December 18, 2007 -- Taking aim squarely at the subprime mortgage market, the Federal Reserve Board today issued proposed changes to Regulation Z (Truth in Lending) intended to "protect consumers from unfair or deceptive home mortgage lending and advertising practices." The Fed is requesting public comment on the proposal which would "restrict certain practices and would also require certain mortgage disclosures to be provided earlier in the transaction." The announcement is here; the full text of the proposal (PDF) is here.

Summary of Proposed Revisions

Advertising rates or payments.

The proposed amendments would require that whenever a rate or payment is included in an advertisement for closed-end or open-end credit secured by a dwelling, all rates or payments that will apply over the term of the loan (and the time periods for which those rates or payments apply) must be disclosed with equal prominence and in close proximity to the advertised rate or payment.

For example, if the advertised monthly payment is $1,000, but increases to $2,000 after six months, the payment increase and the limited duration of the initial monthly payment could not be disclosed in smaller type or in a footnote, but would have to be disclosed close to and as prominently as the $1,000 initial monthly payment. The proposed amendments would also strengthen the clear and conspicuous standard, as it applies to advertisements.

These revisions would apply to both closed-end and open-end mortgage advertisements. For closed-end mortgage advertisements, the proposed amendments would no longer allow the advertisement of any interest rate lower than the rate at which interest is accruing on an annual basis.

Prohibited practices in closed-end mortgage advertisements. The proposed amendments would prohibit the following practices in advertisements for closed-end mortgage loans:

• Advertising "fixed" rates or payments without adequately disclosing that the interest rate or payment amounts are "fixed" only for a limited period of time, rather than for the full term of the loan;
• Comparing an actual or hypothetical consumer’s current rate or payment obligations and the rates or payments that would apply if the consumer obtains the advertised product, unless the advertisement states the rates or payments that will apply over the full term of the loan;
• Advertisements that characterize the products offered as "government loan programs," "government-supported loans," or otherwise endorsed or sponsored by a federal or state government entity, unless the loans are government-supported or sponsored loans, such as FHA or VA loans;
• Advertisements that prominently display the name of the consumer’s current mortgage lender, unless the advertisement also discloses the fact that the advertisement is from a mortgage lender that is not affiliated with the consumer’s current lender;
• Advertising claims of debt elimination if the product advertised would merely replace one debt obligation with another;
• Advertisements that falsely create the impression that the mortgage broker or lender has a fiduciary relationship with the consumer; and
• Foreign-language advertisements in which certain information, such as a low introductory "teaser" rate, is provided in a foreign language, while required disclosures are provided only in English.

These prohibitions would apply to advertisements for all closed-end mortgage loans, but would not apply to advertisements for open-end home-equity plans.

[The Fed] Staff did not observe the practices described above in advertisements for home-equity plans. The proposal would solicit comment, however, on whether these or other practices should be prohibited in advertisements for home-equity plans.