Carleton, Inc.
Consumer Lending Software

U.S. Rule vs Actuarial Method APR Disclosure

While the subject has been around now for over 30 years, it's still a question we get asked a lot: should I use the actuarial or U.S. Rule method to compute and disclose the A.P.R.?

Like any sound decision when making choices, it is important to understand the properties of each method involved and the context from which the decision is based.

Regulation Z allows a compliant and accurate Truth in Lending Act A.P.R. disclosure by either method.  The regular 1/8 of 1% tolerance may be measured from the properly computed number computed by either method.  So, at first glance, it may seem like a simple and obvious choice to make but there are some practical considerations to take into account.

First, Appendix J of Regulation Z lays out precise definitions and variables for a basic effective rate of return iterative routine...........for the actuarial method only.  The United States Rule is an accounting/allocation concept that cannot be accurately portrayed by a linear "formula" for all potential eventualities.  It is essential to understand the U.S. Rule concept in depth to build a computing routine that will always produce an accurate APR value.

Second, for that very reason the vast majority of regulators and auditors use the OCC program APRWIN for Truth in Lending APR validation.  It is important for creditors to recognize that the tool that is nearly always employed only utilizes one of the two authorized methods of APR computation.

If you are a creditor that incorporates what are often referred to as 'transactional irregularities", e.g. 90 days no interest, no payment, in your financing plans, the goal is generally for the APR to be as close to the input interest rate as possible.  The interest charge is undoubtedly computed by the U.S. Rule method, to avoid inherent compounding of interest, so only a U.S. Rule APR will meet that objective.

But from a practical standpoint, your regulator is going to walk in with APRWIN on his/her laptop every two years and the ensuing process will undoubtedly require a fair amount of explanation and education to avoid a citation for a material TILA violation.

Yes, the Fed complicated the matter greatly during Truth in Lending's "simplification" process some thirty years ago by allowing a second computation method, not to mention diminishing the idea that the APR would be a single barometer to level the playing field for intelligent consumer credit decisioning. But that is reality and we counsel creditors on a regular basis about which APR disclosure best fits their goals and objectives.

Posted on Sep 17, 2012