Alert May 14, 2013

CFPB Proposes to Delay Implementation of Prohibition on Financing of Credit Insurance

The CFPB is proposing to temporarily delay the June 1, 2013 effective date of a prohibition on creditors financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling, which was originally adopted in its final rule governing practices for the origination of consumer mortgage loans in January 2013 (see January 22, 2013 Alert). The final rule addressed loan originator compensation; qualifications of, and registration or licensing of loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single-premium credit insurance. The proposed temporary delay of the effective date of the prohibition on creditors financing credit insurance premiums in the final rule will allow the CFPB to clarify the prohibition’s applicability to transactions other than those in which a lump-sum premium is added to the loan amount at closing.

The final rule generally prohibited creditors from financing any premiums or fees for credit insurance (i.e., credit life, credit disability, credit unemployment, credit property insurance) in connection with any residential mortgage loan or with any extension of credit under an open-end consumer credit plan secured by a consumer’s principal dwelling. However, the prohibition does not apply to credit insurance for which the premiums or fees are calculated and paid in full on a monthly basis or to credit unemployment insurance for which the premiums are reasonable, the creditor receives no compensation, and the premiums are paid pursuant to a separate insurance contract and are not paid to the creditor’s affiliate.

In the lead up to the adoption of the final rule, consumer groups sought clarification on the prohibition’s applicability where credit insurance premiums are charged periodically, rather than as a lump-sum added to the loan amount at closing. In response, the CFPB attempted to clarify the applicability of the prohibition to the periodic premiums in the preamble to the final rule. However, this only drew comments from the industry that the text of the prohibition provision and the preamble left substantial uncertainty about the applicability of the prohibition on credit insurance products charged on a periodic basis. To address these concerns, the CFPB will issue a new proposal seeking further comment on the provision in June 2013, and in the interim is now proposing to temporarily delay the effective date of the provision due to the concern that creditors could face uncertainty about whether and under what circumstances credit insurance premiums may be charged periodically in connection with covered consumer credit transactions secured by a dwelling. The CFPB anticipates delaying the effective date only as long as necessary for any clarifications to be proposed, finalized and implemented, and is soliciting comments on what the new effective date should be. Comments on the proposed delay must be received by May 25, 2013.