[Anonymous]

We have a customer who has inquired about adding credit life to their current mortgage loan. I have been asked by the loan officer how that would work from a compliance standpoint. Since this will affect the APR, count towards points and fees, etc., wouldn’t we have to refinance the loan? It can’t just be added with no new disclosures….

[rcooper]

If you don’t require credit life insurance then it wouldn’t be considered a finance charge nor would it be included in the points and fees calculation since it wasn’t payable at or before consummation. 1026.32(b)(1)(iv) states: In connection with a closed-end credit transaction, points and fees means the following fees or charges that are known at or before consummation: Premiums or other charges payable at or before consummation for any credit life, credit disability, credit unemployment, or credit property insurance, or any other life, accident, health, or loss-of-income insurance for which the creditor is a beneficiary, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract.

You would still need to give the “Consumer Protection in Sale of Insurance” disclosures: 1) the insurance disclosure (“not, not, not, may”) would be given orally and in writing before the completion of the sale; and 2) the credit disclosure (“we may not condition an extension of credit on…”) should be given orally and in writing at the time of application for credit in which an insurance product was solicited, offered or sold (I’m assuming you have already given that disclosure at application). Also remember the prohibition on financing certain credit insurance in connection with a loan secured by a dwelling (1026.36).

[jholzknecht]

Robin has done a fantastic job explaining the finance charge ramifications of your question. Let me explore another aspect of the proposed transaction.

There appears to be no issue if:
* The borrower is purchasing a single-premium credit life policy and is paying the full premium in cash; or
* The borrower is purchasing monthly pay credit life policy and is billed monthly for the premium which is paid in cash.

Adding the premium to the existing mortgage loan may be an issue. Does your note and mortgage allow the bank to make advances to purchase optional credit insurance? Maybe not. Your contract probably allows advances to pay for required insurance that the borrower has failed to maintain, but that is not the situation your bank faces.

You could make a separate loan, not secured by a dwelling, for the purpose of purchasing the life insurance.

You could refinance the transaction and finance the premiums for monthly premium, but not single premium, credit life insurance.

You have several options. It is not clear that any of the options will work for the borrower and for your bank.

[Author]

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