Consumer Protection for Borrowers

If you go to your local insurance agent and purchase coverage on your car, your house, your health or your life, the practices of your agent and your company are generally regulated by your state’s Bureau of Insurance, or by an agency with a similar name. In a nutshell, the state charges each company it licenses to sell insurance a fee for the privilege of doing business. Part of these fees establish and maintain a fund to protect consumers. If the company gets into financial trouble, the state can step in and use the fund to make the consumer whole. The state establishes the limits and the exact workings of the protection.

Banks, however, are generally under Federal control. Problems can arise when banks step into the role of insurance agents.
In today’s world, insurance companies, banks and brokerage houses are all competing for custody of consumer dollars. A consumer can walk into any of the three financial service companies and deposit money at interest, buy a mutual fund or find a life insurance policy or annuity.

Obviously, a representative of any of these firms can provide reasons why he or she offers the best security, the best price and the best features to the consumer. The problem comes when the consumer doesn’t understand the separate roles of the three types of firms and is mislead as to his options.

Banks traditionally have two functions. They provide safety and a small return on customer deposits and lend that money to other customers at a slightly higher interest rate. Now, suppose a customer applies for a loan to purchase a house or a car. The bank may decide that it wants the borrower to have a life insurance or disability insurance policy to repay the bank if he or she cannot continue payments. If the bank sells these kinds of policies, consumers could easily come to believe that buying the coverage from the bank will help them qualify for the loan or give them a lower interest rate.

Federal Consumer Protection Regulations allow borrowers to separate the banking/borrowing process from the insurance purchase. Banks must make it clear that any purchase of insurance by the individual borrower to protect against loss of life or property can be made from any source and that buying from the bank will have no impact on the loan application. Similar regulations also restrict insurance companies and security brokerages.

As recently as the 1960s, some insurance companies offered home mortgages as a way of getting consumers to buy life insurance from them. With the advent of Consumer Protection Regulations, this practice largely disappeared. Today, while banks often offer the insurance products, they are required to keep a wall of separation between them and the loan applicant.