Federal Credit Application Disclosure Confusion

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Question:

The new consumer protection laws will be in effect soon and I am still somewhat confused in regards to the Federal Credit Application Disclosure. Could you please try and clarify this for me: The disclosure states that Federal Law prohibits you from conditioning the extension of credit on either: 1. My purchase of an insurance product or annuity from you or from any of your affiliates OR 2. My agreement NOT to obtain or a prohibition on me from obtaining, an insurance product or annuity from an unaffiliated entity. As I understand this A lender cannot condition a loan based on them purchasing insurance from my bank or any other insurance company. In a discussion this morning there was a disagreement by another lender that we can base a loan approval on the condition that the consumer have insurance just that we cannot base the approval or condition on them purchasing the insurance from us directly.

Answer:

You can make the purchase of insurance a condition of the loan. In fact, most secured loans are conditioned on purchase and maintenance of hazard insurance. However, you cannot condition a consumer loan on the purchase of such insurance from the bank. Nor can you condition by saying the borrower is prohibited from purchasing the insurance from any other specific source.

First published on BankersOnline.com 9/3/01