Companies often advertise one price to lure customers into their stores, then charge a higher price. In days gone by, this was called "bait and switch." Now, it's called fees and surcharges.

On the Internet, this tactic has another fancy name: "landing price." Advertisements include a low price to persuade customers to land on their e-commerce site. But by the time shipping and handling is piled on, the "out-the-door" price is substantially higher.

This tactic is most clear in the world of online florists, and most prevalent during Valentine's Day. A quick survey of the top online florists shows that consumers using the two top sites typically pay at least 50 percent -- and often as much as 100 percent -- higher than the advertised price.

Take ProFlowers.com, which this week was running nearly ubiquitous ads with offers like this: $29.99 for a dozen roses and a free vase. But any consumer wanting the arrangement delivered on Valentine's Day will pay at least $55, after shipping, taxes, handling and a Saturday delivery fee are added. Shoppers who agree to early delivery on Feb. 12 will save $10, but will still pay around $45 (when $10 shipping, $1.99 handling and about $3 in taxes are added in). That's still 50 percent above the advertised price.

Making matters worse for shoppers: The total price isn't revealed until the last possible moment -- after the recipient's name and address, credit card number, billing address and even the "Love, Bob," note are entered. This reporter counted seven screens before the real price was unmasked. After all that typing, consumers are less likely to abandon the transaction.

ProFlowers says all its advertisements indicate customers will face additional fees

"ProFlowers advertising...clearly states that shipping and handling are additional costs," spokesman Mike Rosen said in an e-mail. He said the company has not received any complaints that its advertisements are deceptive.

Rosen also pointed out that consumers can add the total cost on their own within the first click or two. But to do that, consumers must notice and click on a link named "details" while picking the delivery date.

"I don't think you give consumers enough credit," Rosen countered. "In this day and age customers understand this process better … and expect to pay shipping charges."

At FTD, $19.99 flowers cost $42.77
ProFlowers' strategy is relatively standard in the flower business. Shoppers at FTD.com may arrive at the site lured by the promise of Valentine's arrangements that cost $19.99. But that price doesn't include an additional $19.99 "service charge." By the time customers click "order," they are told the $19.99 flowers really cost $42.77.

But at least customers at FTD.com see the full price before they are asked to enter their credit card numbers.
Robert Apatoff, president of FTD, said his company was "transparent" about its pricing.

"People get that they pay for shipping and handling. You can't just ship for free," he said. "There's nothing new about price point advertising…it's consistent with the practices of the vast majority of online and offline retailers."

He also said that $19.99 was a reasonable service charge when the additional costs of special handling and Saturday delivery are factored in.

After these two disappointing experiences, consumers might be too disheartened to try the third major online florist, 1800Flowers.com. That's too bad, because on Tuesday the site advertised a $39 arrangement with free shipping. The actual price: $39, plus tax of a few dollars. A $34 arrangement without the free shipping offer would cost $50 for delivery on Valentine's Day, but that additional charge was made clear the moment a delivery date was picked.

Our wilting economy
Shopping for Valentines flowers is a study in why the U.S. economy is so broken today.

In the end, the prices at all three sites are quite similar. Yet consumers shopping for flowers must jump through near-impossible hoops to actually comparison shop. (Only a reporter with too much time on his hands is likely to do it.) That means many consumers won't make rational economic decisions based on quality or price, but rather will choose based on which company's advertisements are most compelling -- or, some might say, deceptive. In the end, it's almost certain that the most up-front company, 1800Flowers, will lose sales because consumers think they are getting a better price from a competitor when they really aren't.

Some might argue this is simply capitalism at work. In fact, the opposite is true. If this were a free market, all information about the transaction would be transparent, and the best product with the best price would win. Instead, the most convincing advertiser wins. Ultimately, this economic system -- which is not capitalism -- will put honest companies out of business and reward deceivers. The current list of troubled banks, home builders, mortgage brokers and retailers is a "Who's Who" of well-marketed companies that had unsustainable profits built on false advertising. Their business models were a house of cards destined to eventually fail.

When the new administration in Washington wants to renew the promise of America and create change all consumers can believe in, it will focus considerable attention on creating a true free market, which will be made obvious by its transparency and lack of unfair trade practices.

RED TAPE WRESTLING TIP
All three of the big flower sites have dynamic front pages, which change depending on how a customer arrives at the site. Make sure to click through an advertisement or enter a discount code before ordering, or you may not be presented with the cheapest price.

Have some Red Tape you need untangled? Ask the Red Tape Raiders for help! Or become a consumer advocate!!

Ed McMahon appeared in this advertisement on Super Bowl Sunday.

Ed McMahon once traveled the country telling lucky families they'd won a huge cash prize through a sweepstakes. On Super Bowl Sunday, he told viewers they can turn old jewelry into money by sending it to a company named Cash4Gold.

But one blogger who's critical of the firm McMahon is touting has recently discovered that sometimes words can be more valuable than gold.

Web satirist Rob Cockerham stumbled into the bizarre and sometimes aggressive world of search engine optimization recently after he published a blog entry that criticized Cash4Gold; the firm then offered him money if he'd remove the site.

A few months ago, Cockerham posted the tale of a man who claims he sent $180 worth of gold to Cash4Gold only to receive a lowball offer of $60. The item was read and linked to by so many Web users that it quickly climbed the rankings at search engines like Google. That caught the attention of Cash4Gold, a Pompano Beach, Fla. company.

Just a few days before the Super Bowl – and the airing of McMahon's Super Bowl ad -- Cockerham revealed that a Cash4Gold representative had sent him an e-mail offering him "a few thousand" dollars to take down his critical Web site.

"I'm still marveling over it," Cockerham said. "They sent me a bribe e-mail."

Cash4Gold is one of several companies that have emerged in recent months offering to exchange old jewelry for cash. The process is simple; consumers contact the firm, receive a special envelope in the mail, send in their jewelry items and receive a check. Consumers can either cash the check if they accept Cash4Gold's offer or reject it and ask that their jewelry be returned. Cash4Gold customers also have the option of receiving payments instantly and electronically, bypassing the negotiating step.

A lowball offer?
Cockerham's blog alleging that Cash4Gold made the lowball offer included detailed documentation of the transaction provided by a consumer named Brent Kutz.

"I had some gold I was going to sell anyways so I was thought I would keep track of the details for insurance in case of loss and to give (Cockerham) the information for one of his articles," Kutz said. So before he mailed the jewelry to Cash4Gold, he took it to a local pawn shop and received an offer of $180. "I really didn't think I would have a problem with the amount before I did it. I was more looking at it from what I could get locally and then from Cash4gold as they advertise paying higher amounts," he said

Kutz said Cash4Gold sent him a check for $60. When he called and balked at the offer, it was increased to $180. He then sent the evidence to Cockerham.

"This tells me (consumers) should never accept Cash4Gold's first offer," Cockerham said.

Most customers satisfied, company says
Cash4Gold CEO Jeff Aranson didn't dispute Cockerham's account, though he said he no specific knowledge of the transaction because his company processes thousands of requests each day. But he suggested that Brent may have "bullied" a telephone operator into increasing the firm's offer for his jewelry.

He added that his company does not aim to compete with pawn shops. Instead, it allows consumers to liquidate their unwanted jewelry with ease and privacy. And he said jewelry can often be sold at five or six times the "melt" value, so wide price discrepancies in appraisals can be common. In other words, a pawn shop might get a higher price for old jewelry after cleaning it than Cash4Gold would get by melting it down.

Cash4Gold has sent checks to 500,000 consumers in the past 12 months with only a handful of complaints, Aranson said.

"I view us as the world's largest appraisal service," he said. "Only one-tenth of 1 percent complain that they are not happy."

'Aware of what was going on'
Aranson confirmed that Cockerham was offered financial compensation for removal of the negative Web site. But he said the e-mail was written by an employee of a third-party company who was acting independently, and that employee is no longer associated with Cash4Gold.

"We had no idea it happened at the time," he said. "I wouldn't have done it and I don't endorse it."

The man who sent the e-mail, Joe Laratro of marketing firm Tandem Interactive, challenged Aranson's account.

"Everyone (at Cash4Gold) was well aware of what was going on," he told msnbc.com.

Laratro said his company provided search engine optimization for Cash4Gold, a field in which tactics can range from simply adding keywords to a Web site to improve search engine performance to creating fake Web sites so a competitor or critical blogger is pushed off page of Google results.

Laratro also denied that the offer was intended as a bribe, saying it was meant to be a part of a chatty negotiation.

"Anything within reason we would have done," he said, adding that companies regularly contact consumers who have posted negative information on Web sites and try to satisfy their complaints. "This was about what we could do to make this guy happy." He even suggested the firm would make a donation to Cockerham's "favorite charity."

Cockerham, however, would have none of it. Instead, he posted Laratro's e-mail on his Web site, alongside the rest of the saga.

Cockerham regularly pulls such "gags" on his blog, Cockeyed.com. Many are designed to embarrass companies he feels are misbehaving. One such stunt earned him an entry in the Red Tape Chronicles two years ago, after he ripped up a credit card application, taped it back together to simulate the behavior of dumpster-diving identity thief and then mailed it to the bank. A few weeks after he returned the disheveled application, he received a credit card.

But Cockerham said in a recent entry, titled "Cash4Gold would like to melt down and recast their reputation," that in his relatively long history as a critical blogger, "This was the first time someone else was trying to buy me out of their Google search results."

The offer, he said, wasn't the sort of reward he was looking for.

"This is my declaration of not selling out. I think it will work out better this way, don't you?"

Leave a comment below or become a member of the Red Tape Raiders and be a consumer advocate!

You've probably noticed the ads, particularly if you are thinking about getting something sparkly for someone you love this Christmas. They promise that any jewelry you buy will appraise for twice as much as you pay for it. A Red Tape reader recently wrote to me and asked, "How can this be?"

Well, there's good news and bad news. Internet-based jewelry stores have really changed the economics of the tight-lipped jewelry business, leading to more choice, and more price transparency, which is always a good thing for consumers. On the other hand, Web jewelry sales have also opened up a whole new language to consumers, which invites the opportunity for word-play and potential confusion. That's what we have here.

Can you buy something from a jewelry store at half the price it's really worth? Of course not. Can you buy something and get it appraised at twice the price you paid or it? Yes, you can.

That doesn't make sense -- until you understand that appraised and market value are two very different things. Before you buy jewelry this holiday season, it's important for you to know how appraisals work.

Let's look at the promise made by JewelryExchange.com. The site's disclaimer page explains the firm's "Double Value Guarantee."

"We guarantee the retail value of all finished jewelry manufactured by the Jewelry Exchange and not requiring center stones or customization, that is priced under $3,000, to appraise for double the purchase price." The store goes on to explain what it defines as a valid appraisal and what the reward is for beating their claim (either a refund or a store credit for the difference).

How can Jewelry Exchange do this without going out of business? Before we explain what's going on, let's have jewelry analyst Ken Gassman demonstrate the best way for a consumer to assess such a guarantee.

"Any store which makes this kind of promise, tell them, 'Show me the money,'" he said. Ask the store if they will give you $6,000 if you buy the ring for $3,000 and sell it back to them, he said. Their answer will reveal a lot about the guarantee.

But notice, the guarantee says nothing about retail value. It applies only to an appraisal value, which is a different thing. And jewelers tell me the appraised value of an item often is twice the amount consumers pay in a discount retail shop.

Multimedia special report: A diamond's journey

Many appraisals are ordered to establish value for insurance purposes (some insurers require an appraisal), and they represent replacement value. Insurance companies are fond of planning for worst-case scenarios, so an insurance appraisal may take into account the actual cost of replacing an item at a full-price store five or 10 years in the future. The insurance firm likely won't have to pay that amount, but remember, a higher appraisal means a higher premium.

Meanwhile, a love-struck man who bought his girl a diamond bracelet and gets a high-priced appraisal will feel like a million bucks if he thinks the gift is worth more than he paid for it. So what's the harm?

Only worth what you pay for it
The harm occurs if that love-struck man gets the notion that the bracelet he just bought really is worth twice what he's paying for it.

Bill Doddridge, owner of Jewelry Exchange, said that never happens because his salespeople don't pitch the appraisal guarantee as if it's a retail price guarantee.

"(Jewelry) is only worth what you pay for it," he said. "We are not saying it's worth double."

Gassman said he was concerned that such a guarantee might confuse consumers, who rarely understand the nature of the jewelry business and the relationship of appraisals to retail price.

But Doddridge said if there's any criticism to be levied, it should be aimed at the appraisal business.

"I'll stop (using the slogan) the day appraisers stop appraising (our) things for double," he said. The store really does abide by its guarantee, he said. If consumers come in with a low appraisal -- and it happens a couple of times a year -- the store offers a refund or compensation.

He also says Jewelry Exchange pieces are often half the price consumers would pay in a high-end store like Tiffany's, because the company manufactures its own pieces and uses other cost-cutting techniques.

But is the use of the phrase double-value misleading? Elliot Goldman, the Jewelry Exchange's lawyer, says no.

"We stand buy our guarantee. I don't think there's anything misleading about that," he said.

Different kinds of appraisals
Confused yet? The world of appraisals can get even more confusing, warns long-time appraiser Maury Woulf, an accredited member of the International Society of Appraisers and a jewelry store owner. Not only is there a big difference between the appraised value and the market value of an item – there can be big differences among various appraisals conducted for different reasons.

The aforementioned insurance-related appraisal might produce one value. But an "income-value" appraisal, conducted for aging jewelry owner worried about the impact jewels might have on any estate tax an heir would have to pay, would likely produce a different value – probably much lower, for obvious reasons.

Appraisals also are impacted by market conditions, Woulf said. A house in eastern Pennsylvania could be double or triple the price if it was located in Northern New Jersey – and the same ring sold online could be double the price if sold by Tiffany's. Such market considerations are a big factor in appraisals, Woulf said.

"When your wife holds out her hand and tells her friends you bought it at Tiffany's, it is a different product at that point," he said.

And of course, appraisers are human, and will often disagree over the value of an item.

Some mixture of these factors explains how a store could issue a guarantee that items it sells will appraise for twice the value, he said.

Blue Nile, one of the Web's largest retailers, makes no such double value claim, said spokesman John Baird. He did say consumers can often get very good jewelry prices online, but should tread carefully.

"People should comparison shop," he said. Independent grading of diamonds by non-profit laboratories, in particular, make things much easier for consumers. "Diamonds in particular are a very objective product," he said. "... You can compare apples to apples. So do your research."

That research should include understanding promises connected to the value of an appraisal.

You know the jingle if you've ever watched late-night television: "Free ... Credit Report DOT com."

What you might not know is this: There's nothing free about FreeCreditReport.com. Like so many other come-ons you hear on late-night TV, you just can't trust that word "free."

I'll explain the Web site's misleading advertisements in a moment, but first, here's what you really need to know: When you want to see your credit report, you want to use AnnualCreditReport.com. There, you can actually get your credit report for free. Congress gave you the right to see your report every year for free, so there's no reason to visit any pay sites – like FreeCreditReport.com – to plunk down money for it.

In fact, this month marks the one-year anniversary of the liberation of your credit report by Congress. In September 2005, every consumer in America was granted the right to obtain a free copy of his or her credit report every year.

If you obtained your free credit report at this time last year, here's a reminder that you can get a fresh version now at AnnualCreditReport.com.

Also one year ago, credit bureau Experian was also slapped on the wrist by the Federal Trade Commission for misleading consumers at its FreeCreditReport.com Web site. The FTC said Experian didn't make clear to consumers that they would be charged $79 for an annual subscription after they signed up at FreeCreditReport.com.

What the FTC didn't say (but was abundantly clear to anyone with a brain) was that FreeCreditReport.com and Experian were benefiting from confusion over news stories telling consumers were entitled to a free copy of their credit report every year. And the site was designed to add to the confusion.

While not admitting wrongdoing, Experian agreed last August to give consumers refunds and make the terms of its product clearer. One year later, how is the company doing? The television ads are as misleading as ever. On the other hand, the Web site itself is improved, with a disclaimer featured fairly prominently. But it would be a stretch to say the terms are clear, the price is clear and consumers are being treated fairly.

Given all the confusion, and the legal action, it's amazing that FreeCreditReport.com is allowed to continue operating. I know it continues to cause mix-ups. Earlier this year, during the hubbub about the missing Veterans Administration laptop, I heard experts testifying before Congress point to the wrong site by accident. In April, an ID theft expert speaking to students in Tacoma, Wash., pointed the teenagers to the wrong site, and was quoted in the local Tacoma News Tribune. The newspaper was flooded with complaints. Here's what those readers were complaining about:

The television ad
"I'm thinking of a number ...," the smiling host says in one version of the FreeCreditReport.com television advertisement. He sits director-style on a chair, then brags about how high his number is -- his credit score -- and how much money it saves him when he gets a new card loan or mortgage. Nothing misleading there: A good credit score is good for you.

But the advertisement shows the word free repeatedly, and the host says it. There is no indication of any cost. In fact, during the 30-second spot there is only one indication that there is a catch: a disclaimer, read at lightning-fast speed, in the commercial's final seconds as it fades to black.

"Free credit report requires enrollment in Triple Advantage."

The disclaimer is so short that I've seen occasions when it is cut off by a returning television program. But even when it plays in full, notice what isn't there: Any indication that FreeCreditReport.com costs money.

The Web site
The good news is consumers who are misled by the ads will encounter a relatively prominent warning when they go to the FreeCreditReport.com Web site to sign up

"When you order your free report here, you will begin your free trial membership in Triple AdvantageSM Credit Monitoring," it says. "If you don't cancel your membership within the 30-day trial period, you will be billed $12.95 for each month that you continue your membership."

The site also includes a link to the genuinely free site, AnnualCreditReport.com.

But even with that disclaimer, Experian's Web site is still designed to mislead. The disclaimer is written in small, light blue type on a dark blue background – hardly the choice of someone designing for clarity. And the print is understated compared to the huge "Get Yours Now" button on a white background in the center of the site. Once consumers click there, the chance to see the disclaimer is gone.

And even in the disclaimer -- right next to the link to the real free credit report site -- there is yet another link that says "Get your free credit report and credit score," which is a link to the form consumers fill out to buy the paid service. Click on that second link by accident and you find yourself on stuck the toll road instead of the free highway.

I could go on; but suffice to say that Experian's effort to comply with the FTC ruling looks like a minimal-effort homework assignment done by the most reluctant student in class, only after he was sent home with notes to his parents, then given a bad grade, then threatened with expulsion. It's just enough to keep the kid in school, but certainly not enough to earn a passing grade.

Millions have obtained their free credit report
Straightening out the free credit report mess is important. Millions of Americans are now aware that they must keep track of their credit report and score. New research from consulting firm Gartner indicates that nearly 50 million Americans say they've signed up for their free credit report, and that about another 40 million plan to. Those polled didn't indicate if they had used AnnualCreditReport.com or FreeCreditReport.com – or some other site -- to obtain their reports.

Researcher Avivah Litan, who derived the numbers from a recent poll, said that about 70 percent of American adults are aware of their right to obtain a free copy of their credit report, an incredibly high awareness rating. In fact, you'd have to call the marketing efforts around free credit reports a great success story.

Now, if we could just make sure all those people are going to the right site.

Have you noticed any other free products or services that aren't really free? Submit your ideas below.

Today we are introducing a new monthly feature that I hope you'll find fun and educational – Truth in Advertising. I also hope you will participate and write in suggested topics. To get things started, here's this month's winner, concerning home loan offers that sound too good to be true. 

"Have you ever heard of a mortgage rate of 1 ¼ percent? Yes, 1 ¼ percent!," the radio ads blare, crowding out box scores and trade talk on a very popular New York-based sports radio station. "An unheard of rate so low, you cannot imagine."

This advertisement seems the mark of great imagination.  Here's more of one version of the ad, as supplied to MSNBC.com by the lender, Hall of Fame Funding.

"Hall of Fame Funding, one of the leading mortgage lenders in the tri-state area, has just secured funding for a special 30-year program …a 30-year rate starting at an unbelievable 1 ¼ percent. With an A.P.R. of …."  The prevailing rate is then inserted by the anchor; for an adjustable rate loan, it would be closer to 6 percent.

But in each ad, the "1 1/4 percent" rate is repeated several times. In some cases, the ads are taped spots. In others, the well-known sports anchors read the ads Paul Harvey-style, lending them an air of credibility.

"Could this be true?" I thought to myself when I first heard the ad. Is there such a loan as a 1.25 percent mortgage? During a time of rising interest rates, everyone is looking for an edge.  Perhaps Hall of Fame Funding has, as its advertising suggests, found some special money magic.

If there is such a low-cost loan, applying would be a no-brainer. I could load up on the cheap money, then buy myself some bank certificates of deposit at around 5 percent. My resignation would soon follow. Alas, as you can tell, I haven't quit my job yet. There is a catch. Listen closely, and you might hear that key word "starting." And you'll also hear the real interest rate, but you'll only hear it once. 

So it's hard to ignore the repeated reference to a 1.25 percent loan. I decided to investigate. 

What Eric told me

I called Hall of Fame to learn more. An operator named Eric took my call. He was encouraging.

"It's pretty sophisticated," he said. "You have to have a great credit score." But don't worry, he added, people who have scores in the 700s "can get away with murder."

I told him I was considering a $500,000 loan, like the one that the radio ads said I could get from Hall of Fame with payments of less than $2,000 a month. With a traditional mortgage, my payment on a loan like that would be $3,284, Eric explained. But he could sell me a $500,000 loan with payments at $1,786 -- a savings of 50 percent!

"I have this product myself," he assured me. "My payments were $4,100. They shot down to $2,100."

Using this loan I would save almost $100,000 during my first five years, and then I could afford a house in the overpriced New York City area, he told me.

But I was worried about this very interest low rate. "Is it really 1.25 percent that whole time?" I asked.

Almost, Eric said. He explained that the payments rise 7.5 percent each year, creeping up from about $1,800 to about $2,500 by year five. That's still a lot less than the $3,400 I could expect to pay with a traditional mortgage, Eric said.

"But what about the sixth year?" I asked.

"Hold on, Bob, I have another call," Eric said.

For a while, there was silence. Then, Eric got back on the phone and told me how likely it was that I'd refinance my mortgage before year six. Or that I'd move. And he reminded me that I would have saved $100,000 by then. He told me about a friend who bought a house two years ago for $430,000 that's now worth $730,000. Then he told me he couldn't calculate a payment because he didn't know what the interest rate would be in six years.

Humor me, I said. Let's say rates are flat. He still hemmed and hawed.

Finally, Eric said the payments in the sixth year would be about $3,600.

But that's hardly the worst of it. After a series of additional questions, Eric told me that as time went by, the actual balance on my mortgage would increase -- not decrease as it normally would -- after each payment. 

Let me explain. During those heady first five years of easy loan payments, I'd be borrowing money from my home to keep those low payments that appear to be based on 1.25 percent interest. It's a process called negative amortization, a phrase that was as hard for Eric to say as it was for The Fonz to say "I'm sorry" on "Happy Days." In fact, he didn't say it. He simply did the telephone equivalent of nodding after I did.

Thanks to the negative amortization loan, I would actually own less of the home after five years than I did the day I bought it.

"Well, you figure something's got to give," Eric said. 

Claims explained

What's going on here? I turned to an expert for an explanation.

Jack Guttentag is professor emeritus at The Wharton School of Business and runs the "Mortgage Professor" Web site. No one should shop for a home loan without visiting MTGProfessor.com.

Guttentag broke down Hall of Fame's claims for me. First, he explained that Hall of Fame Funding is hardly unique.  He said he regularly receives e-mails from consumers bragging that they're paying miniscule interest rates like 1.25 percent for the first five years of their new mortgage.

Well, not quite. Think credit card teaser interest rates, only much worse. Homeowners with loans like these pay a minimum payment and the amount of their loans keeps growing, as with credit card revolving debt. There never really is a time when the consumer is spending only 1.25 percent interest to borrow the money.  Rather, to make the payment "feel" like a 1.25 percent loan, the lender tacks on the added interest to the loan balance, a process called "capitalizing interest."

Here's the critical distinction to watch for: The 1.25 percent quoted in the ad is really the "payment rate," not the interest rate. In other words, it's the amount required by a calculator to keep your payments at that artificially low level. The difference is tacked onto the "back" of the loan, meaning after I start making payments, my $500,000 loan starts an upward climb.

That climb is capped at $550,000, Eric explained. But that's bad news, too. The moment the cap is reached, the monthly payment is immediately "recast." So I could face that $3,600 a month payment – or more -- sooner than five years in the future.

Guttentag had choice words for such mortgages.

"They are a nasty instrument," he said. "So complex that very few people really understand how (they) work."

Hall of Fame's 1.25 percent mortgage is not the cheapest teaser rate you'll find, by the way. A year ago, MSNBC.com wrote about the growth of exotic interest-only and negative amortization loans, and found one company selling something called 'The Stress-Free Mortgage" at 0.99 percent.

Guttentag called any ad that hawks a mortgage interest rate purporting to be this low "egregious." The industry calls these loans "pay-option ARMs." And as the days of rock-bottom mortgage rates fade into history, you'll probably continue to see ads across all media promoting mortgages with impossible interest rates like this.

Targeting jocks

So how can a company call a 6 percent mortgage a 1.25 percent mortgage? Aren't there laws against false advertising, and laws that mandate truth in lending?

There are. But even if a regulatory agency decided the ads were deceptive, mortgage brokers and mortgage bankers fall between the regulatory cracks, allowing them to walk very close to the legal edge. Federal banking regulators like the Federal Reserve or the Office of the Comptroller of the Currency don't have jurisdiction over mortgage bankers and brokers. Instead, state banking supervisors do.

In the case of Hall of Fame Funding, that would be the New York State Banking Department. Agency spokeswoman Elizabeth Billet pointed me to the federal Truth in Lending Act, which requires lenders to state the annual percentage rate when describing loan interest rates. What's unclear from the act is this: Is it within the law to mention one rate multiple times (in this case, 1.25 percent), and mention the true rate – the annual percentage rate – once?

My next step was to call back Hall of Fame Funding and ask what the company thought of all this.  When I called, I was eventually passed to the company's president, Dan LaRosa. The Hall of Fame Funding name was actually created to attract sports fans, he said. Initially, the company tried a cable television campaign with former New York Giants great Lawrence Taylor. That didn't work well. But the sports radio ads have been very successful, he said.

"We've gotten a lot of hits," he said. "We are able to help people."

LaRosa said the 1.25 percent mortgage "affords certain people the ability to move into something that they can afford the payments on," and works for people who may be moving in a year or two. Eric, LaRosa's employee, had earlier told me there was a prepayment penalty for paying off the loan within three years, but LaRosa said that wasn't always the case.

He also said borrowers pay 1.25 percent interest on the money during the first five years, with only fractional increases once per year.

Strictly speaking, that's true. But also strictly speaking, consumers are paying much higher interest rates for the money along the way -- they are simply paying with debt rather than paying with cash.

When I asked LaRosa if his ads were deceptive, he said he wouldn't answer any more questions over the phone. He asked me to e-mail questions to him. I did. Then his lawyer wrote to me.

'Not one consumer expressed confusion'

"The ad was not deceptive," said attorney Howard Newman in an e-mail. "I am informed by my client that other than your inquiry, not one consumer has expressed confusion or alarm upon responding to the said ad and conferring with a loan counselor."

Newman went on to make the point that the ad clearly states a "30-year rate starting at an unbelievable 1 1/4 percent – stressing the word "starting" -- and that the annual percentage rate is revealed soon after.

"Quite clearly, this was disclosed as an adjustable rate mortgage," he said. "Otherwise, the language 'starting at' would have been inappropriate and misplaced." Consumers can also choose to make more than the minimum payment each month, which would prevent the loan from negatively amortizing, he said.

In an interview, he defended use of the payment rate in advertisements, saying that the primary concern of most consumers is the amount of their monthly payment.

He did concede that the 1.25 percent mortgage is "a complicated loan product," difficult to fully explain in a 15 second ad. But such low-interest loans with teaser rates are popular with consumers, who are more sophisticated than many believe, he said.  And before they sign for a loan, consumers receive a variable rate program disclosure and a payment schedule explaining what really happens to their money. 

"You'd be hard pressed to find a consumer who understood (the ad to be an offer of ) a 30-year fixed rate at 1.25 percent," he said.

Regulator: 'It could be more clear'

Armed with a copy of the radio advertisement provided by Newman, I went back to the New York State Banking Department. After reviewing it, the agency contacted Hall of Fame Funding and said the advertisement needed clarification.

"It's not illegal," said Billet, the spokeswoman. "But it could be more clear." She pointed out that in the ad, Hall of Fame mentions a 1.25 percent rate twice before adding in the qualifier "starting at 1.25 percent." Billet said the agency has "instructed" the company to make changes to the ad.

But how can this company spend three months claiming to sell a 1.25 percent mortgage on the radio without stating just as often that the real interest rate -- the annual percentage rate -- is much higher?

Oh yeah? Make me!

The answer is a question: Who's going to make them?

The New York State Banking Department can -- and does - investigate consumer complaints. But it has no authority to prosecute. Instead, when the agency finds egregious cases or gets a flood of complaints, it must take a number at the New York attorney general's office and ask Elliot Spitzer to prosecute. Of course, only the choicest, noisiest cases rise to that level.

The Federal Trade Commission also can enforce Truth in Lending Act rules or truth in advertising rules through civil cases, but resource constraints mean it only targets regional mortgage brokers and bankers that are generating a lot of complaints, said Mary Engle, associate director of the Division of Advertising Practices.

Truth in Lending rules can be found in Regulation Z, written by the Federal Reserve Board as an extension of the Truth in Lending Act. Sadly, they are rarely enforced against mortgage brokers, says John Burnett, editor of BankersOnline.com.

"The only people who are effectively, proactively monitored for compliance are banks and other financial institutions because they have a regular regulator who comes in and looks," he said. As a result, "There are advertising requirements (mortgage brokers) are ignoring."

So that leaves it to you.

Of course, you can vote with your wallet and simply ignore ads that sound too good to be true. Better still, New Yorkers who believe a banking-related advertisement is deceptive can report the company by calling 1-877-BANKNYS. Those in other states can look up their state banking supervisor on the Internet, or fill out a complaint at FTC.gov. And of course, you can also complain to the media outfit that ran the advertisement.

And finally, you can complain to me. Truth in Advertisements will be a regular feature on the Red Tape Chronicles, and I'm taking submissions for July's entry and beyond.

Send in your nominations. I'll try to chase down the truth of the matter, and I'll also ask: Isn't someone responsible for enforcing truth in advertising rules?

Of course, I'll have to keep the topics interesting to a national audience, so I will avoid advertisements that are purely local. But something tells me I won't be lacking for material.

Now it's your turn to have the last word.  Either post your candidates below, or write them to me privately at BobSullivan@feedback.msnbc.com