The CFPB has issued a final rule delaying the June 1, 2013 effective date of the Regulation Z prohibition on financing credit insurance premiums (Section 1026.36(i)).  The final rule sets January 10, 2014 as the prohibition’s new effective date, which is also the effective date for most of the mortgage-related rules issued by the CFPB in January 2013.  

The CFPB had proposed the delay in response to concerns raised by industry about the CFPB’s interpretation that the prohibition would apply to level premiums. The CFPB plans to issue a new proposal clarifying the prohibition’s applicability to transactions in which credit insurance premiums are charged periodically.  In the new proposal, the CFPB intends to seek comment on what effective date would be appropriate for the prohibition as clarified. 

The prohibition was intended to implement new Truth in Lending Act Section 129C(d), which generally prohibits a creditor from financing the purchase of credit insurance in connection with any residential mortgage loan or extension of credit under an open-end plan secured by the consumer’s principal dwelling.  It also provides that fees for credit insurance “calculated and paid in full on a monthly basis shall not be considered financed by the creditor.” 

Industry had urged the CFPB to revisit its interpretation and clarify that level premiums are outside the scope of the prohibition because they are “calculated on a monthly basis” even though they do not decrease each month as the loan balance decreases and are not “financed” because they do not increase the borrower’s principal loan amount and are paid in full each month.  The American Bankers Association, joined by the Consumer Bankers Association and six other industry trade groups, filed a comment letter supporting the CFPB’s proposal to delay the prohibition’s effective date. 

According to the supplementary information accompanying the final rule, the CFPB felt it was “appropriate to adopt” the January 10, 2014 effective date for the prohibition “rather than suspend the effective date indefinitely pending the clarification.”  Although the CFPB states that it intends to seek comment on the appropriate effective date, it appears to be signaling that any delay in the effective date beyond January 10, 2014 is unlikely.  The CFPB’s summary of the final rule states that “[t]he Bureau is not contemplating extending the effective date beyond January 10, 2014.”   While indicating that it “is mindful of” comments “that suggest creditors will need time to adjust certain credit insurance premium billing practices once the clarifications are finalized,” the CFPB states that it “is also mindful of the fact that the protections provided by Congress would have applied effective January 10, 2013, had the Bureau not promulgated implementing regulations.”  The CFPB further states that it expects industry to “begin making appropriate modifications to facilitate the implementation process as quickly as practicable once the additional clarifications are finalized.”