For loans with closing dates on or after January 10, 2014, premiums for most credit insurances are generally prohibited from being financed into a loan, to wit:
“(1) A creditor may not finance, directly or indirectly, any premiums or fees for credit insurance in connection with a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling). This prohibition does not apply to credit insurance for which premiums or fees are calculated and paid in full on a monthly basis.
(2) For purposes of this paragraph (i):
(i) “Credit insurance”:
(A) Means credit life, credit disability, credit unemployment, or credit property insurance, or any other accident, loss-of-income, life, or health insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract, but
(B) Excludes credit unemployment insurance for which the unemployment insurance premiums are reasonable, the creditor receives no direct or indirect compensation in connection with the unemployment insurance premiums, and the unemployment insurance premiums are paid pursuant to a separate insurance contract and are not paid to an affiliate of the creditor;
(ii) A creditor finances premiums or fees for credit insurance if it provides a consumer the right to defer payment of a credit insurance premium or fee owed by the consumer beyond the monthly period in which the premium or fee is due; and
(iii) Credit insurance premiums of fees are calculated on a monthly basis if they are determined mathematically by multiplying a rate by the actual monthly outstanding balance.” (12 CFR § 1026.36[i])
However, the laws in the states of Oklahoma, Pennsylvania, and Texas do allow for the financing of premiums, either upfront or on a monthly basis. In connection with such financing, the borrower is to be provided with a disclosure containing statutorily-prescribed text (an “Optional Credit Insurance Notice”), which informs them that the cost of the insurance premiums is being prepaid and financed into the loan. Massachusetts has a similar requirement, though the language of the required disclosure is not prescribed.
Because the language of (most of) these disclosures is statutorily-prescribed with no provision allowing for material alterations, it is not possible to alter the language and still be in compliance with state law. In addition, because the language is statutory, only the state legislatures may authorize a modification to the text, rather than state regulatory agencies.
This leaves several conundrums. One is where the borrowers may elect to purchase credit insurance, the upfront premiums of which are not financed (due to Regulation Z), but they are informed that such premiums are being financed (due to state law). Another one is where the borrowers may pay for the credit insurance premiums upfront and out of pocket (thus complying with Regulation Z), but they will be receiving a disclosure stating that the premiums are being financed into the loan, which is incorrect.
Finally, to complicate matters further, the Oklahoma and Massachusetts laws which require the disclosures are exempt from being governed by Regulation Z, in accordance with 12 CFR § 1026.29. However, such exemptions only apply to the extent that such laws do not conflict with Regulation Z and, clearly, a case can be made that a conflict does exist in regards to the financing of credit insurance premiums.
We have been in consultation with officials from several state agencies on this matter, as well as attorneys from the CFPB and, based on our own conclusions from these discussions, we will be modifying each of our versions of the Optional Credit Insurance Notice to include a disclaimer, which will generally state the following (there will be slight variations state-by-state):
You have been provided an Insurance Notice, which is required under state law, in which you were informed that if you choose a single premium payment for certain credit insurances that the cost of the premium will be financed by the mortgage loan you have applied for.
If such premiums are paid in full outside of your mortgage loan, the provisions in the Insurance Notice concerning the cost of the insurance being prepaid and financed is not applicable. However, the cancellation privileges described in the Insurance Notice still apply, even though the insurance is prepaid.
Please also note that under Federal law, particularly 12 CFR § 1026.36(i), the financing of premiums or fees for certain credit insurances is generally prohibited in connection with consumer credit transactions, secured by a dwelling, which are subject to the Truth-in-Lending Act and Regulation Z.
In order to segregate this disclaimer from the statutorily-prescribed disclosure, it will print on a separate page within the same document and contain an exclusive border, as well as containing the caption “Lender (or Creditor) Disclaimer,” so that borrowers are aware that this disclaimer is not prescribed by the state, but is being provided by the lender.
Slight variants of this disclaimer will print in the Oklahoma (Cx3324), Pennsylvania (Cx1027), and Texas (Cx3715) versions of the Optional Insurance Notice. Since its language is not prescribed, the Massachusetts version (Cx3745) will not contain a disclaimer, but the first sentence of the document will be modified to state the following:
“This loan contains [x], does not contain [x], credit life insurance and other goods and services, which will be prepaid and financed at the interest rate established for the loan, unless applicable Federal law provides otherwise.”
The laws which require and (where applicable) set forth the language of the Optional Insurance Notices are:
Mass. Regs. Code tit. 209, § 32.34(2)(b) (2013)
Okla. Stat. Ann. tit. 14A, § 4-113 (2013)
63 Pa. Stat. Ann. § 456.512(f)(2) (West 2013)
Tex. Fin. Code Ann. § 343.104 (West 2013)
The disclaimer will print on the document all the time, when Field Index 67281 (Closing On or After 01/10/2014) equals “Yes.” These changes will be pushed to Production on December 12, 2013. If you have any questions or concerns about these changes, please contact Client Support at 1.800.497.3584.
December 5, 2013