Banking in Fine Print

Juxtaposition. Avoid it. It makes things seem ridiculous if not incomprehensible. Consider the banking industry. At almost the same time that Bank of America agreed to an $8.5 billion settlement with assorted investors who were disappointed in the investment results they realized when investing in bonds that were based on substandard mortgages, an ad in the New York Times for adjustable rate mortgages (ARMs) provided by PenFed caught my eye. The ad seemed oblivious to the lessons taught the last few years.

The substandard mortgage and the ARM were two of the reasons for the country’s recent financial troubles. Banks conspired with borrowers to let them take out loans without verifying their income and assisted the would be homeowners in acquiring properties that were beneficiaries of bubbles rather than increases in value. Many borrowers did not know how ARMs worked. They were seduced by the promise of a low initial interest rate and unaware that that rate could quickly become punitively high, depending on factors over which the borrower had no control.

ARMs were all the rage in the last decade. Borrower and lender alike assumed that house prices (if not values) would continue to go up and when the time came for the interest rate to be adjusted upwards, the home owner would sell at a profit and not be confronted with the higher monthly payments required by the new, much higher interest rate. It was, therefore, surprising to see that notwithstanding their contribution to the mortgage crisis, one financial institution that offers ARMs goes to great length to make them attractive, if deceptively so. That institution is PenFed whose copywriters for ads for ARMs were either born after the recent mortgage crisis (unlikely) or were completely oblivious to what went on (more likely.) The foregoing assumption is based on an advertisement in the New York Times that appeared in late June and that can be viewed on PenFed’s webpage.

As long as you’re a fine print sort of person, the ad is not at all deceiving. And even if you’re not a fine print sort, I’m sure that a loan officer would carefully explain to you that contrary to what the bold print in the advertisement appears to say, it doesn’t mean it at all. It means the fine print stuff. The rest was just put in to catch the reader’s eye. In my case it worked.

The ad was a half page ad. Using a headline type designed to attract the reader’s attention, it proclaimed: “A PenFed Mortgage. Right for you.” It then stated in considerably smaller type the advantages of a 5/5 Adjustable Rate Mortgage which included the statement that “Your rate is locked-in for 5 years at a time, guaranteed.” In large bold letters in the center of the ad it provided an example that a casual reader would assume was an example of how such a mortgage would work. It said that for the first 60 months at a mortgage rate of 3.35% and an annual percentage rate of 3.494%, the monthly payment would be $1,959. In the next line it said for the next 300 months at a 3.625% rate and an annual percentage rate of 3.494% the monthly payment would be $2,039. Beneath this description, in small-italicized print appeared a recital that the interest rate “is variable and can increase by no more than 2 percentage points every 5 years . . . .”

There is probably a simple explanation for why, when the interest rate goes from 3.25% to 3.625%, the annual percentage rate remains constant, although the explanation will not be found in this relatively unsophisticated space. The more tantalizing question to which no answer is yet forthcoming is, why would PenFed place, in an advertisement for a 5/5 ARM, an example that shows 60 monthly payments at one fixed rate and 300 payments at another fixed rate when in fact there is not only no guarantee that the second rate will remain in effect for 300 months but a certainty that it will not. A phone call to the call center for PenFed Mortgage where one can apply for a mortgage yielded little enlightenment. The person who answered the phone said he had seen the ad and found it confusing. He said when consulting with his superior about its confusing nature he was told that the company was required to advertise the mortgage in that fashion. He did not say whose requirement it was. Another person in the call center thought the form of the advertisement was mandated by the government.

Any borrower will almost certainly have any confusion caused by the ad cleared up before the borrower actually signs any papers. The ad is probably just intended to catch the attention of the readers, some of whom may be potential borrowers. It has probably worked.

Christopher Brauchli is an attorney living in Boulder, Colorado. He can be e-mailed at brauchli.56@post.harvard.edu.





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