Regulation Z or the Truth in Lending Act (TILA) provides a specific carve-out exemption and special treatment for the Blanket Single Interest (or VSI as its commonly called) product for various reasons. Predominantly we believe the regulators knew that a great majority of US banks already use the coverage and it is a growing product in credit unions and other lending sectors, which has provided a great option to protect the loan portfolios of lenders efficiently while keeping the cost to customers to a minimum.
Lenders track insurance for one main reason: To minimize the risk of loss they would sustain when loan collateral is not properly insured. All of the work, time, and cost that goes into insurance tracking and force placing is done for the small percentage of customers that don’t have proper coverage and the even smaller percentage of cases where those borrowers then have a loss. Examiners also want to know that the risk of loss to the lender is being dealt with either through tracking and force placing or blanket protection.
Blanket coverage has been so attractive to lenders, examiners, and regulators (who gave it preferential treatment) because it is superior coverage since it does not depend on tracking and force placing which is not always reliable or accurate (mistakes can be made and lenders may not be notified of cancellations). Blanket coverage protects the entire portfolio and the risk of uninsured loss, so it eliminates the time and expense of insurance tracking and force placing. The cost is also attractive in that the premium is normally only $20 to $50 per new loan and is a one-time fee, and on a good policy covers the life of the loan. Most force placed premiums are well over $1000 annually which greatly impacts loan payment amounts and causes delinquency (not to mention ill will with members).
For those reasons the Blanket Single Interest product was given preferential treatment in the regulations to allow for the premium to be passed on to all loans and for the fee to be excluded from the APR calculation. The only requirements for this special carve-out were:
- A simple disclosure that states “Single Interest Insurance. I understand that I may purchase this coverage from anyone of my choosing that is acceptable to you, however if I obtain it from or through you I will pay $X for Y months of coverage.”
- The insurance company behind the product has to waive their rights to pursue collection against the borrower when they pay a claim.
- Charges for coverages that only benefit the lender (like damage after repossession coverage) have to be limited to certain amounts.
Golden Eagle Insurance and our insurance carriers fully comply with these requirements. Included below are the pertinent paragraphs and the Reg Z commentary on the issue. Of special note is that the Reg Z commentary says that the lender need not ascertain whether or not the borrower is actually able to purchase the insurance coverage on their own. They knew that it is not practical or possible for borrowers to purchase this coverage so they wanted to make it clear that even though the disclosure says the borrower may purchase it from anyone they want it is not the lender’s responsibility or concern if they're not able to do so.
Regulators knew that the single interest product was worthy of special treatment and saw the benefits of such a small premium to members as compared to the high cost of individual force-placed premiums, especially since the Blanket Single Interest plan covers the same risk and removes the lender’s huge cost and burden of insurance tracking and force placing.
Regulation Z, TILA 226.4 (d)
(2)Property insurance premiums. Premiums for insurance against loss of or damage to property, or against liability arising out of the ownership or use of property, including single interest insurance (if the insurer waives all right of subrogation against the consumer), may be excluded from the finance charge if the following conditions are met:
(i) The insurance coverage may be obtained from a person of the consumer's choice, 6 and this fact is disclosed. (A creditor may reserve the right to refuse to accept, for reasonable cause, an insurer offered by the consumer.)
(ii) If the coverage is obtained from or through the creditor, the premium for the initial term of insurance coverage shall be disclosed. If the term of insurance is less than the term of the transaction, the term of insurance shall also be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under § 226.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage.
Regulation Z Commentary on 226.4 (d)Single-interest insurance. Blanket and specific single-interest coverage are treated the same for purposes of the regulation. A charge for either type of single-interest insurance may be excluded from the finance charge ifThe insurer waives any right of subrogation.The other requirements of § 226.4(d)(2) are met. This includes, of course, giving the consumer the option of obtaining the insurance from a person of the consumer's choice. The creditor need not ascertain whether the consumer is able to purchase the insurance from someone else. Single-interest insurance defined. The term single-interest insurance as used in the regulation refers only to the types of coverage traditionally included in the term vendor's single-interest insurance (or VSI), that is, protection of tangible property against normal property damage, concealment, confiscation, conversion, embezzlement, and skip. Some comprehensive insurance policies may include a variety of additional coverages, such as repossession insurance and holder-in-due-course insurance. These types of coverage do not constitute single-interest insurance for purposes of the regulation, and premiums for them do not qualify for exclusion from the finance charge under § 226.4(d). If a policy that is primarily VSI also provides coverages that are not VSI or other property insurance, a portion of the premiums must be allocated to the non-excludable coverages and included in the finance charge. However, such allocation is not required if the total premium in fact attributable to all of the non-VSI coverages included in the policy is $1.00 or less (or $5.00 or less in the case of a multiyear policy).