National consumer organizations urged Congress today to ensure that the proposed Consumer Financial Protection Agency (CFPA) has regulatory authority over credit insurance, title insurance and mortgage guaranty insurance.  In a letter to the House Financial Services Committee, which will begin consideration of legislation to create a CFPA this week, consumer groups said that credit-related insurance products are often precisely the type of products for which the CFPA is needed to protect consumers.

Bob Hunter, Director of Insurance for the Consumer Federation of America and former Commissioner of Insurance in Texas said, “The rationale for the CFPA is to create a single agency responsible for the consumer protection of financial products, which will prevent lenders and insurers from playing one regulator off another.  Credit-related insurance products, which are often overpriced and sold in conjunction with abusive loans, are a glaring example of terrible consumer protection because of poor regulatory oversight and industry lobbying power.

Birny Birnbaum, Executive Director of the CEJ and former Chief Economist at the Texas Department of Insurance said, “The vast majority of states do a terrible job protecting consumers for credit-related insurance.  And federal agencies do an even worse job protecting consumers of credit insurance substitutes – ‘payment protection’ products called debt cancellation contracts or debt suspension agreements.”

The letter to Congress identified several problems with the oversight of credit insurance:

• Providing the CFPA with authority to set minimum standards that cannot be skirted is appropriate because credit-related insurance products are already subject to both state and federal regulatory requirements. The sale of credit insurance is typically inseparable from the sale or servicing of a credit product.  In fact, credit insurance is often “packed” into a loan product and not chosen voluntarily by consumers;
• Lenders often use “regulatory arbitrage” too seek out the weakest regulator of credit-related insurance products at the federal or state level;
• Credit-related insurance product markets are characterized by reverse competition – competition which drives up prices to consumers – which requires strong regulatory oversight to protect consumers;
• Credit insurance has historically been a primary tool for predatory lending and equity skimming in the refinance mortgage market, auto financing, and personal loans, and they remain so:
• State and federal regulators have done a very poor job of protecting consumers of credit-related insurance products and their banking counterparts’ debt cancellation contracts and debt suspension agreements. The groups conservatively estimate that Americans have been overcharged by at least $17.5 billion since 2004 for credit insurance alone.
• Regulatory oversight of credit-related insurance products is biased towards insurers, lenders, and auto dealers because consumers have no institutionalized advocate to counter the lobbying of those who benefit from excessive prices.

Birnbaum said, “The best measure of value of a credit insurance product is the ratio of benefits paid on behalf of consumers to the premiums paid by consumers for the product – the portion of premium paid for the benefit of consumers.  Credit insurance benefit ratios are pitiful in most states with ratios in the single digits or teens for some products and states.”

Hunter added, “State insurance regulators fought to stop the federal regulation of DCC/DSA to prevent lenders from playing federal regulators off against state regulators at the expense of consumers, but they lost that fight.  State insurance regulators now have the chance to prove their claim that consumer protection is their number one priority by supporting the creation of the CFPA and its authority over credit-related insurance products.”

Birnbaum concluded, “The CFPA is a litmus test for state insurance regulators.  If state insurance regulators are committed to consumer protection, they will support the CFPA and its authority over credit-related insurance products.  But, if state regulators are more committed to protecting their turf, they will oppose the CFPA’s authority in this area at the expense of the consumers they pledged to protect.

The national consumer organizations urging the members of the House Financial Services Committee to retain credit insurance authority for the Consumer Financial Protection Agency included:  the Center for Economic Justice, the Center for Responsible Lending, the Consumer Federation of America, the National Consumer Law Center, and the U.S. Public Interest Research Group.