Earlier this month, the CFPB issued a proposal to clarify the application of the Regulation Z prohibition on financing credit insurance premiums (Section 1026.36(i)) to transactions in which credit insurance premiums are charged periodically rather than added as a lump sum at closing.
The proposal, which fell short of industry expectations that the CFPB would clarify that level and levelized premiums are outside the prohibition’s scope, has generated several comment letters urging the CFPB to revise its proposal. (The comment period ended on July 22.)
The prohibition was one of the amendments to Reg Z made by the CFPB’s January 2013 final rule on loan originator compensation. It was intended to implement new TILA Section 129C(d), added by the Dodd-Frank Act, which generally prohibits a creditor from financing the purchase of credit insurance in connection with any residential mortgage loan or extension of credit under an open-end plan secured by the consumer’s principal dwelling. It also provides that fees for credit insurance “calculated and paid in full on a monthly basis shall not be considered financed by the creditor.” “Credit insurance” for purposes of the prohibition includes credit life, credit disability, credit unemployment, credit property insurance, and other similar products, including debt cancellation and debt suspension contracts.
In the proposal’s background discussion, the CFPB stated that the proposal responds to industry concerns raised by language in the preamble to the final loan originator compensation rule. That language suggested that the prohibition extended to premiums “charged to the consumer on a ‘levelized’ basis, meaning that the premiums remain the same each month, even as the consumer pays down the outstanding balance of the loan.” In anticipation of the proposal, the CFPB had delayed the effective date of the prohibition from June 1, 2013 until January 10, 2014 (which is also the effective date for most of the mortgage-related rules issued by the CFPB in January 2013). In the proposal, the CFPB asked for comments on whether it should move up the effective date.
The proposed amendments addressed two issues: when premiums are considered to be “calculated and paid in full on a monthly basis” for purposes of the exclusion from the prohibition and what constitutes “financing” of premiums by a creditor. The proposal rejected industry’s argument that levelized and level premiums should be considered “calculated on a monthly basis” even though they do not decrease each month as the loan balance decreases. Instead, the CFPB took the position that only decreasing premiums or premiums calculated using a factor that changes monthly are “calculated on a monthly basis” for purposes of the exemption.
The proposal also did not clearly exclude level or levelized premiums from the prohibition on the basis that they are not “financed” even though they are separate, monthly transactions that are collected along with the loan’s principal and interest payment and are paid in full each month. It would add new language providing that “a creditor finances a premium or fee for credit insurance if it provides a consumer the right to defer payment of a credit insurance premium or fee owed by the consumer.”
Comment letters filed by providers of the various credit insurance products covered by the prohibition as well as an industry trade group seek a more precise definition of when premiums are “financed” for purposes of the prohibition. They ask the CFPB to clarify that monthly premiums are financed only if they are deferred beyond the month in which they are due.
The comment letters also discuss the absence of support in Dodd-Frank for the CFPB’s narrow reading of when premiums are “calculated on a monthly basis” and assert that the type of premium (decreasing, level or levelized) is irrelevant and whether premiums are “calculated on a monthly basis” should depend only on whether they are paid in full in each month.
Finally, all of the commenters urge the CFPB not to move up the prohibition’s January 10, 2014 effective date.
We think the commenters have made a convincing case and that the CFPB should revise its proposal to make clear that the prohibition does not apply to level and levelized premiums.