Reg Z Proposals May Harm CUs and Members
The Federal Reserve Board's proposed amendments to Regulation Z regarding credit insurance and debt protection products are inaccurate, misleading and negative. These proposals would not only significantly change the rules, they have the potential to devastate credit union sales of these products.
The new rules would apply to credit protection products such as short-term credit and mortgage life, disability, and unemployment insurance; debt cancellation and suspension products that cancel or suspend loan balances or payments in the event of death, disability, unemployment or other events; and guaranteed asset protection.
Currently, Reg Z says creditors can exclude the cost of credit protection products from a loan's annual percentage rate if three requirements are met: (1) the purchase of the product has no bearing on the creditor's decision to approve the loan; (2) the cost of the product is disclosed; and (3) the borrower consents to the purchase.
The new rules set forth three new requirements regarding disclosure, eligibility and mortgage loan APR.
The proposal triples the number of required disclosures and mandates a tabular, question-and-answer format in a ten-point font. More significantly, the content of the proposed disclosures is inaccurate and misleading, with a pronounced negative bias against the products. Particularly egregious disclosures for credit life insurance include questions and explanations on the necessity and benefits of the product (see box).
The first disclosure assumes members already have term life insurance or similar coverage, and they should use those benefits to pay off their loans. Purchasers of these products seldom have that type of coverage, which is why they are interested in the credit protection product. This disclosure also assumes those products are less expensive than credit insurance, which simply is not accurate.
The second disclosure is alarmist and implies the member would never receive benefits. There are more objective and accurate ways of explaining that some conditions and exclusions may apply. For example, the Office of the Comptroller of the Currency's debt protection disclosure simply states that "there are eligibility requirements, conditions, and exclusions that could prevent a consumer from receiving benefits."
Another problem with the proposal is the way the Fed tested the disclosures with consumers. This research was not sound. Because the disclosures are inaccurate, the consumers came away with an inaccurate understanding of the product. Also, the disclosures were tested on only 18 consumers-10 in the first round and eight in a second round. The sample was not large enough to yield valid conclusions.
The second requirement is that credit unions must check age and employment eligibility prior to the purchase of products with such requirements. The credit union may no longer rely on statements or answers contained in the product application. Eligibility must be checked against "reasonably reliable evidence," such as the birth date on the member's driver's license or a current pay stub. If eligibility is not checked and documented, the credit union cannot exclude the product cost from the loan's APR. Doing so would be a Reg Z violation.
Finally, the new rules would require credit unions to include the cost of the product in the APR for closed-end loans secured by real estate or a dwelling, in addition to the required disclosures and eligibility check. This contradicts the language of the Truth-in-Lending Act and would make the cost of the loan look higher than it actually is.
Credit unions' safety and soundness would suffer under these rules. Sales of credit protection products would fall because the disclosures tell consumers the products are bad. Credit unions' noninterest income would shrink when they can least afford it.
The rules also would raise the cost of administering credit protection programs due to increased length, programming, and complexity of the disclosure forms. Credit unions' delinquencies, defaults and charge-offs would also rise because fewer members would have protection to pay their loans in the event of their death, disability or unemployment.
Finally, the rules would do a disservice to members who believe the negative slant and decline a product that could provide valuable benefits to them at critical times in their lives.
The Federal Reserve Board is very close to finalizing these rules and the credit union industry must speak up now. You can submit comments, identified by "Docket No. R-1390," to the Federal Reserve by Dec. 23, 2010, via e-mail, fax or mail. The agency's website provides instructions for submitting comments at www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm. To obtain a sample comment letter and find more information about the proposal, visit Securian's credit protection microsite at http://bit.ly/btJM1.
All comments will be public record and posted on the Board's website.
You have an opportunity to tell the Federal Reserve Board that the new rules would require credit unions to provide disclosures that are inaccurate, misleading and biased. They would discourage members from buying the products, jeopardizing their personal financial well-being and threatening credit unions' safety and soundness.
Catherine M. Klimek
is counsel at Securian Financial Group
651-665-3285 or firstname.lastname@example.org