Mortgage Disclosures: Old Explanations vs New Definitions

I was recently directed to an article on Bankrate.com that was said to be a "great" (or similar words) explanation of the difference between "Interest Rate" and "Annual Percentage Rate".  The article explained that, "{t}he interest rate is the cost of borrowing the principal loan amount...."  The article then stated that, "{t}he APR is a broader measure of the cost of your mortgage because it reflects the interest rate as well as other costs such as broker fees, discount points and some closing costs".    The article then explained that a lower APR would be good for a long-term period of ownership while a higher APR would be more favorable for a short-term ownership period, reasoning that lower fees and a higher rate would be better for a short term owner.

The explanation used in this article roughly reflects the explanation that I used while closing loans over a period of about 30+ years.  The article itself is not dated.  My instinct was to look again at the definitions that the CFPB enacted with their revision of Regulation Z, 12 CFR, Title 12, as I knew in the back of my mind that these  definitions had been changed if only technically but resulting in the same practical effect. 

Under the currect version of Regulation Z as enacted by CFPB, "APR" is defined at 12 CFR, Section 1026.22.  That definition states that the APR is, "a measure of the cost of credit, expressed as a yearly rate that relates the amount and timing of value received by the consumer to the amount and timing of payments made. The annual percentage rate shall be determined in accordance with either the actuarial method or the United States Rule method".  Section 1026.22(a)(ii)(4)(i) indicates that the APR "results from the disclosed finance charge. 

The term "finance charge" is defined at 12 CFR, Section 1026.4.  While the definition of "finance charge" has been expanded tremendously in terms of the details of the phrase, the phrase is still basically the interest rate plus the fees, points and discounts paid for the loan (to both lender and broker), and excludes a number of fees and charges as long as the additional fees and charges are itemized and disclosed separately.  The term, "interest rate" as stated in Black's Law Dictionary has been the same for ages and is the simply stated as compensation paid for the use of someone else's money.

I think if someone closing a loan today were to provide the borrower with the definition of APR as enacted by CFPB, the borrower would have no idea what the term really means.  And, to provide the definition of finance charge that goes on for pages would add to the confusion. 

It seems to me that the old explanations are still suitable today as a practical matter to give a clear and concise explanation of the terms although the technical definitions have changed.  Makes me wonder if the changes were really necessary, but you can bet that I will be studying them when I prepare for my NMLS exam in the next few days.  Good luck on your exam, if you are among the chosen few that need to face that obstacle every year.

The foregoing does not constitute legal advise or a legal opinion, but is only the personal thoughts and conclusions of the author.