WASHINGTON--Representatives of the insurance industry--both life and property and casualty--are raising strong objections to the Federal Reserve Board's new initiative to make credit insurance subject to strong disclosures through the Truth In Lending Act.
The letter was written by the American Insurance Association and the American Council of Life Insurers relating to amendments being proposed by the Fed to Regulation Z, the Truth In Lending Act.
The proposal would require substantive additional disclosures relating to the sale of credit insurance when selling a financial product.
Critical to the AIA and ACLI's concern is that the data the Fed wants creditors to disclose would be through model forms that require disclosures in a tabular and question-and-answer format.
But in voicing opposition to the new requirements, the AIA and ACLI object, because, they argued, "... a fair reading of the tone of the language proposed in the model forms presents the products in a very negative light."
Amongst the disclosures that would be required by banks selling a credit insurance product to a potential customer would be the possible need for the insurance product and the cost of the insurance expressed as a dollar figure tailored to the amount of the loan using the maximum rate under the policy rather than a unit cost basis as is presently required.
And the proposal would mandate that a bank disclose when selling credit insurance whether the premium is based upon the outstanding balance or periodic principal or interest payment.
Moreover, the disclosure must be based upon the maximum outstanding balance or periodic principal and interest payment possible under the loan agreement.
The AIA and ACLI stated in their letter that they believe the Fed's proposal conflicts with the McCarran-Ferguson Act and state laws relating to the business of insurance.
"Moreover, the AIA and ACLI have concluded that the Board's proposal invalidates, impairs or supersedes state laws regulating the offering of credit life, accident, health and loss-of-income insurance," the comment letter said.
The letter contends that the U.S. Supreme Court has already said that statutes aimed at protecting or regulating the relationship between an insurer and insured are laws regulating the business of insurance.
The letter argues, "Virtually every state maintains comprehensive regulations affecting the offering of credit, life, accident, health and loss-of-income insurance, which are the same categories of insurance that are subject to the Board's proposed disclosures."
Furthermore the letter said, states dictate the premiums that may be charged, the terms that insurance policies may possess, the content of disclosures that must be provided to prospective policyholders and requirements as to when disclosures must be provided to consumers.
In effect, the letter says, by proposing disclosure language that conflicts with state regulatory requirements, " the Fed has made a subjective determination that state mandated disclosures are inadequate and has substituted its judgment for that of the states, which the McCarran-Ferguson Act directs are the primary regulators of insurers."
The letter adds, "Because the use of model forms insulates creditors from potential liability for violations of TILA, it is anticipated that virtually all creditors will employ the Fed's model forms if the proposed rule is adopted."
The AIA and ACLI contend in their comment letter that, TILA cannot possibly be read as a basis for the proposal's deep intrusion into areas such as policy terms, coverage and exclusions, which are areas the McCarran-Ferguson Act clearly reserves for the states."
Moreover, the letter says, "as numerous other commenters have advised the Board, the proposed disclosures themselves are confusing, ambiguous and incomplete.
"In addition, the language of the Board's proposed disclosures, which effectively dissuade consumers from purchasing these insurance products, will undoubtedly compound consumer confusion and misunderstanding," the letter says.