Three Lenses on Interest Rate Disclosure

> Posted by Elisabeth Rhyne
Yesterday I had the pleasure of a talk with Rosamund Grady, an Australian lawyer with long experience working with the Australian Bankers Association on client protection.  Ros drafted the client protection code that has been the Australian banking industry’s “bible” on implementing client protection. She’s now getting involved with microfinance by providing input to The Smart Campaign based on her experience.
We got to talking about interest rate disclosure, and Ros pointed out that in Australian consumer credit regulation the issue of interest rate disclosure is treated in at least three distinct ways…

First, how must interest be calculated?  In Australia, all credit providers are required to charge interest for consumer credit on the basis of declining balances calculated daily.

Second, how should interest charges be disclosed so that clients are fully informed about everything they will be expected to pay?  In Australia there are rules requiring up-front disclosure of the annual percentage rate, repayments, and even total interest charges if the contract is for less than seven years (assuming all payments are made on time and as required by the contract). There could be a number of acceptable approaches to full disclosure.

Third, does disclosure permit comparison-shopping?   Australia has rules requiring disclosure of a comparison rate. This is a really tough requirement, given the number of permutations and combination of features that make calculating comparison rates difficult and their usefulness questionable, including the loan’s size, fees, term, the implications of the type of any security, and the customer status (which might affect the interest rate charged).  Ros was skeptical about success on this dimension.

In Australia, these issues are viewed so differently that they are even treated in different parts of the consumer credit laws and regulations.  These seem to me to be useful distinctions relevant for developing guidance about best practices.  Guidance from The Smart Campaign might want to focus on disclosure using one or more but not necessarily all three of these lenses. 
I would welcome your comments to deepen exploration on this topic.