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February 20, 2011 at 07:00 PM
The decision of the Federal Reserve Board to defer any changes to disclosure rules regarding credit insurance to the new Consumer Financial Protection Bureau is likely to delay–but not end–any effort to strengthen disclosure rules regarding these products.
William Komp, associate counsel at Securian Financial Group, St. Paul, Minn. said comments submitted to the September 2010 proposal by the Fed to improve disclosure rules reflected “nearly uniform opposition” to the proposed changes regarding credit protection product disclosures.
Specifically, the Fed announced last week that it has decided not to finalize any proposed amendments to the truth in lending rules, and instead hand them over to the CFPB, which begins work July 1.
The Fed proposal would have required insurers selling credit insurance products through banks to disclose key data regarding the product through model forms that require disclosures in a tabular and question-and-answer format.
Amongst other concerns, insurance industry officials in general argue that “a fair reading of the tone of the language proposed in the model forms presents the products in a very negative light.”
One proposal would require banks to inform potential customers for credit insurance about why the product would possibly be needed as well as the cost of the insurance, tailored to the amount of the loan using the maximum rate under the policy rather than as a unit cost basis, as is currently required.
And the proposal would mandate that a bank disclose when it is selling credit insurance whether the premium is based upon the outstanding balance or periodic principal or interest payment.
Moreover, the disclosure must be based upon the maximum outstanding balance or periodic principal and interest payment possible under the loan agreement.
“The most reasonable course of action now would be for the CFPB to evaluate anew what revisions, if any, are supported by the record, rather than simply finalizing the flawed rules previously proposed by the Federal Reserve Board,” Komp said.
At the same time, he conceded that while the rules “will ultimately face revision,” they are likely to be imposed in some form.
But, he said, “Until the industry has established a meaningful dialogue with the key players at the CFPB, it is nearly impossible to gauge how balanced an approach the new agency will take.”
And, he said, adding additional credit insurance disclosures, “particularly ones as factually inaccurate and misleading as those proposed by the Fed,” to an already highly regulated industry “raises compliance costs for underwriters and plan sponsors, and risks impairing the availability and desirability of these products in the marketplace.”
As a result, Komp said, a number of underinsured consumers may no longer be able to obtain the protection that they deeply need.
