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Thursday, July 01, 2010

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Afbob Blairjr

I opine that the first thing to correct is changing the financially, mathematically-UNTRUE method of calculating the Annual Percentage Rate (APR) in the Truth in Lending Act (TILA) of 1968 from the Nominal, Simple-Interest APR (SIAPR) to the financially, mathematically-TRUE Compound APR (CAPR). In TILA, the method of calculating the APR is stated: Appendix J line (b)(1), http://www.fdic.gov/regulations/laws/rules/6500-1950.html#fdic6500appendixjtopart226 , “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.” Those who would like to quote Black’s Law Dictionary will find that “nominal” is defined as: “not real or actual.” So the Truth in Lending is not True … sophistry (something that sounds plausible, but is not true).
In June a speaker at Consumers Union’s Summit (in Washington) expressed shock at the charge of $34 on a single overdraft of $17 at a bank. Not expressed was the APR that is for the 7 day settlement date. The SIAPR is
10,428.571%, calculated as (using Excel notations: * multiply, / divide, ^ compound, E exponents of 10’s) (34/17)*(365/7)*100. Three decimals are use since TILA allows a tolerance or accuracy of one eight of one percent (1/8th% or 0.125%). The mathematically-true CAPR is 7.56E+26%, (756,000,000,000,000,000,000,000,000.000%) calculated as (((34/17)+1)^(365/7) -1)*100. The CAPR is not only over one of the tolerances of 0.125% from the SIAPR, it is 6,047,215,028,770,700,000,000,000,000 of those 0.125%.
Changing the law to be true is easy. In the Appendix J, line (b)(1) change the words “multiplied … by” to “compound … for”.
The Truth in Savings Act of 1991 uses the compounded APR and calls it the Annual Percentage Yield.

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