AALS Conference and Consumer Protection

It's a little tricky sometimes to figure out from the descriptions which sessions at the AALS Conference will touch on consumer protection; sometimes the blurbs refer to topics which are not covered in the sessions.  I'm listing the ones I can identify here, and if anyone knows of any others, please mention them in the comments.  Pat McCoy of Connecticut and I are speaking at the Financial Institutions and Consumer Financial Services Breakfast which runs from 7:00 a.m. to 8:30 on Friday the eighth.  We'll be talking about the case for the Consumer Financial Protection Agency. Pat, of course, is a leading writer on predatory lending. I plan to argue that the Fed failed to implement Truth in Lending in such a way as to help subprime borrowers understand what they were getting into in that the disclosure forms for many of the loans were misleading and essentially useless.  I believe a CFPA could have done better.   That event requires a ticket which has to be purchased in advance.  The description of the main meeting of that section (Friday 10:30 to 12:14) mentions regulation of consumer financial products, so perhaps it will touch on consumer law as well.  The description of the Section on Real Estate Transactions (Thursday, 2:00 to 5:00)  refers to the mortgage foreclosure and credit crises.  The Defamation and Privacy Section (Friday 4:00 to 5:45) lists as its topic "Fusion Centers and Beyond: New Challenges to Privacy."  The Remedies Section (Friday 4:00 to 5:45) includes in its blurb a reference to the subprime securitization crisis.  The Section on Commercial and Related Consumer Law (Saturday 10:30 to 12:15) will focus on software contracts.  Did I miss anything?

Comments

[A F "Bob" Blair Jr]

12-26-09, Comment Box in Public Citizen website, http://pubcit.typepad.com/clpblog/2009/12/aals-conference-and-consumer-protection.html on AALS Meeting in New Orleans, from subscriber A F “Bob” Blair Jr at afblair@internet8.net

In your December 23rd web-article, “AALS Conference and Consumer Protection” you did not state the group associated with the acronym “AALS,” which is the Association of American Law Schools. Your comment, that “Pat McCoy of [the University of] Connecticut is a leading writer on predatory lending”, probably should be expanded to say “on the consumer lending law and associated economic statistics” I have found her May 2009 paper on “Systemic Risk through Securitization: The Result of Deregulation and Regulatory Failure,” which was written with other authors. I speed-read the 49 pages in the Social Science Research Network website: http://papers.ssrn.com/sol3/papers.cfmm?abstract_id=1367973) and searched (with the “find” tool) for words “annual percentage rate” and “compounding” and found neither. So that article must not address the financial calculations components of predatory loans. The disparity of calculations is illustrated in the three popular examples below:

First: The often quoted “shocking” annual percentage rate (APR) example, which most consumer groups quote, is a payday loan for $100 to be repaid in 14 days with $15.00 in interest. The APR they quote is the simple-interest APR, called the Nominal APR (NAPR). It is calculated in accordance with the Truth in Lending Act of 1968 (TILA) … the interest for a payment period multiplied by [*] the number of payment periods in a year. Some advocacy groups incorrectly round down the number of payment periods to an even number in a year. In this case 26 periods, calculated 365/14 = 26.07. Therefore their NAPR is 390%, calculated as (15/100)*26 (then *100 for percent). The correct NAPR would be 391.071%, calculated (15/100)*(365/14 (then times 100 for percent). The mathematically-true APR is calculated as the rate for a payment period compounded for [^] (CAPR) the number of payment periods in a year. On this loan the CAPR is 3,723.661%, (((15/100)+1)^(365/14))-1 (then *100 for percent). TILA allows for the tolerance of accuracy plus or minus one eight of 1 percent (0.125%). The CAPR is not merely slightly over 1 of the 0.125%’s it is 26,660 of those 0.125%’s. calculated as (3,723.661%-391.071%)/0.125%.

Second: In the February issue of Consumer Reports (subscriptions, 4,000,000) an article described a $400 loan taken out by a school principal, which was to be paid in 16 days with interest of $120. The NAPR was 684.375% (120/400)*(365/16). The CAPR is 39,649.597% (((1+(120/400))^(365/16))-1. In this example the CAPR is 311,721 of the 0.125%’s from the NAPR (39,649.597%-684.375%)/0.125% … astronomically wrong. In this case the CAPR is 58 times greater than the NAPR (39,650%/684%). In 1968, interest rates were low (5±%) and payment periods longer (monthly). At these conditions the CAPR is close to the NAPR. In fact, the CAPR is within the 0.125% tolerance until the NAPR is 5.185% or under [solved by iteration ((((NAPR/12) +1)^12)-1)- NAPR=0.00125].

Third: Another example is the current proposed legislation on overdraft fees (which are really a loan). A sample of the charges is $35 for an overdraft of $5.00 and $35 more to be paid in 7 days. Banks will persist that it is a “fee” not a loan. A rose by any name other name is still a rose. The NAPR on the $70 ($35 + $35) for 7 days is 73,000.000% (70/5)*365/7. The CAPR is 2,112,314,148,043,200,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000% normally written for brevity 2.1123141489432e+63% (70/5)+1)^(365/7)-1, then * 100 for percent. How would you like to get that APR in your retirement account or investments?

The Truth in Savings Act of 1991 uses the compound method in expressing a compounded annual percentage rate, which is called the Annual Percentage Yield (APY), possibly to obfuscate its association with the CAPR and not the NAPR.

Changing TILA to tell the truth is as simple as a one page congressional bill (with no ear-marks) that states; “wherever the words ‘multiplied by’ appear, change them to ‘compounded for’”.

An explanation of the financial parameters at your breakfast Section [1409] on Friday, January 8, (in New Orleans) might inspire attorneys to raise a new issue, the fact that the Annual Percentage Rate (APR) used in exterminating interest on predatory loans, expressed in accordance with the Truth in Lending Act of 1968 (as amended), is not the mathematically-true APR and on predatory loan and overdraft fees can be astronomically untrue … so much as to shock the conscience of the court, because it was not explained to the borrower. An attorney could certainly get the lender to admit that the simple-interest (called Nominal) APR (NAPR) is not the mathematically-true, Compounded APR (CARP). The method of admission is easy, but the attorney should be familiar with finance.
CC: Pat McCoy

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