Hello! We're looking to put our loan rates on our website, but I'm having some issues with what APR to show. I'm modeling it after what I saw another bank do, and they have based theirs on a loan amount between $15k and $50k. How is it possible to show just one APR when the loan amounts are different? From my research, I found that APR is calculated as ((Finance charge / loan amount) x 365) / term then converted to a percentage.

With loan amount being a variable, I don't understand how one APR can be given for a range of amounts. The disclosures on the website offer no guidance.

Thanks!

Just kidding - I didn't realize that there was a loan amount slider . I figured it out!

Your APR formula is correct for single payment loans, but if you're advertising any other type of loan, the calculations require a computer program. Actually, the simple, accurate way to get what you need for an advertisement is to run a hypothetical deal through the software your lenders use to generate the official disclosures that will be printed and delivered to new borrowers.

Other bank websites can be used as guides for style and formatting, but DO NOT use them as a substitute for the actual regulation. For many years after banks started advertising loan rates online, I routinely found that 80% to 90% violated Regulation Z in one or more ways. Minutes ago, I looked at the loan rate advertising on 5 randomly selected bank websites. Four out of the five didn't comply. If you want to study lots of online rate boards, use "member fdic" and "loan rates" as your search terms.

Here are a few suggestions that should help you avoid the most common errors and misconceptions:
1. Regulation Z says you can only advertise terms that are actually available, so the terms you advertise in any medium must be up to date. This is especially true for online rate boards because, unlike print advertising, you can change virtual ads at any time without additional distribution cost, i.e. - no excuses. In the real world, things don't always happen as quickly as you would like, so it's a good business practice, even on web pages, to indicate expiration dates in one way or another. Doing so will help deflect "bait & switch" claims.
2. It's a bad idea to "low-ball" your ad terms. Even though they may actually be available, terms beyond the reach of a significant percentage of your target audience can cause unrealistic expectations and result in complaints to regulators who are bound to investigate (wasting your time.)
3. You are not required to advertise the range of terms that are available, but that would be one way to provide representative examples. Many banks select one mid-range set of terms for their ads, label the necessary disclosures as "typical" or "representative", and invite potential borrowers to contact a lender to discuss specific terms. Without getting into random samples, bell-shaped curves, or other formalities, I simply looked at a recent report of new loans of the type we were advertising, eyeballed the list, and picked loan amounts, rates, maturities that showed up most often. Then, I ran my representative terms through our loan documentation software to get the APR and payment scheudle. There can be many ways to pick illustrative examples, but it's good practice to note your method on the web page.
4. You can never advertise simple interest rates without the accompanying APR, and if you do mention simple rates, they can't be presented in a more conspicuous manner than the APR.
5. For decades, Regulation Z did not allow use of the abbreviation "APR". We still can't use it on loan disclosures, but the rulewriters finally relented and allowed it in advertisements.
6. If you advertise APRs, you must state that the rate is subject to increase when that is the case.
7. Sorry to quote the regulation, but there's no clearer way to say this:
If any of the following "triggering terms" is set forth in an advertisement,
- the number of payments or period of repayment.
- the amount of any payment.
- the amount of any finance charge.
- if, and ONLY IF, you are advertising credit sales (loans to finance the sale of repos, foreclosures, or other bank-owned property): the amount or percentage of any downpayment.;
then the advertisement must include:
- the terms of repayment, which reflect the repayment obligations over the full term of the loan, including any balloon payment.
- the “annual percentage rate,” using that term (or "APR"), and, if the rate may be increased after consummation, that fact.
- if, and ONLY IF, you are advertising credit sales, the amount or percentage of the downpayment.
8. The "one-click rule": If a web page contains a triggering term requiring additional disclosures, then those additional disclosures may be placed elsewhere on the site provided there is a link that directly takes the consumer to the additional information. "A link" means one click. If more than one click is required, then this option is not available.
9. The hands down, all time favorite way to violate Regulation Z's advertising rules is to state the period of repayment (ex: "30-year fixed rate", "up to 72 months to pay", etc.) without also stating the dollar amounts of the resulting payments and the APR.

This is incredibly helpful, Richard! Thank you so much.

It's crazy to me that there are banks out there that violate this and just seem to get away with it... but I suppose we probably "get away" with things too

With a couple of notable exceptions, my experience was (and remains) that the regulators have done a terrible job enforcing a respectable level of industry-wide compliance with this part of Reg. Z. Granted, with the exception of the bait & switch prohibition, these are technical requirements & there are many bigger fish to fry...but if they don't plan (via examiner training and effective work programs) to enforce these rules, they should be withdrawn.

Reg. Z exams at the OCC basically consisted of running APRWin, lol.

Richard,

You seem to know a lot about advertising related compliance issues. What if an LO discusses rates with a customer? It is not necessarily an "advertisement," but do the same rules basically apply? Can my LO discuss a range of simple interest rates with the potential borrower? Does an APR need to be provided if a simple interest rate is mentioned? Thank you for your time and assistance.

See the discussion of direct personal contacts in the Official Interpretation of Section 1026.2(a)(2).

Thank you Richard. How about 12 CFR 1026.26? The conversation would seem to have to be in line with those standards, yes?

Yes, the type of conversation you describe doesn't sound like an "advertisement", so Section 1026.26 would apply rather than Sections 1026.16 and 1026.24.

I'm reviewing an ad that includes the following: "Rates as low as 5.924% APR fixed for 36 months. We reference in the footer that the Annual Percentage Rate (APR) is based on a sample loan of $5,000 including applicable fees. Rate may change or be withdrawn at any time. Subject to credit approval.

I know the term of 36 months is a triggering term but I don't think the statement regarding "...based on sample loan of $5,000 including applicable fees." satisfies the requirement for the terms of repayment. Am I correct? If so, can you give me an example of what statement would satisfy this requirement.

based on sample loan of $5,000 with 36 monthly payments of $xx.xx

You are going to have to itemize "the applicable fees" also

That's what I thought. Thank you.

Follow Randy's advice. Also, whenever you review ads containing rate quotes, throw in an "actually available" test. Look at a handful of recent applicants who asked for or qualified for the promotional terms and confirm that loans are actually being made (or will be) at the advertised rate. The higher the percentage of borrowers who fail to qualify for the promotional rate, the greater the UDAAP risk.

Richard - Your list above is very helpful. I know I have heard about the one-click rule for internet advertising several times, but I have not come across a Regulatory basis for it. Where is this "officially" sanctioned?

See the Official Staff Commentary to 1026.24(e)(4).

For example, a term triggering additional disclosures may be accompanied by a link that directly takes the consumer to the additional information.

If they have to click more than once to get to the disclosure then they were not taken directly to it.

Got it, thank you. For other readers, the citation above is 1026.24(e) - 4. In other words it is Official Interpretation #4 to (e).

This might go along with Richard's comments about advertisement being completely wrong most of the time; but I went out to the major Banks to compare and am curious if I'm missing something.

Trigger mentioned (term, etc) on a variable rate note at a discount; doesn't the advertisement need to include what the rate would be based on the margin and index within the advertisement? Also, does everyone agree that stating 5/1 or 7/1 is sufficient to disclose the period of time for the initial payment?

1026.24(f)(2) Disclosure of rates —
(i) In general. If an advertisement for credit secured by a dwelling states a simple annual rate of interest and more than one simple annual rate of interest will apply over the term of the advertised loan, the advertisement shall disclose in a clear and conspicuous manner:
(A) Each simple annual rate of interest that will apply. In variable-rate transactions, a rate determined by adding an index and margin shall be disclosed based on a reasonably current index and margin;
(B) The period of time during which each simple annual rate of interest will apply; and
(C) The annual percentage rate for the loan. If such rate is variable, the annual percentage rate shall comply with the accuracy standards in §§ 1026.17(c) and 1026.22.

2016.24(f)(2)(ii) For purposes of paragraph (f)(2)(i) of this section, clearly and conspicuously disclosed means that the required information in paragraphs (f)(2)(i)(A) through (C) shall be disclosed with equal prominence and in close proximity to any advertised rate that triggered the required disclosures. The required information in paragraph (f)(2)(i)(C) may be disclosed with greater prominence than the other information.

Bump!

In relation to APR fee's, I wanted to confirm that would also include APR fee's not charged by the lending institution (Attorney / Title / Settlement/closing / 3rd party ,etc) if they are known to be typically charged.

If we are wanting to advertise a rate for an auto loan, that incorporates our processing fee, do we need to show that rate as the APR or can we simply put, for example, 3.25%, and leave the letters APR off?

This is from Reg Z:


1026.24(c) Advertisement of rate of finance charge. If an advertisement states a rate of finance charge, it shall state the rate as an “annual percentage rate,” using that term.

OI #1 goes on to say "Unlike the transactional disclosure of an annual percentage rate under §1026.18(e), the advertised annual percentage rate...may be expressed using the abbreviation APR."

Regarding this suggestion - "2. It's a bad idea to "low-ball" your ad terms. Even though they may actually be available, terms beyond the reach of a significant percentage of your target audience can cause unrealistic expectations and result in complaints to regulators who are bound to investigate (wasting your time.)"

Do you use a general guideline or percentage of borrowers that must qualify for the advertised rate in order to feel comfortable with advertising it? In other words, if we know that only 20% of our customers would qualify for our lowest rate, (80% of applicants would not) is that considered to be a significant percentage of the target audience, and therefore should not advertise the rate?

I've never heard of anything resembling a standard. Just keep the risk in mind and word you ads so it's clear that only the most creditworthy applicants will qualify for the lowest rates.

I fielded a question like this today and the phrase "APR Interest" as is "Low APR interest" or "0 percent APR interest" was part of the question.

I see that combination -- APR interest -- a lot in automobile advertising. It never made sense to me. Just for kicks I pulled up Reg Z on the ECFR website (where the whole reg and commentary display on the same page) and searched for the phrase -- Not once does it appear in the regulation.

For credit card advertising, I was running myself ragged in Reg. Z the past few days and kept going back and forth about the requirement to show a range. I checked some major credit cards online and the vast majority display a range, but I could not find this specifically stated in Reg. Z. The following could imply that a blended rate is necessary, though I could see it also being a reference to two different rates being used within the same year:

1. Corresponding annual percentage rate computation. For purposes of §§ 1026.60, 1026.40, 1026.6, 1026.7(a)(4) or (b)(4), 1026.9, 1026.15, 1026.16, 1026.26, 1026.55, and 1026.56, the annual percentage rate is determined by multiplying the periodic rate by the number of periods in the year. This computation reflects the fact that, in such disclosures, the rate (known as the corresponding annual percentage rate) is prospective and does not involve any particular finance charge or periodic balance.

I'm sorry. What are you referring to as a blended rate and why?

Blended rate meaning a single APR that captures the various APRs that exist.

The range of rates you are referring to on the application/solicitation disclosures is when the creditor offers multiple rates on the same product (i.e. risk based pricing). There's no blended rate for that. When the consumer actually opens the account, the account opening disclosure shows their actual rate. If there's a promotional rate for a particular period, the chart shows the promotional rate, how long it's in effect, and what the regular rate is (the current regular rate if it's a variable rate product).

Yes, I just don't see where it is specifically noted in the advertising regulations. Is it because, in essence, if you disclose the APR for the product and different rates exist, then each separate rate IS the APR for that ad?

My issue with that is Mortgage Loans have different rates as well based on borrower credit characteristics, but nobody goes around doing mortgage ads with a range of rates.

If it's a "solicitation" to which 1026.60 applies, then that's your answer. If it's not, and it's just regular advertising, then nothing says you have to disclose a range. Some lenders advertise the range as opposed to advertising rates "as low as" the lowest rate for UDAAP/UDAP reasons.

Advertising a blended APR would not be accurate, because there is no such thing in open-end lending. But the same would be true for mortgages. If you offered a risk priced mortgage, you wouldn't advertise a "blended" APR that covered the different rates. The "blended" APR only applies when there are multiple rates that will apply to the same person's loan.

@Rainman -- thank you for your input. This was helpful and solidifies my understanding.

For closing costs, such as prepaid interest, does it just come down to picking a representative extension of credit and using that?

OK friends, I need a jolt to jump start my weary brain...

1026.24(f)(2) reads:

(2) Disclosure of rates. (i) In general. If an advertisement for credit secured by a dwelling states a simple annual rate of interest and more than one simple annual rate of interest will apply over the term of the advertised loan, the advertisement shall disclose in a clear and conspicuous manner:

(A) Each simple annual rate of interest that will apply. In variable-rate transactions, a rate determined by adding an index and margin shall be disclosed based on a reasonably current index and margin;

(B) The period of time during which each simple annual rate of interest will apply; and

(C) The annual percentage rate for the loan. If such rate is variable, the annual percentage rate shall comply with the accuracy standards in §§1026.17(c) and 1026.22.

Requirement (C) is tripping me up today. Do we need to compute the APR for the corresponding interest rate adjustment to come? That is, if we have a 7/5 ARM, I know the APR for the entire loan (Laser Pro computes it), but I do not know the APR for the adjustment that occurs at 7 years. We estimate the payment based on the current index and margin, but Laser Pro does not break down the APR for that part of the amortization schedule.

I think I'm overthinking it -- we are trying to insert a corresponding APR into the table for the line that provides the adjusted payment amount starting in year 8. I don't think I need to now, and it is fine to just disclose the single APR spit out by LP for the entire loan (and of course disclose it can go up).

Right?

A closed end loan only has one APR, so I am a little confused. If your ARM loan is based on the index plus margin at closing, there is no adjustment to the payment stream to calculate the APR for the entire loan term.

See, that's why I needed a reset. Ha! Thanks Randy, I got lost in the depths of my first day back after an extended weekend. I left my brain at the lake.