Following yesterday’s article on the Actual /360 method of accruing interest on loans I received several comments. One commenter pointed out that laws of some states permit the practice. For example earlier this year the Texas legislature passed H.B. 1979 which states that a lender and a borrower may calculate the interest on a commercial loan using the “paid in kind” method, the “365/360” method, the method in the existing law, or any other method otherwise permitted by law. H.B. 1979 also confirms that the provisions in Chapter 306 of the Finance Code are meant as safe-harbors and are not intended to affect or negatively impact loans made under other provisions of the chapter.
This information should provide comfort regarding commercial loans under state law in Texas, or in other states with similar laws. But I still believe UDAAP is a big concern regarding this practice. The contract on any loan, commercial or consumer, should make absolutely clear that the Actual/360 method is used to accrue interest and the method results in a yield that exceeds the simple interest rate. In my opinion the failure to clearly explain the practice could result in charges that the practice is unfair, and deceptive, and abusive – a trifecta.
In horse racing when you hit a trifecta you are a big winner, but in compliance hitting this trifecta makes you a really big loser.
Unfair – The act or practice is unfair when:
(1) It causes or is likely to cause substantial injury to consumers,
(2) The injury is not reasonably avoidable by consumers, and
(3) The injury is not outweighed by countervailing benefits to consumers or to competition.
Deceptive – An act or practice is deceptive if:
(1) It misleads or is likely to mislead from the consumer’s perspective;
(2) If the consumer’s interpretation is reasonable under the circumstances; and
(3) If the representation, omission, or practice is material.
Abusive – An abusive act or practice:
(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
(2) Takes unreasonable advantage of:
- A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
- The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or
- The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.