Winter · 1997 -- Volume 14 Issue 4
Contents
The Cost of Personal Borrowing in the United States
The Only Single Volume State by State Compliance Guide!
Financial Publishing Company, a division of Carleton, Inc., has provided this compliance service to the consumer credit industry for the past 25 years. Carleton and Financial Publishing's combined research expertise, assures the most comprehensive and accurate compliance publication available today.
Receive up to date state regulatory guidelines with dollar finance charge cost and Annual Percentage Rate equivalents for maximum rate structures in all 50 states, plus Washington, D.C. and Puerto Rico. You'll also gain valuable insight and background into the history of installment lending and other consumer credit classifications. A state by state listing of maximum charges for small loans, industrial loans, bank installment loans, auto finance, and other goods financing, is included and more.
Contents
| Part I | - | Federal Truth-in-Lending |
| Part II | - | The methods for computing charges |
| Part III | - | Classes of loans, lenders, and governing statutes |
| Part IV | - | The Uniform Consumer Credit Code |
| Part V | - | Prepayment: Actuarial, Rule of 78's, Pro-rata |
| Part VI | - | Credit Insurance |
| Part VII | - | Examination of the 50 States - Summaries of each state's consumer finance laws - Published Credit Life and A&H Rates |
| Part VIII | - | Finance charge tables for actuarial, add-on, discount rates of charge and conversion tables for each type of rate structure |
For only $175, you receive detailed information on consumer credit in all 50 states in a convenient 9" x 7¹" loose-leaf binder, update service for one year, and a subscription to the Consumer Finance Newsletter which alerts you to pending statutory and regulatory changes. A subscription to the Consumer Finance Newsletter only is available for $45 annually.
of Interest! is a complimentary quarterly newsletter designed to alert our clients of pending consumer credit regulatory changes. Distribution of this newsletter is made with the understanding that the information contained herein has not been certified as legally acceptable for any particular statute, law, or regulation. For more timely and detailed information, subscribe to our Consumer Finance Newsletter and/or The Cost of Personal Borrowing in the United States Compliance Guide which are both published and updated ten times each year.
* 1996 - Year in Review *
A review of changes previously reported in of Interest!
Alaska -- Retail Installments Sales transactions deregulated. July 3, 1996.
California -- Senate Bill 740 makes all classes of business subject to credit life rates set by Dept. of Insurance. January 1, 1996.
Idaho -- Delinquency charge increase to 5% or $10. July 1, 1996.
Illinois -- Credit Life Rate Reduction. Single Life $.47/$100/yr. January 1, 1996.
Indiana -- UCCC dollar amounts increase 10%. July 1, 1996.
Kentucky -- Delinquency charges increased to 5% or $10. July 15, 1996.
Michigan -- Credit Reform Act passed. Interest and Time Price differential charges set at 25% simple. March 28, 1996.
Minnesota -- Credit life insurance OAI is Amount Financed plus 1 payment. Discount points may not be insured. August 1, 1996.
Missouri -- Retail Installment Sales transactions deregulated. August 28, 1996.
North Carolina -- Last in the series of credit life reductions takes place. Single Life $.50/$100/yr. January 1, 1997.
South Carolina -- Consumer Protection Code dollar amounts increase 10%. July 1, 1996.
West Virginia -- Industrial Loan Law repealed. New maximum interest rates for regulated lenders. September 1, 1996.
From Our Research Dept.........
Net Payoff Credit Life Premiums Revisited
Credit life insurance premium calculations have once again become an interesting topic of discussion as of late.
Specifically, the formula for premium calculation contained in the NAIC Model Act is being considered and/or adopted as individual states examine amendments to their particular insurance regulations. An active example is Montana where the formula was included in amendments to the Insurance Regulation which took effect on September 1, 1996.
The New Jersey Insurance Department originally proposed to include the formula in the amendments to their Insurance Regulation, but removed it from the final version of the amendments due to negative responses received during the comment period.
What makes this approach to premium calculation different from what we have historically viewed as net payoff life coverage with discounting for interest and mortality? We thought this might be an opportune time to present an overview of the Model Act formula and its ramifications on the calculation of the credit life premium compared to what we term "traditional" methods.
The Formula
The formula presented in the Model Act is:
where
Over the years we have seen premium calculation formulas with the same premise adopted in New York, Virginia, and California. Insurance carriers doing business in those states are, no doubt, familiar with the formula in the Model Act.
Why then does this approach draw raised eyebrows and blank stares from those unfamiliar with it?
One reason is the complexity of the premium calculation. The most difficult ingredient is the formulation of the single premium rate. Traditional pro-rates (rates per $100 per year) can often be applied to nominal values, such as the total of payments in a gross coverage situation or the amount financed in certain net payoff situations, to compute the premium. At a slightly more complex level, a monthly rate per $1000 of coverage can be applied to the sum of the month dollars of coverage to arrive at the credit life premium.
However, the premium formula displayed here determines the present value of each earned monthly portion of premium as of the first month of the transaction. The present value is determined at the published discount rate for interest and mortality.
In a net coverage situation, where the unpaid principal balances are determined through actuarial amortization, the effective monthly rate per $1000 of coverage is a function of the amortizing interest rate. The source of the complexity of these computations is the interaction between the interest rate and the discount rate in computing the sum of the present values of the month dollars of coverage. This interaction also creates unique situations when the issues of truncated term coverage and credit life refunds are introduced.
Since the resulting premium is a function of the profile of the declining principal balances, and is directly affected by the amortizing interest rate, a schedule of credit life rates constructed for full term transactions is rendered useless for truncated term computations. The profile of death benefits for a 36 month full term transaction is unique and distinct from the profile of a 60 month transaction truncated at 36 months. Thus, a special schedule must be created for the truncated term transaction.
Determining the unearned premium for the purpose of credit life rebates also differs from traditional methods. Utilizing the Model Act formula necessitates the use of the Rule of Anticipation to achieve a proper rebate. The discount rate, however, makes the computation more difficult than the actuarial refund widely used for traditional net payoff rebates. Likewise, simply subtracting the cumulative earned premium from the original single premium does not properly account for the interest allocated to remaining unearned premium. This is another lingering effect of determining the present value of each monthly piece of earned premium at the discount rate in the published formula.
In the next issue, we will discuss the effects of the formula for a gross life coverage environment. In the meantime, we welcome your comments, thoughts, and experiences in dealing with this relatively new method of premium computation.
Distribution of this newsletter is made with the understanding that the information contained herein has not been certified as legally acceptable for any particular statute, law, or regulation. For more timely and detailed information, subscribe to our Consumer Finance Newsletter and/or The Cost of Personal Borrowing in the United States compliance guide which are both published and updated ten times a year.
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