Carleton, Inc.
Consumer Lending Software

Keeping the "Truth" in Truth-in-Lending

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.

 I think sometimes that simple fact gets overlooked as layer upon layer of extra and extraneous data, information, and operating policy emerges to impact business practices for a consumer credit contract.

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.

Posted on Apr 22, 2013