A six-month enforcement program by the Federal Trade Commission has resulted in a dramatic increase in compliance with the Truth in Lending Act by real estate advertisers, the agency announced this week.
The level of compliance in 16 major markets increased from what FTC Chairman James C. Miller III called a "deplorably low" level of 13 percent in January to about 83 percent in June "and it's rising," Miller told a news conference here.
In the Washington area, only 11 percent of the advertisements of builders and Realtors offering credit for purchasing homes and apartments were in compliance when the pilot project started; the compliance level has risen to 91 percent this month, the FTC figures showed.
The Truth in Lending Act, which became law in 1969, is designed to ensure that credit advertising is truthful and that it uses terms that will enable consumers to make meaningful comparisons among competing credit offers.
"This is a multibillion-dollar business," Miller said. "The stake for consumers is very large; it's important that they be able to comparison-shop for loan terms." He noted that a half point in interest rate can mean $10,000 or more to a consumer over the life of a loan.
Miller said that during the last six months, the FTC staff reviewed 15,000 newspaper advertisements, wrote 1,500 letters to builders and real estate agents whose ads didn't conform to the law, and made 700 telephone calls. "We brought 1,300 companies into compliance," he boasted.
Although the Truth in Lending Act has been law for 14 years and 18 major companies have been sued by the FTC for violating it, the FTC chairman, whose mother is a real estate broker in Conyers, Ga., said he suspected the high level of noncompliance was primarily because the builders and brokers "don't know what the rules of the game are."
The voluntary pilot program was an attempt "to use a little more honey and a little less vinegar" to gain compliance, Miller said, but he warned that the FTC goal is "100 percent compliance as the law requires.
"We do have a policy of suing people who fail to come into compliance," he said. Each violation of the act is subject to a $10,000 civil penalty each day the violation continues.
The Truth in Lending Act requires that if any interest rate is mentioned in a real estate advertisement, the advertiser also must include the annual percentage rate--a uniform measure of the total cost of credit stated as a percentage, calculated on an annual basis.
Also under the law, the inclusion of any of a list of major credit terms in an advertisement--the amount of downpayment, the amount of any payment, the number of payments, the period of repayment and the amount of any finance charge--triggers the mandatory disclosure of three specific terms in the ad. The terms then required are the annual percentage rate, the amount or percentage of the downpayment, and the terms of repayment.
In other words, terms such as "10 percent down," "pay only $300 a month" and "30-year mortgage available" would trigger the mandatory disclosure of the three specific terms in the ad. If the annual percentge rate increases after consummation of the credit transaction, that fact also must be stated in the ad.
All the disclosures have to be printed "clearly and conspicuously."
The FTC staff found that almost 58 percent of the 2,484 credit advertisements found in violation had used triggering terms without making the required disclosures. Of the total violations, 15 percent violated requirements for "creative financing" terms; 13 percent failed to spell out the words "annual percentage rate;" and 11 percent failed to state the annual percentage rate when a simple interest rate was included.
In the Washington area, almost 48 percent of the ads found in violation used trigger terms without the other terms; 17 percent used the simple interest rate without the annual percentage rate; almost 14 percent failed to spell out the words "annual percentage rate;" almost 12 percent had the simple rate more conspicuous than the APR; and almost 10 percent improperly advertised creative financing.
David E. Stahl, executive vice president of the National Association of Home Builders applauded the FTC's voluntary approach as "far more successful than past enforcement efforts. It sought to inform rather than reach into their pockets for fines for past errors."
Besides Washington, the other markets monitored by the FTC were Atlanta, Boston, Chicago, Dallas-Fort Worth, Denver, Houston, Los Angeles, Miami, Minneapolis-St. Paul, Philadelphia, Phoenix, San Antonio, San Diego, San Francisco and Tampa. A review of ads in the Seattle area is continuing.