MOB Credit Insurance and the CFPB

It's been an active month for regulation, to say the least.  A minor deluge of state based July 1st law changes mixed with the CFPB's upswing in both proposed and final regulations has made for an awful lot of reading, analysis, and retrofitting of existing programs.

The CFPB saga regarding the attempt to implement the Dodd Frank prohibition on single premium credit insurance/deb cancellation products with real estate transactions has taken its latest turn with their clarification proposal on June 24th.  A good deal of that appears to be in response to the industry's requests for a clearer meaning of "calculated paid in full on a monthly basis" clause in the original CFPB proposal.

The June 24th proposal appears to center around two broad definitions; that of 'calculated on a monthly basis' and the definition of 'financed'.  Make no mistake, there are other issues addressed, along with an almost endless list of granular sub-plots, but to an entity like Carleton, where the credit math is a first priority, these two points dominate the initial discussion.

One additional point of interest where it appears the effect of the mathematics involved is not clearly understood is in the CFPB expectation that credit transactions with traditional MOB insurance (or monthly debt cancellation) should create the same interest charge as a comparable transaction with no insurance.

From an “outside looking in” perspective, that doesn’t seem to be an unreasonable presumption. 

The fact is, though, that the traditional objective of supplying an equal monthly payment to the consumer, and the math required in that process, renders the ideological goal of identical interest charges an impractical impossibility.

The equal monthly payment containing MOB insurance is made of three parts; computed insurance premium, accrued interest, and principal reduction.

The insurance portion is found by multiplying a rate times the outstanding loan balance each month, so that portion is variable.

The remaining principal and interest components must also be variable to arrive at an equal sum each month.

The kicker is that once all those variables pieces of the payment are rounded to dollar and cent values in order to make the payment “collectible”, the dynamics of the transaction change.  Merely the monthly insurance portion produced by multiplying the rate times the outstanding loan balance each month is going to be a value like $13.125812964… and on to 32 decimal places.

Rounding the insurance piece to $13.13 produces one effect, rounding to $13.12 another and the effect becomes cumulative throughout the life of the transaction.

That rounding effect generally does slow the liquidation of principal a bit and produces a slightly higher total interest charge. Whether that slowdown in principal reduction is ‘significant’ is probably in the eye of the beholder but it’s simply the nature of the beast.

So, the expectation of “identical interest charges” and the idea that credit insurance premiums are calculated on a monthly basis “if they are determined mathematically by multiplying a rate by the actual monthly outstanding balance” seem to work at a bit of a cross purpose.