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Final
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About
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Paying Interest Instead of Earning It Lucy H. of Splendora purchased a
preneed funeral services contract, preneed monument, and a
preneed outer burial container and interment in 1997, but
later decided to donate her body to Baylor College of
Medicine. She had trouble getting her money back and
complained to the Texas Department of Insurance. According to her documentation, a
substantial portion of her monthly payment was tied up in
two separate retail installment contracts. Instead of
earning interest on her money during the years before her
death, she had agreed to pay 12.5% APR interest for five
years on her memorial and 11% APR for three years for the
outer burial container and “opening and closing”
services—even though these things would not be
delivered until her death. The interest on her contracts
totaled $1,442.(1)
Consumers today routinely make time
payments for major purchases, and we are accustomed to
paying interest. But a preneed funeral contract is not a
purchase that we take home now and pay for later. It is a
way to save now for something we will need in the future,
and instead of paying interest consumers should ensure they
collect interest on the money they set aside. In some cases, consumers may find that
a portion of their funeral arrangement is purchased on a
standard preneed contract while another portion (the
cemetery plot, monument, “opening and closing” the
grave, or an outer burial container) is purchased on a
retail installment contract with a finance charge. State law
requires that preneed money for funeral services and
merchandise, and cemetery services must be placed in trust.
The finance charge portion of a retail installment contract,
and charges for monuments, crypts and plots, do not go into
the trust and are not generally refundable. SCI’s prepaid funeral services contract states that each payment will be deposited into the trust except for the amounts which SCI is authorized to keep—half of the total amount collected up to 10% of the cash price of the funeral and “exclusive of any finance charges which will be retained by the seller as payment for the extension of credit.”(2) According to SCI’s Sales Counselor Sales Guide for cemetery sales, preneed interment services and recording fees are subject to finance charges “except in states that do not allow finance charges to be imposed on undelivered services,” and finance charges are applied to the unpaid balance of all preneed cemetery property sales.(3) Mrs. H. ultimately received a
refund--smaller than she believed she deserved. About a
third of the money she paid on the two retail installment
contracts was a finance charge that the company is not
obliged to refund.. And the funeral company can keep half of
the principle payment on preneed contracts up to 10% of the
contract amount. The principle for items purchased on a
retail installment contract that is not backed by a trust,
like Mrs. H.’s monument, is also not refundable. In other words, consumers pay for
goods and services—plus interest charges—on items
they won’t receive until death and also pay the funeral
company its cut on the trust account before the savings
begins to accrue toward the prepaid funeral service. In the past, state law required a
retail installment contract to be related to the exchange of
goods or services, and could not be used for
“professional” services. Since no goods or
services are exchanged at the time of the sale of a preneed
contract, and funeral home services are
“professional” services, no interest could be
charged for preneed arrangements paid for over time.
Further, the banking laws related to preneed trust accounts
prohibited additional charges outside the scope of the
trust-funded preneed contract. In 1993 the Texas Legislature passed
reforms to the Banking Code designed to strengthen
enforcement of the consumer protections for preneed trust
accounts, and limit the funeral home’s ability to
withdraw earnings on the account before providing the
funeral. (4)
However, the Senate version of the bill—passed late in
the session—also authorized the sale of preneed funeral
services on retail installment contracts charging interest.
The bill amended the banking code and the credit code to
allow this new type of interest charge for older
consumers.(5) To ensure that consumer funds used to
purchase preneed goods and services, whether from a funeral
home, cemetery or other funeral related company, are not
lost, Consumers Union recommends that the Legislature:
______ 2 Office of the Attorney General, Consumer Complaint File M9808-0099. 3 SCI Sales Counselor and Reference Guide, July 10, 1997, pp. 6-5, 8-7. 4 Acts of the 73rd Legislature, Chapter 808. H.B. 2499 by Marchant. 5 H.B. 2499, Senate Amendments, 2nd Printing, May 11, 1993, adding new sections 2 and 3 amending the Credit Code to authorize retail installment contracts for pre-need funeral services and allowing retail installment interest rates under Vernons Tex Civ Stat 5065. |
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