WASHINGTON BUREAU – Life insurers are teaming with property-casualty insurers to object to Federal Reserve Board efforts to apply Truth in Lending Act (TILA) disclosure requirements to credit insurance.
The American Council of Life Insurers (ACLI), Washington, and the American Insurance Association (AIA), Washington, have expressed their opposition to proposed Fed amendments to “Regulation Z” in a joint comment letter.
The Fed wants banks to use model notices that present credit insurance products in a negative light, Gary Hughes, ACLI general counsel, and J. Stephen Zielezienski, general counsel of the AIA, write in the groups’ comment letter.
Disclosure notices would have to include statements such as, “If you already have enough insurance or savings to pay off this loan if you die, you may not need this product,” and “Other types of insurance can give you similar benefits and are often less expensive.”
The Fed also wants to require banks selling credit insurance products to express the potential need for coverage, and the likely cost of the coverage, in terms of a dollar figure based on the amount of the loan using the maximum rate under the policy, rather than a unit cost basis, as is presently required.
The Fed would require that a bank disclose whether the premium for the credit insurance is based on the outstanding balance or periodic principal or interest payment. The disclosure would have to be based on the maximum outstanding balance or the largest periodic principal and interest payment possible under the loan agreement.
Hughes and Zielezienski say the Fed’s proposal conflicts with the McCarran-Ferguson Act and state laws relating to the business of insurance, including state laws that regulate the offering of credit life, accident, health and loss-of-income insurance.
The U.S. Supreme Court has ruled that statutes aimed at protecting or regulating the relationship between an insurer and insured are laws regulating the business of insurance, Hughes and Zielezienski say.
States already regulate the cost of credit insurance, credit insurance policy
terms and credit insurance disclosures, Hughes and Zielezienski say.
In effect, Hughes and Zielezienski say, by proposing disclosure language that conflicts with state regulatory requirements, “the Fed has made a subjective determination that state mandated disclosures are inadequate and has substituted its judgment for that of the states, which the McCarran-Ferguson Act directs are the primary regulators of insurers.”
TILA “cannot possibly be read as a basis for the proposal’s deep intrusion into areas such as policy terms, coverage and exclusions, which are areas the McCarran-Ferguson Act clearly reserves for the states,” Hughes and Zielezienski say.
Because using the model forms can insulate creditors from potential liability for TILA violations, most creditors will use the Fed’s model forms if the proposed rule is adopted, Hughes and Zielezienski say.
“As numerous other commenters have advised the Board, the proposed disclosures themselves are confusing, ambiguous and incomplete,” Hughes and Zielezienski say. “In addition, the language of the Board’s proposed disclosures, which effectively dissuade consumers from purchasing these insurance products, will undoubtedly compound consumer confusion and misunderstanding.”
Robert Senkler, chairman of Securian Financial Group Inc., St. Paul, Minn., also has written to object to the proposed disclosures.
“I believe the proposed disclosures are ill-advised, misleading, and reflect an unfair and uninformed bias against credit protection products,” Senkler says. “The proposed disclosures are tantamount to government-mandated advice not to buy the product. I believe it is inappropriate for the federal government to advise consumers, either directly or through mandated disclosures, on what products to buy or not buy.”