CFPB Monitor News Guidance Perspectives of CFPB | Ballard Spahr Law Firm Blog

CFPB proposes delay in effective date of Reg Z prohibition on financing credit insurance premiums

Posted in Mortgages

The CFPB has issued a proposal to temporarily delay the June 1, 2013 effective date of the Regulation Z prohibition on financing credit insurance premiums (Section 1026.36(i)).  The proposal responds to concerns raised by industry about the CFPB’s interpretation that the prohibition would apply to level premiums (meaning premiums that remain the same amount each month, are paid in full each month and are not financed). 

The prohibition was one of the amendments to Regulation Z made by the CFPB’s final rule on loan originator compensation issued in January 2013.  It was intended to implement new Truth in Lending Act Section 129C(d) added by the Dodd-Frank Act.  Section 129C(d) generally prohibits a creditor from financing the purchase of credit insurance in connection with any residential mortgage loan or extension of credit under an open-end plan secured by the consumer’s principal dwelling.  It also provides that fees for credit insurance “calculated and paid in full on a monthly basis shall not be considered financed by the creditor.” 

Industry was blindsided when, after conclusion of the notice and comment period, the CFPB included language in the background discussion of the final loan originator compensation rule indicating that it interpreted the rule to bar level premiums.  Because that language had not previously appeared in the background discussion of the CFPB’s proposed loan originator compensation rule, industry had no opportunity to comment on the prohibition’s applicability to level premiums before the rule was finalized.  Since adoption of the final rule, industry has been urging the CFPB to revisit its interpretation and clarify that level premiums are outside the scope of the prohibition because they are “calculated on a monthly basis” even though they do not decrease each month as the loan balance decreases and are not “financed” because they do not increase the borrower’s principal loan amount and are paid in full each month. 

If the CFPB’s interpretation that level premiums are encompassed by the prohibition were to become effective, it would effectively shut down the sale of mortgage life insurance. That’s because the entire industry charges mortgage life insurance premiums on a level and not a declining basis. We have been retained by several industry participants to urge the CFPB to revisit its interpretation of the prohibition as encompassing level premiums.  That language is also contrary to the interests of consumers since it would have required companies to charge higher monthly premiums in the earlier years of loans when the principal balances are highest. 

Comments on the proposal are due by May 25, 2013.  In its discussion of the proposal, the CFPB indicates that it plans to publish a new proposal regarding the scope of the prohibition and propose a new date for when the prohibition would become effective following finalization of that proposal.