Kansas Advertising Claims, an Unlicensed Branch, and an OSBC Examination
Prairie Mortgage Inc. is a Kansas-licensed mortgage company with its main office in Salina. It runs radio ads saying "3.25% fixed APR - guaranteed approval - no closing costs" and a website banner saying "Kansas's lowest fees, no questions asked." The ad does not disclose that the 3.25% is a note rate available only to borrowers with a 780 score and 20% down, and "no closing costs" excludes third-party title and appraisal fees. Prairie opens an unlicensed storefront in a Hays real estate office where consumers can apply and meet loan officers. It retains loan files for two years and then shreds them. An OSBC examiner arrives with a request for advertising files, branch records, and loan files; the manager says the examiner needs a subpoena and that federal law preempts Kansas advertising rules.
1. Identify the advertising violations and the corrections Prairie must make.
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The advertising is misleading on several levels. "Guaranteed approval" is an absolute claim that Prairie cannot support and that may cause borrowers to overlook underwriting requirements. "No closing costs" is misleading if title, appraisal, and other third-party fees are still charged; if Prairie means only lender fees, it must say so clearly. The radio ad also confuses a note rate with an APR by calling 3.25% a "fixed APR" while the supporting facts describe a note rate available only to a narrow credit tier. Regulation Z requires accurate triggering-term disclosures when an ad states a rate or payment, and Kansas law prohibits false or misleading mortgage advertising. The website claim "lowest fees" must be substantiated or removed. Prairie should revise the ads to state accurate terms, include required APR and other disclosures, disclose eligibility conditions, and include required license or NMLS identifiers. It should retain substantiation for any comparative claim.
2. Can Prairie operate the Hays storefront without notifying or licensing it? Does the OSBC need a subpoena to examine the licensee?
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The Hays storefront is likely a branch that must be licensed or registered under Kansas law because consumers can apply and meet loan officers there. Operating an unlicensed branch is a separate violation from the main-office license. Prairie should stop consumer activity at that location until it confirms the Kansas branch requirement with the OSBC and obtains any required approval. The manager's subpoena argument is wrong for an examination of a licensee. The OSBC has statutory examination and investigatory authority over licensed mortgage businesses and can request books, records, advertising, and loan files as part of an examination. Federal law does not generally preempt Kansas licensing and advertising rules for a state-licensed mortgage company. Refusing to cooperate can itself support discipline, including fines or license action.
3. Evaluate the two-year record destruction policy and advise Prairie on responding to the examination request.
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A blanket two-year shred policy is risky. Mortgage records are subject to multiple retention periods, and federal rules can require longer retention for certain mortgage records; Regulation Z, for example, requires five-year retention for specified mortgage loan records, while other records have shorter periods. Kansas mortgage recordkeeping rules may also require retention beyond two years, and examination or complaint files may need to be preserved longer. Prairie should suspend destruction immediately, preserve all requested advertising files, branch records, loan files, and related electronic records, and adopt a retention schedule that follows the longest applicable Kansas and federal period. In response to the examiner, Prairie should designate a compliance contact, provide the requested records in an organized manner, document any legitimate privilege or confidentiality claims, and avoid informal excuses such as "federal preemption." It should also correct the Hays branch status and the advertising while the examination is pending.