Understanding HELOC Advertising Requirements for Promotional Rates
One of the most common compliance challenges financial institutions face when advertising Home Equity Lines of Credit (HELOCs) is ensuring that promotional rates are properly disclosed. Federal regulations, particularly those under Regulation Z (Truth in Lending Act), impose specific requirements for transparency in advertising HELOCs. The two most frequently misunderstood requirements involve the need to disclose both the duration of the promotional rate and the post-promotional rate with equal prominence and in close proximity to each mention of the promotional rate. Failure to comply with these requirements can lead to regulatory scrutiny, consumer complaints, and potential enforcement actions. This article will explore these requirements in detail, clarifying key concepts such as equal prominence, close proximity, and how to properly disclose the post-promotional rate range.
Requirement to Disclose the Duration of the Promotional Rate and the Post-Promotional Rate
When advertising a promotional rate for a HELOC, it is essential to disclose both the length of time that the promotional rate will be in effect and the rate that will apply after the promotional period ends. This requirement is designed to ensure that consumers are not misled into believing that the promotional rate is permanent.
For example, if a bank advertises a “1.99% APR for 6 months” promotional rate on a HELOC, the advertisement must also clearly disclose what the interest rate will be once the 6-month period expires. Simply stating that a post-promotional rate “applies” is not sufficient; the advertisement must provide a specific range of the post-promotional rate that consumers can expect.
Understanding the Post-Promotional Rate Range
One of the most common mistakes in HELOC advertisements is improperly defining the post-promotional rate range. Many advertisers mistakenly list the absolute lowest (floor) and highest (ceiling) rates their HELOC products could ever have, which may not accurately reflect the rates a consumer will receive once the promotional period ends.
The correct approach is to disclose the lowest and highest rates based on the current index and margin, as if the promotional rate had not been applied. The disclosed range should be reflective of what a consumer would reasonably expect to pay once the promotional period ends, based on current market conditions. For example, if the post-promotional rate is based on the Prime Rate plus a margin that varies based on creditworthiness, the range should be calculated using the current Prime Rate and the lowest and highest margins that the institution applies under normal circumstances.
Equal Prominence Requirement
Regulation Z requires that the disclosure of the post-promotional rate and promotional period be given “equal prominence” to the promotional rate itself. This means that the font size, style, and emphasis of the post-promotional rate must be the same as that of the promotional rate. If the promotional rate is highlighted in bold, the post-promotional rate must also be in bold. If the promotional rate is displayed in a larger font, the post-promotional rate must be in the same font size.
Common compliance pitfalls occur when financial institutions display the promotional rate in a large, eye-catching font while burying the post-promotional rate in smaller text or footnotes. For example, an advertisement that states “1.99% APR for 6 months!” in large, bold letters but discloses “After 6 months, rates range from 6.50% – 10.75% APR” in small, fine print at the bottom of the ad would be non-compliant because the post-promotional rate is not given equal prominence.
Close Proximity Requirement
In addition to being equally prominent, the disclosure of the post-promotional rate must be in “close proximity” to each instance of the promotional rate. This means that the information about what happens after the promotional period ends must be immediately before, after, above, or below each listing of the promotional rate.
A common mistake is placing the post-promotional rate disclosure only in a footnote or at the bottom of an advertisement, separate from the promotional rate. This does not meet the close proximity requirement. Instead, every time a promotional rate appears in an advertisement, the post-promotional rate must appear right next to it. For instance, if an advertisement states:
“1.99% APR for 6 months!”
Then, right below or next to it, the ad must state:
“After 6 months, rates will range from 6.50% – 10.75% APR based on the current index and margin.”
Placing this information only in a footnote, even if the footnote is clear and legible, does not satisfy the close proximity requirement.
Best Practices for Compliance
To ensure compliance with HELOC advertising requirements, financial institutions should implement the following best practices:
- Ensure every mention of a promotional rate is immediately followed by or preceded by the duration of the promotional rate and the post-promotional rate range.
- Use the same font size, weight, and style for both the promotional rate and the post-promotional rate.
- Do not place the post-promotional rate disclosure only in footnotes or fine print at the bottom of the advertisement.
- When providing a range for the post-promotional rate, ensure it reflects the actual expected range based on the current index and margin, not just the broadest possible range.
- Train marketing and compliance teams to review advertisements with an understanding of equal prominence and close proximity requirements.
- Use real-world examples and case studies during training to highlight common compliance pitfalls.
Conclusion
Regulatory scrutiny of HELOC advertisements is increasing, making it essential for financial institutions to comply with the requirements for disclosing promotional rates. The key principles of equal prominence and close proximity must be adhered to in order to ensure transparency and avoid misleading consumers. Furthermore, when disclosing post-promotional rates, institutions must provide a realistic range based on the current index and margin rather than an artificially broad floor and ceiling range.
By following these best practices, financial institutions can create compliant, consumer-friendly HELOC advertisements that meet regulatory requirements while effectively communicating the benefits of their loan products. Taking the time to properly disclose promotional rates and post-promotional rates in accordance with Regulation Z will not only help avoid regulatory penalties but also foster trust with consumers who are considering a HELOC.