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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.”

Consumer Credit Regulation: 6.5.7 Proving Coercion

Creditors today rarely openly admit that they require credit insurance. Most credit documents include a boilerplate insurance authorization containing the TILA disclosure that life and disability is not required, and that there is a choice of providers if property insurance is required. However, a signature on such an authorization is not the end of the analysis.

Consumer Credit Regulation: 6.6.1.1 Introduction

There are at least three ways in which a creditor can overcharge for credit insurance. One is to charge a premium rate higher than that permitted by law or regulation.429 Another is to purchase an amount of insurance coverage in excess of that allowable under the law or necessary to protect the loan. Finally, a level life policy may be sold where a decreasing life policy is required.

Consumer Credit Regulation: 6.6.1.2 Credit Life

The statute, regulation, or other administrative ruling establishing the approved rates for credit life insurance will usually couch the rate in terms of the cost per $100 of the obligation per year—for instance, 65¢/$100/year. This provides that the rate is 65 cents per year for every $100 owed. The insurance is usually written to insure the total of payments on a closed-end loan, which includes both the anticipated interest and the insurance premiums themselves.

Consumer Credit Regulation: 6.6.1.3 Credit Accident and Health

Approved rates for credit accident and health, also called credit disability insurance, are generally derived from estimates as to what rate will result in a specified target loss ratio.443 There are different kinds of disability coverage: retroactive and non-retroactive, as well as seven-, fourteen-, or thirty-day waiting or elimination periods,444 each with its own approved rate.

Consumer Credit Regulation: 6.6.1.4 Credit Personal Property Insurance

Credit personal property insurance generally is not subject to rate regulation in any state. However, the borrower may have purchased excess coverage,448 which could give rise to an overcharge claim. It may be a simple matter to determine the amount of coverage by referring to the certificate of property insurance. However, if the certificate of insurance is unavailable, or if it does not contain the amount of coverage, the practitioner may have to try to calculate the amount of coverage sold.

Consumer Credit Regulation: 6.6.2.2 Creditor Compensation As Interest

A number of early cases considered whether credit insurance premiums constituted usury under state small loan acts. As phrased in the Uniform Small Loan Law:

In addition to the interest herein provided for, no further or other charge or amount for any examination, service, brokerage, expense, fee, or bonus or otherwise shall be directly or indirectly charged, contracted for, or received.475

Consumer Credit Regulation: 6.6.3.2 Amount of Coverage

Courts have long recognized that usury may exist when lenders charge borrowers for coverage in an amount “greater than the amount of the loan with a purpose of increasing the proportion of charges to the amount of money lent.”499 Some regulations similarly restrict credit life and disability coverage to the amount and term of the indebtedness.500 This limitation is found in both the credit insurance codes,501 and often in the special credit regulat

Consumer Credit Regulation: 6.6.4.1 Scope of Insurable Interest

Excess credit personal property insurance may be manifested in a number of different ways. The creditor may sell it in transactions where it is not permitted by law; it may sell coverage for an amount greater than the collateral (or the debt) is worth; it may insure property which is not collateral; it may add additional types of coverage beyond that which is authorized or necessary; or it may insure a phantom risk.

Consumer Credit Regulation: 6.6.4.2 Phantom Coverage

Excess coverage may also be argued in situations where the coverage buys illusory benefits. This may occur, for example, in connection with open-end accounts, where the account balance reflects nondurable purchases, such as lunches at the department store restaurant, tune-ups at the auto center, or cosmetics.

Consumer Credit Regulation: 6.7.1 Overview

Insurance packing refers to increasing a consumer’s debt by padding or “packing” the amount financed through the sale of expensive, unnecessary, and often unwanted products, such as credit insurance.527 A number of claims can be raised to challenge packing practices: usury, UDAP, breach of fiduciary duty, and RICO.

Consumer Credit Regulation: 6.7.2 Packing to Exceed Critical Statutory Thresholds

The primary motivation for credit insurance packing is increased profits through the sale of additional profitable products. One of the more subtle mechanisms by which insurance packing can maximize profits is if the creditor stretches a loan’s term, since the cost of the insurance premiums increases with the term of the loan. Consider the following actual fact situation:528 a customer wished to borrow approximately $1,400, and informed the lender she could afford a $75 per month payment.