VP of Compliance at Carleton Discusses TILA, APR, and Navigating Lending Compliance

Rich Alterman sits down with Sarah Way Milovich, General Counsel and VP of Compliance at Carleton, Inc., to explore the intricacies of lending compliance, with a particular focus on the Truth in Lending Act (TILA) and Annual Percentage Rate (APR) calculations.

Carleton, a leader in financial software and services for over 50 years, has been at the forefront of helping lenders meet complex regulatory requirements. 

Sarah shares her journey from corporate attorney to her current role, offering a behind-the-scenes look at Carleton’s long history of providing critical compliance tools to major lending organizations. Sarah explains how Carleton supports lenders in navigating these complexities, from managing regulatory differences across states to the challenges of staying compliant with APR calculations. 

Listeners will gain valuable insights into the differences between simple interest and add-on rates and the importance of accurate APR calculations in ensuring compliance. With the rise of state-level scrutiny and the growing use of AI in compliance, this episode is packed with expert perspectives on the evolving role of technology in the lending space. 

Tune in to hear Sarah’s thoughts on the intersection of law, technology, and compliance, and discover how Carleton’s decades of expertise continue to provide essential support for lenders. 

Catch the full episode now! 

Episode Transcript

Rich Alterman: You're syncing up and tuning in to The Lending Link Podcast powered by GDS Link, where the modern-day lender can dive deeper into the future of data decisioning and credit risk solutions. Welcome to the show, everyone. I'm your host, Rich Alterman, and today we're syncing up with Sarah Way Milovich, General Counsel and Vice President of Compliance at Carleton, Inc. Sarah has been with Carleton for almost eight years, initially joining in the role of corporate attorney and compliance associate in 2016. Sarah assumed the role of General Counsel and Vice President of Compliance in June of this year. Carleton and GDS entered into a partnership in July 2020. Carleton is the country's leading provider of financial calculation software, compliant loan origination disclosures, and document generation solutions. Based in South Bend, Indiana, Carleton possesses over 55 years of leadership in the consumer lending industry. Carleton was formed in the late 1960s in conjunction with the passage of the Truth in Lending Act, also known as TILA and Reg Z. Over the past five decades, Carleton's client list has grown to include many of the major lending organizations, loan origination software providers, digital channel technology, and retail credit finance companies in the United States. Carleton's core expertise is consumer credit math as it relates to the Truth in Lending annual percentage rate, or APR, and state regulations. Sarah plays a central role in ensuring Carleton software meets the very stringent compliance requirements of each state. In addition to the software services, Carleton provides a myriad of consulting services which have included individual calculation analysis and bulk transactional audits. Carleton also provides examiner-focused software and implements calculation requirements necessary for state-level evaluations. Sarah is a proud graduate of the University of Notre Dame and Loyola University School of Law. Sarah spent a few years in private practice in a local firm before joining Carleton to serve as its corporate attorney. In this episode, Sarah and I will be discussing aspects of the Truth in Lending Act, the evolution of Carleton and how it delivers value to its end clients, and so much more. But before we dive into the interview, please head over to our LinkedIn and Twitter pages at GDS Link. That's G-D-S-L-I-N-K, and please hit those like and follow buttons. If you have not done so already, please subscribe to our podcast on Apple Podcasts, Spotify, wherever you prefer to listen to your podcast. All right, now let's get synced with GDS Link. Welcome, Sarah. I hope you're having a great week. It's a Friday and the weekend's upon us, so I hope you're looking forward to that. So where are you joining us from today?

Sarah Way Milovich: I'm joining from South Bend, Indiana. That's where our corporate headquarters are at. And our offices are actually just a block away from Notre Dame's campus. And right now, campus is a bit more lively than normal because it's football season. So we've got thousands of visitors here in town that are not normally here in South Bend.

Rich Alterman: Well, great. Well, I hope you guys have a good game this weekend. So thank you for spending time with me today. But, you know, maybe before we talk business, let's get a bit personal. You shared with me that you've really enjoyed traveling and that your favorite destination is Italy. With your travel destinations, including Kenya, Turkey, China, India, Croatia, and Montenegro, what are the attributes of Italy that landed it on your favorite destination list?

Sarah Way Milovich: Well, what is not to love about Italy? That would be my question back to you. But the time I've spent in Italy, I've absolutely loved, first of all, the history. You walk around in every corner, there's some historical artifact or some historical building, but just the history that surrounds the city. You feel it when you're there. But walking around the ancient streets, seeing all the architecture, it's just such a beautiful atmosphere to be in. The last trip I took to Italy, we were able to spend some time in Tuscany. And so I got to see a different side of the country that I absolutely fell in love with. And I think one of the things I love about Italy is there are so many different locations that you can visit, and it's almost like you're stepping into a whole different world in each of those different distinct locations. The food and the wine. How can you.

Rich Alterman: Well, good. Yeah. My family had the opportunity to visit. We actually stayed in Tuscany for a couple of days. Really beautiful. I also understand that you studied Chinese in college and spent two years, two short stints in Shanghai during college and then during law school. Any interesting experiences that you can share about being in Shanghai?

Sarah Way Milovich: Oh, an interesting experience. Well, the whole experience was interesting. Let me. Let me start with that. Very different culture, very different way of living in so many different aspects. The first experience there was the study abroad experience. And so that was certainly more exciting and lively than my second opportunity, which was working for a U.S. corporation. So that was a completely different experience than the study abroad experience. But I think I would point to, from a larger aspect, the opportunities to go to the different street markets that were quite a unique experience. So wandering around, especially the night street markets that appear to pop up out of nowhere, being in downtown Shanghai, where it is a very lively and vibrant culture, these late-night markets pop up and have vendors of all different sorts, performers of all different sorts, food that is very questionable, things like grilled scorpions, things that I wouldn't have thought that I would ever see in my lifetime. Now I stuck with more mundane things like skewers of vegetables and things that I knew were safe. But it was a fun experience nonetheless.

Rich Alterman: My wife and I had the chance to visit Vietnam, Cambodia, and Singapore this past June and definitely had a great time. I loved. I loved Vietnam. But great. Thanks for sharing that. And okay, let's get down to business. So let's start off with history. You talked about how you love the history of Italy, so let's talk about the history of Carleton. As mentioned, the company was formed in the late 1960s. So why don't you start by sharing, you know, what was the catalyst behind the company starting and who. And who started it.

Sarah Way Milovich: Sure. So a bit of background because we get asked this all the time. Carleton is named after the founder, Joseph Carleton Pitts. So his middle name is where our company's name comes from. You wouldn't believe how often we get asked that question of where is Carleton? The name of the owner, Carleton, the last name of the owner. It's his middle. It was the founder's middle name. Joe was an aeronautical engineer by trade, but then grew this fascination with financial analysis and started going down a path of authoring different articles relating to financial calculations. Was eventually published in various financial magazines and grew different relationships in that world that eventually earned him an invitation from the Federal Reserve Board to sit on a committee that eventually was the committee that authored Appendix J to Regulation Z. So we like to say he was in the room when Appendix J to Regulation Z was drafted. So he understood all the ins and outs of the different requirements for Appendix J. Essentially, the company began producing rate charts that produced the financial calculations that were required. The name was Carleton Financial Computations, and these rate charts were used by companies in order to comply with the requirements of Appendix J to Regulation Z. Great.

Rich Alterman: Well, thank you for sharing that. That's interesting. So now we know the secret where Carleton came from. It's always interesting to look at company names and you try to associate it with what they do, and you're like, there's nothing here. Like, where is this from?

Sarah Way Milovich: I also get asked the question, if we all know how to do the Carleton dance from The Fresh Prince of Bel-Air TV show, because that seems like a necessary fit. And unfortunately, that's not part of our employee onboarding. Not yet, at least.

Rich Alterman: Well, you'll let us know what it is and we'll do a visual podcast instead. So, as you know, we've talked about that. GDS, our podcast, has a large global reach. We're streaming now in 69 countries. So for the benefit of our audience who may not be familiar with the TILA disclosure, can you kind of paint a visual—obviously this is an audio webcast—so can you paint a visual of the information it contains and when a consumer would first be exposed to it in the lending process?

Sarah Way Milovich: Sure. The Truth in Lending Act, or TILA disclosures, were one of the requirements that came out of Regulation Z when it was adopted. And as I mentioned, Appendix J was the implementing piece of the regulation that explained how a company has to compute the APR in the context of the Truth in Lending Act. The Fed box, or the TILA disclosure box as it's also referred to, is a specific section on a loan or sales contract that provides the required disclosures under federal law. The purpose of this box of disclosures is to provide clear and concise information to a consumer in a way that's helpful for the consumer to understand what they are signing up for. So within this Fed box, as it's often referred to, there are components such as the APR, which must be the most conspicuous part of the Fed box. Bold. Generally, they don't provide exact requirements here, but generally the boldest font and the largest font for this APR value. There's also a box for the finance charge, which is the total cost of credit. It includes things like interest and any additional fees based on the definitions under TILA. It includes a box for the amount financed, which is essentially the loan amount that is, that is used for the contractual agreement. And then it includes the total of payments, which is the combination of the total finance charge and amount financed. And then it also includes the payment schedule, which tells the consumer, this is the number of payments you need to make, this is the amount of the payment, and then the payment due dates. So the idea is that this Fed box serves as a way of providing both standardization and clarity to the consumer. It standardizes whether you go to lender A or lender B. The rules are the same in terms of how these numbers are disclosed. And then it provides clarity so the consumer, in theory, knows exactly what they're signing up for.

Rich Alterman: That kind of ties into this level playing field. Right. That part of the objective of TILA is to help that consumer do a better job discerning what the true cost of a loan is going to be, whether they're working with this bank or looking at this bank or this bank. So they talk about level the playing field and that's kind of like what you're alluding to there. Cool. Well, great. I think you did a good job of allowing our listeners to kind of visualize. So, you know, with over five decades in business, it'd be interesting to take a journey with you on how Carleton's offering was made available to its clients when it first started. And you talked about rate sheets and how it's deployed today. So if we kind of think about a technology journey, kind of like walk us through a product roadmap. I know you have a visual in one of your hallways where you kind of go through the different stages of Carleton delivery. So let's kind of take that journey from the very beginning and how it's being done today.

Sarah Way Milovich: Sure. And in its early days, Carleton used IBM mainframe computers and printing equipment to print rate charts that I mentioned earlier. So bound books of rate charts that were distributed nationwide to. As I understand it, Carleton's client list grew to include most of the major finance companies and credit insurance companies because Carleton became very, very efficient in producing these rate charts in a way that complied with Appendix J. And then in the 1970s through 1980s, Carleton expanded from printed rate charts to developing loan quoting software applications that were used in Sharp electronic calculators and handheld computers. These small handheld devices which included computation routines that allowed lenders to quickly and efficiently do the necessary calculations for quoting a loan. This was adapted and expanded to be used with major automotive companies who began purchasing the Carleton custom quoter tool to facilitate purchases of new vehicles nationwide. So it's been used, it was used across the country during that time in dealerships frequently. Over the years, Carleton continued to advance in producing such software that eventually grew to be a PC-based loan quoting product, and that expanded to include document mapping and document generation services. And then we eventually expanded into what we use primarily today. We still have some PC-based products, but primarily our clients utilize us through a web service API call.

Rich Alterman: So we find those initial handheld calculators in the Smithsonian Institution in the finance.

Sarah Way Milovich: I think it's fair that there might be some there. I know we have some of our prior publications are in the Library of Congress now. So there is certainly—we may be able to dig some up and find some in different places.

Rich Alterman: Oh, there you go. Well, you can always visit the Carleton Museum in Indiana. So during my 15 years with GDS, you know, we've worked with a lot of startup lenders. So I think it'd be interesting for companies that are listening to us, that are lenders, to kind of think about the services you provide, kind of taking that journey of a startup lender who may come to you initially and then, of course, they're going to be evaluating, you know, what software, what their loan product is going to be, and then how you might facilitate them over time. And I think it's one of the things to point out for especially our non-U.S. listeners is that one of the challenges, of course, in the U.S. is that you could have different lending laws in each state, or you could be operating under a bank model where you have a national charter and you have the ability to export rates. So kind of let's kind of like think about a startup lender. They're evaluating, you know, systems, they want to make sure they're compliant, and then maybe they're starting out in one state, but they have plans that over the next two years are going to roll out to another five states. So kind of walk us through the value that Carleton would bring to those, to that startup lender.

Sarah Way Milovich: Sure. One of the major benefits of working with a well-established company like Carleton is the value of the industry knowledge. So as you alluded to, among the 50 states, there are varying laws, varying requirements. Anywhere from the rate caps to the calendar that's mandated under the state in terms of calculating the maximum charge to the fees that are allowed, there are many, many nuances under the state's lending laws. And for different types of transactions, those can be different as well. I think the saying is applicable here. You don't know what you don't know. So if you're getting into the market, it's easy to assume that maybe operating in one state or a state that has no rate cap, that the other states will be just as easy. Well, that's simply not the case. I know for the case of Carleton, our knowledge and our knowledge of the industry has been gleaned over decades and decades of working with clients, examiners, law firms, companies that are new to the industry, companies that are very well-established as well. And so what we've learned over the years has shaped how we provide our products. I think a good example would be if you're perhaps looking to lend in a state like New York, you may try to do some research to find what the applicable rate would be. And if you were to look for consumer lending laws in New York to try to find the applicable rate, you're not going to find what the maximum usury rate is. You have to look in the penal code in New York to find the maximum usury rate. So with some of these nuances of knowing not just what the rate caps are, but where they're found and how they must be applied, that are equally as important as knowing just what the straight rate is. I think another example of where the value add is in working with a company like Carleton is needing to understand the archaic consumer mathematic requirements. So for example, understanding how an add-on rate structure is different from a simple interest rate structure. All interest rates are not the same. The idea of a state that applies add-on rates or applies a simple interest rate and then moving to a state that applies an add-on rate, you need to understand the math behind it in order to compute correctly. Or you need to work with a partner that understands the math behind it and can help you with that requirement. One of the things you mentioned actually is, I think, a very ripe item for discussion, and that's the true lender concept and the idea of rate exportation. You mentioned that earlier. What we've seen is that this has increasingly come under scrutiny. So whereas this whole rate exportation model has worked for years for many companies, and I don't envision that it'll go away altogether anytime soon, but states like California and others have launched challenges to this concept of the rate exportation. So the idea of if you want to operate in a state, you can't necessarily assume that rate exportation will work in every scenario.

Rich Alterman: Yeah, no, I agree with you. And keeping an eye on those certainly can have an impact on our clients. We're going to come back in a few minutes to some of the things you're talking about, like the all-in rates. I think it's important to dig a little, get a little geeky there. But with apps, mention any names. There are several companies one can find via Google search offering an APR calculation solution. And then these programs may be used by lenders developing their own loan origination system or embedded in third-party loan origination software. Putting on a consulting hat for a second, what advice would you provide an entity choosing to use one of these packages versus working with someone like Carleton? I think you've touched on it a little bit, but let's maybe elaborate on that.

Sarah Way Milovich: Sure. I would say history and a track record matter. Those are very important in determining who to work with. Carleton's known for being a leader in the industry in our particular niche that relates to consumer credit calculations. Over the years, we've seen various systems come on the scene and attempt to be the master of all components. They want to do everything in-house. In our experience, this can cause a bit of difficulty where the system may be incredibly smooth and provide great features for decisioning, for example. But if they try to handle robust payment calculation requirements and stay up to date on the different compliance requirements among the states, there may be limitations in what all they can be excellent at. We work with different lending platforms like GDS Link, where they've recognized that they're better off letting us focus on the area that we really excel in, and that provides the best overall package to their clients. And I think that is one of the key things to look for when you're looking for a calculation solution like this. You have to look at the bigger picture, the expertise that's embedded in that software solution. And on top of that, I think another important aspect is the level of support that's provided. So if you use an online calculator and the numbers get called into question, do they back up their numbers? Do they provide support, whether it's in the form of an amortization schedule or otherwise? Are they providing the level of dedication and support needed to really justify where those numbers come from? I know we have a dedicated support and compliance team that—that really is our focus, is ensuring that our clients always have that support. Whether it's called into question in an examination, in a lawsuit with a consumer, whether it's called into question just internally trying to figure out, does this make sense, or should we enter into this new market or use these new rate structures.

Rich Alterman: So buyer beware. Buyer beware. Absolutely. So you've touched on this, but given the nature of your business, it's hard not to get a bit into the weeds when discussing TILA and APR. So a few questions that follow may get a bit granular for the podcast, but since you mentioned it, so why not. So one reads up—when one reads up on interest rates and APR, you find reference to the all-in rate you mentioned versus a simple interest rate, and an add-on rate structure versus a simple contract rate calculation. So maybe in layperson's a little bit, maybe talk about what is a different—what is an all-in rate versus simple interest rate, and then what's the add-on rate versus a simple contract rate?

Sarah Way Milovich: Yeah, it's difficult for me not to get in the weeds too much here because we like to say that we live in the weeds here at Carleton because we focus on such a specific area. But I will, I'll try my best. I think it's important to, when looking at rates, to know that not all rates are equal. So when we talk about the interest rate, which is, if we're talking about a traditional simple interest rate as the applied rate, that is distinct from an annual percentage rate as defined by TILA. So within the world of the annual percentage rate, there's an all-in APR, which is an APR that may be very similar to TILA, but some additional things are counted as a finance charge that would not typically be counted as a finance charge under TILA. The biggest example we see in that scenario is credit insurance premiums. Typically, credit insurance premiums are not counted as a TILA finance charge when they're voluntary, but in the case of an all-in APR, they are counted as a finance charge, which elevates the amount of the resulting all-in APR. Looking at interest rates—so separate from the APR—looking at interest rates, there are nuances within the world of interest rates such as the dichotomy between simple interest and add-on interest. An add-on interest rate is a particular type of interest rate that's associated with precomputed contracts. While not as common in the industry, there are some states that still list an add-on rate structure as the maximum rate structure in the state. When add-on rates are used, the rates are applied to the full principal amount for the entire term of the transaction. So in contrast, the simple interest rate is calculated on the outstanding balance of the loan and often applied on a daily basis. So slight differences in approach, but important differences because they do create differences in the outcome.

Rich Alterman: Thank you for that detail. So Sarah, a few minutes ago when we were chatting about the rates, you mentioned the federal calendar in relationship to the Truth in Lending Act. So maybe we can dig into a little bit about what is the federal calendar and how does it apply in the calculation of APR and fall on the TILA regs.

Sarah Way Milovich: First, in answering this question, I will add a disclaimer that if you look in Regulation Z or Appendix J for the term federal calendar, you will not find it. Rather, this term is what the industry has adopted to refer to the specific time-counting requirement outlined in Appendix J. For the purposes of computing an actuarial method APR, the federal calendar is periodic in nature as opposed to daily. As we've mentioned before earlier in this conversation, where simple interest is often applied on a daily basis. The federal calendar is a periodic calendar, not a daily calendar in nature. Appendix J prescribes how time is to be counted backward in terms of measuring days between the contract date and the date of first payment. So in doing so, it produces slightly different results, but that all align with the very specific rules of Appendix J for computing time.

Rich Alterman: 2024 was a leap year, bringing us February 29th to make up for the difference between a single year in the Gregorian calendar and a solar or tropical year, which is the amount of time it takes for the Earth to completely orbit the sun once. We probably all knew this when we were in elementary school, but have forgotten as we've gotten older. And of course, the next leap year will be 2028. For most, this day goes unnoticed, except for those, of course, born on February 29th. But it can have a real implication when performing APR calculations. So kind of tying back to what we just talked about. What is the impact that a leap year does have on calculations and how do you guys deal with that for your clients?

Sarah Way Milovich: So we've seen system issues wrapped around the end of February in general. So February, whether it's the 28th or the 29th, we have seen some differences in approaches here. Specifically looking at the 29th. The issue often arises when reviewing the origination versus the servicing system and looking at alignment between the two. For instance, in computing the payment, the origination system may apply interest on a daily basis at a rate of 1/365 and ignore leap year. And then the servicing system, when it goes to service the loan, may count leap year as a day because you have options if February 29th occurs: you can either ignore it completely or you count it as a day on which interest would accrue. So at times you may see a difference in the total amount of interest charged that is different than expected at origination simply because leap year is counted or is not counted on either side of the coin.

Rich Alterman: So you mentioned that in most cases processing systems, that they do have a ability to include it or not include it. What has been Carleton's experience? Do you think most lenders do exclude that in their processing system because it helps with better alignment to the origination system?

Sarah Way Milovich: You know, I would actually say that it's hard to draw a conclusion there. I would almost say it's 50/50.

Rich Alterman: Okay.

Sarah Way Milovich: It depends on the differences in, in how the system was built or how easy it is for the system to change and adapt to that. There are a variety of approaches, and it doesn't seem like one is the predominant approach versus another.

Rich Alterman: Well, thanks for sharing that. You know, you mentioned different companies that you work with, and certainly, you know, lenders will contract with law firms that specialize in lending laws and compliance, such as Hudson Cook. I have a relationship with several people there. You know, what is a typical relationship Carleton would have with a firm such as Hudson Cook? Do they kind of lean on you for this type of expertise, or do they kind of maybe recommend you to their clients?

Sarah Way Milovich: We have a variety of approaches as to how we work with law firms. At times, as you mentioned, it's just a referral. So attorneys say, we don't want to deal with the math. That's very common for attorneys. I'm an attorney by trade, and I do feel like in law school we were promised that we were not going to have to do math, which is not the case. In my job, at least, it is common for attorneys to simply refer out to us and say, you guys deal with the math part. Call me for the other issues. But we also have attorneys that are more hands-on with each step. So they want to do the analysis with us. They want to look at the numbers in detail. They want to get more involved in that sort of thing. And I would say that that's often going to depend on the client's needs or the particular issue. For example, if it's an internal investigation where they're looking at numbers and want some clarity, then it might be more of a handoff approach. Whereas a lawsuit approach, the attorney is trying to deeply understand the nuances of what is involved so they can make the best case or defense for their client. We've also had attorneys that act as an intermediary. So they do the handoff but maintain the level of oversight in order to ensure that there's still attorney-client privilege in the work that we do for them. And then, as I've already briefly mentioned, the idea of getting involved in lawsuits. We have been hired as expert witnesses for lawsuits that have come up that relate to the consumer credit math.

Rich Alterman: So from time to time, you know, lenders will undergo audits by state examiners that are part of the entity that oversees licensed lenders, such as the Department of Financial Institutions in your hometown of Indiana. Kind of maybe help the audience understand what would be that typical audit type process that the lenders will go through. Especially obviously as it relates to TILA.

Sarah Way Milovich: And APR, different approaches when it comes to examinations. Generally, when we get called in, it may be a simple validation. So if a lender uses, for example, a U.S. Rule method approach to computing their APR, which TILA allows for an actuarial method computation, which by and large is what most lenders use. But there's also an option to use a U.S. Rule method APR calculation. There are two predominant tools that examiners use. There's the APRWIN program and there's the FFIEC tool that are available for free for lenders or for examiners to use in doing their examinations. Both of those tools only compute an APR by the actuarial method. So whereas the U.S. Rule method is allowed in the U.S., there's not a prescribed tool in order to calculate it. So we have been hired various times, or have done a consulting project for our clients, where we've helped to prove their U.S. Rule numbers and justify that it is the correct approach throughout the course of an examination, sometimes providing training to the examiners on what exactly the U.S. Rule method is and how it works in the industry. So that's from an APR perspective, that's how we've seen the issue arise more often than not, or sometimes validating the APR itself. Maybe there are nuances with the transaction that are difficult to prove or show in the particular tools being used that may require some finesse in using those tools and making sure that the data is input correctly. By and large, if a state is examining the lending requirements, then they're looking at the state maximum charge that's allowed. So while they may be looking at the TILA APR, oftentimes they're more concerned about the total charge that's provided for on the contract and whether that is underneath the state requirements. Things like in Indiana, for example, where there is a time-counting calendar that was prescribed at a time—it's now widely known that the calendar options are broader than was originally stated in the code. So Indiana, I believe it was, through a bulletin put out something saying that if your differences are only because of the time-counting calendar used, we will ignore that for purposes of the examination. So in that instance, we may potentially provide a proof showing the differences in calendars are the only thing that made a difference in this particular lending transaction and help solve the issue that way.

Rich Alterman: Well, certainly you touched on several points here that should make people pause for just pulling down an APR calculator off of Google. Staying abreast of all this seems like it could be a big investment. So you mentioned we were talking about law firms earlier and talked about different levels of involvement, and you mentioned lawsuits. Without giving away any confidential information, maybe it'd be interesting just to share a case that maybe you were involved with. I think it's hard for most of us to think about being pulled into court of law over the calculation of APR.

Sarah Way Milovich: As you actually alluded to in the preface to this question, everyone wants the math to be simple, everyone thinks the math should be simple, and it's just not the case. There are nuances in consumer credit math that make a difference and can cause a violation or not. So a good example of this is actually a case that we worked on in Pennsylvania where we were hired. This was not our client. We ended up being hired by a company that the law firm hired us as an expert witness. So these were not our numbers we were validating. But the big question in this lawsuit stemmed around Pennsylvania's use of a discount interest rate in terms of the maximum charge that was allowed. And in the end, the plaintiff simply did not know how to compute discount interest. So what it required, rather than going—we didn't have to go to court and testify, although we had signed up for that. But that wasn't needed in the end. Really what was needed was an explainer on discount interest in the state of Pennsylvania that the defense attorney could use for the plaintiff's attorney to show that the numbers were correct. And so we provided an explainer document walking through some of the nuances of discount interest and how it applies in Pennsylvania and how to do the math. And it ended up that the plaintiff's attorney dropped at least that part of the lawsuit. I don't know what else was going on in the other particulars, but at least that part of the lawsuit was dropped because the plaintiff's attorney came to realize that their math was way too simple for what was actually the case.

Rich Alterman: We know that, you know, most of your clients are U.S.-based, but in our initial discussions a couple days ago, we talked about that you have done some work in Canada, of course, with GDS. We have several clients in Canada. Any, any nuances that kind of stand out about dealing in, in the Canadian regulations?

Sarah Way Milovich: You know, Canada is in some ways the same, but different when it comes to consumer credit. Similar to the U.S. where different states have requirements—fees, maximum rate—provinces in Canada can have different rate caps or allowed fees. So in that sense it's somewhat similar. There is a national rate cap that's similar to an APR, has some different nuances involved there. What we've been told regarding these national rate—the national rate cap in Canada is that that particular part of the transaction is the Canadian examiners are a bit more lenient on and just want it to be close enough. So the particular requirements there are not as stringent as what we have in the U.S. for the overarching rate cap. I'll say I do know from our experience there were some nuances that we worked through in regards to credit insurance. So there are some different things that apply for credit insurance. And we worked on some programming differences for expanding coverage options just a few years back. So, so it's another one of those examples where there are small nuances that might be slightly different when you're expanding to different areas. Whether you're expanding maybe from Canada to the U.S. or from the U.S. into Canada, it's not as simple as just assuming it's going to be the same approach.

Rich Alterman: And of course, we've read that Canada is rolling out a national rate cap of 35% effective January, down from 47.2%. So lots of changes going on there. Every company today is wrestling with ChatGPT and generative AI and how does it apply to their organization? Is it something that could be implemented for the benefit of their own employees or benefit of their clients? Have you guys been doing any exploration in the area of generative AI or ChatGPT in your organization?

Sarah Way Milovich: We have, we have, and it's been a fun experiment, I will say. So I would say some of the lessons that we've learned, and I could chat a bit about what we've looked into and what we're continuing to look into. But at the outset, I will say my word of caution or advice: instead of trust, but verify, I would say test and verify. So I think the example that's frequently used is this case of an attorney who used ChatGPT to draft a brief, and in doing so, ChatGPT made up, or what they say, hallucinated cases, hallucinated case law in order to draft the—and put it into this drafted brief. The attorney was caught doing so, got sanctioned, got in trouble. That's the frequently used story that is shared in the industry of, you know, a word of advice or caution. I will say from personal experience, we have a product offering that tracks dealer fees. So we are frequently looking at states' websites to find if there are any changes to the dealer fees that are offered in the context of a motor vehicle transaction. We always do our external research, but in looking at the benefits and use of ChatGPT, I thought I'll go ahead and look into it and try to find information on this particular dealer fee in Florida. It was—so I was doing, I typed into ChatGPT the exact fee that I was looking for, asked it to find me that fee. I always say provide a citation. That's my other piece of advice, if applicable at all. When doing this, always ask for a citation so you can externally go and test that citation. Because in my particular instance, it searched for it, found a very compelling answer of this is the particular dealer fee in Florida. Here is the Florida Department of Revenue bulletin number that is associated with this particular language and particular fee. So I went to the Florida Department of Revenue website, searched for this bulletin number, pulled it up. In the end, it didn't relate to motor vehicle loans or any kind of motor vehicle transaction at all. Rather, it related to, I think it was a child tax credit or something completely unrelated to the actual question that I asked it. So it provided a very convincing answer that was completely bogus. Now this was a few months ago, so by now maybe it has corrected that and maybe it has learned that that is not the right answer and gotten better. So I do have hopes that there is potential in the future. But I just say test and verify. Always, always be mistrusting. For internal purposes, we are looking at some different use cases of how we could use it. So we're continuing to test the easy things like using ChatGPT to check for these fees to see what comes up without trusting it at a great level right now. But we're doing some, we're doing some analysis and looking at could we use it internally to review documentation and sources. So as you can imagine, over the course of 50-plus years, 55, I think, years of existence, we have a lot of documentation, a lot of bulletins, a lot of internal research memorandums that we've compiled, a lot of really, really good source information that we have stored internally in our internal database and library. And so the question we're asking is, is there a tool that we can use to glean information from our internal database? So not going out and looking on the web, but with all the information that we have, can we use it in a question-and-answer type manner to help us with internal training or client responses or different avenues of taking a look at our own resources and resources that have already been vetted and verified to use it in an easier search capability. So we've, we made some inroads in using—Amazon has a tool actually that we've been looking into that, that can do this. And so that's some of our initial review of AI possibilities. And then, of course, we're a software company that does development. So we do believe that staying on top of the possibilities and opportunities with AI are table stakes for a company like us. We need to stay cutting edge. We need to ensure that we are abreast of what is out there and what the benefits that AI can bring. That being said, we will never compromise our quality or the service that we provide. So we are not going at this blindly. We're approaching it with great caution—optimistic caution, I'll say. So we are diving into it, testing things out, but doing it in a way that allows us to still feel like we're using it in a very responsible way.

Rich Alterman: So yeah, the use of large language models is a lot of what you're talking about in order to create like a company-wide database and search capabilities, and definitely a lot of benefit there. I was looking at LinkedIn the other night and a guy had a video posted, I don't know if it was made up, where two iPhones were actually negotiating a contract between the two iPhones and no human was involved. So it's kind of mind-boggling to think about where things could actually end up going. You know, last question for you for the day. You mentioned earlier that you were promised that math would not be part of law school. So, but you know, as you have an opportunity here to, to maybe talk to some upcoming law school students, you know, I, I would imagine that thinking about financial services compliance is not something that typically comes up in their mind when they think about what major in law school. Any, any guidance that you would give someone on, on potentially pursuing this as a career in the law field of law.

Sarah Way Milovich: Well, I may be a little strange in this where I joke about math not being part of law school, but when I was in college I was also partially considering being an accountant. So the math doesn't scare me. The math is something that I actually enjoy and like. And not all lawyers will say that, but in my case it is true that I enjoy the puzzle that math creates. I would say the financial services sector is an interesting blend of law and politics and math and finance, in a broad sense, of course. It's this interesting combination, in my opinion, this really interesting combination of all these different fields, all these, all these things that I've been really interested in over the course of my life thus far, and the things that it provides the opportunity to stay somewhat involved in politics. Not too much given everything that's happening in politics these days, but also, you know, get involved in the math and finance side of it. I would also say this particular field is a very dynamic field. So particularly in the roles, Rich, that you and I are in, we get to stay on the cutting edge of technology. We get to work in the technology space. So it's not just compliance as you would generally think of compliance. We're involved with what is changing in technology and the different offerings that companies have in this technological space in the industry. So I think there is—it's an area of practice that most don't necessarily go to law school and say, this is where I'm going to end up. This is what—where I'm looking. I know I certainly had no idea that this particular type of industry existed in the way that it does. But I will say that I'm incredibly grateful that I ended up here because it is a very perfect fit for me, at least, of these different areas that I can combine together to do something that I truly enjoy doing.

Rich Alterman: Well, good. Well, thank you very much and thank you for joining us. This is Rich Alterman. We've been syncing up with Sarah Way Milovich, General Counsel and Vice President of Compliance at Carleton, Inc. Thank you, Sarah, for joining me today and providing some background on Carleton, the Truth in Lending Act, or Reg Z as it is also known, and APR calculations and implications. We hope you've all enjoyed this podcast. Please stay connected with GDS Link and The Lending Link to listen to future podcasts and catch up on ones you missed. Thank you and make it a great day. Thanks for listening. If you've enjoyed today's episode, please be sure to subscribe on Apple, Spotify, Google, or wherever you listen to your podcast. And be sure to leave us a review, follow us on LinkedIn, and connect with us on Twitter @GDSLink. That's @GDS-L-I-N-K. Have a question for the show or have a specific topic you want us to cover? Hit the link in the description to drop us a note. Thank you for lending us part of your day. Make it a great one.