From the first introduction of a
bill to promote "Truth in Lending" in 1960 by Senator Paul Douglas of
Illinois to its adoption and enactment in 1969, the first principle of the
Truth in Lending Act is to ensure the American consumer is given the whole
truth about the price he is asked to pay for credit.
We've discussed several times that
differences between values of "interest rate" and "APR"
seem to be making constant waves throughout the consumer finance industry. One
reason is that it simply represents a historical perspective that "they've
always been the same". But it's important to keep in mind the intent of
TILA.
When I read the "declaration of
purpose" section of 15 USC 1601(1) (the Truth in Lending Act) I see:
"The informed use of credit
results from an awareness of the cost thereof by consumers. It is the purpose
of this subchapter to assure a meaningful disclosure of credit terms so that
the consumer will be able to compare more readily the various credit terms
available to him and avoid the uninformed use of credit..."
The intent is for the Truth in
Lending Act, along with its accompanying disclosure values, to be a DISCLOSURE
LAW. Tell the consumer the TRUTH by being precise and accurate in calculating
and disclosing values. That sure appears to be the beginning and end of it.
We recently encountered a situation
where an indirect lender refused to purchase a RISC because the promissory note
section of the contract showed an interest rate of 7.99% and the TILA Fedbox
APR was 8.00%.
Both values were accurate. The
computational interest rate was 7.99% and that rate was applied on a daily
basis, "365 day year" to some, while the resulting TILA APR employed
the Federal Calendar that is mandated with an actuarial method computation. The
difference in methods caused the slight differences. It was slight, computed
APR value was 7.997% which rounded to 8.00%.
The lender's determination was that
having two different rates appear on the contract was deceptive.
That rings a familiar tone, doesn't
it? More than likely an echo of much of the CFPB dialogue stating "abusive
and deceptive" practices will be a point of emphasis with the bureau.
Although regulations specifically targeting retail installment financing have
yet to be established by the CFPB, the prospect of such regulations seems to
weigh heavily upon those who set policies and practices in the consumer finance
industry.
If computing an accurate TILA APR
that coincides with an accurate portrayal of the lenders business decision to
accrue interest income on a daily basis is deemed "deceptive", what
alternatives does that leave?
Lenders no longer have the choice to
accrue interest income at their discretion? All lenders should be locked into
an interest accrual method that resembles the Federal Calendar so as to match
the APR? TILA disclosures were designed the "level the playing field"
when it came to the diversity available to lenders in business policy, not the
other way around.
It seems some of these purely
subjective declarations of intent have lost sight of the purpose and goals of
the Truth in Lending Act.
A complicating factor in this particular case was the
servicer's practice of exporting the TILA Fedbox APR value into the servicing
system to actually earn interest. More on that dubious process next time.
