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Consumer Credit Regulation: 6.7.3 Packing with Sales of Non-Credit Insurance and Other Ancillary Products

Some creditors pack into loans non-credit insurance, club memberships, and similar fee-generating extras. Creditors profit from these sales and often have set employee quotas for inclusion of the products. The insurance packing practices of ITT Financial a number of years ago provides an example. Debtors would request a loan in a specified amount. The lender would telephone back that the loan plus optional insurance had been approved with a stated monthly payment, never mentioning the total loan amount.

Consumer Credit Regulation: 6.7.4 Unnecessary Collateral, Duplicative Insurance

Another feature of packed loans may be unnecessary collateral taken as security in order to write profitable credit property insurance. A creditor may, for example, take a superfluous non-purchase-money security interest in the borrower’s old car which has little or no market value, and write property insurance for it into the loan. The most common example of unnecessary collateral is household goods, despite the legal restrictions on a creditor’s right to take household goods as security.

Consumer Credit Regulation: 6.7.5 Non-Filing Insurance

Ordinarily, a creditor taking a security interest in personal property files a record of its security interest in a county recorder’s office as a means of protecting its interest in the collateral against other creditors.555 However, sometimes creditors find it easier to purchase non-filing insurance than to perfect the security interest.

Consumer Credit Regulation: 6.8.1 Sale of Insurance to Borrowers Unlikely to Benefit

Credit insurance may be sold to borrowers who are ineligible for the insurance coverage under the terms of the policies that they buy. Unlike ordinary insurance sales, creditors may not ask borrowers for information, such as medical histories, relating to their eligibility for benefits under credit insurance policies.565 Only after a claim is filed are eligibility factors such as health, age, and employment checked to see if grounds exist for denying coverage.

Consumer Credit Regulation: 6.8.2 Incomplete Coverage

A credit insurance abuse involves the sale of coverage represented to be full but is only partial coverage. As consumer loan balances grow larger, and terms longer, creditors may sell credit insurance which does not completely insure the loan. For example, a ten-year, $10,000 policy may be sold in connection with a fifteen-year, $15,000 loan. If the benefits of such a policy are misrepresented as being full coverage, the consumer should have a UDAP or a common law fraud claim.580

Consumer Credit Regulation: 6.8.3.1 Types of Improper Denial of Coverage

There are any number of reasons why a credit insurance claim will be improperly denied. The consumer’s pre-existing medical condition may be a disqualification and the creditor knew of the condition (or should have known) but does not inform the insurer.583 The creditor may simply not inquire about relevant facts, such as health. In some cases, there is no instruction from the insurer to do so. On occasion, the creditor deliberately misstates information on the insurance application.

Consumer Credit Regulation: 6.8.3.2 Theories to Recover From the Insurer

Where the consumer’s insurance claim is denied, any resulting litigation must decide whether to sue the creditor-seller, or the insurance company, or both. Legal claims leading to liability may differ depending on the defendant. This section examines theories of recovery against the insurer and the next against the creditor.

Consumer Credit Regulation: 6.8.3.3 Theories to Recover From the Creditor

Fraud claims against a creditor may be appropriate in challenging the denial of benefits.604 Knowingly selling credit insurance to a borrower unlikely to be eligible for benefits has been found to be fraudulent under Alabama law.605 Another case raises the question of whether selling excessive insurance coverage may be fraudulent.

Consumer Credit Regulation: 6.9 Surpluses, Secondary Beneficiaries

Because the purpose of credit life insurance is to protect the account from default if the borrower dies, the named primary beneficiary will be the creditor. However, any surplus should be distributed to a secondary beneficiary, such as the borrower’s heirs. While there are no reliable data, many people question whether insurance companies actually distribute any surplus to a secondary beneficiary.

Consumer Credit Regulation: 6.10.1 The Requirement of a Rebate

Upon prepayment, refinancing, or default leading to cancellation of insurance, the unearned portion of the premium must be rebated.630 At the outset of any litigation, ensure that insurers retain information regarding policy termination dates so that subsequent review of rebate issues is possible.631

Consumer Credit Regulation: 6.10.2 Rebates upon Default and Acceleration of the Debt

Some state statutes require that all unearned charges, including insurance, be rebated on prepayment, and further require that acceleration be treated as prepayment.641 Review the terms of the master policy between creditor and insurer, if group insurance, or the borrower’s policy if individually insured. The insurance contract may require the rebate.

Consumer Credit Regulation: 6.10.3 Calculating the Rebate

State rules vary on the rules for how to calculate a rebate, as well as notice requirements and statutory minimums for refunds.651 State insurance departments generally prescribe the method by which a rebate must be calculated, usually authorizing the Rule of 78s formula that will be generous to the insurer. Even in states where interest rebates must be calculated by the actuarial method, the Rule of 78s may be authorized for credit insurance rebates.

Consumer Credit Regulation: 6.10.4 Consumer Remedies for Failure to Rebate Unearned Premiums

Failure to provide a rebate for unearned credit insurance is a breach of contract.654 In addition, if the lender has retained greater compensation than that to which it is entitled, the amount retained would be interest.655 Similarly, where a contract term provides that insurance premium refunds will be applied to the last maturing installments, and not to the principal remaining unpaid or to currently maturing installments, such a provision contains “the seeds of usury” and may render the trans

Student Loan Law: 6.2.1 Federal Student Loan Default

Borrowers are in default on Federal Family Education Loan (FFEL) Program loans or Direct Loan Program loans (Direct Loans) if they fail to make required payments for 270 days for loans repayable in monthly installments.4 This nine-month period is a relatively long time and advocates should take advantage of this period to help borrowers seek alternatives to default, such as more affordable repayment plans, cancellation, deferment, and/or forbearance.5

Student Loan Law: 6.2.2 Private Loan Default

Default conditions for private student loans are specified in the loan contracts. In most cases, borrowers will not have the protection of a nine-month period if they miss payments on a private student loan.

Student Loan Law: 6.4.1 Cohort Default Rates

The cohort default rate (CDR) is the most frequently cited default measure because it is the basis for sanctioning schools with persistently high default rates.34 The cohort for a particular year consists of all current and former students who, during that fiscal year, entered into repayment on a Federal Stafford Loan, a federal Supplemental Loan for Students (SLS) loan, a Direct Subsidized Loan, or a Direct Unsubsidized Loan that they received to attend the school, or on the portion of a loan made under the FFEL or Direct Consolidation Loan

Student Loan Law: 6.4.2 Problems with the Cohort Default Rate Measure

The Government Accountability Office (GAO) and the Department’s Office of the Inspector General (OIG) have released reports describing the ways in which the CDRs understate the scope of the default problem—and the ways in which schools manipulate the CDR.44 One OIG report, for example, cited a number of problems, including that the rates reflected defaults during a limited time period and not the life of the loan, that PLUS loans and certain consolidation loans are excluded, and that the rates are calculated based on the number of borrowers i

Student Loan Law: 6.4.3 Other Federal Default Measures

The Department releases three types64 of default rates—cohort default rates (CDRs), cumulative default rates, and new Direct Loans entering default.65 The cumulative default rate includes all federal loans that are more than 360 days delinquent, whereas the rate for new Direct Loans entering default measures only Direct Loans that defaulted in a given year.

Student Loan Law: 6.5.2 Default Risk Factors and Racial Disparities

Researchers have identified a number of risk factors for student loan default and there are well-documented racial disparities in default rates.80 While there is still insufficient empirical research about why borrowers default and how to best help them, a number of recent studies and reports help break down the factors that make default a continuing problem.81 Borrowers in default often did not complete