BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1371|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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THIRD READING
Bill No: SB 1371
Author: Galgiani (D)
Amended: 3/28/16
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 4/6/16
AYES: Glazer, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SUBJECT: Credit disability insurance: premium payments
SOURCE: California Financial Services Association
DIGEST: This bill authorizes California Finance Lenders Law
(CFLL) licensees to offer credit disability insurance on a
single premium basis.
ANALYSIS:
Existing law:
1)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).
2)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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3)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).
This bill 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).
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 California Financial
Services Association (CFSA), the provision of California law
that this bill amends 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 insurance
in connection with a multi-year installment loan. CFLLs may
offer credit disability insurance on a monthly or annual premium
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Page 3
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.
Comments
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).
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified4/6/16)
California Financial Services Association (source)
OPPOSITION: (Verified4/6/16)
None received
ARGUMENTS IN SUPPORT: CFSA is sponsoring this bill to authorize
the use of single premium credit disability insurance by CFLL
licensees on multi-year installment loans. "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
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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."
Prepared by: Eileen Newhall / B. & F.I. / (916) 651-4102
4/8/16 14:09:30
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