DEPARTMENT OF REGULATORY AGENCIES

DIVISION OF REAL ESTATE

MORTGAGE LOAN ORIGINATORS

4CCR 725-3

8-1-1 MORTGAGE LOAN ORIGINATOR ADVERTISING

Pursuant to and in compliance with Title 12, Article 61 and Title 24, Article 4, C.R.S. as amended, notice of proposed rulemaking is hereby given, including notice to the Attorney General of the State of Colorado, and to all persons who have requested to be advised of the intention of the Board or Mortgage Loan Originators to promulgate rules.

Section 1.	Authority
Section 2. 	Scope and Purpose
Section 3.	Definitions
Section 4.	Applicability
Section 5. 	8-1-1 Mortgage Loan Originator Advertising
Section 6. 	Enforcement

Section 1. 	Authority

The Board of Mortgage Loan Originators adopts the following rule entitled, 8-1-1 Mortgage Loan Originator Advertising, according to the authority found in § 12-61-910.3, C.R.S.

The notice proposes to update rule 8-1-1.  The rule establishes advertising guidelines for mortgage loan originators and mortgage companies.

Section 2.	Scope and Purpose

Section 12-61-910.4, C.R.S., states the Board shall adopt rules regarding the marketing of nontraditional mortgages by mortgage loan originators.  In adopting such rules, the Director is required to incorporate appropriate provisions of the final “Interagency Guidance on Nontraditional Mortgage Product Risks” released on September 29, 2006.  While this rule incorporates provisions specific to nontraditional mortgage products, the requirements herein are applicable to all types of mortgage product advertisements.

Section 12-61-911(1)(j), C.R.S., in summary, prohibits mortgage loan originators from failing to comply with the Truth in Lending Act.  The Truth in Lending Act defines specific requirements for advertising. 

The purpose of this rule is to ensure that mortgage loan originators and mortgage companies are familiar with all current regulations that address advertising and to ensure the advertising of nontraditional mortgage products is addressed.

Section 3.	Definitions

1.	“Interest Only Mortgage Loan” means a nontraditional mortgage on which, for a specified number of years the borrower is required to pay only the interest due on the loan, during which time, the rate may fluctuate or may be fixed.  After the interest only period, the rate may be fixed or fluctuate, based on the prescribed index, and payments include both the principal and interest.

2.	“Nontraditional Mortgage” means any mortgage product other than a 30-year fixed rate mortgage.

3.	“Payment Option Arm” means a nontraditional adjustable rate mortgage that allows the borrower to choose from a number of different payment options.  For example, each month, the borrower may choose a minimum payment option based on a “start” or introductory interest rate, an interest only payment option based on the fully indexed interest rate, or a fully amortizing principal and interest payment option based on a 15 year or 30 year loan term, plus any required escrow payments.  The minimum payment option can be less than the interest accruing on the loan, resulting in negative amortization.  After a specified number of years, or if the loan reaches a certain negative amortization cap, the required monthly payment amount is recast to require payments that will fully amortize the outstanding balance over the remaining loan term.

4.	“Reduced Documentation” means a loan feature that is commonly referred to as “low doc/no doc,” “no income/no asset,” “stated income,” or “stated assets.”  For mortgage loans with this feature, an institution sets reduced or minimal documentation standards to substantiate the borrower’s income and assets.

5.	“Simultaneous Second Lien Loan” means a lending arrangement where either a closed end second lien or a home equity line of credit is originated simultaneously with the first lien mortgage loan, typically in lieu of a higher down payment.

6.	Advertisement: An "advertisement" is any commercial message that promotes consumer credit. "Advertisements" may appear:

a.	In newspapers, magazines, leaflets, flyers, catalogs, direct mail literature, or other printed material;
b.	On radio, television, or a public address system;
c.	On an inside or outside sign or display, or a window display;
d.	In point-of-sale literature, price tags, signs, and billboards; or
e.	Online, such as on the Internet.

7.	"Annual Percentage Rate" means the charge for credit, stated as a percentage, and expressed as an annualized rate as defined by the Truth in Lending Act.

8.	 "Closed-end credit" includes all consumer credit that does not fit the definition of open-end credit.  Closed-end credit consists of both sales credit and loans. In a typical closed-end credit transaction, credit is advanced for a specific time period, and the "amount financed," "finance charge,' and "schedule of payments" are agreed upon by the lender and the customer.

9.	 "Consumer credit" may be either closed-end or open-end credit. It is credit that is extended primarily for personal, family, or household purposes. It excludes business and agricultural loans, and loans exceeding $25,000 that are not secured by real property or a dwelling. It also must be extended by a "creditor".

10.	"Credit Sale" is a transaction in which the seller is also the creditor, at least initially. Often, the seller-creditor will later assign the installment sales contract to another entity, such as a finance company or a bank.

11.	"Creditor" is a person or organization (a) that regularly extends consumer credit for which a finance charge is required or that is repayable in more than four installments even without a finance charge, and (b) to whom the obligation is initially payable—for example, the finance company, bank, automobile dealer or other lender identified on the face of the credit agreement. A person or organization is considered to extend credit "regularly," if it has extended credit more than 25 times during the preceding year or more than 5 times for transactions secured by dwellings.

12.	"Downpayment" is an amount paid to reduce the cash price of goods or services purchased in a credit sale transaction. The value of a trade-in is included in the downpayment. It can include a "pick-up" or deferred downpayment that is not subject to a finance charge and is due no later than the second regularly scheduled payment. The downpayment does not include any prepaid finance charges such as points.

13.	"Finance Charge" is the dollar amount charged for credit. It includes interest and other costs, such as service charges, transaction charges, buyer's points, loan fees, and mortgage insurance. It also includes the premiums for credit life, accident, and health insurance, if required, and for property insurance, unless the buyer may select the insurer.

14.	"Terms of Repayment" generally refers to the payment schedule, including the number, timing, and amount of the payments, including any final "balloon" payment, scheduled to repay the debt.

Section 4. 	Applicability

This rule applies to mortgage loan originators as that term is defined in § 12-61-902(6), C.R.S. and mortgage companies as that term is defined in § 12-61-902(5), C.R.S.  

Section 5. 	8-1-1 Mortgage Loan Originator Advertising

1.	Mortgage loan originators and mortgage companies shall comply with all advertising provisions, regulations and official staff commentary of the Truth in Lending Act (Regulation Z).  Such provisions, regulations and official staff commentary include:

a.	Section 226.16; and 
b.	Supplement I of Part 226 – Official Staff interpretations.

2.	Mortgage loan originators and mortgage companies may review the Truth in Lending Act (Regulation Z) on the Division of Real Estate’s website.  Additionally, mortgage loan originators and mortgage companies may also review the Truth in Lending Act (Regulation Z) at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=635f26c4af3e2fe4327fd25ef4cb5638&tpl=/ecfrbrowse/Title12/12cfr226_main_02.tpl. 

3.	Mortgage loan originators and mortgage companies may advertise only credit terms that are actually available to the consumer. "Bait and switch" credit or promotions are not allowed. For example, no advertisement may state that a specific installment payment or a specific downpayment can be arranged unless the creditor is prepared to make those arrangements. However, mortgage loan originators and mortgage companies may advertise terms that will be offered only for a limited time or terms that will become available at a known future date. 

4.	If a mortgage loan originator or a mortgage company advertises closed-end credit with a "triggering term," the mortgage loan originator and mortgage company also must disclose other major terms, including the annual percentage rate. This rule is intended to ensure that all important terms of a credit plan, not just the most attractive ones, appear in an ad. This includes all important terms that are advertised in ranges.  The triggering terms for closed-end credit are:

a.	The amount of the downpayment expressed as either a percentage or dollar amount, in a "credit sale" transaction.  Examples include, but are not limited to:

i.	"10% down"

ii.	"$10,000 down"

iii.	"90% financing"

b.	The amount of any payment expressed as either a percentage or dollar amount. Examples include, but are not limited to:

i.	"Monthly payments less than $650 on all our loan plans"

ii.	"Pay $300.00 per $100,000 amount borrowed"

iii.	"$650 per month"

c.	The number of payments or the period of repayment.  Examples include, but are not limited to:

i.	"Up to thirty years to pay”

ii.	"180 months to pay"

iii.	"30-year mortgages available"

d.	The amount of any finance charge.  Examples include, but are not limited to:

i.	"Financing costs less than $1,000 per year"

ii.	"Less than $1200 interest"

e.	Some statements about credit terms are too general to trigger additional disclosures. Examples of terms that do not trigger the required disclosures are:

i.	"No down payment"

ii.	"Easy monthly payments"

iii.	"Low downpayment accepted"

iv.	"Pay weekly"

v.	"Terms to fit your budget"

vi.	"Financing available."

f.	General statements, such as "take years to pay" or "no closing costs," do not trigger further disclosures because they do not state or suggest the period of repayment or down payment cost.  Advertisements that refer to a range of interest rates that may be provided are considered to advertise an interest rate and are considered a triggering term.  The more specific the statement, the more likely it is to trigger additional disclosures.

5.	If the ad for closed-end credit uses a triggering term, it also must include the following information: 

a.	The amount or percentage of the down-payment; 

b.	The terms of repayment; and 

c.	The "annual percentage rate," using that term or the abbreviation "APR." If the annual percentage rate may be increased after consummation of the credit transaction, that fact also must be stated. 

6.	If the ad shows the finance charge as a rate, that rate must be stated as an "annual percentage rate," using that term or the abbreviation "APR." The ad must state the annual percentage rate, even if it is the same as the simple interest rate.  Disclosure of the annual percentage rate shall be disclosed as clearly and conspicuously as any interest rate in the advertisement. If the ad only shows a rate, and the APR is stated in the ad, no other credit information need be included: the "triggering term" requirement does not apply because the rate and APR are not triggering terms. Thus, an advertisement could simply state, "Assume 10% annual percentage rate" or "10% annual percentage rate mortgages available."

a.	All ads must state the annual percentage rate accurately. For example, some transactions include other components in the finance charge besides interest, such as "points" and mortgage insurance premiums paid by the buyer.  As a result, the annual percentage rate may be higher than the simple interest rate, because the APR reflects the total cost of credit, including interest and other credit charges.

b.	As long as the ad includes the annual percentage rate, one also may state a simple annual rate or a periodic rate or both, applicable to an unpaid balance. However, the simple annual or periodic rate may not be more conspicuous in the advertisement than the annual percentage rate. For example, an advertisement may include the interest rate together with the annual percentage rate, as long as the interest rate is not more prominent than the APR.

7.	Ads for variable-rate credit must state that the rate may increase or that it is subject to change, but need not explain how changes will be made.

a.	The following statement would satisfy this requirement.

i.	8.5% annual percentage rate subject to increase or decrease. 

b.	By contrast, an ad that promotes "9% APR graduated payment adjustable mortgages" (graduated payment mortgages plus an adjustable rate feature) would not comply with the law, because it does not state clearly that the rate may change.

8.	The annual percentage rate in variable-rate financing ads must be accurate. To help calculate the APR, keep two principles in mind. First, remember there is only one APR per loan, regardless of how many interest rates may apply during the term of the loan. Second, assume that any "index" rates, such as the prime rate or the 6-month Treasury bill, used to determine future interest rate changes will remain constant during the life of the loan.

9.	Special rules apply when it advertises a loan in which the seller or a third party "buys down" the interest rate during the early years of the loan.

a.	To comply with this requirement, the accurate annual percentage rate must be determined. First, ascertain whether the lower rates are stated as part of the credit contract between the consumer and the creditor. If so, the buydown should be taken into account in calculating the annual percentage rate for the advertisement.

b.	If the lower rates are not part of the credit contract, the advertised annual percentage rate should not reflect the buydown. For example, suppose the seller agrees with the consumer to place funds in an escrow account. This escrow account will be drawn upon by the creditor to reduce the consumer's monthly payments during the term of the loan, but the consumer's credit obligation is not changed to reflect the lower effective rate and payments. In this situation, the buydown in calculating the APR should not be considered.  Assuming the reduced rates are part of the credit contract between the consumer and lender, the ad might read as follows: 

i.	This buydown reduces your interest rate from 10½% to 8½% for the first year of your loan. APR 10½%.

c.	If the interest rates in the buydown are not part of the credit agreement between the consumer and lender, because, for example, they are included in a separate contract between the consumer and the builder/seller, it still may show the reduced interest rates in the ad. But, if this is done, the ad must include all the rates, the limited terms to which they apply, and the annual percentage rate for the loan. The annual percentage rate that is disclosed will not be based on the reduced interest rates, and therefore will be higher than those rates, as in the following example:

i.	With this buydown, your interest rate for the first year of your loan is only 8½%.  Rate for remainder of term is 10½%. 10¾% APR.

d.	If this information is advertised, the effect of a buydown on the monthly payments without triggering other disclosures may be disclosed. For example, an ad that states the above information also may say "with this buydown, your monthly payment for the first year of the mortgage will be only $615," or "save more than $100 per month the first year!" The use of these terms does not trigger disclosure of other information, other than the APR. But, if the ad shows the full term of the loan, such as "30-year financing", other required disclosures—namely, the downpayment, the terms of repayment, and the APR—must be shown, because the time period is a triggering term.

10.	Adjustable rate mortgages (ARMs) often have a first-year "discount" or "teaser" feature in which the initial rate is substantially reduced. In these loans, the first year's rate is not computed in the same way as the rate for later years. Often, the "spread" or "margin" that is normally added to an "index", such as the one-year Treasury-note rate, to determine changes in the interest rate in the future is not included in the first year of a discounted ARM offered by a creditor.

a.	Special rules, similar to those for buydowns, apply to advertising a discounted variable rate. An ad for this type of plan can show the simple interest rate during the discount period, as long as it also shows the annual percentage rate. However, in contrast to buydowns, the ad need not show the simple interest rate applicable after the discount period. For example, a plan with a low first year's interest rate (8%), but with a 10.25% rate in subsequent years, and additional credit costs, could be advertised as follows:

i.	8% first-year financing. APR 10.41%. APR subject to increase after closing.

b.	As in buydowns, the annual percentage rate in discounted plans is a composite figure that must take into account the interest rates that are known at closing. In the above example, the disclosed APR must reflect the 8% rate for the first year, as well as, for example, the 10.25% rate applicable for the remainder of the term, plus any additional credit costs, such as buyer's points. 

c.	An ad for a discounted variable-rate loan, like an ad for a buydown, may show the effect of the discount on the payment schedule during the discount period without triggering other disclosures. An example of a disclosure that complies with Regulation Z is:

i.	Interest rate only 8% first year. APR 10.50% subject to increase.
With this discount, your monthly payments for the first year will be only $587.

11.	In some transactions, particularly some graduated payment loans, the consumer's payments for the first few years of the loan may be based on an interest rate lower than the rate for which the consumer is liable. This situation is referred to as "negative amortization." As with buydowns, special rules apply when you advertise the "effective" or "payment" rates for these transactions. 

a.	Specifically, you may advertise these effective rates if you show the following information: 

i.	The "effective" or "payment" rate; 

ii.	The term of the reduced payments;

iii.	The "note rate" at which interest is actually accruing; and 

iv.	The annual percentage rate. 

b.	The advertised annual percentage rate must take into account the interest for which the consumer is liable, even though it is not paid by the consumer during the period of reduced payments.

c.	This type of financing could be advertised as:

i.	An effective first-year rate of only 1½ percent.
Interest being charged at 10½ percent. 10¾% APR.

d.	In contrast to an ad for a buydown or a discounted variable rate, an ad for an "effective" or "payment" rate may not show the monthly payments without triggering the other disclosures. You can, however, show the range of payments without showing all the intermediate payment amounts. 

e.	In addition to the information about the interest rate and APR, a complying ad for a "payment rate" plan also could state:

i.	Payments begin at $557.92 for the first year, ranging to
$800.96 in years six through remainder of loan term.

12.	The ad need not show all the different payments required during the life of the loan, if you advertise a mortgage in which the payments vary because:

a.	 Payments include mortgage insurance premiums payable monthly or annually; or 

b.	The loan has a "graduated payment" feature. 

c.	These advertisements must state:

i.	the number and timing of payments, 

ii.	the largest and smallest payments, and

iii.	the fact that the other payments will vary between those amounts. 

d.	The following example, based upon a condominium with a $65,000 sale price, illustrates the terms of an advertisement for a loan with mortgage insurance.

i.	This example would comply with the disclosure requirements, assuming the information is printed clearly and conspicuously:

1.	Downpayment $15,000; 9.5% APR

2.	360 monthly payments

3.	Payments 1-120 vary from $303.94 to $405.96

4.	Remaining 240 payments are $436.35.

13.	When an advertisement promotes a variable-rate loan that is not a "discount" or a "buydown" and has no other special features, the advertisement contains triggering terms that require disclosure of the "terms of repayment", which include the payment amounts. In this ad, only one payment amount need be disclosed to comply with the law.

a.	To determine the proper payment disclosure, calculate the payment based on the interest rate that will be in effect initially during the loan, using the best information available at the time you run the ad. For example, suppose you want to determine the payments for a 30-year variable-rate mortgage in which rate changes will be based on the one-year Treasury bill index, and in which there is no discount and no additional "margin" added to the index.

b.	If that index is at 9.5% at the time the ad is run, the payment amounts by developing an example, using 360 monthly payments based on the 9.5% rate could be disclosed. 

c.	If the ad offers a $100,000 condominium with a 20% downpayment , leaving an amount financed of $80,000, with no mortgage insurance and with all prepaid finance charges paid by the seller, the ad could state:

i.	Payments as low as $673 monthly. 30-year loan.
20% down. 9.5% APR subject to increase

14.	When an advertisement requiring disclosure of the payment schedule promotes a discounted variable-rate loan, rather than a variable rate plan with no special features, the advertised payment schedule must show all payment amounts that can be determined before consummation of the loan. For example, if the discounted rate is applicable for only one year, the advertisement should show a payment for the first year based on the reduced interest rate in effect for that year. If the interest rate is subject to annual increases thereafter, the advertisement must show a second payment amount based upon the interest rate that would have been in effect at consummation, except for the discount feature of the loan. 

a.	Thus, for example, the payment schedule portion of an advertisement for a discounted variable-rate loan with a one-year discount might state:

i.	1st year monthly payments are $585 and 2nd and subsequent years' monthly payments are $700. 

b.	If the reduced rate plan has limits or "caps" on the amount that the interest rate or payments may increase in any year, the payment schedule must also show the effect of those caps. Suppose the plan has a cap that limits interest rate increases each year to 2%. Also suppose that interest rates for the loan are determined by the Treasury bill rate plus a 2% margin and that the Treasury bill rate at the time of your ad is 10%. The rate determined by this formula would be 12%, 10% plus the 2% margin. The creditor, however, has set the first-year rate at only 9% and the second-year rate can be no more than 11% because of the cap. In a 30-year loan for $100,000 with no other credit charges, the payment disclosures for this loan might read:

i.	1st year's monthly payment are $ 804.62; 
ii.	2nd year's monthly payments are $ 950.09; and 
iii.	3rd year and subsequent year's monthly payments are $1024.34.

15.	For the purpose of section 5, subsections sixteen (16) through twenty-one (21) of this rule, the requirements set forth in this rule do not apply to:

a.	Any advertisement which indirectly promotes a credit transaction and which contains only the name of the mortgage company, the name and title of the mortgage loan originator, the contact information for the mortgage company or the mortgage loan originator, a mortgage company logo, or any license or registration numbers, such as on the inscription on a coffee mug, pen, pencil, youth league jersey, sign, business card, or other promotional item; or

b.	Any rate sheet, pricing sheet, or similar proprietary information provided to real estate brokers, builders, and other commercial entities that is not intended for distribution to consumers.

16.	All advertisements shall have at least one (1) responsible person that is accountable. If the responsible party is an individual, their Colorado license number and their registration number approved on the Nationwide Mortgage Licensing System and Registry (the “NMLS”) shall be clearly and conspicuously included in the advertisement.  If the responsible party is a mortgage company, the company shall clearly and conspicuously include their NMLS approved registration number on all advertisements.  

17.	All advertisements shall clearly and conspicuously provide the following information:

a.	The mortgage company name; and

b.	The business phone number of the responsible party.

18.	All advertisements shall clearly and conspicuously include the following statement:

a.	Regulated by the Division of Real Estate

19.	 Advertisements containing an interest rate, payment rate, teaser rate or an annual percentage rate must be reasonably available on the day of the advertisement or the day the advertisement is received.

20.	Advertisements containing an interest rate, payment rate, teaser rate or annual percentage rate must clearly and conspicuously include all material terms and conditions specific to the rates advertised.  Material terms and conditions include, but are not limited:

a.	Credit score;
b.	Debt to income ratios;
c.	Loan to value; and
d.	Occupancy type.

21.	Advertisements promoting non-traditional mortgage products, as defined in this rule, must clearly and conspicuously demonstrate the type of product advertised.

Section 6. 	Enforcement

1.	Noncompliance with this rule, whether defined or reasonably implied in the rule, may result in the imposition of any of the sanctions allowable under Colorado law, including, but not limited to:

a.	Revocation;

b.	Refusal to renew a license;

c.	Imposition of fines; or 

d.	Restitution for any financial loss.