A recent opinion piece in the Boston Herald underscored what NILA has consistently pointed out to policymakers, journalists and others – that the requirement to disclose Annual Percentage Rates (APR) for short term loans causes “…confusion and harm to many consumers trying to rebuild their credit and their lives in this pandemic era”.
The article, by the Competitive Enterprise Institute’s John Berlau, uses a memorable example to highlight the challenges associated with an annualized measure for a time-related cost – that of a hotel room. He says if hotels operated under similar rules to those regulating installment lenders, then:
“No matter the length of a guest’s stay, hotels would have to quote prices as if guests were staying a year. Thus, the stay for a $100-per-night room would have to be listed on websites and hotel advertising as $36,000, because that is the total when the nightly rate is multiplied by the 360 days in a year.”
Under the Truth in Lending Act of 1968, installment lenders and other providers of consumer finance is required to disclose the interest rate as if the consumer were paying interest for an entire year. This would not be a problem, if this measure were not used to create “shocking” figures that were then used as justification for price-caps based on that measure.
This is precisely what happened in Illinois, of course, with activists and self-interested, out-of-state lenders not subject to state law, trumpeted “triple digit APRs” as justification for the so-called “Predatory Loan Prevention Act”, which effectively excludes huge numbers of Illinois citizens from access to credit that they previously used effectively to increase their financial capability and mobility. As this sorry situation plays out, we expect catastrophic consequences for many in that state.
John Berlau rounds out his piece by calling on Congress to modernize the APR disclosure mandate in TILA to account for the true cost of credit for short-term loans. “We must not let,” he says, “the federal government’s outdated financial measures hinder the resilience of American entrepreneurs and consumers in these challenging times.”
SOURCE: BOSTON HERALD/COMPETITIVE ENTERPRISE INSTITUTE