Advertising Credit And Lease Arrangements:
How To Comply With The Truth In Lending Act
The federal Truth in Lending Act ("TILA") governs most consumer credit
transactions. Its companion law — the Consumer Leasing Act ("CLA") —
regulates consumer lease arrangements. Two federal agencies have jurisdiction
over these measures. The Federal Reserve Board ("the Fed") promulgates the
rules that implement the TILA and CLA, while the Federal Trade Commission
("FTC") enforces their rules and provisions. One of the purposes of these Acts is
to protect consumers by enabling them to make informed choices of consumer
credit plans and consumer lease agreements. To this end, Regulations Z and M
require advertisers to disclose certain crucial information if certain "triggering
terms" are mentioned in an advertisement.
Coverage of The Laws
When an advertisement contains any one of a list of terms specified in these
laws, the advertisement must include a number of specific disclosures. Certain
words trigger certain disclosures. Essentially, the required disclosures reflect the
lease and credit terms to which the parties are legally bound at the outset of the
transaction. These disclosures must be made clearly and conspicuously in a
reasonably understandable form.
Advertisements covered under these laws include commercial messages that
offer consumer credit or consumer lease agreements. Consumer credit is any
credit extended primarily for personal, family or household purposes. A
consumer lease is a lease of personal property to a private individual. Messages
inviting, offering or otherwise announcing the availability of credit transactions or
lease terms generally to prospective customers are probably covered by the
regulation. The TILA and the CLA do not cover transactions between businesses.
Regulation Z and Consumer Credit
Two different types of consumer credit are regulated: open-end credit and
closed-end credit. Regulation Z treats each differently, and, therefore, it is
important to distinguish between these two types of credit transactions.
Open-End Credit Defined
In open-end credit, there is a contractual arrangement between the
creditor and the consumer. The creditor must contemplate future
transactions. This means that the credit plan must be usable periodically
and the creditor must expect that there will be additional business rather
than a one-time credit extension. Furthermore, specific approval for each
credit extension is unnecessary. The creditor may impose a charge on
unpaid balances, and as the customer pays outstanding balances, the
amount of credit is again available to the customer. The amount of credit
that can be extended is therefore unlimited because credit is generally
replenished as earlier advances are repaid. Examples of open-end credit
are: gas and bank credit cards, revolving charge accounts at stores, and
cash advance checking accounts. This aspect of "unlimited credit"
distinguishes open-end credit from closed-end credit. Moreover, any other
consumer credit that does not fit the definition of open-end credit should
be treated as closed-end credit.
Closed-End Credit Defined
In closed-end credit, credit is advanced for a specific period of time. The
creditor and the consumer agree to the amount financed, the payment
schedule and the finance charge. The creditor and the customer go
through the same process and make a new agreement each time credit is
extended. However, this does not mean that the creditor must establish a
specific credit limit or extend new credit in a particular case. Typically,
closed-end credit arrangements appear in the form of the sale or financing
of real estate, automobiles or appliances.
Watch out for arrangements that may seem to be open-end in nature but
are really closed-end. Closed-end credit includes both sales credit and
loans. For example, under a closed-credit commitment the creditor might
agree to lend a total of $10,000 in a series of advances as needed by the
borrower. When a consumer has borrowed the full $10,000 no more is
advanced under that particular agreement even if there has been
repayment of a portion of that debt.
A Checklist for Open-End Credit Advertisements
Examine the advertisement to see if open-end consumer credit is being
advertised. If it is, check to see if any of the following triggering terms are
included in the language. If they are, you must make the necessary disclosures
listed below. Here are some examples of terms that do not trigger any
disclosures: "charge accounts available"; "just say 'charge it'"; "pay monthly";
"charge some cash."
Triggering Terms:
1. A statement of when finance charges accrue. For example: "interest
charged from date of purchase." This includes any free ride period: "up to
30 days credit if you pay in full each month."
2. A statement of any charges other than a finance charge that may be
imposed as part of the plan. For example: "an annual charge of $5.00 will
be assessed to cover billing costs."
3. The fact that the creditor will acquire a security interest in the property
purchased under the plan. For example: "secure your credit with a $100
certificate of deposit." CAUTION: The phrase "the equity in your home
becomes spendable with an XYZ line of credit" implies that the creditor will
take a security interest in the consumer's home. This phrase triggers the
mandatory disclosures.
4. The method of determining the balance on which a finance charge is
imposed. For example: "interest will be charged on your average daily
balance each month."
5. The periodic rate or annual percentage rate. For example: "less than five
percent each month."
Necessary Disclosures:
1. Any minimum, fixed transaction or activity, or similar charge that could be
imposed.
2. Any periodic rate that may be applied, expressed as an "annual
percentage rate" ("APR"). Typically, the APR is found by multiplying the
periodic rate by the number of periods in a year, but in some instances
(such as discounted variable rate transactions") the calculation is more
complex. If the plan provides for a variable period rate, that fact should be
disclosed and special care should be taken in calculating the APR.
3. Any membership or participation fee that may be imposed.
A Checklist for Closed-End Credit Advertisements
Examine the advertisement to see if closed-end consumer credit is being
advertised. If it is, check to see if any of the following triggering terms are
included in the language. If they are, you must make the necessary disclosures
listed below. Here are some examples of terms that do not trigger any
disclosures: "no downpayment"; "pay only five percent per month"; "financing
available"; "pay weekly."
Triggering Terms:
1. The amount or percentage of any downpayment. For example: "only five
percent down"; "as low as $100 down"; "total move-in costs of
$800." (Caution: The phrase "80 percent financing available" implies that a
20 percent down payment is required. Therefore, this phrase triggers the
mandatory disclosures.)
2. The number of any payments. For example: "50 payments are all you
make."
3. The amount of any payment. For example: "pay just $25 a week";
"payable in installments of $103"; "$1,200 balance payable in ten equal
installments."
4. The time period of repayment. For example: "seven years to pay"; "48month payment terms"; "30-year mortgage"; "repayment in as many as 36
monthly installments."
5. The amount of any finance charges. For example: "$200 financing"; "$500
total cost of credit"; $2.00 monthly carrying charge"; "$50,000 mortgages,
two points to the borrower."
Necessary Disclosures:
1. The amount or percentage of down payment. The total downpayment as
a dollar amount must be stated, but use of the word "downpayment" is not
required.
2. "The terms of repayment." While the phrase "terms of repayment"
generally has the same meaning as the "payment schedule," the
advertiser has considerable discretion in the way this information is
presented.
3. The annual percentage rate or "APR." The advertisement must state that
the rate is subject to increase, if that is the case, but the ad need not
describe the rate increase, its limits, or how it would affect the payment
schedule.
Regulation M and Consumer Leases
The original Consumer Leasing Act was passed in 1976, and contains detailed
disclosure requirements if certain triggering terms are mentioned in an ad. In
September 1994, the Riegle Community Development and Regulatory
Improvement Act became law. Section 336 of this broad-ranging banking bill
revises the rules for advertising of consumer leases on radio. This section, which
was proposed and promoted by NAB, recognizes the time constraints inherent to
radio and allows some of the detailed disclosures required by the Consumer
Leasing Act to be made by reference to a toll-free telephone number or a
newspaper ad where the information can be obtained. This simplified procedure
has recently been extended to television.
Coverage
Under the CLA, disclosure requirements are applicable to leases or "bailments"
for the use of personal property, primarily for personal, family or household
purposes. Disclosures are required where a lease transaction includes incidental
services or when a prior lease or credit balance is part of a single lease
transaction. Excluded are leases for agricultural, business or commercial
purposes, or to a government, government agency or instrumentality, or an
organization. The lease must be for greater than four months and must not
contain a total contractual obligation (including nonrefundable downpayments)
exceeding $25,000. Leases of personal property which are incidental to a service
are not subject to regulation:
1. Home entertainment systems requiring the consumer to lease equipment
that enables a television to receive the transmitted programming.
2. Security alarm systems requiring the installation of leased equipment.
3. Propane gas service where the consumer must lease a propane tank to
receive the service.
Triggering Terms
Once a triggering term is mentioned in a consumer leasing ad, then all the
required disclosures must be made. Therefore, it is important to recognize the
triggering terms. Under the statute, a consumer leasing advertisement triggers
the disclosure requirement if it mentions:
1. The amount of any payment or
2. That any or no downpayment or other payment is required prior to or at
consummation or by delivery, if delivery occurs after consummation.
* Stating the number of required payments has been eliminated as a
triggering term
Examples of triggering terms include:
1. "Pay a mere $128 a month."
2. "Lease now and make no payments for three months."
3. "Only a small downpayment."
4. "Leave your pocketbook behind and lease a car today."
Some statements that do not trigger the required disclosures are:
1. "Low monthly payments."
2. "Lease for less than it costs to buy."
3. "We lease to anyone."
4. "Lease today and drive it away."
Remember, if a spot contains any one triggering term, then all the required
disclosures must be made.
A lessor is not required to disclose the cost of a lease expressed as a percentage
rate; however, if a rate is disclosed or advertised, a special notice must
accompany the rate stating that it may not measure the overall cost of financing
the lease. The notice must be placed in close proximity to the rate without any
other intervening language or symbols. Further, the rate in an advertisement
cannot be more prominent than any other Regulation M disclosure.
• A lessor advertising or disclosing a lease rate is also precluded from
calling the rate an "annual percentage rate" or any equivalent term to
avoid the inference that the rate is directly comparable to the APR.
The General Disclosure Requirements
Advertisements that do not follow the simplified disclosure format must follow the
general disclosure requirements contained in the CLA. The statute states that if
one of the triggering terms is mentioned in a consumer lease spot, the spot must
also make the following disclosures:
1. That the transaction is a lease;
2. The total amount due prior to or at consummation or by delivery, if delivery
occurs after consummation;
The disclosure of the total amount due at lease signing or delivery may:
a. Exclude third-party fees, such as taxes, licenses, and registration
fees and disclose that fact; or
b. Provide a total that includes third-party fees based on a particular
state or locality as long as that fact and the fact that fees may vary
by state or locality are disclosed.
*The requirement to disclose that no payment is required has been
eliminated
3. The number, amounts, and due dates or periods of scheduled payments;
4. *The requirement to disclose the total of scheduled payments under
the lease has been eliminated
5. A statement of whether or not a security deposit is required; and
6. A statement that an extra charge may be imposed at the end of the lease
term where the lessee’s liability (if any) is based on the difference between
the residual value of the leased property and its realized value at the end
of the lease term.
Two disclosures have been eliminated entirely from the rule. It is no longer
required to disclose:
• A statement of whether or not the lessee has the option to purchase the
leased property, and where the lessee has the option to purchase at the
end of the lease term, the purchase-option price.
• A statement of the amount, or the method for determining the amount, or
the lessee’s liability (if any) at the end of the lease term.
The required disclosures can be made in television advertisements either visually
or aurally.
Simplified Disclosures
In enacting Section 336 of the Riegle Act, Congress has recognized the problems
with making detailed disclosures on radio, and has allowed an alternative means
for making the required disclosures. These simplified disclosures have been
expanded to include television spots as well. Now, if a spot for consumer leasing
contains one of the triggering terms, the spot must disclose:
1. That the transaction is a lease;
2. The total amount due prior to or at consummation or by delivery, if delivery
occurs after consummation. The amount of any payment required at the
inception of the lease or that no such payment is required, if that is the
case;
3. The number, amounts, and due dates or periods of scheduled payments;
and
4. A reference to a toll-free telephone number or written advertisement where
consumers may obtain all general disclosures required by the CLA, and
discussed above.
Examples of disclosures that appear to meet the statutory requirements
include:
1. "Lease for $1,000 down and $300 a month for a total of $10,800. Call 555CARS for more information."
2. "Our no money down, 24-month lease will cost you just $1,200. See
Sunday’s Herald for details."
3. "Call 1-800-QUIKRENT for the scoop on our monthly lease program. Just
$500 down and total payments of $7,200."
The Reference Points
The statute sets out parameters for the medium used to disseminate all the
required disclosures:
Toll-free Numbers
• A toll-free number (or a number allowing a consumer to reverse the phone
charges when calling) referenced in a leasing spot must be established no
later than the broadcast date of the spot referencing the number. Because
the advertiser is liable for making the required disclosures, it appears that
the advertiser is therefore responsible for ensuring that the toll-free
number is functional. However, the advertiser, the station or a third party
(such as a commercial toll-free number service) may operate the number.
• The number must be maintained no less than ten days, beginning on the
date of any such broadcast. Although this point is not clear, it would
seemingly require that the number be maintained at least ten days past
the last airdate of the spot referencing the number.
• There is no requirement as to the coverage area of the toll-free number.
• Consumers calling the toll-free number must be sent the required
disclosure information in writing, if requested.
• Language in the ad must indicate that disclosures are available by calling
the toll-free number.
• When an advertised toll-free number responds with a recording, lease
disclosures must be provided early in the sequence to ensure that the
consumer receives the required disclosures.
Written Advertisements
•
•
•
The broadcast ad must give the name of the publication in which the
written advertisement appears and the publication date(s) of the
advertisement.
The publication must be in general circulation in the community served by
the radio station (which includes nationally circulated newspapers), and
The written ad referenced in the spot must appear at least three days
before and ending at least ten days after the broadcast. Thus, it appears
that, for example, a leasing spot that airs on September 30th could not
refer listeners to a September 25th newspaper ad for disclosures, even
though the spot schedule may have begun on September 15th.
Clear and Conspicuous Standard
The disclosures in both radio and television spots must be made "clearly and
conspicuously." The Fed’s "clear and conspicuous" standard calls for the
information to be legible and reasonably understandable. There are no
requirements as to the size of type or length of time that the image is required to
be on the screen, or the audio level of aural disclosures. However, very fine print
in a television advertisement or detailed and rapidly stated information in a radio
advertisement does not meet the clear and conspicuous standard if consumers
cannot see and read or comprehend all of the information required to be
disclosed.
Specifically, the rule states that any reference to a charge that is part of the total
amount due at lease signing or delivery may not be more prominent than the
disclosure of the total amount due at lease signing or delivery.
Prohibited Ads
The Act prohibits "bait and switch" advertising of both consumer credit and
consumer leases. This means that an advertiser cannot promote credit or lease
terms that are not available. It may state only those terms that the creditor is
actually prepared to offer. For example, a creditor may not advertise a very low
annual percentage rate that will not in fact be available at any time. This
prohibition is not intended to inhibit the promotion of new credit programs, or
terms that will be offered for a limited period or that will become available at a
future date.
Broadcasters Liability for Violations of The Regulations
Although broadcasters are not subject to civil liability for advertisements not in
compliance with the provisions of the Truth in Lending Act and the Consumer
Leasing Act, the FTC has authority under the Federal Trade Commission Act to
take action against any medium that disseminates deceptive advertising. The
FTC generally does not pursue the media, but, instead, holds advertisers
responsible for the content of their copy. Thus, deceptive advertising is
controlled at its source.
Nonetheless, the Federal Communications Commission has stated in the past
that licensees who broadcast advertisements deemed false, misleading, or
deceptive by the FTC, call into question their ability to operate in the public
interest. Generally, broadcasters must act responsibly with regard to all material
that is broadcast through their facilities. This includes taking all reasonable
measures to eliminate any false, misleading or deceptive advertising. In addition,
if the station produces the spot, state law may impose the same liability on the
station as is imposed on the advertiser. Stations should check with their own
attorneys regarding liability imposed under state law.
Check State Law
Because the Truth in Lending Act and the Consumer Leasing Act (as well as the
new legislation) do not preempt state law, states may have other triggering terms
and more extensive disclosure requirements than those required by federal law.
Before determining whether a spot contains the proper disclosures, be sure to
check with your state’s attorney general or office of consumer affairs, or your own
attorney.
Additionally, states may apply for exemption from the Federal Consumer Leasing
Act. Both Maine and Oklahoma are exempt from Regulation M.