Reg Z Prohibition on Financing
Credit Insurance
(12 CFR § 1026.36 (i))
The Consumer Financial Protection Bureau’s (CFPB) prohibition on financing
credit insurance under Regulation Z goes into effect on January 10, 2014. The
provision applies to closed-end consumer credit transactions secured by a
dwelling and home equity lines of credit (HELOCs) secured by the consumer’s
principal dwelling.
O cto be r 24 , 201 3
F o r th e l at e st in fo rmat ion
p le ase se e CUNA’s eGuide
to Federal Laws and
Regulations
Valerie Moss
Regulatory Compliance
CREDIT UNION NATIONAL ASSOCIATION ©
Reg Z Prohibition on Financing Credit Insurance
As of October 24, 2013
TABLE OF CONTENTS
Background
2
Amended Section 1026.36 (i) and New Comment
2
CFPB Clarifies Prohibition on Financing Credit Insurance
2
What is “financing” under the rule?
5
What does it mean to be “calculated and paid in full on a monthly basis”?
5
What about accrued interest
9
CompBlog Post – Update on Financing Credit Insurance Premiums (10/8/13)
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Reg Z Prohibition on Financing Credit Insurance
As of October 24, 2013
Background
Dodd-Frank Act Section 1414 added Truth in Lending Act Section 129C(d), which generally prohibits a creditor
from financing premiums or fees for credit insurance in connection with a closed-end consumer credit transaction
secured by a dwelling, or an extension of open-end consumer credit secured by the consumer’s principal dwelling.
The prohibition applies to credit life, credit disability, credit unemployment, credit property insurance, and other
similar products, including debt cancellation and debt suspension contracts (defined collectively as “credit
insurance” for purposes of this discussion). The same provision, however, excludes from the prohibition credit
insurance premiums or fees that are “calculated and paid in full on a monthly basis.”
In the 2013 loan originator compensation final rule, the Consumer Financial Protection Bureau (CFPB) adopted the
statutory provision without substantive change in Regulation Z Section 1026.36(i): prohibition on financing single
premium credit insurance. The final rule provided an effective date of June 1, 2013 for Section 1026.36(i) and
clarified that the provision applied to transactions for which a creditor received an application on or after that
date.
In the preamble to the final rule (not in the regulation or commentary), the CFPB stated that “adding a monthly
charge for the insurance to the loan balance would amount to financing the premiums for credit insurance rather
than paying them in full on a monthly basis,” and doing so would “fail to satisfy the conditions for the exclusion.”
CUNA and CUNA Mutual Group urged the CFPB to clarify the scope of the provision in light of the comments in
the supplemental information to the final rule. It was clear that “single premium” credit insurance was prohibited.
However, credit unions needed clarification regarding the application of the prohibition to monthly premium
payments. Many credit unions’ data processing systems add the insurance premium amount to the loan balance
on a monthly basis and as a result, it would be quite costly for changes to be made by June 1, 2013. Responding to
these concerns, the CFPB delayed the June 1 effective date until January 10, 2014 and on September 13, 2013,
clarified the scope of the prohibition on financing credit insurance premiums in connection with dwelling-secured
consumer credit transactions.
Amended Section 1026.36 (i)
The amended Section 1026.36(i) reads as follows:
(i) Prohibition on financing credit insurance.
(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):
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Reg Z Prohibition on Financing Credit Insurance
As of October 24, 2013
(A) “Credit insurance” 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.
(B) The term “credit insurance” 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 or fees are calculated on a monthly basis if they are determined mathematically by
multiplying a rate by the actual monthly outstanding balance.
New Comment
Comment 36(i) - Prohibition on financing credit insurance.
Financing credit insurance premiums or fees. In the case of single-premium credit insurance, a creditor
violates § 1026.36(i) by adding the credit insurance premium or fee to the amount owed by the consumer
at closing. In the case of monthly-pay credit insurance, a creditor violates § 1026.36(i) if, upon the close of
the monthly period in which the premium or fee is due, the creditor includes the premium or fee in the
amount owed by the consumer.
CFPB Clarifies Prohibition on Financing Credit Insurance
Right away, you’ll notice that the CFPB removed the term “single premium” from Section 1026.36(i). Single
premium credit insurance has generally been understood to mean a lump sum premium added to the consumer’s
loan balance at consummation. However, the CFPB clarified that Section 1026.36(i) more broadly prohibits a
creditor from “financing” credit insurance premiums “directly or indirectly” in connection with a covered
consumer credit transaction secured by a dwelling. In other words, the rule generally prohibits a creditor from
financing credit insurance premiums at any time. So, the prohibited financing of credit insurance premiums is not
limited to the addition of a single, lump-sum premium to the loan amount by the creditor at consummation.
What is “financing” under the rule?
Under final Section1026.36(i)(2)(ii), “financing” occurs when a creditor treats a credit insurance premium as an
amount owed and provides a consumer the right to defer payment of that obligation.
According to the preamble to the rule, the CFPB believes this clarification best conforms the concept of
“financing” in Section 1026.36(i) with Regulation Z’s concept of an extension of “credit” in Section 1026.2(a)(14),
which is defined as “the right to defer payment of debt or to incur debt and defer its payment.” The CFPB also
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Reg Z Prohibition on Financing Credit Insurance
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clarified that granting the consumer this right to defer payment only constitutes financing if it provides the
consumer the right to defer payment of the premiums or fees “beyond the period in which they are due.”
The CFPB also added comment 36(i)-1 to clarify how the prohibition applies to single-premium and monthly pay
products. It clarifies that in the case of single-premium credit insurance, a creditor violates Section 1026.36(i) by
adding the credit insurance premium or fee to the amount owed by the consumer at closing.
The comment states further that, in the case of monthly-pay credit insurance, a creditor violates the provision if,
upon the close of the monthly period in which the premium or fee is due, the creditor includes the premium or
fee in the amount owed by the consumer—and thus treats it not as a monthly charge that could be cancelled
prior to being due, but as a “debt” that is owed by the consumer to the creditor, which the consumer then would
have a right to pay at some later date.
What does it mean to be “calculated and paid in full on a monthly basis”?
Credit insurance for which premiums or fees are calculated and paid in full on a monthly basis are excluded from
the provision’s general prohibition. Section 1026.36(i)(2)(iii) states that that credit insurance premiums or fees are
calculated on a monthly basis if they are determined mathematically by multiplying a rate by the monthly
outstanding balance (e.g., the loan balance following the consumer’s most recent monthly payment).
According to the CFPB, a premium or fee that is “calculated on a monthly basis” is a premium or fee that declines
as the consumer pays down the outstanding principal balance. Credit insurance with this feature is often referred
to as a “monthly outstanding balance,” or M.O.B. credit insurance product. The CFPB stressed that a premium is
not paid in full on a monthly basis merely because it is contractually required to be paid monthly.
“Levelized premiums” refer to a flat monthly payment that is derived from a decreasing monthly premium
payment arrangement and “level premiums” refer to premiums for which there is no decreasing monthly
premium payment arrangement available. According to the CFPB, “level or levelized premiums or fees that are
calculated by multiplying a rate by the initial loan amount or by a fixed monthly principal and interest payment
are not ‘calculated on a monthly basis’ in any meaningful way because the factors in the calculation do not change
monthly (in contrast to the M.O.B. credit insurance product).”
Nevertheless, the CFPB emphasized that “a credit insurance product with a level or levelized premium is not
prohibited by this final rule. For any credit insurance product that does not meet the conditions of the exclusion,
this final rule’s clarification on what constitutes a creditor’s financing of credit insurance premiums or fees
applies.”
What about accrued interest?
Lastly, the CFPB addressed the issue of creditors adding credit insurance premiums to a consumer’s principal
balance before the premium is due from the consumer—even though no funds are advanced on behalf of the
consumer at that time. Interest then accrues on the increased principal until the consumer’s subsequent payment
is credited to the account.
The CFPB stated that the accruing interest does not indicate that the creditor has financed the premium because
the creditor doesn’t advance any funds for the premium, and therefore, could not add to the consumer’s debt
until after the consumer’s payment is actually due. Nevertheless, “the Bureau believes that interest charged
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Reg Z Prohibition on Financing Credit Insurance
As of October 24, 2013
under such practices raises potential consumer protection concerns and may not be appropriate --although the
reason it may be inappropriate is not because it indicates the creditor is financing the premium. Rather, the
potential concerns arise if the creditor is charging the consumer additional interest on the premium even though
the creditor is not financing the premium.”
CUNA CompBlog Post: Update on Financing Credit Insurance Premiums (10/8/2013)
A new final rule prohibiting the financing of credit insurance premiums
By David K. Tomar, CUNA Mutual Group
The Consumer Financial Protection Bureau (Bureau) delivered its final rule on
September 13, 2013 prohibiting the financing of credit insurance premiums and
debt protection fees (premiums). The rule can be found here. The rule is effective
for loans whose applications are taken on or after January 10, 2014. The scope of
the rule still applies only to closed-end loans secured by any dwelling or open-end
loans secured by a principal dwelling.
Thanks largely to the efforts of CUNA, credit unions, and CUNA Mutual, the Bureau agreed that adding a premium
to the outstanding loan is not “financing” if the premium is posted and paid in the same monthly period, even if
some interest accrues. That’s the most common scenario and a huge relief for credit unions because credit
unions do not need to make changes by January 10, 2014.
Unfortunately, the Bureau also said that forbearances, modifications, and other delinquencies (including skip-apays) could cause a violation because it could amount to financing. That’s so, says the Bureau, because it is a
violation if credit unions, upon the close of the monthly period in which the premium is due, include the premium
in the amount owed by the member. The Bureau suggested various solutions: offer a grace period to the
member, suspend coverage, or cancel coverage immediately upon non-payment. While offering these
suggestions, the Bureau did not address the rules, regulations and agreements of the underlying credit insurance
or debt cancellation products, so some revisions to credit union practices might follow.
Finally, the Bureau also said that, regardless of everything else, and while not a violation of the financing
prohibition, the practice of charging interest was viewed as a potential violation of state or Federal law, though
the Bureau cited no specific examples. The Bureau did, however, acknowledge it will “monitor and may revisit”
these practices in the future.
So what’s that mean? It means the Bureau wants credit unions to either refund the additional interest or change
the way their data processing systems account for the premiums (e.g., don't include the premiums in the loan
balance). The Bureau did not put a timetable on when a change in practice needs to be in place. Rather, credit
unions should begin planning a way to account for the premiums that is consistent with the Bureau’s new rules
and changes, while not required by January 10th, should happen sooner rather than later (e.g., 2014 and not
2016).
There is, obviously, much more to the story. But since this is a blog, we’ve kept it brief. So, in the meantime, if
you have questions or want more information, feel free to contact CUNA compliance staff
at [email protected] or myself at CUNA Mutual ([email protected]) if you have any questions.
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