Regulation N: What it is, How it Works, Example

What Is Regulation N?

Regulation N is a rule established by the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) that enforces compliance with the Credit Card Accountability and Responsibility and Disclosure Act of 2009 (CARD Act) and the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank Act).

Understanding Regulation N

Regulation N regulates what financial products constitute mortgage credit products, defining them as any credit product secured by a dwelling or other real property that is offered to a consumer for family, personal, or household use. It also further regulates how mortgage brokers may represent their mortgage credit products to consumers. Compliance with Regulation N is overseen by the Federal Trade Commission (FTC).

Regulation N is also known as the Mortgage Acts and Practices Advertising Rule, or MAPs rule because it regulates how mortgage lenders, servicers, brokers, advertising agencies, and others can advertise mortgage services. The rule forbids deceptive claims in mortgage advertising and other commercial communications sent to consumers by mortgage brokers, lenders, services, and advertising agencies.

Examples of deceptive claims include advertising a low fixed rate, without specifying that said rate is applicable only for a very brief introductory period and conflating payment rates with interest rates. Alternatively, a lender could fail to let the consumer know that payment rates may not cover the interest due each month, leading to negative amortization, a situation in which the loan amount increases over time because monthly unpaid interest is being added to the principal amount.

Deceptive mortgage advertisements might also fail to discuss significant loan terms, or imply that the mortgage lender in question is affiliated with a government agency when they are not.

Regulation N aims to stamp out that type of behavior and was implemented based on laws that were passed in the wake of the 2008 financial crisis and the ensuing Great Recession. Excessive extension of real estate credit, including alleged predator lending practices, was a major component of the housing bubble of the 2000s that led to this crisis, prompting lawmakers, consumer advocacy groups, and financial industry figures to take action and introduce reforms to prevent similar abuses from happening in the future.

Examples of Deceptive Mortgage Claims Banned Under Regulation N

Regulation N parallels Section 5 of the FTC Act, which prohibits false advertising and misleading claims in advertising. Some examples of deceptive claims prohibited under Regulation N include misrepresentations of:

• The nature, amount, or existence of consumer fees associated with a mortgage product;
• The type of mortgage on offer;
• Terms, payments, amounts, or other requirements of the mortgage agreement, including those related to insurance and taxes;
• Variability of interest rates, payment amounts, term lengths, and other mortgage terms;
• What percentage of the monthly payment will go towards paying interest, the amount of the loan, or the total amount due;
• The likelihood of the consumer to refinance or modify the mortgage or its terms, or the consumer’s ability to do so;
• Any prepayment penalties that the mortgage product may carry;
• The potential for default and what circumstances constitute default;
• The right of the consumer to reside in the dwelling being purchased;
• The nature, substance, and availability of any expert advice or counseling services offered to the customer in regards to the mortgage credit product;
• The source of commercial communication or advertisements regarding mortgage products.