Insights

An in-house attorney friend was persistently combing through the introductory material of some recently released proposed changes to Regulation Z for the home mortgage loan disclosures. He happened upon a single sentence that provided a clue to what was buried toward the end of the 250 pages – some proposed changes to the disclosures for voluntary credit insurance, debt cancellation and debt suspension coverage that apply to non-mortgage credit as well – and decided to share his find. The proposed changes to the regulations, including new model forms, continues the trend of the federal agencies to instruct creditors as to exactly how the disclosures should appear. These changes come well ahead of any that might be proposed by the Bureau of Consumer Financial Protection later in 2011. Comments to the proposed regulations must be received by the Federal Reserve Board on or before December 23, 2010.

The proposed changes will affect the offer and sale of voluntary credit life, accident, health or loss-of-income insurance, and voluntary debt cancellation or debt suspension coverage. Optional GAP products sold by motor vehicle dealers fall within the voluntary debt cancellation coverage rules. This article addresses the proposed changes in relation to closed-end credit. The proposed regulations make no distinction between a loan and a credit sale or retail installment sale contract – references to the obligation in the model disclosures are to a “loan.”

Changes to “Finance Charge”

Arcane though it may be, it is important to understanding the proposed changes to 12 CFR Section 226.4 - the meaning of the term “finance charge.” This is because 226.4 is the basic rule for what is, and what is not, a finance charge. As everyone knows, the finance charge is what determines the Annual Percentage Rate in a credit transaction. Keeping a charge for a product out of the finance charge means having to comply with the rules. The existing rules are to be greatly expanded, with a new model disclosure form. As presently constituted, the form is designed to be informative, but some content appears that will discourage consumers from purchasing the product.

Voluntary Credit Life, Accident, Health, or Loss-of-Income Insurance

Premiums for credit life, accident, health or loss-of-income insurance may be excluded from the finance charge if certain conditions are met. The proposed regulations add that these conditions must be met “before the consumer enrolls in the credit insurance policy written in connection with the credit transaction.” The creditor must clearly and conspicuously provide, in a minimum of 10-point type, the specific disclosures, grouped together and substantially similar in headings, content, and format to new Model Form H-17(A). The disclosures must contain:

(A) A heading disclosing the optional nature of the product, together with the name of the product;

(B) A statement that the consumer should stop to review the disclosure, together with a statement that the consumer does not have to buy the product to get or keep the loan;

(C) A statement that the consumer may visit the Web site of the Federal Reserve Board to learn more about the product, and a reference to that Web site;

(D) The following information in tabular and question and answer format:

• A statement that if the consumer already has enough insurance or savings to pay off or make payments on the debt if a covered event occurs, the consumer may not need the product;
• A statement that other types of insurance can give the consumer similar benefits and are often less expensive;
• A statement of the maximum premium or charge per period, together with a statement that the cost depends on the consumer’s balance or interest rate, as applicable;
• A statement of the maximum benefit amount, together with a statement that the consumer will be responsible for any balance due above the maximum benefit amount, as applicable;
• A statement that the consumer meets the age and employment eligibility requirements (the creditor must determine prior to or at the time of enrollment that the consumer meets any applicable age or employment eligibility criteria for coverage);
• If there are other eligibility requirements in addition to age and employment, a statement in bold, underlined text that the consumer may not receive any benefits even if the consumer purchases the product, together with a statement that there are other requirements that the consumer may not meet and that, if the consumer does not meet these requirements, the consumer will not receive any benefits even if the consumer purchases the product and pays the periodic premium or charge; and
• A statement of the time period and age limit for coverage.

(E) A checkbox and a statement that the consumer wants to purchase the optional product, together with a statement of the maximum premium or charge per period; and

(F) A designation for the consumer’s signature or initials (any consumer in the transaction may sign or initial the request).

Voluntary Debt Cancellation or Debt Suspension

The rules for disclosures for voluntary debt cancellation are expanded to cover debt suspension products as well. Charges or premiums paid for debt cancellation coverage for amounts exceeding the value of the collateral securing the obligation or for debt cancellation or debt suspension coverage in the event of loss of life, health, or income or in the case of accident may be excluded from the finance charge whether or not the coverage is insurance, if certain conditions are met. The proposed regulations add that these conditions must be met “before the consumer enrolls in the coverage written in connection with the credit transaction.”

The creditor must clearly and conspicuously provide, in a minimum of 10-point type, the specific disclosures, grouped together and substantially similar in headings, content, and format to new Model Form H-17(A). The disclosures must contain the same information as provided above in connection with credit life, accident, health or loss-of-income insurance (above).

Furthermore, in connection with the offer of debt suspension coverage an additional statement is required that the obligation to pay the loan principal and interest is only suspended, that interest will continue to accrue during the period of suspension, and that the balance will increase during the suspension period. As with the credit insurance products, the consumer must sign or initial an affirmative written request for coverage after receiving the disclosures. Any consumer in the transaction may sign or initial the request.

Model Form H-17(A) may be used for Credit Insurance, Debt Cancellation Coverage, or Debt Suspension Coverage (individual completed samples appear in Appendix H – Model Form H-17(B) for Credit Life Insurance, Model Form H-17(C) for Disability Debt Cancellation Coverage, and Model Form H-17(D) for Unemployment Debt Suspension Coverage).

What about the disclosures for credit insurance, debt cancellation or debt suspension coverage that a creditor requires in a credit transaction? Would they change as well? They would. In this case, the creditor would have to disclose:

(1) A statement that the consumer may visit the Web site of the Federal Reserve Board to learn more about the product, and a reference to that Web site; and

(2) The following information in tabular and question and answer format:

• A statement that if the consumer already has enough insurance or savings to pay off or make payments on the debt if a covered event occurs, the consumer may not need the product;
• A statement that other types of insurance can give the consumer similar benefits and are often less expensive;
• A statement of the maximum premium or charge per period, together with a statement that the cost depends on the consumer’s balance or interest rate, as applicable;
• A statement of the maximum benefit amount, together with a statement that the consumer will be responsible for any balance due above the maximum benefit amount, as applicable;
• If there are other eligibility requirements in addition to age and employment, a statement in bold, underlined text that the consumer may not receive any benefits even if the consumer purchases the product, together with a statement that there are other requirements that the consumer may not meet and that, if the consumer does not meet these requirements, the consumer will not receive any benefits even if the consumer purchases the product and pays the periodic premium or charge; and
• A statement of the time period and age limit for coverage.

There is no model form for the disclosures above; we’re guessing that the model form provided for voluntary credit insurance, debt cancellation or debt suspension coverage could be modified. In any case, the premium or charge for any insurance protecting the creditor against the consumer’s default or other credit loss, or charges paid for debt cancellation coverage written in connection with a credit transaction, that is required by the creditor would be considered a finance charge.

Elizabeth A. Huber is a partner in the California office of Hudson Cook, LLP. Liz can be reached at 310-686-5050 or by email at ehuber@hudco.com.