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Three mortgage loan advertisers that allegedly deceptively touted low monthly payments and low rates without fully disclosing loan terms have agreed to settle Federal Trade Commission charges that their ads violated federal law.

According to the FTC, the ads represented that people could receive mortgage loans at the terms prominently stated in the ads. However, in violation of the FTC Act, the ads allegedly failed to disclose, or failed to disclose adequately, that the advertised low monthly payment amounts and low rates apply only for a limited time, after which they will increase, and that the advertised payment amounts and rates did not include the interest owed each month, with the interest added to the total loan balance.

The Commission also charged the mortgage advertisers with violating the Truth in Lending Act (TILA) and its Regulation Z by stating periodic payment amounts but failing to disclose clearly and conspicuously the repayment terms, the annual percentage rate (APR), and that the APR could be increased during the loan period. They also were charged with failing to disclose clearly and conspicuously the rate of finance charge as an APR, using that term; the APR, stated with, and at least as conspicuously as, the stated simple annual rate; and required payment rate disclosures.

According to the Commission’s complaint against Florida-based American Nationwide Mortgage Co., a direct mail ad for the company states, “30-Year Fixed. 1.95%.” However, a fine-print, virtually illegible footnote at the bottom of the ad states, “4.981% Annual Percentage Rate,” and a fine-print disclosure on the reverse side of the ad states, “Initial Annual Percentage Rate (APR) for a 30 year mortgage loan with 80% loan to value is 4.981%. Rate is fixed for 12 months and adjusts upward 7.5% of the payment amount annually for the first ten years of the loan . . .” In addition to the other charges, the FTC alleges that American Nationwide violated the FTC Act by falsely representing that its advertised rate is a fixed rate for the full term of the loan.

According to the FTC’s complaint against California-based Michael Gendrolis, doing
business as Good Life Funding, a direct mail ad for the respondent states, “Your first Mortgage originally funded by [the consumer’s current lender] can be restructured to a TEN Yr fixed
payment of only $116 . . . Your payment rate is only 1/4%* and is fixed for TEN years . . . This is the lowest payment in history. You can receive an additional $88,252 Cash out with a monthly payment of only $134 . . . Call Today, and have No House Payments until June 2008 (that’s 12 months)**.” However, a fine-print disclosure at the bottom of the ad states, “Good Life Funding is not sponsored or affiliated with [the consumer’s current lender] and the solicitation is not authorized by [the consumer’s current lender] . . . *Payment Rate 1/4% 6.75% APR. Deferred interest will accrue . . .** . . . Based on the first year 1/4% interest only payment at close . . .” In addition to the other charges, the FTC alleges that Gendrolis violated the FTC Act by failing to disclose adequately that the mortgage offer is made by the respondent, Gendrolis, and not the consumer’s current lender.

According to the Commission’s complaint against California-based Shiva Venture Group, Inc., doing business as Innova Financial Group, an Internet ad for the company states, “Innova Financial Group is currently offering monthly payments as low as 1%!,” without disclosing terms as required by law.

The proposed consent orders bar all of the respondents, in connection with promoting any extension of closed-end credit (including mortgages), from advertising a rate lower than the rate at which interest is accruing, regardless of whether the rate is referred to as an “effective rate,” a “payment rate,” “qualifying rate,” or any other term, provided that this does not prohibit the respondents from advertising the “annual percentage rate” or “APR.” The respondents are also barred, in connection with promoting any extension of closed-end credit, from making any representation about the monthly payment amount unless they disclose, clearly and conspicuously and in close proximity to the representation, as applicable, that the advertised low monthly payment amount: 1) applies only for a limited period of time, after which it will increase; 2) does not include the amount of interest that the consumer owes each month; and 3) is less than the monthly payment amount (including interest) that the consumer owes, with the difference added to the total amount due from the consumer.

The consent order with American Nationwide also bars the company, in connection with promoting any extension of closed-end credit, from misrepresenting the nature and/or extent of the variability of any loan rate or payment amount, such as an interest rate or APR; whether it is fixed rather than adjustable or vice versa; and, for an interest rate or payment amount, the duration of the fixed or variable interest rate or payment amount.

The consent order with Michael Gendrolis, d/b/a Good Life Funding, also bars him, in connection with promoting any extension of consumer credit, from making representations about the consumer’s current lender or any entity other than the respondent, unless it clearly and conspicuously discloses the respondent’s name and identity as the entity promoting or offering the extension of credit.

In addition, the consent orders bar all of the respondents, in connection with promoting any extension of closed-end credit, from stating the amount of any payment, the number of
payments or the repayment period, or the amount of any finance charge, unless they clearly and conspicuously disclose the repayment terms, the APR, and whether the APR may be increased, as required by the TILA and Regulation Z. In addition, the respondents may not state a rate of finance charge without clearly and conspicuously stating the rate as an APR; and, if the rate is a simple annual rate, stating it in conjunction with, but not more conspicuously than, the APR. The respondents also may not fail to comply in any respect with the TILA and Regulation Z.

Each of the settlements contains record-keeping provisions to allow the FTC to monitor compliance with the order. The Commission voted 4-0 to accept the administrative complaints and consent orders.

The FTC will publish an announcement regarding the agreements in the Federal Register soon. The agreements will be subject to public comment for 30 days, until February 9, 2009, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, Room 135-H, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. The FTC requests that any comment filed in paper form near the end of the public comment period be sent by courier or overnight service, if possible, because U.S. postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions.

NOTE: The Commission issues an administrative complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. These complaints are not a finding or ruling that the respondents have actually violated the law. The consent agreements are for settlement purposes only and do not constitute admissions by the respondents of a law violation.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.

(FTC File Nos. 0723168, 0823034, & 0823032)
(Nationwide, Good Life, Innova)