Credit Life and Disability Insurance: Legal Actions | State National Bank
Question
State National Bank offers credit life and disability insurance on all consumer loans. This credit-related insurance is sold by a third party, but the bank collects a commission on all sales. The bank also sells hazard insurance through its affiliated insurance agency. Which of the following actions is legal for State National?
Answers
Explanations
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A. B. C. D.C
State National Bank can legally require borrowers to purchase insurance to protect the collateral on their loans. This requirement is called a collateral protection requirement, and it is legal as long as the requirement is reasonable and related to the protection of the bank's security interest in the property. Therefore, option C is legal, as long as the requirement applies to all borrowers with real property loans, not just certain borrowers.
However, options A, B, and D are not legal. Option A is not legal because State National cannot require all consumers to purchase credit life insurance through the bank. This requirement would violate the Truth in Lending Act (TILA) and Regulation Z, which prohibit tying the extension of credit to the purchase of any other product or service. Tying credit life insurance to a loan would be considered unfair or deceptive practices under the Federal Trade Commission Act.
Option B is also not legal because State National cannot require only certain consumers to purchase credit life insurance through the bank. This requirement would also be considered discriminatory and violate the Equal Credit Opportunity Act (ECOA), which prohibits lenders from discriminating against any applicant on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of income from public assistance programs.
Option D is not legal because State National cannot require borrowers on real estate loans over $50,000 to purchase hazard insurance through the bank. While lenders are allowed to require borrowers to maintain hazard insurance on the property securing the loan, they cannot require the borrower to purchase insurance from a particular provider. This would be considered a violation of the Sherman Antitrust Act, which prohibits anticompetitive practices in the marketplace.
In summary, State National Bank can legally require all borrowers with real property loans to provide insurance to protect the collateral, but it cannot require borrowers to purchase credit life insurance through the bank or a specific provider for hazard insurance.
