San Diego, CA. Why are bankers getting more excited about promoting consumer debt? Because a new lucrative debt protection program has replaced credit insurance as part of more and more lending agreements consumers sign when closing a loan other than a mortgage. This is not a separate insurance contract, so loan officers do not need a license to sell it and it is regulated by one state or federal banking agency rather than 50 state insurance agencies, according to USBanker magazine (06-04).
This is a new and growing profit center for lenders. Credit insurance, a waste of money for the majority of borrowers, used to be an option. Now, even the most creditworthy customers may be stuck paying for this protection, which amounts to the lender agreeing to suspending or canceling the loan payments under certain conditions for an unspecified period of time. So if a consumer wants the loan, they may have to pay the debt protection fees, like it or not.
The monthly cost is up to the lender, and to a large degree what the market will bear. It seems the $15-$25 a-month added to the payment is acceptable to borrowers, says USBanker, however it becomes a much tougher sell when it approaches $50 a month-add on. Some lenders refer to their product as monthly outstanding balance (MOB) debt cancellation contracts. Debt protection with an unemployment clause sells very well as one California based lender discovered when comparing sales of debt protection without an unemployment provision. This is just another fee trap for qualified borrowers and even for sub-prime borrowers. The chances of ever being eligible for and collecting any benefits are very remote for the large percentage of borrowers.
A plus for home buyers is that many mortgage lenders are now including no-cost or low-cost policies that provides six to nine months of loan payments, following an involuntary loss of employment. This seems worth while on the surface if, in fact, it is no cost. Mortgage lenders have a logical selfish interest because the costs associated with default, in some cases leading to foreclosures, can be in the $10,000 to $40,000 range or more. Some policies also cover work related injuries, however employers must certify the injury and the insured must be under constant care.
The ICFE urges all borrowers to read loan offers very carefully and completely to determine what fees and other often unnecessary add-ons may be included in the monthly payments before signing on the dotted line.
For more info contac:
Paul Richard, RFC Executive Director Institute of Consumer Financial Education PO Box 34070 San Diego, CA 92163
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