Dozens of Washington area builders and real estate developers have been warned over the last three months by the Federal Trade Commissiion that their advertisements may violate the Truth in Lending Act.
Letters sent to builders here were part of an overall FTC campaign to gain voluntary compliance with provisions of the 1969 consumer credit disclosure law, which is designed to inform consumers of meaningful credit terms so they can make comparisons and shop wisely.
Under the act, the inclusion of any of a list of terms in an advertisement -- terms such as "10 percent down," "pay only $300 a month" and "30-year mortgage available" -- triggers the mandatory disclosure of three specific terms in the ad. The required terms are the amount or percentage of the down payment; the terms of repayment; and the "annual percentage rate," which is the total charge for credit stated as a percentage, calculated on an annual basis.
All the disclosures have to be printed "clearly and conspicuously." The law also requires that, if the annual percentage rate increases after consummation of the credit transaction, that fact must be stated in the ad.
According to Irvin E. Abrams, chief investigator in the FTC's Bureau of Consumer Protection, more than 1,500 letters were sent over the last three months to advertisers of residential real estate and mortgage loans in 17 major markets, with one of the "largest" batches of letters going to businesses in the Washington area.
Prior to sending out the letters, the FTC staff monitored ads in newspapers in the 17 cities to determine the level of compliance with the Truth in Lending Act and to pick out the names of builders and other advertisers of mortgage credit whose advertising failed to meet the requirements of the law, Abrams said.
"When we find ads in violation, we write the companies and tell them of the nature of the violatins and how they can bring the ads into compliance," Abrams said. Enclosed with the letter is a copy of the law and How to Advertise Consumer Credit, a 20-page manual developed that explains to advertisers how to the law. It includes examples of wrong adsand right ads.
The staff then continues to monitor paper ads and follows up with a second phone call if a company's ads continueto violate the law, Abrams said. At the conclusion of the project, about the end of June, the state recommendations to the commission action against those companies whose ads continue to violate the law. Each violation of the act is subject to a $10,000 civil penalty each violation continues.
The monitoring program uncovered any violations, Abrams said. "We found that they're advertising an interest rate only good for a limited period of time without disclosing that at the end of the year the rate will increase," he said. "They're advetising down payments without telling you what the monthly payments will be; it can be a low down payment -- but they don't tell you the monthly payments will be extraordinarily high."
He noted that an "extremely troublesome" ad among those dealing with "creative financing" is one in which a developer advertises a low rate for the first year -- say, 8 percent -- and says the mortgage will vary after that. The reader isn't told that it will vary from a higher rate, say, 12 percent, Abrams said.
The terms used in credit advertising that trigger the three required disclosures are the amount of down payment, the amount of any payment, the number of payments, the period of repayment and the amount of any finance charge.
The voluntary-compliance program has yielded significant results, Abrams said. The level of compliance with the law, which was 10 percent or less when the ad monitoring began, now ranges from 65 to 90 percent, he said.
The crackdown was announced to the industry by FTC Chairman James C. Miller III in a speech to a National Association of Home Builders conference in late January. In addition to Washington, the other markets being monitored are Atlanta, Boston, Chicago, Dallas-Fort Worth, Denver, Houston, Los Angeles, Miami, Minneapolis-St. Paul, Philadelphia, Phoenix, San Antonio, San Diego, San Francisco, Seattle and Tampa.
The markets were chosen on the basis of the number of housing starts, the presence of companies operating in multiple markets, the overall level of compliance, the severity of violations and whether companies in those markets had been the subject of FTC actions in the past, Abrams noted. In 1981 the commission had sued 12 builders for Truth in Lending violations and cxollected almost $500,000 in fines.