News Room

July 26, 2001

Assurant Group Urges Senate Committee to Evaluate Single Premium Credit Insurance on Merits as Filling Critical Need for Sub-prime Borrowers

Atlanta/Miami: Congress is considering a ban on the sale of single premium credit insurance as part on its investigation of predatory lending practices. On July 26, 2001, Jerome Atkinson, executive vice president and general counsel of Assurant Group, submitted a written statement to the U.S. Senate Banking Committee asking that single premium credit insurance be evaluated on its merits as a product that fills a critical need for sub-prime borrowers. His statement emphasized the following points:

• Predatory lending practices are reprehensible and should be vigorously attacked by Congress. However, these practices should not be confused with credit insurance products, which borrowers with limited options depend on to make critical investments, consolidate loans, protect them and their families against bankruptcy and get back on their feet financially.
• While credit life insurance is not designed for everyone, it has served for many decades as an important financial planning tool for those consumers with health and other risk factors who cannot easily obtain or afford traditional term life insurance.
• A recent study conducted by Purdue University found that marketing/coercion accounts for a maximum of just 3.5 percent of all credit life insurance sales. Additionally, according to a recent study conducted by a major consumer lender on behalf of Assurant Group, 98 percent of purchasers of truncated single premium credit insurance surveyed from a group of 1,800 participants indicated that they were satisfied with their purchase, felt no pressure to buy the product and understood the coverage and truncation features of the coverage.
• If single premium credit insurance is ultimately eradicated from the marketplace, the very group of low-income homeowners that Congress is seeking to protect from predatory lending practices will find themselves at even greater risk of bankruptcy, foreclosure and estate liability.

The complete text of Mr. Atkinson’s statement follows.

Statement Of Jerome Atkinson, Esq. Before the Senate Banking Committee Hearings on Predatory Lending

July 26, 2001

Mr. Chairman and members of the Committee, my name is Jerome A. Atkinson, and I am Executive Vice President and General Counsel of Assurant Group. Assurant Group is a $5 billion (in premium) affinity marketing group that sells products, including credit insurance, and services (managing debt cancellation programs for financial institutions) designed to assist consumers in achieving peace of mind by effectively managing their debt and risk (in terms of extended service warranty contracts). We do not lend money, but we are the largest producer of credit insurance in the United States and we work in collaboration with lending institutions, including banks. We believe our product meets a key risk management need of a sizeable segment of our population.

Given our role in the production and availability of credit insurance, including single premium credit insurance, we had very much hoped to be able to testify before this Committee during the course of these hearings, and we are very disappointed that our written request to that effect was denied. This statement, however, represents our attempt to make two very important points: 1) that credit insurance and, specifically, single premium credit insurance, is an important and necessary product for many consumers who need it, and 2) that credit insurance is a product, not a predatory lending practice, and the Committee should not confuse the two.

If a consumer is misled into believing that a loan is contingent on single premium credit insurance, or if a consumer is improperly pressured into making loans and then sold single premium credit insurance, Congress and the regulatory community not only have the right, but the moral obligation, to attack those problems with righteous vigor, and we will back your collective efforts every step of the way. But for the Congress and/or the regulatory community, at the behest of Congress, to attempt to eradicate the product from the marketplace, when many hard working consumers say they need and depend on it to help them get back on their feet, is both inappropriate and misguided. If single premium insurance is unavailable to people who depend on it, people who live from paycheck to paycheck, and who need the psychological cushion which credit insurance provides when death or disability disrupts their ability to meet their financial obligations, then where will they go when unforeseen circumstances rob them of their financial resources? This is a question that this Committee must not only ask, but answer, before it comes to any comprehensive conclusions as to how to address problems related to predatory lending practices.

Background

It is critically important that it be understood that credit insurance on home equity loans, whether single premium or in some other form, is not designed for everyone, but, rather, for those who, because of health or other risk factors cannot obtain traditional term insurance as cheaply and conveniently as they can get credit insurance. For this population, credit insurance has, for over seventy years, been a very important financial planning tool. Without it, borrowers, whose market options are limited, may not choose to purchase the house they want and need, or package their debts through the consolidation of a number of outstanding debts which they may owe.

There are, of course, many different kinds of credit insurance. Some is offered in connection with credit cards, to cover the unpaid balance in the event of death or disability, and, similarly, in conjunction with purchases such as jewelry and automobiles. But the largest credit insurance coverages, in terms of dollars per loan, are usually offered in combination with home equity loans. As noted above, they are often used as a means to insure loans that consolidate a variety of outstanding debts that the borrower owes. Usually, lending institutions offer life insurance and disability insurance as a package, only sometimes including involuntary unemployment insurance. But for people whose jobs place them in jeopardy of physical injury, or worse, the knowledge that credit insurance will pay their debts in case of death or disability can be a great comfort.

One credit insurance product, in particular, has attracted a great deal of attention, and it will be the subject of a great deal of discussion during these hearings. That product is "truncated", single premium credit insurance related to home equity financing. This is a product which provides both life insurance and disability insurance for a residential borrower on a larger than average loan (over $15,000) with a longer than average term (120 months). The insurance premium is paid in a single payment at the start of coverage and is financed as part of the home loan transaction, just as other needs often are. The length, or term, of insurance coverage is usually "truncated," meaning that the consumer has guaranteed insurance coverage for a period of time (most often 60 months, or five years) that is shorter than their loan term (often 120 months). But their payment schedule, and therefore their monthly cost, is spread out over the life of the loan, and therefore less than would otherwise be the case. Why would someone do this? It seems like counter intuitive behavior, but the typical users of single premium credit insurance are good, hardworking people, with severe financial problems. Specifically, they are carrying too much debt. They are also often over forty years of age, empty nesters, and work in small businesses without the benefit of life and/or disability insurance benefits and, as previously mentioned, they often work in occupations that are hazardous. The drain on their financial resources may be the result of college costs, an unexpected illness, or an unanticipated interruption in their employment income. In this weakened financial condition, they find that they have been declined a prime rate loan and have discovered that the only loan they can quality for is a "high risk" or "sub prime" loan.

When they take out sub prime loans, this population does not do so with the expectation that they will indefinitely remain sub prime creditors. Instead, they typically plan to put their financial houses in order within five years and regain their eligibility for the lower interest rates that prime lenders offer. Thus, the first 60 months of the loan is critical to the ability of borrowers to get back on their feet, and it is particularly imperative, during that time frame, that they not become disabled or otherwise unable to meet their obligations.

This population is also not likely to have any life insurance. In fact, sixty eight percent (68%) of all American households earning less than $35,000 do not have life insurance. Moreover, due to their low income, they have probably not even been solicited by traditional insurance agents. Most Americans who can afford to do so, in order to protect against unforeseen events, especially when large financial commitments are at stake, have an insurance policy. Because of the sometimes dangerous nature of their employment, the presence of medical problems and/or the cost of traditional insurance, the sub prime population is often unable to qualify for insurance of any kind, and so they are left exposed to risk when they borrow. That’s where credit insurance can be a savior.

Consumer Value

Over the past 3 years, Assurant has paid out more in disability claims than it has collected in premiums. In fact, our present claim-to-premium ratio (116%) suggests that our company is losing money, and we will soon be asking state insurance departments to approve reasonable rate increases. On the life insurance side, the claims paid equals 50% to 60% of the premiums collected. Studies suggest that the traditional term life claim-to-premium ratio is about 40%. For disability it is in the 50% to 60-% range. Our actuarial studies find that for persons who can take a physical and show they are in good health and are under 41 years of age, traditional term life rates are cheaper than credit insurance. But the profile of the typical purchaser of single premium credit insurance does not parallel these characteristics.

Moreover, traditional term insurance rates are age specific, with rates increasing with age, while credit insurance offers the same price, regardless of age, within an allowable range. Under the McCarran Ferguson Act, the States have responsibility for regulating insurance, and a number of them have dictated that insurance may not be sold to persons beyond a certain age. Interestingly, all fifty states and the District of Columbia regulate the rates of credit insurance, while none regulate term life rates, according to surveys by both the Financial Services Roundtable and the Assurant Group.

Traditional term life is also limited in its accessibility. For example, rates are not quoted on the Internet for loans below $25,000, and insurance salesmen generally do not attempt to sell small term life policies because the profit margin is very narrow. Credit life, on the other hand, is available at the point of sale, and in the amount of the loan. In addition, traditional term life policies often have life style limitations, while credit insurance does not. These life style issues involve whether an applicant has a dangerous job, such as working in a machine shop, operating heavy equipment or other, physical jobs. Very importantly, traditional term life policies often require a physical examination and tests, while a credit life policy involves answering a few questions designed protect the insurance company against applicants who know themselves to be mortally ill. (See Tab A for typical health questionnaire.)

Bottom Line: Single premium credit insurance is a better deal for consumers over 41 years of age because it is cheaper and it is generally more available that traditional term life insurance.

To the sub prime borrower, disability insurance is even more important than life insurance. In 1999, 46% of the 1.2 million bankruptcies filed in the US and 46% of foreclosures could be traced to medical causes. But disability insurance is not generally available to anyone on a stand-alone basis. When it is available, for many Americans, it is part of an employer benefits package, but sub prime borrowers are generally not among them.

Monthly Alternative to Single Premium Insurance

Much will be said about the use of credit insurance paid on a monthly basis. In fact, we have been developing a monthly outstanding balance level premium product, and we have received approval from 19 state departments of insurance for this product. We have requests for approval pending in 21 other states. Which approach should a borrower take if states would allow both to be sold? Assume a typical loan of $28,000, with a 12% interest rate over 25 years (remember, the sub prime borrower represents a higher risk, and the interest rate available to him reflects that reality). A typical single premium rate for 5 year truncated credit insurance covering life and disability to be paid at closing is $2,136 and the monthly cost of the financed premium payment for the five year truncated single premium policy would be $22.53 per month (including tax-deductible interest), while the premium for the level monthly product is $32.97 (excluding interest). This difference constitutes a cash flow improvement of 46%: $10.44 a month, or $125.25 a year, a small yet often important difference for people living on the financial edge.

The obvious question, and the one which will be raised repeatedly throughout these hearings, is whether this slight annual benefit justifies a payout program in which the coverage lasts for five years, yet the obligation to pay continues over the life of the loan, with the end result that, if the loan remains in effect after five years, the borrower is paying for coverage he/she no longer has?

To answer this question fairly, and there are many who have already come to a visceral, negative conclusion, one has to consider context. Typical sub prime borrowers are in tight financial straits, and insurance, as we have previously noted, provides them with a level of security many of us take for granted. But every penny counts for people in this demographic category, and they do not intend their poor credit history to last. They expect their financial obligations, such as college or medical expenses, to taper off, their employment situation to improve, through a better job and/or a raise, and they expect the equity in their home to rise, over time, along with its market value. In other words, they fully expect to refinance at a traditional interest rate within five years, thereby negating any long-term obligation.

In a very real sense, their long term insurance payment obligation is not unlike the mortgage obligation that they and most homeowners have. In the typical mortgage, which is spread out over 30 years, the interest is front-end loaded, and the bulk of the principle is paid in the latter years of the loan. So, in the first years of a mortgage, borrowers are paying a disproportionate percentage of interest, and the converse is true in the latter years. And the potential payout, for prime and sub prime borrowers alike, is huge. The only difference lies in the interest rate and the fees and points which are charged by lenders. A typical prime mortgage of $100,000, for example, if repaid over the course of its thirty year life at a rate of 7.5%, will result in a total payout, interest and principal included, of $251,717. For the sub prime borrower, it is potentially much worse. But for both categories of borrowers, this prospect is more myth than reality. Since the average homeowner sells or refinances his house every 5 to 7 years, and the remaining, unpaid principle is credited to the lender at settlement, these long-term costs rarely materialize.

Our preliminary studies indicate the same is true of truncated, single premium credit insurance, that when the home is sold, or refinanced, as normally happens in an average of 4 to 5 Years, both long and short term obligations are extinguished at settlement. It may well be that the initial decision on the part of the sub prime borrower to take on more debt while in a perilous financial situation is a poor choice, but that has nothing to do with credit insurance. Truncated, single premium credit insurance merely guarantees that the bills will be paid if death or disability occurs in the first five years of the loan, and spreading out the payment obligation over the life of the loan serves to improve the borrower’s monthly cash flow.

The Real Issues

What ought to be the focus of primary concern during the predatory lending debate is not so much whether options available to sub prime borrowers include truncated, single premium credit insurance, but whether, if they decide to purchase it, their decision to do so is an informed one, and whether predatory tactics are utilized to trick or pressure borrowers into purchasing it or any other loan-related product. As we mentioned at the outset, credit insurance is very strictly regulated by all fifty states and the District of Columbia. There is no "hidden ball" trick here. If some sub prime lenders are pressuring borrowers to refinance loans in order to meet irrational sales quotas, a practice known as "loan flipping", with the result that borrowers lose equity in their homes through the payment of additional points and fees, a result called "equity stripping", then immediate steps ought to be taken to stop it. And we wholeheartedly support the Committee in such efforts. But, again, these practices have nothing whatsoever to do with the product of credit insurance. If anything, credit insurance is the borrower’s real friend. It is his/her protector against bankruptcy due to the loss of income or disability and it protects his/her estate and family from debts through tax-free life insurance equal to the amount of the loan.

We strongly advocate the imposition of Best Practices in the sub prime marketplace. The American Financial Services Association (AFSA) issued a Statement of Voluntary Standards for Consumer Mortgage Lending six months ago. With respect to credit insurance products, the statement urges its members to assure that they make full and accurate disclosures and emphasize that credit insurance is always optional and "never a condition to the extension of credit." AFSA also urges that the consumer be given a choice of single premium or monthly premium insurance products. Finally, they urge a 30-day "free look," with a full refund and pro rata refund at any time should the borrower chance his/her mind.

As noted above, some of our clients have gone beyond this to pro-actively survey customers to make sure that they realize they bought the insurance, that they are satisfied with it, and that they understand that they have the opportunity for a full refund. Furthermore, many states have installed excellent disclosure programs, which make it clear to consumers what they have bought and what they have paid.

Predatory lending is an abhorrent practice. But the evidence demonstrates that credit insurance, in whatever form, is not a culprit. In fact, the available evidence suggests otherwise. It suggests that, nationally, Best Practices are generally adhered to when it comes to the sale of credit insurance. For example, a study by Purdue University found that marketing/coercion accounts for a maximum of 3.5% of all credit life insurance sales. Our own, internal research has found that credit insurance has only a 12% take rate, or penetration level – which would suggest that, contrary to assumptions, market "packing" is not a widespread practice. Two Federal Reserve studies also have shown that "involuntary tying is not widespread" and that "creditors do not subject borrowers to undue pressure to purchase credit insurance." It is also worth noting that the 30-day "free look", with a 100% refund, is standard practice in the sale of credit insurance.

Purchasers Are Satisfied

One major consumer lender agreed to share with us the results of its customer satisfaction surveys, if we agreed to use them without attribution. As a part of their best practices program within the last year, they surveyed 20% of the purchasers of truncated single premium credit insurance from any originator with an unusually high penetration rate (over 35%).

Of the approximately 1,800 people contacted within sixty days of their purchase of the product, 98% indicated that they were satisfied with their purchase, and felt no pressure to buy the product, and understood the coverage and the truncation feature of the coverage. Less than 2% said that they were unsatisfied, but less than half of that group said they wanted their money back. This systematically collected data does not suggest that there is a chorus of consumers who are unhappy with their single premium credit insurance.

Conclusion

Mr. Chairman and members of this Committee, credit insurance, in a very real sense, has become a victim of guilt by association in the debate on predatory lending practices. It is simply not a practice, predatory or otherwise. It is a product, which studies show has been sold in a responsible manner. Credit insurance is also a value to the borrower. The borrower gets a valuable insurance coverage, especially if the borrower is over 41 years of age and has any concerns about his health. But the real victims of efforts to eliminate this product from the marketplace will be the people who depend on it. Where will they go for comfort when they consolidate large loans or fear disability or death during the critical first five years of the repayment period?

Monthly credit insurance, which some think is preferable, has its own risks. If the borrower encounters an unintended shortage in funds and the payment of monthly premiums lapses, coverage may not be available if death or disability intervenes; remember, single premium credit insurance is paid at settlement, and coverage is guaranteed for five years. Moreover, as has been noted previously, the monthly product is not even currently available in all states, and it may take years before all fifty states and the District of Columbia approve its use. What are borrowers to do until then? Their only recourse will be to take a chance if they want a loan. Some will decline to buy a house or refinance what they have. Others will take that chance, and some of them will be unable to pay their monthly mortgages and lose their homes. These questions, in our judgement, are just as important and valid as any others in this debate. Sub prime borrowers are just as capable of making informed decisions as those eligible for traditional loans; there is an unspoken undercurrent in the debate that suggests that they are not, or that this "class" of borrowers are somehow undeserving of both credit and products to insure that financial obligation. This view, in our judgment, is dead wrong. Sub prime borrowers are people who are down on their luck, and their decision to protect their family and themselves through the use of single premium credit insurance is a rational, responsible decision in an uncertain personal and financial environment. Ultimately, policymakers want low income Americans to have access to credit, even when the risks are high and the options limited. And so do we. Eliminating single premium credit insurance from the scene, if that is the goal, will not improve the lot of low-income homeowners. It will only worsen it.

Life and Health Insurance Foundation for Education’s 1998 survey, "America’s Financial Insecurity."

Media contact

Jerome Atkinson
Telephone: 770.763.1592

James A. Sykes
Director, Corporate Communications
Assurant Solutions
260 Interstate N. Circle, SE
Atlanta, Ga. 30339-2111
Telephone: 770.763.1015
FAX: 770.859.4325
E-mail: james.sykes@assurant.com