Texas Auto Dealers Overcharge Millions Selling Overpriced, Low Value Credit Insurance (March 2003).

High-pressure sales tactics include sales of policies to those who do not even qualify

Automobile dealerships in Texas are reaping extravagant returns for the few minutes they spend at the financing desk with consumers pushing the sale of credit insurance -- a notoriously bad deal for consumers -- according to a Consumers Union study released in March.

Based on rate filings and 2001 market data, Consumers Union estimates that credit insurance companies overcharged consumers $125 million in 2002, after the Legislature passed a bill in 2001 allowing companies to raise rates 30 percent. All but one of the companies selling credit insurance in Texas immediately raised their rates to the full 30 percent. One company filed for a smaller increase or no increase on credit disability coverage for some of its credit union clients.

Consumers Union also reviewed more than 400 complaints filed with the Texas Attorney General's Office, the Office of the Consumer Credit Commissioner and the Texas Department of Insurance between 1999 and 2001. The most common complaint to the Texas Department of Insurance involved the sale of policies to people who don't even qualify for them. Dealers also pushed credit life policies by a nearly 2-to-1 margin over credit disability insurance policies. Credit life policies pay higher commissions to dealers but have a lower claims-paid ratio.

"Basically, dealerships know they've got a captive audience at closing," says Rob Schneider, senior staff attorney for the Southwest Regional Office of Consumers Union. "Many consumers feel overwhelmed at the financing stage of their car purchase and are anxious to close the deal. Dealers can make it pretty uncomfortable for a buyer to just say 'no'."

Credit insurance pays lenders if a person dies, becomes temporarily disabled or unemployed, or the person's car is wrecked or stolen. It is big business in Texas. In 2001, Texas insurers earned $263 million in premium for the most common class of credit insurance sold by auto dealers.

"We expect this number this number to be much higher for 2002," said Schneider. "Almost every company asked permission to charge 30 percent more and got it, and we have no reason to believe claims would increase more than inflation."

Of the 404 auto dealer complaints examined by CU that were filed with the Attorney General's Office, about half dealt with financing and insurance. At the root of the problem is the fact that consumers do not shop for credit insurance. Dealers sell it to them as part of the final car loan package. Insurance companies compete to win an auto dealer's endorsement to sell its products by offering hefty commissions.

One of the most egregious but currently legal practices in the sale of credit insurance is that the insurance companies underwrite their policies after consumers file a claim. Most consumers sign a "good health" statement, but the pressure to pull down high commissions leads some dealers to oversell the product, or fail to explain what it means to be in "good health."

The report also noted that:

• Consumers frequently complained that dealers told them credit insurance was required in order to be approved for financing (it is not required), or in order to get a lower interest rate.

• Consumers reported that dealers downplay the importance of "good health," and sold policies to people who didn't qualify for them.

• Sometimes the language used by dealers implies that the insurance is included in the loan amount when it is not, or they may quote monthly payments with credit insurance already included.

"Consumers should beware," Schneider said. "Dealers earn a lot of money on the sale of credit insurance and other add-ons. If they think they can get away with high-pressure tactics, you're likely to walk out the door with this expensive insurance. Until Texas can do a better job protecting consumers to assure fair rates, our advice is to just say 'no.'"

Because the products are regulated at the state level, the report calls on state policymakers to consider new consumer protection laws to put money back in buyer's pockets. Consumers Union recommends that the legislature:

• Eliminate the new 30 percent "rate band" for credit life and credit disability policies which has resulted in a windfall to credit insurance companies and auto dealers.

• Require credit insurance companies to underwrite the consumer's policy before a claim is filed in order to eliminate unpleasant surprises to those who discover at claim time that they have no benefits.

The report is the first of two dealing with auto dealer charges at the time of closing. The other one to be released soon addresses theft protection plans and extended warranties.