CalFed Sued on ARM Ad Campaign : Consumer Reports Publisher Says S&L;’s Promotion Deceptive
The publisher of Consumer Reports magazine has filed suit against California Federal Savings, charging the behemoth financial institution with “a deceptive and unlawful advertising campaign” to promote adjustable-rate mortgage loans.
The suit, filed in Sacramento County Superior Court by the Consumers Union, accuses the savings and loan of deceiving about 2.2 million Californians through advertisements in major newspapers throughout the state, including the Los Angeles Times.
The suit charges that the ads are misleading because they do not explain that monthly mortgage payments may go up by several hundred dollars a month if interest rates rise.
CalFed officials strongly denied the charge.
4th-Largest S&L; in U.S.
“Our ads are not deceptive or misleading,” George Rutland, chief executive of the Los Angeles-based savings and loan, said emphatically in a phone interview. CalFed, which has 139 offices in California, is the nation’s fourth-largest S&L.;
Rutland also suggested that the suit, filed Thursday, was a ploy to draw attention to a bill pending before the California Legislature that calls for fuller disclosure for adjustable-rate mortgages in newspaper advertisements. A hearing on the bill, which passed the Assembly in June, is scheduled before a Senate committee Tuesday.
“I don’t believe the timing of the suit and the hearing is purely coincidental,” Rutland said.
Consumers Union attorney Carl Oshiro said CalFed was sued now because its ad campaign has been both aggressive and extensive.
CalFed headed off an immediate court action Friday by filing a petition to have the case heard in federal court, on the grounds that the charge is based on an alleged violation of the Truth in Lending Act, a federal statute. The move prevented the plaintiff’s attorneys from arguing for a temporary restraining order in state court.
The suit is a reminder that adjustable-rate mortgages, despite heavy promotion by the savings and loan industry in the past two years, remain confusing to many consumers. The action also reflects the pitfalls of promoting these kinds of loans, because they are so much more complicated than the traditional fixed-rate mortgage.
Matter of Practicality
Consumers Union has been one of the leading critics of adjustable-rate mortgage promotions. Last year, the nonprofit company forced Bank of America to cancel an ad campaign that suggested that adjustable-rate mortgages were less expensive than fixed-rate loans.
CalFed officials argue that it is impractical to explain all of the details of an adjustable-rate mortgage in a newspaper advertisement.
“Customers are given full disclosure when they file a loan application,” Rutland said. Rutland also noted that the present ad campaign for adjustable-rate mortgages has concluded and a new one will not begin again until early next year.
The ads in question promote adjustable-rate mortgages that have a “today rate” of 9% and an “annual percentage rate” of 10.45%. Neither term is defined in the ads. (The “today” rate is what is often called the introductory, or teaser, rate on the loan, while the “annual percentage rate” is the anticipated cost of the loan over its entire life, calculated as if current interest rates remain the same.)
In the CalFed suit, Consumers Union said the ads don’t explain the terms of the loan, including the fact that they will automatically be adjusted upward in six months. Further, the suit says, the advertisement doesn’t explain that the interest rate may go as high as 14% during the next five years if interest rates rise.
That means a monthly payment of $804--based on a $100,000, 30-year loan with an initial interest rate of 9%--could increase to as much as as $1,390 per month if the interest rate went to 14%, the suit said.
“You have to be a fortune teller to know now much these loans are going to cost you,” said Wallace Smith, a business professor at the University of California at Berkeley who helped to prepare the suit.
