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Truth in Lending: 3.9.4.4.3.2 Voluntariness disclosure
If credit insurance is required, the premiums must be included in the finance charge, regardless of whether the consumer purchases it from the creditor or from a third party.642 For example, if the creditor requires the debtor to purchase credit life insurance, the premium for the life insurance policy the consumer purchases (and assigns) must be included in the finance charge.643 If the creditor offers the insurance, but the consumer purchases the required insurance elsewhere, the amount in
Truth in Lending: 3.9.4.4.3.3 Affirmative written request for insurance
The consumer must sign or initial an affirmative written request for the insurance after receiving the required disclosures of the voluntary nature of the insurance and the premium for the initial term in order for the premium to be excluded from the finance charge.652 The regulation’s model disclosure forms merely provide a space for the consumer’s signature after these statements: “I want credit life insurance”; “I want credit disability insurance”; and “I want credit life and disability insurance.”
Truth in Lending: 3.9.4.4.3.4 Voluntariness is a factual issue
The official interpretations provide that voluntariness is a factual issue,661 ascertainable only “by reference to all of the circumstances of a particular transaction. Inquiry into these circumstances is, of course, not foreclosed by the presence of a customer’s signature in an insurance authorization.”662 The Federal Trade Commission, in enforcement proceedings, has similarly looked upon voluntariness as a factual issue.663
Truth in Lending: 3.9.4.4.3.5 Parol evidence
A series of Fifth Circuit cases from the late 1970s, the most prominent of which is USLIFE Credit Corp. v.
Truth in Lending: 3.9.4.4.3.7 Other claims to challenge coercive insurance
Coercive or deceptive practices in the sale of credit insurance can also be challenged under various state law theories, including state deceptive acts and practices statutes,698 usury, and common law tort claims.699 Antitrust laws may offer some relief, though that can be an extremely complicated issue when it comes to insurance.700 Finally, relief may be available under the Equal Credit Opportunity Act.
Truth in Lending: 3.9.4.4.4 Timing and location of insurance disclosures
The rules on the timing and location of insurance disclosures for closed-end transactions must be followed in order to exclude the cost from the finance charge disclosure.702 The disclosure, like all other required disclosures, must be made prior to consummation in closed-end transactions.703 However, the disclosures, and, in the case of credit insurance, authorization required to exclude the insurance premiums from the finance charge may be made either together with or separately from the o
Truth in Lending: 3.9.4.4.5 Premium cost disclosures
The creditor must disclose the premium for the initial term of insurance coverage if the premium is to be excluded from the finance charge.709 For example, if the initial term of the credit property insurance policy is three years, the creditor must disclose the premium for the first three years, even if the term of the insurance may later be extended.710
Truth in Lending: 3.9.4.4.6 Term disclosures
If the term of the insurance is less than the term of the transaction, then the term of the insurance must also be disclosed.732 Practitioners should be especially alert for this issue on longer term loans, such as ten-year or fifteen-year loans. To fully insure those loans is quite expensive, so frequently credit insurance is written for only a part of the term.733 Property insurance, similarly, is usually written for a year at a time, and so the term disclosures are necessary.
Truth in Lending: 3.9.4.5.1.1 Generally
Like credit insurance, the premiums or other charges for property insurance written in connection with a consumer credit transaction must be included in the finance charge unless the creditor meets certain requirements. This applies to insurance against loss of or damage to property (sometimes called hazard insurance), or against liability arising out of the ownership or use of property.737 Property insurance—in the form of homeowner’s insurance—is almost universally required with mortgages.
Truth in Lending: 3.9.4.5.1.2 Choice of provider disclosure
If the creditor wishes to exclude the premiums from the finance charge, it must allow the consumer to choose the insurer and must disclose the availability of that choice to the consumer.751 Oral notice of the option is not sufficient; it must be written.752 This disclosure must be made regardless of whether the insurance is available from the creditor or not,753 and must be made even if it is not readily available from anyone but the credito
Truth in Lending: 3.9.4.5.1.3 “From or through” the creditor
If the creditor wants to exclude the premium from the finance charge, and the insurance is purchased “from or through the creditor,” the creditor must disclose the premium for the initial term of coverage and the initial term of coverage.757
Truth in Lending: 3.9.4.5.2.1 Excludable from finance charge under certain circumstances
The term “single-interest insurance” in Regulation Z refers to a type of credit property insurance traditionally included in the term “vendor’s single-interest insurance” (VSI).763 VSI protects only the vendor’s (that is, the seller’s) interest in tangible property.
Truth in Lending: 3.9.4.5.2.2 When the insurance consists of or includes non-VSI coverages
Insurance described as VSI insurance may, in fact, be credit loss coverage. Credit loss insurance is always a finance charge.768 So, the premiums for repossession or holder-in-due-course insurance cannot be excluded, for example.769 A premium for residual value insurance required by the creditor or on which the creditor is a beneficiary is not excludable.
Truth in Lending: 3.9.4.5.3 Voluntary homeowners insurance, flood insurance, and wind insurance
Nearly all lenders require consumers to insure mortgaged dwellings against property damage. In some regions, that may mean obtaining separate coverage for flood or wind damage. This insurance is required as a condition of the extension of credit and, therefore, meets the definition of a finance charge. But the cost of this insurance is usually excluded from the finance charge because most creditors disclose that the insurance may be obtained from anyone the consumer chooses, subject to the creditor’s approval.780
Truth in Lending: 3.9.4.5.4 Force-placed insurance and other post-consummation insurance
Insurance coverage voluntarily added or requested by a consumer after consummating a closed-end transaction or after opening a home equity line of credit (HELOC) is not considered written in connection with the transaction.782 If it is financed, however, new disclosures may be required.783 For open-end credit not secured by a home, coverage sold after account opening will be considered written in connection with the transaction and subject to the finance charge rules.
Truth in Lending: 3.9.4.5.5.1 GAP insurance described
One add-on product for credit transactions (particularly car loans) is “GAP” insurance. The risk insured is the “gap” between the outstanding loan balance and the amount paid out by the property insurer after a covered loss occurs on the collateral. For example, if the car is totaled and the insurance values it at the time of loss at $3,000, and the debt balance is $5,000, the consumer may be liable for the $2,000 deficiency. GAP insurance covers that deficiency.
Truth in Lending: 3.9.4.5.5.2 TILA coverage of GAP insurance
Since 1996, Regulation Z has treated GAP insurance in the same fashion as credit life and disability insurance.804 That is, in the first instance, it is a finance charge,805 but it may be excluded provided it meets all the same criteria necessary to exclude those types of charges from the finance charge.806 As a result, the discussion at
Truth in Lending: 3.9.4.5.6 TILA coverage of debt cancellation and debt suspension agreements
In 2009, the rules for credit life and disability insurance were directly applied to debt cancellation and suspension agreements between the debtor and creditor as well.813 Only debt cancellation and suspension agreements that parallel life, disability, and loss of income insurance are covered: debt cancellation agreements that cancel liability remaining in excess of the value of collateral, or in case of death, disability, or loss of income are covered.814
Truth in Lending: 3.9.4.5.7 None of the above: Non-credit, non-property insurance
Sometimes creditors sell non-property insurance for which they are not the beneficiary. Insurance policies like these are usually sold contemporaneously with the credit transaction and the premiums are usually included in the amount financed (or financed as a separate transaction).
Truth in Lending: 3.9.4.5.8 Credit insurance and the Dodd-Frank Act
The Dodd-Frank Act amends TILA by prohibiting creditors from financing most forms of credit insurance in connection with residential mortgage loans830 or home equity lines of credit that are secured by the consumer’s principal dwelling.831 Due to an unfortunate drafting error, the relevant section in is entitled “Single premium credit insurance prohibited[.]”832 But the prohibition is not limited to single-premium policies.
Truth in Lending: 3.9.4.5.9 Administrative enforcement of violations of the credit insurance rules
TILA’s administrative enforcement provisions provide for strict enforcement of the credit insurance rules.
Truth in Lending: 3.9.5 Third-Party and Closing Agent Charges: 15 U.S.C. § 1605(a); Regulation Z § 1026.4(a)(1) and (2)
Neither TILA nor Regulation Z makes any reference to how fees for a lender’s closing agent’s own services are to be treated.841 (The 1995 statutory amendments address fees imposed by these closing agents, but, as is discussed below, there is—or should be—a distinction.) In order to analyze these fees, and the fees of other third parties, the practitioner must start by examining section 1026.4(a)(1) and (2). But the inquiry does not end there.
Truth in Lending: 3.9.6.1 General
The complexity of identifying finance charges is compounded by special exceptions for residential mortgage transactions and transactions secured by real property.