Chapter 8: Other Credit Insurance Types & Federal Regulations
Learning Objectives
Understand:
- Credit Unemployment Insurance (IUI)
- Credit Property Insurance and GAP Insurance
- PMI and Mortgage Guaranty Insurance
- Federal regulations (TILA, Fair Credit Reporting, NAIC)
- Consumer protection laws
CREDIT UNEMPLOYMENT INSURANCE (IUI)
IUI = Involuntary Income Unemployment
What It Covers
Involuntary job loss only:
- Being laid off through no fault of your own
- Company closure
- Reduction in force
Does NOT cover:
- Quitting voluntarily
- Being fired for cause
- Retirement
- Resigning for any reason
How It Works
- Debtor loses job involuntarily
- Credit Unemployment Insurance activates
- Pays the monthly loan payment while unemployed
- Helps debtor find new job without defaulting
Example
- Customer has $300/month car payment
- Gets laid off from job
- Credit Unemployment pays the $300/month
- Customer has 3-6 months to find new job
- During waiting period: Car doesn’t get repossessed
- Credit stays intact
Duration
- Typically covers 3-6 months of payments
- Maximum benefit period specified in policy
- Not indefinite coverage
CREDIT PROPERTY INSURANCE
What It Covers
Damage or loss to the ITEM PURCHASED
- Theft
- Damage
- Destruction
- Total loss
How It Works
- Customer finances an item (car, TV, equipment, etc.)
- Item is damaged, stolen, or destroyed
- Credit Property Insurance pays
- Either replaces the item OR pays creditor the amount owed
Common Uses
Most common: Auto loans (called GAP Insurance)
- Also used for: Furniture, appliances, electronics, home goods financed at retailers
GAP INSURANCE (Guaranteed Auto Protection)
What It Covers
The “gap” between what’s owed and what the car is worth
How It Works
Normal situation:
- Customer finances car for $30,000
- After 2 years: Owes $22,000, car worth $25,000
- Car is totaled
- Regular insurance pays: $25,000 (car’s current value)
- Customer pays company: $22,000 (remaining loan balance)
- Customer is out $0 extra
GAP situation (when car depreciates fast):
- Customer finances car for $30,000
- After 2 years: Owes $22,000, car worth $18,000
- Car is totaled
- Regular insurance pays: $18,000 (car’s current value)
- Customer owes: $22,000 (remaining loan balance)
- GAP Insurance covers: $4,000 difference
- Customer is protected
Key Phrase
GAP = The difference between loan balance and car value
PMI & MORTGAGE GUARANTY INSURANCE
PMI (Private Mortgage Insurance)
What it covers:
- Protects the LENDER if homeowner defaults on mortgage
When required:
- When down payment is less than 20%
Example:
- House costs $400,000
- Down payment: 15% = $60,000
- Loan amount: $340,000
- PMI required: YES (down payment less than 20%)
Cost:
- Buyer pays (added to mortgage payment)
- Protects lender, benefits lender
When it ends:
- Once equity reaches 20% (principal paid down enough)
- Buyer can refinance to remove PMI
Different from Homeowners Insurance
Homeowners Insurance:
- Protects the homeowner/property
- Required by mortgage company
- Covers fire, theft, damage, etc.
PMI:
- Protects the lender
- Required when down payment < 20%
- Covers lender’s risk of default
FEDERAL REGULATIONS
THE NAIC MODEL ACT
What it is:
- Model laws created by National Association of Insurance Commissioners
- States use as basis for their own laws
- Michigan uses these principles
Key Principles:
- Creditor must have insurable interest
- Insurance must be optional (not forced on customer)
- Rates must be reasonable
- Unfair practices are prohibited
TILA (Truth in Lending Act)
Full name: Consumer Credit Protection Act
What it requires:
- Creditors must disclose Annual Percentage Rate (APR)
- Creditors must disclose credit insurance costs separately
- Must clearly state credit insurance is optional
- Ensures customers understand true cost of borrowing
Key principle: Transparency - customers must know what they’re paying
REGULATION Z (Implements TILA)
What it covers:
- Details on how to disclose credit terms clearly
- Credit insurance shown separately (not hidden)
- Not buried in fine print
- Clear and conspicuous disclosure
Example of compliant disclosure: