Why One Size Doesn't Fit All

Fighting the conception/perception that the credit industry is operated and regulated on a standardized basis and that parameters are of the “one size fits all” variety isn’t easy.

We constantly work with a variety of prospective clients in the credit industry to explain that choices on a wide variety of fronts and levels are available to lenders when it comes to compliance.

It’s a nice thought that we can just “simplify” things and still meet the specific business and regulatory requirements of our clients.

The reality is that compliance parameters don’t always contain clear cut universal mandates.

To illustrate this point, let’s review the perceived simplicity of credit insurance prima facie rates and state regulated maximum interest charges.

Prime Facie Credit Insurance Rates

It is an accurate description that published prima facie rates are insurance rates that may be used “without providing further justification”, but that doesn’t mean every lender provides credit insurance at those particular rates.

Deviations of prima facie rates based on the actual experience data provided to a state insurance department and their actuaries are often mandated by state insurance codes.

 Simplistically put, if you brought in a lot of premium revenue over the last three years but paid virtually no claims, there’s a good chance the Insurance Department will adjust a lenders rates downward to meet previously determined standards in that regard.

 Conversely, if your claims costs exceed the premium revenue for a stated period, the Department may allow an upward deviation from the prima facie rate as a form of recompense.

We have seen a lot of programs with a nationwide dealer base writing credit insurance in all 50 states make the decision to initially employ the prima facie rates for all their dealers with the goal of “facilitating” the roll out process.

While it’s true that as many as 80% of the dealers may use prima facie rates, the 20% that don’t sure create an administrative headache for the service provider when they are forced to retro-fit all the rates and underwriting limits for those dealers.

The timing is usually so that as the program is just gaining some steam and traction, resources have to be diverted from growth to the re-tooling process.

State Regulated Maximum Interest/Finance Charges

How much interest or finance charge a lender can produce on a credit contract is one of the most misunderstood regulatory disciplines in the industry.

Since most state maximum charge statutory provisions actually regulate the dollar charge generated by a published rate, Carleton’s compliance generator will evaluate the total dollar charge in a transaction against that computed according to statutory/regulatory rules.

However, in order to perform that task we first have to determine which specific provision a particular lender is operating within. Sounds simple enough, doesn’t it?

However, take the state of Texas for example. An institution making a consumer loan under the Texas Finance Code cannot produce an interest charge that will exceed:

A) The dollar charge produced by a split add-on rate structure with rates of 18% and 8%.

Or

B) The dollar charge produced by a melded simple interest structure with rates of 30%, 24%, and 18%, respectively.

Or

C) The dollar charge produced by the alternate simple interest rate tied to Treasury Bill auctions with a provision that contains a ceiling rate and a floor rate.

All of the above qualify as “maximum rate provisions” under the Finance Code.

All can produce significant and varied results when inserted as “THE” maximum charge standard to evaluate an actual loan against.

So, if an “out of the box” solution is presented, which set of rates to choose?

That is a truly key point: everywhere in the compliance process, the lender has choices available.

Don’t Forget the Lender

It is almost impossible to be in sync with a specific lending institution without a discussion that sheds some light on their philosophy and policies. Is their compliance philosophy conservative? aggressive? moderate?

In the end, it is what the institution views as the applicable maximum charge provision that is relevant.

We counsel our clients based on experience but the final call belongs to the lender. Trying to work outside that sphere of knowledge one can only harbor a guess at the “right” answer.

When it comes to compliance, I’d rather not guess.

The “one size fits all” approach does seem to mirror the current trend in our society for all actions to be “seamless” and “transparent”.

 However, it is important to recognize when it comes to calculations and disclosures that the desired transparency is not necessarily a synonym for “easy and fast” but one that adheres to clear and accurate validation of where those values/numbers came from and the basis for their accuracy.

The Rule of 78ths

What's in a name?  Often through this blog, and other writings over the years, you have heard me preach clear communication.  The use, and mis-use, of labels, slang, jargon and other esoteric terms not only makes it difficult to communicate in this industry, it can also lead to less than stellar compliance performance when it comes to calculations and disclosures.

Almost everyone in the industry is familiar with the term "Rule of 78ths".  Ever think about how much you really know about this widely used term?

Here are some things that I know after 27  years of dealing with it:


1) It's an allocation method not a "calculation" method.  I can compute monthly payments that will adhere to a Rule of 78ths allocation of the charge and liquidation of the principal, but I cannot "compute a payment by the Rule of 78ths".

In the heyday of add-on and discount interest, the need arose for a way to determine how much interest was to be allocated to a specific period of time.  Both add-on and discount compute interest charges based on the life of the loan and there is no thought to repayment terms.

Creditors needed a way to determine "earned" interest and, thus, "unearned" interest.  This is how the method grew into a popular method for computing refunds when a loan is prepaid in full before maturity.  It was easy and uncomplicated.

2) It's technically only the "Rule of 78" for a 12 month transaction with equal monthly payments.  The "78" refers to the sum of the numbers 1 through 12.  Since the use of Rule of 78ths requires the summing of the number of payments remaining divided by the sum of the original number of payments, the 78 portion is only applicable if there are 12 payments in the loan.

3) The more precise name is "Direct Ratio" method.  Direct Ratio assumes that the portion of the total charge contained in each installment is computed as a direct ratio of the number of remaining unpaid installments to the sum of the original number of installments.

I wish I could claim that I crafted that definition myself but I can't.  It comes from one of the rare textbooks that address lending calculations titled "Neifeld's Guide to Instalment Computations" by Dr. M.R. Neifeld.  It was first published in 1951.  This definition forms the premise of the concept for which we all take the mathematical shortcut of summing remaining and original payments to find the valued "factor".

4) Most statutes authorize The Sum of the Balances method in the language they use to describe refunds of interest and charge.  The statutory language talks about the sum of the "monthly time balances" scheduled for a loan not the number of scheduled payments.  That provides a more accurate description of the Sum of the Balances method, of which Rule of 78ths is a subset, which accounts more properly for irregularities.

5) The Rule of 78ths can provide accurate computations only if there are none of these irregularities in the loan transaction.  Loan characteristics such as balloon payments, irregular payment amounts, irregular first intervals (aka "45 days to the 1st Payment), skipped payments, non-monthly repayment periods (e.g. quarterly payments) etc. render  a Rule of 78ths calculation imprecise mathematically at best.  The simplistic, traditional Rule of 78ths shortcut cannot properly account for the actual balances and the time they are scheduled to be outstanding.

But when is the last time you had a generic, simple loan transaction with no type of irregularity?  Those transactions seem to be few and far between these days.

6) While Rule of 78ths is  more often used for interest or charge refunds, it can also be used in the proper setting for determining unearned credit insurance premium or ancillary product charges.  The same rules for irregularities, however, continue to apply.

Like a lot things in an ever evolving industry, the intent of "Rule of 78ths" was most likely the concept of the more robust Sum of the Balances method.  As loan products become more complex, the methods we apply to specific operations must adjust also.

Rule of 78ths is still in use today on a regular basis.  However, it is not a "one size fits all" solution and the characteristics of the loan itself determine it's accuracy and viability.

Navigating the Pendulum Swing

What do the following have in common? HMDA, Fair Lending, Suitability, Arbitration, CRA, Ability to Repay, Interchange Fees, Credit Freeze, Risk Retention, Appraiser Independence, FCRA, ECOA.  The answer is,  they all have been regulatory and compliance hot topics in the last 60 months or so.

They are all evidence of the ever-changing regulatory environment that lenders face in the current climate.  However, one facet that these topics don't represent is also significant: they aren't directly computationally  oriented. At the moment, the regulatory pendulum is swinging markedly away from calculation type issues.

Yes, we had the Reg. Z MDIA mortgage disclosures at the beginning of 2011 that did have some direct impact on loan disclosures and calculations.  It certainly made all of us contemplate combinations of potential loans that we didn't even know existed.  But we seem to have survived that window of activity and we'll see what kind of feedback regulators receive once those disclosures have been in use for a year or so.

But when you look at that laundry list of regulatory initiatives, it is clear that direct calculation issues are on the back burner, barely keeping lukewarm.  That merits the question of whether that is by design, or have all the other issues simply pushed them into the background where they can't be seen clearly.

Understand, I'm not championing a new era of calculation-driven regulation, even though I think that's in the back of everyone's mind waiting on the CFPB.   Besides new calculations that could potentially arise during upcoming rule making, there also needs to be a focus on explaining existing calculations.  Remember the mandate from Dodd Frank for plain language, simplicity, and transparency.

There are times it makes me a bit nervous that perhaps inaccuracies and imprecision are being overlooked because of the concentration on other administrative type subjects and issues.

The worst nightmare is a frenzied tweet from the compliance staff, "OMG you should have seen what the examiner just cited us for," and to find out that practice/calculation /disclosure has been in place since 2003.  It's just been obscured and overlooked because of the focus on compiling tons and tons of database information for various governmental agencies.

Don't get caught off guard.  Sure part of this concern is my general paranoid nature, especially when things seem to be running incredibly smoothly, but I think it's essential that internal controls focus on all aspects of compliance and not just the ones with steam rising off the top.  Make no mistake, the pendulum will swing back the other way at some point. Be prepared.

The Match Game

An interesting discussion I have often with members from both the industry and the regulators is the proper way to decide if a computed number is "right". 

Generally, we see two schools of thought on this subject: one that seeks to "re-originate" the transaction in question and match the disclosed results, and the other which seeks to validate computed numbers by a predetermined set of rules.

 I'll admit here at the outset of this discussion that I am an advocate of the second position and feel it is the proper way to determine if a credit calculation is accurate and thus "correct".

The real key to creating a loan transaction from scratch is the integration of interdependent computed values into the transaction at large.  That may seem like a mouthful but the premise is something like this:

     I want to know if the single premium credit life premium of $374.92 is correct, but the premium 

     coverage  is gross payoff so the premium is based on the total of payments.  I can't figure the total of payments until I compute the payment.  The payment can't be computed until I arrive at the principal amount but the principal amount includes the life premium so...........

You see how it goes.  The circular nature of numerous iterations is at the center of the requirement that all computed values be integrated accurately into a credit transaction for it to be valid.

An attempt to start at the beginning with, say, a $5,000 proceeds value and re-create the transaction exactly and also match the premium can be a truly daunting, and perhaps superfluous, task. 

First, the interest accrual calendar has to be the same as the transaction in question, along with the payment rounding of course.  Speaking of rounding, all intermediate rounding of the life rate itself, premiums values, and accrued interest amounts must also match to the penny. 

 So if it's a 60 month transaction, I've got at least 3 things that have to match exactly 60 times in a row.

Remember that the value you want to prove is correct, comes from software utilizing specific code written by a specific programmer or developer.  How many programmers do you know that write code identically even within the same office let alone 1,000 miles apart and working independently?

And, if I don't match, which of those three potential variables is out of sync? or maybe two of the three?  There are way too many variables and unknowns to try and coordinate in order to get an accurate picture.  Sometimes the results may match but you can't be absolutely certain it's for the right reasons.

A much better approach is to know the properties, parameters and pertinent variables included in the transaction and use the true disclosed loan values themselves to prove right or wrong.

For instance, in the above example if the gross credit life rate was $0.40 per $100 per year and the computed and disclosed monthly payment was $310.89 for 60 months, then the proper premium is $373.07.

Now, whether the disclosed contract value of $374.92 is acceptable in light of this evaluation is another level of scrutiny, and a different topic altogether, that I won't try address at the moment.  For today, I'm sticking to the "how to" process.

However, in this validation scenario it is clear what the proper premium is for the rate filed and the disclosed monthly payment of $310.89.  This validation has used the actual contract payment, amount financed, and filed insurance rate to arrive at the result.

It doesn't matter whether the mission is validation of insurance premiums, maximum allowed interest charges, or contractual rates of charge, a key ingredient is the employment of the disclosed contractual payment amount(s).

The payment disclosed and agreed to in the contract is a major determinant of interest earnings and principal reduction for any given period during the transaction. 

The imposition of a theoretical payment through the process of "re-solving" can skew the profile of the loan liquidation so that it no longer resembles the actual transaction.  In that case, re-solving will produce a result but not necessarily one that provides an accurate actuarial analysis of the calculation under scrutiny.

At Carleton we use the process of amortization to provide a precise and accurate validation of the data on a consumer credit contract.  The article in our Spring 2011 "of Interest" newsletter, "The Power of the Schedule", lays out the basics of this approach in more detail. 

The article can be found at http://www.carletoninc.com/services/ofInterest.asp.

We constantly evaluate whether we are keeping our "eyes on the prize" when it comes to ensuring our clients are in compliance when using our calculations.  The key is not to be distracted by available peripheral data and approaches that don't really focus on the issue at hand.

A Fee by Any Other Name....

A particularly key compliance component of our project definition process for new clients is the analysis of the properties associated with any fees paid by a consumer as part of a prospective credit transaction.

 Unlike mortgage lending where some fees have common labels and are universally understood, e.g. appraisal fees, title examination fees, property survey fees etc., fees associated with personal loans, small loans, and retail sales aren't always transparent based solely on the fee name.

Our focus is two-fold; 1) determine if the fee is part of the finance charge for Truth in Lending disclosure purposes, and 2) determine if the fee is included in any regulated "charge" amount for specific state maximum charge evaluation.

The heart and soul of the Federal Truth in Lending Act is really the dollar finance charge, aka "cost of credit". When Truth in Lending first came into being the basic rule of thumb was that "every fee is part of the finance charge, with a few exceptions".  That has evolved over the last 42 years to a process of "some fees are, some fees aren't" based on certain criteria.

State maximum rate statutes generally declare that any statutorily authorized fees either "are" or "are not" included in the maximum amount the particular statute regulates. 

What is often confusing is that while an authorized "processing fee" in a specific state may not be included in the state's maximum charge amount, that same fee is most certainly included in the TILA cost of credit.  To exacerbate the mental congestion that often accompanies trying to clearly digest and segregate two separate sets of rules is that the label used for both state and federal purpose may be identical; "finance charge".

So, for our purposes of making sure both state and federal calculations are accurate and compliant, we do need to know the name/label of a particular fee but we're much more interested in whether it is a TILA finance charge and part of the state maximum charge calculation.  Stating "we charge a service fee" is merely a starting point in the decision making process of how to accurately portray that fee in a "live" credit transaction.

The key is to remember that fees must be evaluated on two separate levels; 1) whether they are included/excluded for state maximum charge evaluation, and 2) whether they are included/excluded for the purpose of determining the Truth in Lending Act finance charge dollar cost of credit. These represent two separate processes to attain two separate compliance goals.

The Deception of Dates

There are days when I absolutely hate the month of February.  And not just during that month with its sub-zero temps, dark days and endless snow, but when the fact that it has only 28 days wreaks havoc on system lending calculations. 

We work to reconcile payment calculations from literally scores of other systems during our project definition process with clients and users. The key is to determine how a particular routine deals with February.  That is as challenging a diagnostic exercise as it gets.

Too many design characteristics draw from the outmoded "360 day year" methodology of 30 years ago.  February 1st to March 3rd may indeed be "30 days" but it most certainly is not a calendar month and Regulation Z, for instance, certainly isn't going to recognize that time period as 1/12 of a year.

It's not merely February but the fact that months have different lengths in days.  A forgotten fine point is that while Appendix J to Reg Z says that "All months shall be considered equal", actual calendar days have to be counted for fractional month periods.  That doesn't jibe with many "360 day year" conceptions that we see put in use.

Like everything else, the devil is in the details.  Consider January 31st to February 28th; it's a month when counting forward for interest accrual purposes but can be a fraction of a month with the Federal Calendar in computing the APR.  That first glance at the dates can be deceptive.

Every Fee "Affects" the APR

When gathering information to define software, one of the critical areas for accurate disclosure is determining the nature of any fees that will be charged by the lender. A really popular industry description of specific fees is that "this fee affects the APR".

It's become clear that statement is intended  to mean that a fee will "make the APR a different value than the interest rate" (See the post "the Interest Rate and the APR").  From our consumer credit math purist standpoint, every fee "affects" the APR.

All fees in a lending transaction are either in the Amount Financed (Truth in Lending Act definition) or the Finance Charge (also TILA defined).  The sum of the AF + FC equals the Total of Payments.  As a general rule, the AF and FC are mutually exclusive and collectively exhaustive.  Fees are either in one or the other but they can't be in both.

Consequently, a fee that is included in the TILA Amount Financed does indeed affect the APR calculation since the APR measures the relationship of the Amount Financed to the Finance Charge over the time period of the loan.

So, our goal in defining software projects is to help clients determine which fees can potentially be required to be in the TILA finance charge.

Single Payment Transactions and Mixed Fruit Results

In the last few months we have had a number of inquiries from clients about how to pass our calculation engine the right information for single advance, single payment transactions. 

There seems to be a degree of uncertainty when dealing with these types of loans. 

Maybe it's because these types of transactions represent the simplest calculations that we do and the expectation is that the concept should be more difficult.  In reality, it is a linear I = P x R x T type environment and there aren't the thousands of behind the scenes iterations that are necessary to compute a precisely integrated declining balance closed end credit transaction.

It seems the first inclination is for a system to collect and pass us the information as though it were a monthly transaction with a series of $0.00 payments followed by one "balloon payment" at maturity.  For instance, a twelve month single pay loan would have 11 $0.00 payments and then one large payment of principal and interest.

That situation may seem analogous to a single payment transaction but it poses two prominent issues with regards to the disclosure computations.

The first is that when assumed to be 'monthly' in nature, interest accrues on a theoretical monthly basis and presents potential rounding options.  Traditional near rounding as in periodic transactions can create an interest charge that is materially larger than a linear calculation where the only rounding is done once at completion.

The more significant issue is the Truth in Lending APR calculation.  The rules in Appendix J of Regulation Z recognize 'events' in order to establish a unit period for APR computation.  Payments of $0.00 are viewed as events, regardless of dollar amount, in order to take into account the time value of money.  That practice establishes the unit period for APR computation as monthly rather than the term of the transaction as prescribed in Appendix J.

The result is that the APR computed for a monthly unit period with 11 $0.00 payments and a final of $10,799.80 for a $10,000 loan is 7.719%.  Computed properly as a single advance, single payment loan the accurate APR disclosure is 7.998%.  The difference of .279% is well outside the 1/8 of 1 percent tolerance Regulation Z allows.

There are instances where our communication is initially hindered by the use of labels.  Since we are creating routines to ensure compliance with regulatory requirements, the labels we use have strict definitions per the appropriate regulation.  A specific lender, however, may develop names for lending programs internally within their institution that have a more esoteric meaning.

We view "single payment" as a transaction where the borrower makes only one payment during the life of the loan.  We have seen the term "single payment" used to also characterize a loan program where interest only payments are required and a single principal and interest payment is due at maturity.  Those two instances, both named "single payment" require separate and distinct procedures for computing the Truth in Lending annual percentage rate.

It is vitally important to keep units of measure and other pertinent characteristics consistent when performing any consumer credit calculation.  Rather than "apples and apples" the result may be a fruit salad not pleasant to the compliance taste buds of the lender.

It's All in the Payment

The thought for the day centers around the seemingly ubiquitous client request of  "why is my payment different when I use your software"?  The specifics of the answer to that question permeates the core of what makes consumer credit math a more intimidating subject than at first glance.  Bottom line: there is no such thing as a single universal payment amount for a given set of loan data.

Obviously, judging from the construction of the opening question, the client has an expectation as to what the payment should be for a specific loan amount, term, and interest rate.  Very often that expectation is driven by the results from the ancient Monroe desktop that has been sitting on the file cabinet for the last 22 years.  "Everyone uses it" so the payment must be right even though, at this point in time, no one remembers what particular parameters were programmed into the box in 1989.

Contrary to what may seem like conventional wisdom, most lenders and point of sale dealers and representatives generally have a number of programs and applications that can take input data and generate a payment and other disclosure values.  So, without coordinating the nuts and bolts parameters of the math involved, the chance of two or more different pieces of software matching payment calculations on a regular basis is actually slimmer than you may think.

Payment calculations are driven by the process of prospective amortization.  The goal is to arrive at the payment that will amortize the loan, accruing interest at the stated interest rate over the stated maturity of the loan. 

Unlike the actual payment history, the amortization process used in creating a payment must assume all payments will be made as scheduled.  That is the only information available at the consummation of the contract.

The dominating wild cards in the process are the interest accrual method and time calendar in use.  In order to move through the theoretical amortization process, we have to have rules.  Those rules are often lumped together under the umbrella "interest accrual" but to really be accurate it takes more delineation than that.

Time calendars are the biggest reason systems produce differing payments for the same set of data.  The recognition of time periods is crucial in understanding if the quoted payment will amortize the credit transaction.

In determining how prospective interest will be assessed on the scheduled outstanding balances between payment dates it is a matter of recognizing the periods between two prospective dates, or events.  Is the time period from today, April 26th, until May 26th one month and the annual interest rate will be applied as 1/12 to the outstanding balance?  Or is it 30 days?  Will the rate be applied as 30/365 of the rate times the balance?  30/360?  or perhaps 30/366 if it is a leap year?    As you can see, it slices and dices in a number of distinct styles and models.  All potentially producing a distinct payment value depending on the loan data involved.

That is why, after 26 years of working to define precise specifications to produce accurate payments, I bite my tongue when I hear "Well, we use a 365 day year".  That indeed is a truthful description of the calendar on my wall but it doesn't provide enough information to decipher a lender's expected interest accrual process.

If we're focusing on "365", does that mean the 26th to following 26th is a month and any days outside that month earn interest at 1/365 of the annual interest rate?  or does that mean to assess 1/365 of the annual rate for 30 days if the time period is April to May? 31 days if May to June, etc.?  And, does "365" really mean we'll exclude leap year when it occurs?  Alone, "365"  creates many more questions than answers.

For a subject that, from the outside looking in, at first appears simple and plain, the complexities and details greatly outnumber the obvious.

I've learned not to jump on the bandwagon too swiftly and declare a payment "wrong" for a set of loan data.  Instead, "different" is a much more accurate and realistic approach when viewing a disclosed payment and attempting to evaluate if it is "right".  You have to understand the rules the payment computation operates under before making a judgment call.

The Interest Rate and the APR

One question we field on a weekly, some weeks daily, basis revolves around the Truth-in-Lending APR disclosure in the "fedbox" being a different value than the originating interest rate. A different value meaning the interest rate was 10.00% but the disclosed TILA APR is 9.98%.

The view in the consumer finance industry that "the APR and the interest rate should be the same if I don't have any fees" is not only predominant but has reached an urban legend type of status. Too many times the answer to my inquiry as to why the above statement is true has been "because it is". Sound logic.

In reality, the two rates are truly distinct values. They have separate purposes and functions. One is to compute the interest charge for the transaction according to the lenders choice of accrual that is in step with their particular philosophies and policies; the other is to measure the cost of credit in a standardized fashion in an attempt to provide consumers with a yardstick in comparing competing deals.

The interest rate is the dominant factor in determining a loan's magic number; the monthly payment. The prospective interest plus the loan principal determine the scheduled total of payments.

Once the payments and all the other disclosure numbers have been computed, then the Truth-in-Lending APR can be accurately computed and disclosed. It is entirely a back-end number. It is often erroneously thought that the APR creates or drives other loan values, but it does not. It merely measures the result of the other computations and provides a common barometer for the consumer to evaluate and compare credit deals.

The changing nature and operations of the lending industry has brought the differing characterstics of these rate values out into the light. For many years the TILA APR produced a rate that was always the same value as the interest rate and it still will on occasion. But in particular, the advent of "simple interest" transactions with daily interest accrual has changed the landscape dramatically.

Back in the day when interest was nearly always computed on a monthly basis, aka "360 day year", the APR and the interest rate, in the absence of pre-paid finance charges, would end up the same value.

That is because Regulation Z mandates that the APR be computed on a "unit-period" basis. (We'll disregard the U.S. Rule implications here; that is another entire blog that could stretch for several city blocks) So when repayment terms on loans were predominantly monthly in the industry, both the interest charge and the APR were computed monthly. A 10% interest rate would work out to be a 10% APR. Most of us who have been around this industry for 20 years or so remember that "it was always that way".

Think about today's lending practices and the prevalence of "simple interest" transactions. One of the hallmarks of simple interest is computing the interest charges on a daily basis. Each calendar day between scheduled payment dates accrues interest at 1/365 of the annual rate. So, that daily interest produces a dollar interest charge that, in the absence of fees, becomes the TILA finance charge by definition.

When the APR recognizes that loan's total dollar charge, it assumes time periods are monthly and computes an APR accordingly. Interest computed daily and an APR computed monthly are not "apples and apples".

However, remember that one of the roles of the TILA APR is to standardize the cost of credit rate and provide a "level playing field" gauge of the credit cost regardless of differing parameters, such as interest accrual, employed by differing lenders.

If the dollar interest charge for 36 months on a daily basis is greater than the dollar charge for 36 months on a monthly basis, it only makes sense that the APR would be higher.

It is not unusual for a 14% interest rate computed on a daily basis for a monthly loan to yield an APR of 14.02%. Both rates are accurate, they simply operate with different rules.

One important caveat for lenders with a policy of operating at state maximum interest rates is recognizing when the practice of daily interest accrual may produce an APR that exceeds the computational rate. Many states have statutory language that equates the maximum rate with the TILA APR. Some states regulate interest and some the equivalent of the TILA finance charge.

Like so many things in today's world, what used to be simple isn't necessarily so any longer.