Lenders drop single-premium credit insurance
By Michael D. Larson • Bankrate.com

After years of peddling a product that consumer advocates call unnecessary and overpriced, two of the nation's largest consumer finance companies have pledged to stop selling "single-premium" credit insurance on their mortgage and home equity loans.

Predatory lending specialists praised the move by Household International Inc., which lends through Household Finance Corp. and Beneficial branch offices, and Citigroup Inc., which lends through CitiFinancial branch offices and those it added by acquiring the third major industry player, Associates First Capital Corp., in November. They say it will help clean up the subprime lending process.

Credit insurance lives on
But while lenders plan to eliminate the worst kind of credit insurance on home-secured loans, they still plan to offer monthly pay coverage.

That means loan seekers who want to ensure their payments will be made if they die, lose their jobs or become disabled will continue to be pitched a product consumer advocates say is overpriced and a much worse option than traditional term insurance. Other "predatory" lending practices continue to plague subprime borrowers, too.

"They are good steps forward," says Chris Saffert, legislative director for the Association of Community Organizations for Reform Now, or ACORN, in Washington. "But we're seeing in a lot of cases, credit insurance is just one of a lot of problems with their loans.

"It doesn't get to high financing of fees, huge prepayment penalties, interest rates that aren't related to risk and a lot of the other abusive terms we've seen."

Credit insurance comes in three forms: credit life, credit disability and credit unemployment.

Credit life typically pays off a borrower's loan in the event of death while credit disability and credit unemployment covers a customer's monthly payments up to a certain dollar amount or for a prescribed amount of time in the event of an injury or layoff. Borrowers can pay for the coverage on a single-premium or monthly basis.

The cost of credit insurance varies by state and is usually the same for everyone in a given state, though it can vary slightly depending on the coverage term. Factors such as smoking status and age, which can affect the price of regular life insurance, don't affect the rates people pay, according to CitiFinancial.

Preying on the uninformed
Advocates say single-premium coverage is predatory for a number of reasons. For one thing, lenders use high-pressure sales tactics to get unsophisticated borrowers to sign up for as many credit policies as possible.

Consumers aren't reminded that they have the coverage because it shows up just once on closing documents, rather than each month in a line item on the monthly statement. As a result, unscrupulous lenders have an easier time slipping single-premium credit insurance into loans without borrowers being the wiser.

But it's not just how the product is sold; it's the product itself. Single-premium insurance runs into the thousands of dollars and most subprime borrowers don't have that kind of money to fork over at closing. They end up financing their one-time premiums into their loans. That makes an already overpriced product even more expensive because borrowers end up paying interest on their premiums, rather than just the premiums themselves.

Since most single-premium credit policies only last five or 10 years, but many borrower loans have terms of 10, 15 or even 30 years, customers get stuck paying thousands of dollars in interest long after the time period in which the coverage provides benefits expires.

Single-premium snapshot
Say someone wants to borrow $125,000 via a 30-year mortgage. Normally, the total interest cost of that loan would be $303,546, assuming a typical subprime rate of 11 percent.

But if the lender sells the borrower a $3,000, five-year credit disability policy, and rolls that amount into the mortgage balance, the borrower's total interest bill rises to $310,831. That more than doubles the effective cost of the insurance.

"It is certainly one of the products that even generically, even if it were offered correctly with the right disclosures and without fraud and arm-twisting, is a bad product," says Matthew Lee, executive director of Inner City Press/Community on the Move, a Bronx-based consumer advocacy and civil rights group. "It seems so clear that it's not in your interest to pay in advance for something and pay interest on it unless you get a discount.

"I can imagine a power company saying, 'If you contract with us for 10 years, you get a lower rate,'" he adds, but that isn't what happens.

Adjusting their stance
Asked for comment, Citigroup spokeswoman Christina Pretto provided a June 28 letter to CitiFinancial employees from the chief executive officer of the company's consumer group, Robert Willumstad.

In it, Willumstad wrote that single-premium credit insurance products "have been approved by state regulators and voluntarily purchased by borrowers for decades and have provided important benefits to many customers who would not otherwise be able to obtain insurance."

But after talking with regulators, community groups and government officials, the company decided to stop offering single-premium coverage to "take a leadership role in raising standards and practices in the financial services industry."

The company will eliminate all three varieties of single-premium coverage on home-secured loans, but not personal loans. It currently has approval to sell at least one type of credit insurance on a monthly pay basis in 35 states. But it could take until early 2002 to switch all of CitiFinancial's branches over to the new system.

Household representatives didn't return calls, a fax or an e-mail regarding the company's policies or pricing. But in a July 11 statement, the Prospect Heights, Ill.-based company said it would adopt a monthly pay system in a handful of states by the end of August and start switching over branches in other states by early next year.

"Over a year ago, we began taking steps to prepare to offer our customers the flexibility of credit insurance with a fixed monthly premium," Gary Gilmer, president of Household's consumer lending unit, said in the statement.

"Our decision to discontinue sales of the single premium product is a natural outgrowth of that strategy" and the company's discussions with consumer groups.

The company announced further anti-predatory lending policies on July 23. One measure doubles the length of time a borrower has to cancel credit insurance and receive a full premium refund to 60 days from 30.

Credit insurance still suspect
Still, experts contend that any kind of credit insurance, including monthly pay, is usually a bad deal. Borrowers should find out what they would have to pay for term life insurance or other coverage through an independent agent or company, and then compare that to the lender's offer.

Consumers with loans on the books already who aren't sure whether they were sold credit insurance should check their closing documents. Those who have the coverage may be able to cancel it and get a refund of at least a portion of the premium paid at closing.

"You're able to file a request," says Saffert of ACORN. On a five-year policy, "If you file a request a year after the loan was taken out and the policy was put in place, you could get 80 percent of the original amount back."

Of course, customers who had credit insurance, high origination fees and other charges packed into their loan -- or were enticed into taking out high-rate loans they couldn't afford -- may have no way to avoid foreclosure. Advocates say those kind of predatory practices will remain a problem even after lenders phase out single-premium credit insurance.

"We really have come into contact with practices where it's sort of a rogue atmosphere of 'Fool the customer,'" says Lee.

"If you can get more out of a borrower, they say, 'Go for it.'"