ARLINGTON, Va.-The Fed is proposing new language for credit protection provisions of Truth in Lending disclosures that may discourage consumers from taking credit insurance products, according to several analysts.
The Fed's proposal is included in its latest review of Reg Z closed-end rules related to real estate lending, and impact credit life, credit disability, debt cancellation, debt suspension, and GAP products. NAFCU, CUNA Mutual Group, and industry analysts caution that if the disclosures are finalized in their current form, not only will they further impair CU revenue streams, they will place members at greater financial risk (see related story). Members who need the protection will forgo the products, increasing defaults.
"The Fed has created model disclosures that really make the consumer question whether they want to buy credit life and credit protection," stated Anthony Demangone, NAFCU director of regulatory compliance. "Credit unions need to take a look and see how much money they bring in from the sale of these products and understand that hypothetically, if this rule goes final in its current form, they will probably see downward pressure on net income. All things being equal, people reading these new disclosures will be less likely to purchase these products."
Demangone described the language as "paternalistic," citing an example from the Fed's proposal for credit life disclosure. "The first thing it says is 'Stop. You do not have to buy credit life insurance to get this line of credit.' It also states that 'you may already have enough insurance or savings to pay off this line of credit.' And the new form underscores that consumers may not even receive any benefits if they buy the product."
Demangone reminded that the Fed is taking comments on the disclosures up to December 23, 2010. He believes if credit unions are vocal, the Fed will amend the forms.
Since scope of the Fed's latest Reg Z review is broad, it will take time to issue a final rule, according to Demangone, who surmised it may be until late 2011 or early 2012 before the new legislation kicks in. He said NAFCU will be providing feedback to the Fed on the proposal and encouraged credit unions to send their comments to NAFCU to be included in the trade association's Fed submission.
CUNA Mutual Group fears if CUs do not voice their opinions and share how the credit protection disclosures could impact CUs and their members, the language may likely go through in its current form. "I think there could be a good chance of that happening," said Bill Klewin, CUNA director of regulatory compliance. "When a proposal is made it means the Fed is being very serious. Often the Fed writes the final rule as the proposed rules are written unless they see some really compelling policy reasons not to do so."
CUNA Mutual is working with state leagues and CUNA to make sure CUs are aware of the Fed's proposal. "We are already seeing credit unions sending letters to the Fed," Klewin said.
Yet there is risk that the new disclosure language may pass as is because many credit unions are unaware of the Fed's actions, insisted Klewin, who pointed out the focus on credit protection products is "hidden" within hundreds of pages of the Reg Z review.
In San Antonio, Security Service FCU knows of the Fed's proposal and has concerns over the impact on the $6-billion credit union's ROA. "We will be working with our trade association to get some changes (to the proposal) made," said SVP John Worthington.
According to Laida Garcia, CEO of the $282-million Florida Central CU in Tampa, the disclosures would "definitely discourage members from purchasing the coverage. There is nothing wrong with providing consumers with clear disclosures, but the proposed language is one-sided and does not include any of the benefits that the coverage provides. In its present form, I anticipate the purchase of credit life and credit disability will significantly drop, impacting not only our non-interest income but also our dollars in delinquent loans."
"This is just a bad regulation," concluded Klewin. "It is not good for credit unions, the system, or members."
