A recent hearing in the U.S. House of Representatives addressed legislation requiring banks and credit unions to calculate overdraft protection fees as an annual percentage rate (APR) under the Truth in Lending Act (TILA). Bank and credit union officials testified that APR was not an accurate measurement of short-term credit.
Kenneth J. Clayton, American Bankers Association (ABA):
“Any time an annual percentage rate is calculated for a term less than a year, the inclusion of a fixed fee, even a modest one, will distort and overstate the APR. The shorter the repayment period, the greater the APR will appear in instances where there is a fixed fee. This means that the sooner the consumer repays, the greater the calculated APR – a difficult concept to explain to consumers, as it appears that paying earlier actually increases the cost of credit.”
