Durkin & Winslow Breakdown CFPB Taskforce Report
In early January the Consumer Financial Protection Bureau released its Taskforce on Federal Consumer Financial Law Report. As AFSA noted, it’s the first time the federal government has done a thorough report on the consumer financial services industry since the 1970s. The report is long; it’s two volumes add up to about 900 pages and it’s full of important research and information. We’ll highlight sections of the report in this newsletter over the next few months. Also, stay tuned for an AFSA podcast with Tom Durkin, one of the taskforce members.
In this issue, we’ll highlight what the report says about APR. In Chapter 4, the taskforce writes, “… the APR is a complete guide to the least expensive loan when the amount of the loan and its maturity are constant, but is only a partial guide otherwise. On small-dollar loans where size, rate, and maturity can all easily double or triple in size, more evaluation is necessary than just looking at the APR.”
The report provides four examples illustrating this point.
- With a $4,000 loan with an APR of 27% and a term of 36 months, the payment would be $163. 30 and the finance charge $1,878.83.
- With a $2,000 loan with an APR of 27% and a term of 24 months, the payment would be $108.76 and the finance charge $610.25.
- With a $1,000 loan with an APR of 72% and a term of 12 months, the payment would be $119.28 and the finance charge $431.32.
- With a $500 loan with an APR of 95% and a term of 6 months, the payment would be 107.88 and the finance charge $147.31.
The taskforce concluded, “As the examples here show, sometimes the highest APR can even produce the least-cost loan in dollars. In these situations regulating by the unit price [which is a term the taskforce uses to describe APR] eliminates the lower cost alternative in dollars.”
The taskforce also notes, “Not very surprisingly, users of small-dollar credit appear to find the dollar amount of the finance charge to be an important for understanding a loan’s cost.”
January 29th, 2021 by Dan Bucherer