In The Matter of The Adoption of 13 NMAC 18.3, Force-Placed Credit Property Insurance, Docket No. 98-364-IN

7 October, 1998

The Honorable Christopher P. Krahling
Superintendent of Insurance
New Mexico Corporation Commission
PO Box Drawer 1269
Santa Fe, NM 87504-1269

Via Facsimile: (505) 827-4601

RE: In The Matter of The Adoption of 13 NMAC 18.3, Force-Placed Credit Property Insurance, Docket No. 98-364-IN

Dear Superintendent Krahling:

Consumers Union will be unable to attend the hearing scheduled for October 8, 1998, and would appreciate the opportunity to file these written comments in lieu of our appearance in the matter of The Adoption of 13 NMAC 18.3, Force-Placed Credit Property Insurance, Docket No. 98-364-IN. Consumers Union strongly supports the proposed rules and believes they will benefit New Mexican consumers.

Lack of Price Competition at the Consumer Level for Force-Place Insurance
Regulators cannot rely on market forces to protect consumers of force-placed credit property insurance. Insurance products sold by lenders that are related to the extension of credit are often subject to reverse competition. Instead of competition characterized by downward pressure on pricing, reverse competition pushes prices up.

Experience with credit insurance illustrates this problem. While consumers have no market power over the price of credit insurance, competition among insurers for access to lender-agents pushes prices up. An insurer induces a lender to sell the insurance product by offering a higher commission than competing insurers will pay. These escalating commissions are passed through to the consumer - the anti-consumer result of reverse competition. Commissions paid on credit insurance - as much as 50-60 percent in some states - exceed by three to four times those paid on other life and annuity products.

The same holds true for force-placed insurance coverage where it is the lender, not the borrower, who buys coverage and requiring the borrower to purchase it. Decisions made by the person paying for the coverage - the borrower - such as shopping for a lower price or a better policy, are not made with force-placed coverage. Therefore, market pressures do not work to keep prices low or improve the quality of the product or its service.

The only protection consumers have against unfair prices and practices are those imposed by insurance regulators, like the proposal before the Superintendent now. Protections included in the rules, like limiting commissions to ten percent, prohibiting the inclusion of loan tracking costs in the rates, and requiring the charging of premium on a monthly - rather than annual - basis are precisely the types of protections consumers need to be sure the rates and terms of force-placed insurance are fair.

Loan Tracking Costs Should be Excluded
The loan agreement between the borrower and lender specify the requirement that the borrower maintain insurance. The cost of the lender tracking whether the borrower maintains that insurance is a necessary cost of doing business. Lenders argue that it is appropriate to charge borrowers who fail to maintain insurance for the cost of tracking the status of every borrower's insurance. However, even if every borrower maintained insurance, lenders would still track and incur costs for tracking insurance. It is unreasonable to shift the lenders' costs of tracking insurance to borrowers. We strongly support this provision of the rule.

Premium Should Be Charged on a Monthly Basis
Lenders may attempt to increase interest revenue by purchasing a force placed policy and charging interest to the borrower for the full amount of the premium. Thus, the lender earns interest on the underlying loan and additional - often much higher - interest on the premium loan. This practice may dramatically increase the finance charge owed by the borrower. Instead, it is appropriate that the rule proposes charging the force placed premium on a monthly basis so that, if the consumer makes the premium payments on time, no finance charge is needed.

Additional Disclosures For Borrowers Receiving Force-Placed Coverage May Be Appropriate
In the Notice Of Force-Placed Insurance, we recommend that the Superintendent notify the borrower that the force-placed insurance that has been purchased is likely to cost much more and provide less coverage than insurance the borrower purchases on his/her own. We suggest that the Superintendent add the following sentence in the Notice Of Force-Placed Insurance:

Notice Of Force-Placed Insurance
You are supposed to maintain insurance on the property that is the collateral for your debt. You have not provided proof of insurance in response to the notices previously sent you. Therefore, [insert name of creditor] has force-placed insurance coverage for you in accordance with the terms of your credit agreement. A copy of that policy/certificate is attached. It states the total cost to you of the insurance and the period of time the insurance will be in force. Be aware that the force-placed insurance that has been purchased is likely to cost much more and provide less coverage than insurance you can purchase on your own. You may purchase other insurance coverage at any time; as soon as you provide proof of other coverage to [insert name of creditor], we will cancel this force-placed coverage and refund any unearned premiums to you.
In the Annual Renewal Notice section, borrowers should be provided notice regarding the cost and coverage of forced placed insurance with the addition of a similar sentence in that section.

Conclusion
The proposed rules will go a long way toward protecting New Mexican consumers who must purchase force-placed insurance coverage. We urge adoption of the rules.

Sincerely,

Reggie James
Director
Consumers Union's Southwest Office

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