Proposed Consumer Financial Agency Is Well-Intended And Fraught With Confusion
The original purpose of the legislation, H.R. 3216, was to rein in unregulated entities and activities that played a role in the most recent economic crisis. It was particularly aimed at predatory mortgage lending. While neither credit unions nor the credit insurance they provide their members played any part in the problem, they would both be brought under the new agency. The legislation would further splinter regulation of credit unions and, for credit insurance, would add a duplicative layer of costly regulation on top of an insurance product that is already highly regulated by each state in which credit unions operate.
Operationally, if enacted as drafted, credit unions would be subject to the NCUA for safety and soundness, the CFPA for compliance with consumer regulations, the Federal Reserve for systemic risk and, if state-chartered, their state regulators for state examinations.
On the insurance side, credit unions would be subject to both their state insurance department and the CFPA for credit insurance activities. But that may be just the beginning. The legislation leaves open the definition of the "business of insurance" that would be subject to CFPA regulation. Consumer groups are asking that any insurance closely related to a credit transaction be subject to the CFPA. That would include auto owners, homeowners and probably others.
With respect to the credit insurance that credit unions offer their members, under the proposed new law each state and the federal government could regulate the price, form, market conduct, licensing and commissions of credit unions and their employees. Under this new dual regulatory construct, there is no clear guidance on which regulator's authority takes precedence. For example, if a state were found to have the strongest pro-consumer position on a clause within the credit insurance contract, then the state would be the regulator for that part of the business. But if the CFPA had a stronger pro-consumer position on another clause within the contract, then the CFPA would be the regulator for that issue. With overlapping authority, the final arbiter would be the courts, the cost of which would ultimately be borne by the consumer for whom the legislation was intended to help.
The one area in which there is no duplication is regulation for solvency. That would continue to reside with each state. But the question of how anyone could separate solvency from product pricing is a mystery the legislation doesn't even attempt to address. In fact, there has been little to no thought on how the CFPA would actually regulate credit insurance with the 50 state insurance regulators.
Confusing? You bet. But it doesn't have to be. Congress should leave insurance regulation to the states or create a federal insurance agency but not try to have credit unions and their credit insurance answer to both. The CFPA isn't the place for insurance regulation, so it should be omitted from the bill.
If lawmakers in Washington are serious about curbing predatory insurance practices closely related to mortgage lending, there's something Congress can do: Ban single-premium credit insurance for mortgage loans. That is the position CUNA Mutual took when it testified in North Carolina in support of that state's proposed ban. Federal legislation to achieve that objective is in antipredatory mortgage legislation that passed the House but stalled in the Senate (H.R. 1728). The House could simply lift the single premium mortgage insurance language from H.R. 1728 and insert it in place of the proposed CFPA language on credit insurance. That's something we can agree upon, and it promises to provide strong consumer protections rather than create confusion.