We have granted some mortgage loans with credit insurance in which the customer pays a monthly premium. Reg Z says that the premium must be disclosed for the "initial term" and that it must be one year, not one month. We only disclosed a monthly premium. How do we calculate the correct APR and reimbursement? Do we enter one year of insurance premiums as a finance charge, or do we now need to enter the full 30 years of premiums?

I have never required life insurance and can't say definitively. But I believe your initial term would be the one-year you mentioned.

But these will likely be big bucks, especially if you have many loans. I would read up on it and I would contact someone intimately familiar with this such as Richard Insley at APR Systems. Verify what the issues are and a plan of action. Get with management and possibly your regulators. And to avoid civil liability you have a short window to do all this in.

Looking at the joint policy statement on restitution, it provides the following guidelines:

Violations Involving the Improper Disclosure of Credit Life, Accident, Health, or Loss of Income Insurance

1. If the creditor has not disclosed to the consumer in writing that credit life, accident, health, or loss of income insurance is optional, the insurance shall be treated as having been required and improperly excluded from the finance charge. An adjustment will be ordered if it results in an understated APR or finance charge. The insurance will remain in effect for the remainder of its term.
2. If the creditor has disclosed to the consumer in writing that credit life, accident, health, or loss of income insurance is optional, but there is either no signed insurance option or no disclosure of the cost of the insurance, the insurance shall be treated as having been required and improperly excluded from the finance charge. An adjustment will be ordered if it results in an understated APR or finance charge. The insurance will remain in effect for the remainder of its term.

Since neither of these seem to be the case, I would be hard pressed to say your regulator would force you into a restitution situation for the type of error described.

Was the insurance optional or required?

I have the same situation as it relates to outstanding balance insurance where we have not disclosed on the loan the premium that applies. Our system looks at the port and determines the outstanding balance of the loans and bills the customer monthly for the insurance and then debits their checking account. This is not insurance that we required but offered but did not disclose in the loan docs. We are also trying to figure out to reimburse.

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This is not insurance that we required but offered but did not disclose in the loan docs.

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Was this sold at the time loan closed or at a later date? If it was sold at the time of the loan closing, than you need to following the directions in the joint policy statement above.

The insurance was disclosed as optional. But in response to rlcarey, I was looking at the same sections in the Joint Policy Statement. I may not have provided enough detail, but I think #2 does apply. While we did disclose a cost of coverage (based on monthly premiums) we did not disclose the proper premium because the commentary says that it must be shown for the initial term of one year. This is the type of insurance that fits the description discussed in the commentary where the initial term is unclear so you must disclose based on one year. I am pretty sure we need to calculate a reimbursement. However, where the guidance says "the insurance shall be treated as having been required and improperly excluded from the finance charge" I don't know if that means we need to calculate the entire 30 year premium as a finance charge or just the amount that we should have disclosed in order to exclude it from the finance charge (one year).

Where can I find the joint policy statement on restitution?

Click me for Policy Guide info.

I'm triggering on #2 also and it says " either no signed insurance option or no disclosure of the cost of the insurance". In your case, you disclosed the cost of insurance - it was just not based on the right period (month -vs- year). I think that becomes a disclosure violation and not a restitutional offense. That would be my argument - whether it would stand or not, I don't know. Maybe Richard will read this and he has crossed this bridge before.

For whoever wanted a copy of the Joint Statement of Policy:

Click Here

I have it in my Fed Consumer and Regulatory Affairs Handbook. But its probably in the exam procedures for Reg Z from any federal regulator. Look on their websites for their exam procedures.

Yes it is a reimburseable violation. We just had to do it from our last exam. If you have the APR checker that will walk you through how you figure the reimburseable amount. It will be different for different types of loans (single pay vs payments, etc).

For the Anon who just went through this - was it specifically because you disclosed a monthly premium rather than an annual premium and your regulatory agency ordered restitution?

Yes it was. Some was disclosing monthly and some were not dislcosing at all. We had to go back and check everyone since the last exam and then recalculate and reimburse for everyone that we had not disclosed at either the full term or one year.

When you calculated the reimbursement on APRWIN did you determine the "Amount Financed" by taking out one year of premium or 30 years of premium?

I'm still trying to understand this and would appreciate you thoughts. I'm looking at a consumer loan to purchase an automobile, the loan is secured by the vehicle and the term is 100 days. Principal & interest due at maturity. The borrower requested credit life insurance. It was not required. However our procedures indicate that the borrower must sign or initial in the area where the premium is disclosed. The lender did not get the borrower's signature for the insurance. I thought I understood that this could be a reimburseable situation since the APR and FC were understated by the amount of the CL after recalculation. However, in reading the Joint Agency reimbursement policy it states under Exempted Transactions: "3) Credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer, in which the total amount financed exceeds $25,000.

Since this loan does not involve real property or the princpal dwelling of the consumer and it is more than $25,000 (the amount is $38,089) do I need to be concerned with reimbursement? Thank you.

I'm still trying to understand this and would appreciate your thoughts. I'm looking at a consumer loan to purchase an automobile, the loan is secured by the vehicle and the term is 100 days. Principal & interest due at maturity. The borrower requested credit life insurance. It was not required. However our procedures indicate that the borrower must sign or initial in the area where the premium is disclosed. The lender did not get the borrower's signature for the insurance. I thought I understood that this could be a reimburseable situation since the APR and FC were understated by the amount of the CL after recalculation. However, in reading the Joint Agency reimbursement policy it states under Exempted Transactions: "3) Credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer, in which the total amount financed exceeds $25,000.

Since this loan does not involve real property or the princpal dwelling of the consumer and it is more than $25,000 (the amount is $38,089) do I need to be concerned with reimbursement? Thank you.

I'm still trying to understand this and would appreciate your thoughts. I'm looking at a consumer loan to purchase an automobile, the loan is secured by the vehicle and the term is 100 days. Principal & interest due at maturity. The borrower requested credit life insurance. It was not required. However our procedures indicate that the borrower must sign or initial in the area where the premium is disclosed. The lender did not get the borrower's signature for the insurance. I thought I understood that this could be a reimburseable situation since the APR and FC were understated by the amount of the CL after recalculation. However, in reading the Joint Agency reimbursement policy it states under Exempted Transactions: "3) Credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer, in which the total amount financed exceeds $25,000.

Since this loan does not involve real property or the princpal dwelling of the consumer and it is more than $25,000 (the amount is $38,089) do I need to be concerned with reimbursement? Thank you.

You are lucky that cars cost so much now. This loan is over the $25,000 TIL limit for consumer loans and is thus exempt. Exemption means no restitution. But slap the lender's hand anyway. He or she should have gotten the signature.

Thank you Lucy! I will definitely make a comment in my review as to the lender not following procedures. Sorry about the multiple postings...my computer locked up and I wasn't sure if actually posted.

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However our procedures indicate that the borrower must sign or initial in the area where the premium is disclosed.

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So does 226.4(d)(iii).