Credit Insurance Alternative Emerges
With the advent of NCUA's new incidental powers rule, credit unions are just now starting to get into the 40-year-old business of debt cancellation, with United Airlines Employees CU becoming the first CU in the nation to offer the product to its members in partnership with CUNA Mutual Group.
Debt cancellation is similar in concept to credit life and disability insurance, but because it is not truly an insurance product, an institution need not have an insurance license to offer it, according Keith Nelson, vice president and product manager at CUNA Mutual Group.
"Both are techniques to protect the loan. With credit insurance, there is a third party involved, and though the credit union sells the credit insurance to the member, the contract is between the member and the third party. With debt cancellation, the contract is between the member and the credit union," he explained. "The financial institution making a loan already has the power to cancel that debt; this is just an extension of those incidental powers related to making a loan. The credit union can charge a fee to exercise those powers under certain conditions."
While the product itself is not an insurance product, insurance will come into play for credit unions seeking to offer debt cancellation. "The transaction is between the credit union and the member, but most credit unions don't have the expertise or financial backing to offer this. They're taking on a risk, and they will want to transfer that risk to an insurance company by purchasing an insurance policy."
That's where CUNA Mutual eventually plans to step in. The insurance company is participating in a pilot program with United Airlines Employees CU, Chicago, which is in the process of transferring its credit insurance members over to debt cancellation products. The transition began July 1 and UAECU hopes to have all credit insurance transferred over to debt cancellation by September.
Though it has been referred to as a pilot program, primarily because CUNA Mutual Group is using UAECU's program to work the kinks out of administering such a program before rolling out debt cancellation to all credit unions, for UAECU, this is no experiment.
"Everyone has been transferred to debt cancellation and we are no longer offering credit insurance," said Jennifer Divelbiss, member communications manager. "There is no going back."
Only about 1% of previous credit insurance holders opted not to take the debt cancellation product and no longer have any sort of credit insurance.
How Product Is Priced
UAECU is basing the pricing of the product on the type of loan as well as the features members select-joint coverage, single coverage, the amount and type of coverage, etc. One of the bonuses to moving to debt cancellation was the ability for the credit union to offer a wider variety of features more tailored to their unique membership. In particular, the ability to offer unemployment coverage was a key change.
UAECU has priced its debt cancellation product from 70 cents per $1,000 to $3.60 per $1,000.
While debt cancellation isn't necessarily a more lucrative product than credit insurance, the benefit is in offering greater flexibility to the members, said Lance Vandenbroek, project manager-debt cancellation products with the credit union.
But both Vandenbroek and Nelson emphasized that debt cancellation is not for every credit union.
"Credit unions should explore all the risks associated with debt cancellation and go into this with eyes open," Nelson suggested. "They need to seek out a partner with the expertise to offer this or acquire that expertise themselves. There's a lot of legal research, product development, even data processing issues; you have to construct new loan forms and calculators. You have to know all the details to look at."
Vandenbroek agreed and offered tips to credit unions interested in debt cancellation: "make sure your DP outfit is willing to work to support it, because they probably don't have the software on the shelf to support this. Make sure you have key people involved in the process from start to finish. And let members know what you're doing and be as up front as possible."
For state charters there is another issue: ensuring the respective insurance regulators don't consider debt cancellation an insurance product requiring a license.
NASCUS recently reported that some states are still debating who has the power to regulate debt cancellation. The National Association of Insurance Commissioners hasn't made a determination on the issue, so some state insurance departments have been exploring their authority in this area, NASCUS said.
But Nelson pointed out that when insurance regulators have asserted they have authority in these matters, challenges to that authority have been successful and that the regulators have never won in any of those cases.
Even so, at least one state regulator-the Kentucky Department of Insurance-has determined that any institution selling debt cancellation must have a limited line credit license.