All-In APRs: What Does It Mean for the Consumer Lending Industry?

 

Over the past decade, we’ve seen a rise in various flavors of “All-in” Annual Percentage Rate (“APR”) legislation. States are evolving in how they regulate interest. One notable piece of this evolution is the movement toward adopting rate caps tied to all-in APRs rather than a traditional charge based solely on interest rates. This shift is significant for both lenders and borrowers, bringing new opportunities and challenges to the consumer installment lending industry.

 

All-In APR vs. Traditional TILA APR: What’s the Difference?

To understand this trend, it’s essential to distinguish between the traditional APR, as defined by the Truth in Lending Act (“TILA”), and an all-in APR.

• Traditional TILA APR: This rate is a measure of the consumer’s cost of credit, expressed as a yearly rate based on the rules outlined in Appendix J to Regulation Z. This calculation takes into account the interest rate plus any additional fees that are considered finance charges under TILA.
• All-In APR: By contrast, this rate is intended to provide a more comprehensive assessment of the consumer’s cost of borrowing. However, states’ definitions of “all-in” vary and can encompass a variety of additional fees that are not considered finance charges under TILA. The most prevalent example of this is the inclusion of optional credit insurance.

 

Examples of States Where All-In APR Legislation Has Gained Traction

• South Dakota: In 2016, a ballot resolution implemented a 36% All-in APR for loans. The resolution sent shock waves throughout the industry due to the nature of the change.
• Illinois: The Illinois Predatory Loan Prevention Act, enacted in 2021, also set a 36% All-in APR cap on most consumer loans. This legislation tied the APR to the Military Lending Act’s calculation requirement and impacted retail sales and loans.
• New Mexico: Beginning January 1, 2023, New Mexico instituted an All-in APR of 36% for loans up to $10,000. The loans required the state APR calculation to include products in connection or concurrent with the extension of credit, and any credit insurance premium or fee.

 

All-In APR Caps: Concerns and Implications

The shift toward all-in APR caps raises several concerns for the consumer lending industry:

• Access to Credit: Lenders argue that strict all-in APR caps could reduce access to credit for consumers, particularly those with subprime credit scores, as lenders may find it unprofitable to offer loans under such stringent conditions and at the effectively lower rates.
• Operational Complexity: Calculating an all-in APR is more complex than determining a traditional TILA APR. This complexity could increase compliance costs for lenders and be particularly burdensome for smaller institutions, potentially leading to higher costs for consumers. In addition, there is confusion over which rates to display on the contract. The all-in APR does not replace the TILA APR, but this confusion remains among lenders and consumers alike.
• Statutory Ambiguity: Some statutory language includes vague language such as the inclusion of fees “in connection with or concurrent to” a loan agreement. Such language leads to uncertainty over whether items like late fees must be included in the all-in APR calculation. These fees, which are incurred after consummation of a loan, alter the fundamental concept of origination disclosures.

 

What Does the Future of All-In APR Caps Look Like?

As more states consider or implement all-in APR caps, it’s clear that the consumer lending landscape is changing. Lenders must stay informed about these developments and consider how they may need to adapt their business models to comply with new regulations quickly and compliantly.

For lenders and borrowers alike, the shift toward all-in APR caps marks a significant change to the industry. Staying ahead of these trends and understanding their implications is crucial for anyone involved in consumer lending.