Promotional and Discounted Rates

Question: We were recently cited because we did not distinguish between a promotional rate and a discounted rate in our advertisements. What is the difference between promotional and discounted rates?

Answer
A promotional rate, in connection with a variable rate plan, is an APR that is not based on the index and margin that will be used to make rate adjustments under the plan, if that rate is less than reasonably current APR that would be in effect under the index and margin which will be used to make rate adjustments under the plan. [12 CFR § 226.16(d)(6)(i)(A); 12 CFR Supplement I to part 226 – Official Staff Commentary § 226.16(d)-5.i]

The promotional rate is quite a bit different than a discounted rate, because a discounted rate is the initial APR that is not based on the index and margin used to make later rate adjustments in a variable rate plan. [12 CFR § 226.16(d)(2)]

So, a discounted rate encompasses only an initial rate, whereas a promotional rate encompasses a rate that could be in effect any time during the life of a credit transaction. A rate can be both a discounted rate and a promotional rate and subject to the disclosure requirements for both types of rates.

Jonathan Foxx is president and managing director of Lenders Compliance Group, Brokers Compliance Group, Servicers Compliance Group and Vendors Compliance Group, national companies devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted by phone at (516) 442-3456, by e-mail at [email protected] or visit LendersComplianceGroup.com.