Fed Proposal Reveals Evidence GAP

Imagine making a major business decision based on how 18 people responded to a survey. Pretty irresponsible, right? Well, the Federal Reserve Board doesn’t think so. In fact, that’s exactly what it’s doing with its newly proposed disclosure requirements under the Truth in Lending Act’s Regulation Z, which, if you hadn’t heard, will impact your ability to sell credit insurance, GAP and debt cancellation agreements.

The study in question was conducted by Calverton, Md.-based ICF Macro. The results, released last July, helped Fed officials craft new disclosures for selling loan protection products. The problem, as Michael Benoit, the magazine’s Legal columnist, puts it, is that they’re basically “designed to convince your customers not to buy them.”

He’s right. In fact, one of the proposed disclosures reads in big bold letters: “You may not receive any benefits even if you buy this product.” My favorite is the one that reads: “Other types of insurance can give you similar benefits and are often less expensive.” Again, 18 people helped the Fed come to its conclusions.

What’s even more amazing is the study was focused mainly on credit insurance for home mortgages. In other words, respondents weren’t shown GAP or debt cancellation agreements. In fact, only one of the 18 respondents indicated that he was familiar with credit life insurance “in the context of car loans.” My question is: When will regulators understand that it wasn’t the auto business that sent the economy and the credit markets into a tailspin?

Look, I’m all about dumbing down disclosures a bit so you don’t need a law degree to understand them, but come on. And why not allow the Federal Trade Commission and the new Consumer Financial Protection Bureau handle this? Well, truth is, the Fed has been in the process of reviewing Regulation Z since 2004. It’s goal is to ensure that disclosures the rule requires are structured and worded in such a way that consumers can easily understand them and use them in their financial decision making. Still, how can you come to a conclusion based on a survey that doesn’t mention all of the products you aim to regulate?

To be fair, there were some eye-opening findings. In fact, I think most of us would be willing to help fix the problems the study identified.

For instance, only five out of 10 interviewees questioned in Phoenix last March understood that credit insurance was not required on their line of credit. Additionally, only half understood that there was a cap on their benefits. That’s fixable, right?

Now, I think I figured out why the Fed and its new disclosures took on the tone they took. See, when eight out of 10 respondents said they were surprised to learn that they may not realize the benefits of credit insurance even after purchasing it and making payments for a number of years, many of them indicated that knowing that made them less likely to purchase the products.

So, when ICF Macro took its findings to Memphis for its second round of interviews on April 16, it showed interviewees its new “You may not receive any benefits even if you buy” disclosure. Well, guess how respondents reacted? Yup, they weren’t interested in the product. But is that full disclosure? And was that the intent of the study?

Again, I think I’m OK with reviewing regs to make sure they’re working as intended, but can we make sure all parties are considered and that regulator A is talking to regulator B?

Take what’s happening in California, where what seemed like a harmless Omnibus Bill (AB 2782) is now threatening a key GAP benefit — deductible coverage. See, the bill was intended to get the state in line with the Producer Licensing Model Act. However, when the state’s dealer association asked the California Department of Insurance to clarify what was considered credit insurance, the agency, in its response, said GAP waivers could not cover a customer’s deductible.

San Diego-based OwnerGUARD is on the case. The F&I product provider is working with the agency and the state’s dealer association on fixer legislation, but there are several hurdles standing in the way. The best case scenario is to get something through the legislature by June.

In the meantime, GAP providers are racing to get their forms up to speed with the new law. Luckily, the insurance agency has delayed enforcement of the new requirement, which went into effect on Jan. 1, through March 31.

Remember when I wrote in December that we’re heading into a new period of rulemaking? Well, welcome to the party. But instead of complaining, it’s time to get active, especially those of you in California.