Some Seeming Disappointments in the CFPB Bill

by Jeff Sovern

I haven't read the conference Dodd-Frank bill yet, so take this with a grain of salt, but judging by Gretchen Morgenson's column in today's Times, it is a long way from a complete victory for consumers. Of course, the auto dealers won their carve-out, and Morgenson's column indicates that the conferees went with the Senate version of preemption, meaning that the OCC can declare state consumer protection laws preempted even if federal law does not provide for corresponding protection, and the Financial Stability Oversight Council can override CFPB rules.  I'm sure the bill is still worth supporting, but losing on all three of those is disappointing.

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[Afbob Blairjr]

Je suis fâché aussi, Jeff! (I am mad too, Jeff!) I agree with all you said! Additionally, I haven't read the bill, but I haven’t heard any change to the method of calculating the Annual Percentage Rate (APR) in LENDING. Since the passage of the Truth in Lending Act (TILA) in 1968 that method has been the mathematically-UNTRUE, Nominal, Actuarial, Simple-Interest APR (which I will acronym, for clarity, SIAPR). TILA states in Appendix J section (b): “Instructions and equations for the actuarial method. (1) General rule. The annual percentage rate shall be the nominal annual percentage rate determined by multiplying the unit-period rate by the number of unit-periods in a year.” Anyone who as taken Finance 101 knows that is not the mathematically-true APR. If I loaned you a dollar and said every month you did not pay it back, the amount owed on the previous month would double, the current SIAPR would calculate as (in Excel notation: * multiply, / divide,, and ^ compound): ((1/1)*12)*100= 1200%. Now, get any alert child over 12 and let him or her multiply the doubling of the previous month’s debt. You will be amazed when you say first month the child will double 1 and say 2, then (2nd) 4, (3rd) 8, (4th) 16, (5th) 32, (6th),64, (7th) 128, (8th) 256, (9th) 512, (10th) 1024, (11th) 2048, (12th) 4096. Then ask the child to deduct 1 … 4095 … then multiply by 100 (or just add 2 zeros) … 409,500. That is the compounded percent, 409,500%. In Excel the formula would be (((1/1)+1)^(12)-1)*100. That is the mathematically-true Compounded APR, for which I will use the acronym CAPR. That method is used in the Truth in SAVING Act (TISA) of 1991 and is called the Annual Percentage Yield. That name avoids its obvious relationship to the SIAPR in TILA. In expression an annual percentage rate TILA allows a tolerance of accuracy of one eighth of one percent (1/8% or 0.125%) on a closed-end loan (one with a certain due date) or 0.250% on and open-end loan (revolving credit). The CAPR on our doubling example is not merely slightly over one of the tolerance of accuracy of 0.125% from the SIAPR, it is 3,266,400 of those tolerances of 0.125% over, calculated (409,500%-1200%)/0/125%, astronomically untrue. Bet you would like to get that percentage rate on your retirement account.
In carving-out the automobile industry from the bill, the Rule of 78 concerning early pay-off (nothing to do with the Rule of 72 on doubling) will remain. I will not bore you with that travesty here, but it isn’t logical or fair to the borrower.
Polonius said to Laertes, “Neither a borrower nor a lender be; For loan oft looses both itself and friend.” The lending industry would stone Polonius.
A F “Bob” Blair Jr