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Credit Insurance Rules Build More Momentum

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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.

The CFPA was created by the Dodd-Frank financial services reform act to take over the consumer protection responsibilities now shared by all federal bank regulatory agencies.

Most insurance products are exempt from the purview of the new agency. Credit insurance products are applicable to CFPA oversight because they are sold through banks.

The decision to delay action on the Fed proposal is being supported by industry and consumer trade groups, albeit for different reasons.

Scott Cipinko, executive vice president of the Consumer Credit Industry Association, said his group will follow the efforts of the CFPB in connection with these and other rules and “continue our efforts to ensure that any rules adopted are fair and effective and allow the consumer to make an informed choice while preserving the availability of products to protect the consumer against unexpected loss.”

He explained that the rules were not withdrawn but the Fed will not finalize or adopt the draft rules.

“It is important to recognize that these issues are not off the table,” Cipinko said.

“It is expected that the matters covered by these rules will be referred to the CFPB. The CFPB van take over those pending proposals and can finalize, adopt, rescind or start the process anew,” he added.

And Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Tex., said the Fed “recognized that the substance of these proposed regulations is precisely the consumer protection areas for which the CFPB was created.”

Cipinko reiterated his opposition to the proposed disclosure rules regarding credit insurance. “CCIA was very concerned over the tone of the proposed disclosures, the way the FRB had changed its fact finding process and many other issues in connection with the proposed regulation,” Cipinko said.

He said the Fed “received critical comments from all sides of the political spectrum.”

But Birnbaum supported the Fed’s proposal regarding stronger disclosures for credit insurance.

He said, “state insurance departments have generally done a poor job of protecting consumers from abuses in credit insurance markets.”

Moreover, his letter said, “State insurance regulators have also failed to take action against unfair sales and abusive credit insurance products.”