Equity Loan Ads Don’t Tell All, Survey Finds

A survey of home equity loan advertisements by a consumer group showed Tuesday that most ads did not disclose important information about fees, interest rates and repayment terms.

Consumers Union, the nonprofit publisher of Consumer Reports, released the survey of ads by 20 financial institutions as Congress considers legislation that would require lenders to disclose terms of home equity lines of credit.

The American Bankers Assn., the chief trade group for commercial banks, has said that it would support some disclosure requirements but urged Congress to give voluntary industry efforts a chance to work.

However, Consumers Union said 80% of the ads surveyed failed to include information about closing costs, such as fees for title examination, appraisal and recording, and 90% failed to say whether or not there was an annual maintenance or membership fee.

In addition, the group reported that 65% did not say whether the loans had an interest rate cap or what the cap was, if present; 35% failed to disclose the formula for calculating the interest rate, and 40% lacked an understandable disclosure of how often the interest rate will change.

- Sixty percent did not describe repayment terms, including whether or not a balloon repayment would be required at the end of the loan term.

- One in four ads promoted the tax deductibility of home equity loans without explaining restrictions. Homeowners cannot deduct interest on loans greater than the original purchase price of the home, plus the value of improvements, unless the loan is for home improvements, medical expenses or education.

The popularity of revolving equity lines, secured by a second mortgage on the borrower’s home, has mushroomed since the 1986 tax law began phasing out the deductibility of other forms of consumer borrowing.

Consumer advocates have warned that such loans are dangerous, attracting applicants through low initial “teaser rates” and subjecting the borrowers to the danger of losing their homes.

The concern prompted the bankers association in January to suggest a series of guidelines for home equity line advertisements.

But, according to Michelle Meier, a Consumers Union attorney, the ads in the survey “don’t even live up to the bankers’ own standards for what an honest ad should tell consumers about home equity loans. Not a single ad fully complies with the trade association’s guidelines.”

Mary-Liz Meany, a spokeswoman for the bankers association, said the guidelines were intended as a suggested checklist, not a requirement for inclusion of each and every item.

“Such a requirement would be unreasonable given the space limitations of print advertisements,” she said. If all the points on the check list were included in an ad, “it would look like a novel” and discourage consumers from reading it, she said.

Consumers Union looked at advertisements placed by 20 financial institutions in major newspapers in four cities: New York, Washington, Los Angeles and San Francisco. Two midweek and the Sunday editions of each newspaper were examined during the six weeks between Oct. 1 and Nov. 10.

Fifteen of the institutions were banks and four were savings and loan institutions. American Express, a diversified financial services company, placed one of the ads.