BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Steven Glazer, Chair
2015 - 2016 Regular
Bill No: SB 1371 Hearing Date: April 6,
2015
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|Author: |Galgiani |
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|Version: |March 28, 2016 Amended |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Eileen Newhall |
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Subject: Credit Disability Insurance: premium payments
SUMMARY Authorizes California Finance Lenders Law (CFLL) licensees
to offer credit disability insurance on a single premium basis.
DESCRIPTION
1. Provides that credit disability insurance may be made
available by a CFLL licensee to a borrower on a single
premium basis (not just on a monthly or annual premium
basis, as is allowed under existing law).
EXISTING LAW
2. Defines credit disability insurance as insurance on a
debtor (i.e., borrower) to provide indemnity for payments
becoming due on a specific loan or other credit transaction
while the debtor is disabled as defined in the policy
(Financial Code Section 22314 and Insurance Code Section
779.2).
3. Authorizes a CFLL licensee to provide credit disability
insurance to a borrower with that borrower's consent but
prohibits a CFLL licensee from requiring credit disability
insurance as a condition of making a loan (Financial Code
Section 22314).
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4. Provides that credit disability insurance, if made
available by a CFLL licensee, shall be available on a
monthly or annual premium basis, and further provides that
the premium by the month shall not exceed a pro rata
relationship to the annual premium (Financial Code Section
22315).
COMMENTS
1. Purpose: This bill is sponsored by the California Financial
Services Association (CFSA) to authorize the use of single
premium credit disability insurance by CFLL licensees on
multi-year installment loans.
2. Background: Credit disability insurance is commonly offered
to installment borrowers as an option at the time of loan
origination. Borrowers who opt into this type of insurance
do so for the security that the disability insurance policy
will cover their loan payments during any period of illness
or injury that prevents the borrower from working. As noted
above, CFLL lenders may not require these policies as a
condition of making a loan to a borrower, but are authorized
to offer these types of policies. All credit disability
insurance terms and rates must be approved by the California
Department of Insurance before being offered to a borrower
in connection with a CFLL loan.
According to this bill's sponsor, the provision of California
law that this bill would amend dates back to the 1960s. At
that time, credit disability insurance was sold either on a
monthly or annual premium basis, and most installment loans
were one year or less in length. Because most installment
loans did not extend beyond one year, credit disability
insurance could effectively be sold on a single premium
basis through use of an annual premium. States across the
country have since updated their laws to expressly authorize
the sale of single premium credit disability insurance in
connection with multi-year installment loans, but California
has not.
Furthermore, California's Department of Business Oversight has
made it clear in an interpretive letter dated December 15,
2015 that, under existing California law, a CFLL licensee is
not authorized to offer single premium credit disability
SB 1371 (Galgiani) Page 3
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insurance in connection with a multi-year installment loan.
CFLLs may offer credit disability insurance on a monthly or
annual premium basis, but a law change such as the one being
sought by this bill's sponsor is necessary to authorize the
sale of credit disability insurance on a single premium
basis.
3. Discussion: If this bill is enacted, and a borrower opts
into the type of insurance this bill would authorize, that
borrower will be issued two checks at the time of loan
origination, one made out to them and one made out to the
insurer. The check to the insurer will pay the insurance
policy in full, and that policy will remain in effect for
the life of the loan. The cost of the insurance policy will
be added to the borrower's initial loan balance and be paid
back by the borrower over the life of the loan.
This bill's sponsor notes that single premium insurance benefits
both borrowers and lenders. Borrowers are protected against
coverage lapses and policy rate increases. Lenders incur
lower administrative costs, due to a more streamlined
billing process (the insurance premium is paid all at once,
rather than on a monthly or annual basis).
4. Summary of Arguments in Support: CFSA is sponsoring this
bill for the reasons stated above. "California is the only
state we are aware of that does not permit a single-premium
credit option for credit disability insurance, which is
likely due to the fact that when [Section] 22315 was
written, most consumer loan contracts were less than 12
months in duration. Enabling a single premium payment
option would benefit consumers and lenders. For those
consumers who take comfort in having credit disability
insurance, SB 1371 will enable them to finance the costs
into their loan and avoid any disruption of coverage.
Absent a single premium option, those charges may not be
included in the loan and consumers must make payments every
month in order to avoid a lapse in coverage. For lenders, a
single-premium option streamlines the billing process,
reducing costs and increasing efficiencies."
5. Summary of Arguments in Opposition: None received.
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LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Financial Services Association (sponsor)
Opposition
None received
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