CFA and Consumer Reports Issue Studies Calling Auto Insurer Pricing Practices Unfair

Last week, both CFA and Consumer Reports issued separate studies on how auto insurers price their insurance policies.  Both reports criticized these insurers for relying more heavily on socio-economic factors than on driving ability in this pricing.  Both organizations then jointly submitted the reports to state insurance regulators and the Federal Insurance Office, calling on these regulators to evaluate and check unfair auto insurance pricing practices.

The CFA report focused on auto insurer use of marital status in this pricing.  It found that most major auto insurers charged higher premiums to single, separated, divorced, and widowed drivers than to married drivers.  CFA Executive Director Stephen Brobeck commented:  “Insurer use of marital status and other non-driving factors in their pricing tends to discriminate against lower income drivers who are less likely to be married than are drivers with higher incomes.  This discrimination is especially harmful because car ownership allows most Americans to hold the best available job and meet other needs, yet in all but one state, car owners are required to purchase auto insurance.”  J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner, noted:  “The ‘widow penalty’ and other pricing related to marital status provides still another reason – along with insurer use of other socio-economic factors and price optimization – for state insurance departments to examine insurer pricing more carefully and to end unfair practices.”

The Consumer Reports study, The Truth About Car Insurance, which is the magazine’s September cover story, was based on a two-year investigation of more than two billion prices.  It found that insurers often give more weight to socio-economic factors, such as credit scores, in their pricing than to how well and how much consumers drive.  As well as joining with CFA to communicate to regulators, Consumer Reports is using social media, including a national petition, to mobilize consumer support for needed reforms.

New Rules Rolled Out for the Military Lending Act

The Obama Administration and Department of Defense issued a strong new rule last month to close loopholes in the Military Lending Act (MLA), a law adopted in 2006 to prevent payday and other high-cost, abusive lenders from targeting servicemembers and their families and thus putting their security clearance and careers at risk.

When rules were adopted implementing the law in 2007, however, they applied the law’s 36 percent rate cap to only a small number of loan types, such as payday loans of 91 days or less and auto title loans of 181 day or less, and exempted payday and auto title loans structured as open-end credit.  By extending the term or restructuring the loan as open-end credit, lenders have continued to target more than one out of every ten active-duty servicemembers with high-cost credit.

The new rule provides several significant new protections to active duty servicemembers and their families, including the following:

• It applies market-wide to all high-cost credit products that target service members, including payday, auto title and installment loans that were excluded from the 2007 protections;
• It caps interest and add-on fees at 36 percent for loans issued to servicemembers and their dependents;
• It preserves service members’ access to the courts by prohibiting mandatory arbitration agreements.

“For nearly a decade, high-cost lenders have exploited loopholes in critical military financial protections so they can continue lending at abusive rates far above the 36 percent rate cap established by Congress,” said CFA Director of Financial Services Tom Feltner in a press statement. “The final rule will ensure that servicemembers and their families get the financial protections they deserve.”

DOL Rule Proposal Offers Much Needed Protections to Retirement Savers

In a comment letter filed last month with the Department of Labor (DOL), CFA praised the agency for proposing a tough but flexible package of rules that would provide much needed new protections for retirement savers and do so in a way that enables well-meaning financial professionals operating under a variety of business models to comply.

“Working families and retirees trust and expect that the financial professionals they turn to for retirement investment advice will act in their best interests, but too often that trust is misplaced,” said CFA Director of Investor Protection Barbara Roper in a press statement. “Because of loopholes in the definition of fiduciary investment advice under ERISA, broker-dealers, insurance agents, and other sales-based ‘advisers’ are able to evade their fiduciary responsibilities to put the interests of their customer first.  When they recommend high-cost, risky or otherwise inferior investments because they happen to be highly profitable for the seller, the retirement saver can end up paying a heavy price in the form of tens of thousands of dollars of lost retirement income.”

The DOL rule proposal addresses this problem by closing loopholes in the definition of fiduciary investment advice while simultaneously providing relief that enables sales-based advisers to comply with their fiduciary obligations.  “As we document in our comment letter, conflicts of interest pervade the industry and taint the recommendations that retirement savers receive,” said CFA Financial Services Counsel Micah Hauptman.  “Contrary to industry claims, the costs of that conflicted advice are typically much higher than comparable services from non-conflicted, fiduciary advisers.  The DOL proposal would preserve individuals’ ability to pay for services through commissions and other such fees while ensuring for the first time that those who prefer to pay for advice in this manner don’t have to give up their right to best interest recommendations.”

The Department is holding public hearings on the rule proposal this month, after which it will reopen the comment period for another month to 45 days before finalizing the rule.

Senate Committee Passes Bill to Roll Back Consumer Protections

The Financial Services and General Government (FSGG) subcommittee of the Senate Appropriations Committee approved appropriations legislation last month that includes a measure to roll back important consumer protections and undermines the ability of crucial agencies to fulfill their missions of protecting consumers.

The bill threatens the viability of the Consumer Financial Protection Bureau (CFPB), does not adequately fund financial regulators, including the Commodity Futures Trading Commission (CFTC), and would prevent the Consumer Product Safety Commission (CPSC) from promulgating a rule to establish critical safety standards for recreational off-highway vehicles, CFA warned in an earlier letter to the Senate Banking Committee.

“This bill is opposed by every Democrat on the Senate Banking Committee and negatively impacts home ownership and financing, financial stability, and improved access to capital and tailored regulation in the financial markets,” said CFA Legislative Director Rachel Weintraub in a press statement. “The bill as drafted would eliminate crucially important consumer protections and reopen financial markets and consumers to the same risks that brought down the financial system in 2008.”

DOE Proposes Strong Furnace Efficiency Standards

Proposed energy efficiency standards for residential gas furnaces could save U.S. households at least $16 billion, according to top consumer experts calling for the adoption of standards. CFA, National Consumer Law Center, Massachusetts Union of Public Housing Tenants, and Texas Ratepayers’ Organization to Save Energy submitted comments to the U.S. Department of Energy (DOE) last month endorsing a proposed Annual Fuel Utilization Efficiency (AFUE) for furnaces of at least 92 percent. A 95 percent AFUE (including certain exemptions) would bring even greater consumer savings, they argued.

“The standards governing natural gas furnaces have been in place for almost a quarter of a century with no meaningful increase. U.S. consumers cannot afford to wait any longer for pocketbook savings of $16 billion and total economy-wide energy savings of $20 billion. These savings must be delivered post haste via new standards,” said CFA Director of Research Mark Cooper in a press statement.

The groups found that:

• Energy savings under the proposed standard would be about twice as large as the cost of fuel saving technologies.
• The payback period on efficient furnaces would be less than half the life of the appliance.
• Many more consumers would enjoy net benefits than bear net costs.
• U.S. households that benefit would have much larger gains when compared to the losses of the individuals who do not benefit from the standard.
• Consumer benefits apply to low-income consumers, and in many cases, low-income consumers will benefit more than others.
• DOE has underestimated the net pocketbook benefits of the proposed standard.
• The standard brings significant environmental, public health and macroeconomic benefits.

The groups urge the DOE to adopt a standard as soon as possible but certainly by the spring of 2016.  “Although the harm done to consumers through years of inaction and stonewalling from the industry on this standard cannot be undone, by adopting a higher standard today, future harm can be prevented,” Cooper concluded.