It's Not Just the Rate...

By: Jeff Buysse

At Carleton, we spend a lot of time and focus on helping our partner lenders stay compliant in the area of the maximum state finance charge that is allowed by a statute or regulation.  Consistent with our expertise, once we drill down to the granular detail, the compliant calculations are not always what they seem.

Regarding the financial term usury, in our opinion usury is not always the most technically correct term for statutory maximum charges, it is however the financial term used most frequently in the industry.  The usury calculation focus by most lenders is almost always on the rate itself.  We have frequent discussions that usury is not merely the rate itself but the application of that published maximum rate that is integral to being compliant.

The passage of HB 1511 in Mississippi recently is a perfect example.  The new Consumer Alternative Installment Loan Act prescribes a maximum rate of 59%.  There is also a provision making an allowance for a daily interest accrual calendar, aka 365/365, that recognizes the current trend toward “simple interest” interest bearing loans and away from traditional pre-computed transactions. 

However, like other provisions in the Mississippi Code, it is clear that the maximum 59% will be measured by the “actuarial method”.  Since that label is defined in the small loan regulations as holding the same meaning as in Regulation Z that implements the Federal Truth in Lending Act, which means the 59% will be a TILA APR type number.  The actuarial method requires the “Federal Calendar” which is a monthly accrual calendar and recognizes each month as 1/12 of a year.

The effect is what we see frequently in today's consumer finance industry.  Applying a nominal contract rate on a daily basis yields a different value when it is measured on a monthly basis.  In the case of the Mississippi bill, applying a 59% contract rate using a 365/365 calendar can yield an actuarial method APR as high as 59.18%. 

That means lenders will have to reduce their in-going contract rate in order not to violate the 59% maximum provision.  That fact is not evident unless you live in the “weeds” of the consumer finance mathematics as we do at Carleton.  In most states, it is the state “finance charge” as a dollar amount that is regulated and not merely the published nominal rate.  That is one reason “table lookup” is not always a safe and efficient method of testing for compliance.