.C. 20551, Phone: 2021452-3867.
I. GENERAL RULES
What kind of advertisements and advertisers are affected by Truth in Lending?
The advertising provisions of Regulation Z (226.10) apply to any advertisement which promotes an extension of consumer credit (that is, credit offered to a natural person in which the money, property or service is primarily for personal, family, household or agricultural purposes and which involves a finance charge or is, by agreement, payable in more than four installments). If the advertisement in question does not involve an offer of consumer credit that requires the disclosures set forth in 226.7 (open end credit) or 226.8 (credit other than open end), then the advertising provisions of Regulation Z are not applicable.
The term "advertisement" itself is quite broad and covers all forms of commercial messages, including display signs in store windows. For example, multiple listing cards, if displayed by a realtor to the public, would constitute an "advertisement." On the other hand, literature such as multiple listing cards that is not on public display and is only used in connection with and in response to an individual prospective buyer's inquiry would not be considered an "advertisement."
Liability for compliance with the advertising provisions of Regulation Z extends beyond that of the extender or arranger of consumer credit. Once it is determined that the subject of the advertisement is a consumer credit transaction, the provisions of 226.10 apply to any advertiser regardless of his role in the transaction. The test is whether the advertisement promotes consumer credit, not whether the advertiser is a creditor, consumer creditor, arranger, etc. Even associations, manufacturers, and government agencies such as the FHA are covered by the Act when they advertise consumer credit transactions.
When a licensed real estate broker advertises a house owned by his principal, is the advertisement covered by Regulation Z?
The answer to this question depends on whether the advertisement promotes the extension of a customer credit sale. The answer is "yes" if the sale of the advertised home is one which will trigger the disclosure requirements of 226.8 of Regulation Z. When the broker advertises a private seller's home, he acts as the agent for the seller, but this fact cannot relieve him from liability for compliance with 226.10. The reason is that when he advertises consumer credit terms to be granted by a creditor covered by the Regulation, the advertisement is also covered by Regulation Z. In summary, the broker or realtor is subject to the advertising provisions of Regulation Z, even though he advertises on behalf of a private seller, so long as the transaction will qualify as an extension or arrangement of "consumer credit" as defined in Regulation Z.
There are cases in which a broker is selling a home for an individual who is not a "creditor," with the seller taking back a purchase-money second trust. This would not be "consumer credit" unless the seller, prior to consummation of the transaction, had made arrangements to discount the second trust note with a "creditor." In such a case the seller is simply a "straw party" and the transaction would be subject to the disclosure provisions as well as the Right of Rescission (226.9).
What parts of the advertising provisions of Regulation Z apply to the real estate industry?
Generally only Sections 226.10(a) and (d) will apply to real estate transactions.
226.10(a) sets forth the overriding principle that no advertisement should contain terms (such as monthly payment amounts or down payment amounts) that are not usually and customarily arranged by the creditor. In essence, this section is designed to make "bait" advertising of credit terms expressly in violation of Federal Law.
Example: An advertisement offering new homes at "11,000 down" is improper if the seller will not usually accept this amount as a down payment, even if all of the other required credit terms are disclosed in the advertisement
II. ADVERTISING OF REAL ESTATE CREDIT
A. Assumptions
Advertisements of assumption generally involve the use of the one credit term that does not trigger the full disclosure required in 226.10(dX2)-the rate of finance charge. In order to comply, the advertiser may state the rate and nothing else, but it must be ex pressed as an "Annual Percentage( Rate," using that term.
Example: "Assume 7 1/2% mortgage" is improper.
"Assume 71/2% Annual Percentage Rate' mortgage is correct.
Further, the term "Annual Percentage Rate" should be spelled out and not reduced to "A.P.R." or otherwise abbreviated. Eventually when it can be demonstrated that the public has learned to recognize this term by its initials, we may relax our position that the term should be fully spelled out.
It is true that some transactions that are commonly called "assumptions" are not within the disclosure requirements of 226.8(k) (Assumption of an obligation), and are therefore not subject to the advertising provisions of Regulation Z. For the purposes of the disclosure requirements of Regulation Z, an "Assumption" occurs only when, by written agreement entered into between a subsequent customer and the creditor, the subsequent customer is or will be accepted by that creditor as an obligor on an existing evidence of debt. If the advertiser has any doubt whether the assumption being offered will meet this test, he would be well advised to comply with the advertising provisions of Regulation Z. Since any additional charges that are involved in the "assumption" transaction will generally not affect the existing rate of the mortgage by 1/4 of one percent, all that is required to be assured that the typical 11 assumption" advertisement meets the Regulation is to add the words "Annual Percentage Rate" to the present advertised rate.
Many previously owned homes are sold "subject to" existing financing which does not involve an "assumption" as defined by Regulation Z. If this is the case, the ad should so state and it would not be covered by Regulation Z (for example, "Take subject to 6% mort.")
(To be continued in next issue of BULLETIN)