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Consumer Credit Regulation: 6.4.3 Insurance Premium Financing Laws

Insurance premium financing laws do not regulate the sale of credit insurance, even though that sale is financed as part of the loan it insures. Instead, these laws regulate the financing of ordinary insurance premiums, often allowing high interest rates on these transactions, which are actually credit sales.

Consumer Credit Regulation: 6.4.4 Introduction to Insurance Regulation of Credit Insurance

Most state insurance codes devote specific chapters to credit insurance. The majority of these are based on the Model Credit Life, Accident and Health Insurance Act, developed by the National Association of Insurance Commissioners (NAIC) in 1960.175 Even where that Act is not specifically adopted in a state, the Act often influences the substance of the state’s credit insurance regulation.176

Consumer Credit Regulation: 6.4.5.3 State Licensing Requirements

State insurance laws often require that the insurer obtain a certificate of authority or license before soliciting insurance applications or transacting insurance in the state or from offering insurance in other states from an office in that state.207 If the insurer does not obtain the necessary permission from the state insurance agency to operate, the insurance contract may be void.208

Consumer Credit Regulation: 6.4.6.1 General

Most states have a prescribed mechanism for establishing authorized rates for credit life and disability insurance, but most states do not do so for credit personal property and credit involuntary unemployment insurance (IUI). Credit personal property and credit IUI rates are more typically subject to department review and approval or department review and disapproval—depending on the regulatory structure (prior approval, file and use, etc.). Consequently, this discussion relates primarily to credit life and disability rates.

Consumer Credit Regulation: 6.4.6.3 Deviations

As the term indicates, the prima facie rate is a presumptive standard of reasonable benefits. An insurer may request that the insurance department grant an “upward deviation,” which then allows it to charge a higher premium. Theoretically, the insurer must present actuarial evidence to the department to establish that the prima facie rate is insufficient. Only a few states have mandatory downward deviations if the rates charged do not meet the benchmark loss ratio.220

Consumer Credit Regulation: 6.4.6.4 Challenging Prima Facie Rates

The NAIC Model Act specifies in mandatory terms that the insurance commissioner require rates that are reasonable in relation to benefits. Therefore, a commissioner who has authorized prima facie rates which result in loss ratios lower than the state’s target benchmark loss ratio may be vulnerable to a mandamus challenge from consumers. This rarely has been done, though consumers were ultimately successful in Ohio and Illinois when this approach was tried.224

Consumer Credit Regulation: 6.4.6.5 Filed-Rate Doctrine

Where insurance companies (or other entities) file and seek approval for their rates from a state regulatory body, the filed-rate doctrine233 requires courts to accord state administrative and regulatory bodies deference regarding approved rates.234

Consumer Credit Regulation: 6.4.7.1 UDAP Statutes

Every state has a state deceptive practices (UDAP) statute that typically provides strong remedies and attorney fees for any unfair or deceptive act or practice.242 UDAP statutes usually are well suited to challenge credit insurance abuses,243 but some state statutes exclude credit or insurance transactions from their coverage, or find that a state’s regulation of unfair insurance practices prevents a private UDAP claim.244

Consumer Credit Regulation: 6.4.7.2 UNIP Statutes

In addition to UDAP statutes, every state has adopted some version of an “unfair insurance trade practices” (UNIP) act,252 based on an NAIC Model Act. These statutes address some of the marketing abuses often involved in credit insurance sales. Among these abuses are coercive sales tactics,253 and the sale of insurance which may be worthless to borrowers who are clearly ineligible for benefits.254

Consumer Credit Regulation: 6.4.9.1 Joint Banking Agency Regulations.

The Gramm-Leach-Bliley Act requires the various federal banking agencies to publish customer protection regulations that apply to the retail sales practices, solicitations, advertising, or offers of any insurance products by a depository institution or affiliate.277 In response, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision issued joint regulations under this provision of the Act278 The re

Consumer Credit Regulation: 6.4.9.2 Preemption of State Regulation

The Gramm-Leach-Bliley Act prohibits the states, by way of statute, regulation, or other action, from preventing or significantly interfering with the ability of an insured depository institution (or a subsidiary or affiliate thereof) to engage in any insurance sales, solicitations, or cross-marketing activity.292 This preemption is subject to thirteen exceptions that preserve the states’ rights to regulate a bank’s insurance sales so long as the restrictions are no more burdensome or restrictive than the provisions outlined in the Act and do

Consumer Credit Regulation: 6.4.10 TILA Regulation of Credit Insurance Covering Manufactured Home Credit

The Truth in Lending Act (TILA), as amended in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act,306 now bans the direct or indirect financing of single-premium credit insurance or similar debt cancellation products in residential mortgage loans or home equity lines of credit,307 which are defined to include manufactured home loans.308 The Consumer Financial Protection Bureau has also amended TILA Regulation Z, effective June 1,

Consumer Credit Regulation: 6.5.1 General: The Law and the Practice

The purchase of credit insurance should be voluntary on the consumer’s part. State law generally makes it illegal to require the purchase of credit insurance. The Truth in Lending Act also only allows exclusion of financed insurance premiums from the TILA finance charge if their purchase is voluntary.313

Consumer Credit Regulation: 6.5.2 Truth in Lending Act

A lender may exclude the credit life and accident insurance premium cost from the calculation of the Truth in Lending Act (TILA) finance charge, but only if the insurance is not a factor in approving the credit, and the consumer is so informed.322 Further, the cost of any such insurance must be disclosed, and the borrower must give specific affirmative written indication of a desire to purchase it.323 Otherwise, credit insurance charges are treated as part of the finance charge.

Consumer Credit Regulation: 6.5.3.1 General

Prior to the development of credit insurance, insurance companies, when acting as lenders, sometimes required borrowers to purchase life insurance from them as a condition of receiving the loan.

Consumer Credit Regulation: 6.5.4 UDAP

A potentially successful way to challenge coercion in the sale of credit insurance is a claim under a state UDAP statute.351 This claim will be available in most states, but not be available in certain states where either insurance or credit is outside the scope of the state UDAP statute.352

Consumer Credit Regulation: 6.5.5.2 McCarran-Ferguson Act’s Impact on Antitrust, Other Challenges to Credit Insurance Practices

The McCarran-Ferguson Act377 provides that a state insurance law can displace the application of the three major federal antitrust statutes to insurance practices—the Clayton Act, the Sherman Act, and the FTC Act. Every state, generally at the behest of the insurance industry, has enacted a state unfair insurance practices act in an attempt to specifically supplant these antitrust statutes.

Consumer Credit Regulation: 6.5.6 Banking Holding Act and Regulation Y

The insurance-related activities of banks and bank holding companies are subject to the requirements of the Bank Holding Company Act and Regulation Y.396 The Act prohibits tying credit to the purchase of credit insurance from the bank, holding company, or an affiliate.397 It also limits the right of regulated banks and bank holding companies to underwrite insurance to those circumstances where the underwriter’s performance could “reasonably be expected to produce benefits to the public.”