truth in lending act: credit insurance

Truth In Lending Act: Credit Insurance

1.    Problems which exist for consumers with credit insurance:
·       Excessive coverage:  Packing extra insurance which no one needs; more insurance necessary than required to pay off debt; longer term than indebtedness; consumer already has life insurance which would apply; pyramiding, when consumer refinances credit and pays for a second insurance policy; insurance not needed because estate will pay off creditor (double dipping).
·       Coersion:  People believe they are required to purchase insurance in order to get loan.
·       Excessive price:  Cost of credit insurance is higher than warranted by the benefit which the consumer receives; cost of credit life insurance is higher than general life insurance (due to shorter duration, higher amount of fixed costs, lower policy amount).
·       Consumers don't feel need or ability to shop around for alternative credit insurance.
2.    How is credit insurance treated under TILA:
·       Costs of credit insurance is required to be included in the finance charge if the insurance is not truly voluntary.
·       Costs of credit insurance is not treated as a finance charge if:
a.    Creditor clearly disclosed in writing to consumer that credit insurance is not required for extention of credit; and
b.    Applicant who is extended credit gives specific affirmative written indication of his desire to do so after written disclosure of the costs.
3.    Why is treatment of credit insurance under TILA not sufficient to protect consumers:
·       Creditors can get around the TILA requirements by saying that asserting that the credit insurance is optional and doesn’t need to be purchased.
·       Creditors can use creative ways of presenting the information to applicants such that the credit insurance truly is voluntary, but applicants don’t perceive it that way.
·       Debtors are in fact being harmed
4.    How might you change requirements of TILA to protect consumers better:
·       Require specific disclosure even if the coverage is voluntary.
·       Limit the amount of coverage to the amount of the debt.
·       Include the definition of “credit insurance” in the Internal Dictionary.
5.    How might you provide better protection for consumers with regard to credit insurance?
·       Require the use of the term “credit insurance” whenever any type of payment protection plan is being offered.
·       Require disclosure (i.e. fact sheet) that if consumer already has life insurance or sufficient assets to cover the debt, credit insurance may not be advisable.
·       Require creditors to quote premiums in terms of the total amount that will be paid over the term of the loan, and each month (as opposed to “this will only cost you xx cents per day!”).
·       Require disclosure of commissions paid to creditor from insurance company.
·       Require that the debtor initial by each term of the credit insurance, to ensure that the debtor read the terms of the insurance policy.
·       Permit civil penalty or private (class) action for creditors who use coercive or fraudulent credit insurance sales tactics.
·       Prohibit selling credit insurance at the time of the contract:  Delay sales until after the fact, so that consumer has time to contemplate.
·       Three day cooling off period.

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