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Financing Credit Insurance on Mortgage Loans - Rule Takes Effect in June

The Credit Union National Association's (CUNA) Regulatory Advocacy group continues to urge the Consumer Financial Protection Bureau (CFPB) to provide flexibility to credit unions regarding two practices relating to covered mortgage-related insurance: adding a monthly charge for credit insurance premiums to the loan balance; and charging a fixed monthly fee for the credit insurance that does not decline as the loan balance decreases.

Under the Dodd-Frank Act and the mortgage loan originator compensation rule, the financing of single premium credit-related insurance in connection with closed-end mortgage loans secured by a dwelling and open-end loans secured by a principal dwelling is prohibited. However, the CFPB Supplementary Information to the final rule has indicated the two practices cited above could also be problematic, even though the proposal did not address these issues.

CUNA has requested that the CFPB, at a minimum, postpone the June 1 effective date regarding these two practices to allow credit unions more time to comply and permit CUNA to continue to pursue flexibility and clarify several key implementation issues with the CFPB.

Credit unions that offer credit life and disability insurance and debt protection programs connected with covered mortgage loans need to consider compliance options, according to Mike McLain, CUNA’s Senior Assistant General Counsel for Compliance. He advises that such credit unions will need to review their contracts and payment plans carefully to make sure that they calculate and collect insurance premiums and debt protection fees consistent with the regulation. Credit unions will also need to discuss the new provisions with their insurance providers and their data processors to determine how best to comply. Short-term solutions may be necessary unless the CFPB provides additional flexibility or delays the effective date. In very recent discussions with a key CFPB regulatory attorney on this issue, CUNA has learned that the agency intends to propose a rulemaking as soon as June to further clarify the statements it included in the Supplementary Information under § 1026.36(i) of Regulation Z, which implements the Truth in Lending Act. CUNA will circulate a Comment Call when the proposal is issued and plans to file a strong comment letter urging as much flexibility as the Dodd-Frank Act will permit.

The agency has shared with CUNA that the CFPB has heard from others on this issue, and believes that further clarification is necessary surrounding certain key terms included in this rule provision, including “financed,” and “calculated and paid in full on a monthly basis.” Until this new rule is issued, credit unions may need to consider short-term solutions on any loan applications received after the rule revisions take effect. For example, credit unions may consider establishing a temporary system where the monthly premium is withdrawn from a share or share draft account. It appears that adding the insurance premiums to an “escrow” account or “bucket” where no interest is charged on the premiums, the principal amount is not increased due to the addition of credit insurance premiums, and both the loan balance and credit insurance premiums are declining, may be acceptable methods as long as the premiums were paid in full each month.