Credit Insurance and Debt Protection Agreements (Vermont)
Last Reviewed: December 2020
Vermont Laws Regarding Credit Insurance and Debt Protection Agreements
Aside from disclosure requirements under the federal Truth-in-Lending Act and Regulation Z, credit unions must be cognizant of certain Vermont law issues when offering or negotiating credit insurance (such as credit life and credit accident and health insurance and Guaranteed Asset Protection [GAP] insurance) or entering into debt protection agreements.
Although creditor placed insurance/vendor’s single interest insurance is different because it is purchased by the credit union not the consumer, we have briefly discussed that below as well.
Vermont Laws Governing Credit Insurance
Introduction/Credit Unions as Insurance Agents
Title 8 V.S.A. Chapter 222 sets forth the powers granted to Vermont credit unions. Section 32102(19) gives Vermont credit unions the power to act as insurance agents for any Vermont State authorized insurance company, except for a title insurance company, subject to applicable state and federal law. The credit union may receive fees and commissions for services rendered. It may not guaranty the payment of any premium or the truth of any statement made by the insured in filing his or her application.
So, it is within the powers granted to Vermont credit unions by the Vermont legislature to act as insurance agents, including for credit insurance. However, a separate question is which state licensing and other legal and regulatory requirements credit unions must follow when acting as agents?
Credit Insurance Licensing Issues
In general no person, partnership, association, or corporation may hold himself, herself, or itself out as an insurance producer or sell, solicit, or negotiate insurance without a license (See Title 8 V.S.A. section 4793 and definitions at section 4791). However, pursuant to Title 8 V.S.A. §§4813a(6) and 4813f(b) the Vermont Department of Financial Regulation has promulgated Regulation I-2007-01 establishing a business entity limited lines producer license for the sale of credit insurance. Note that “business entity” is defined by the Regulation at Section 4(A) to include an “other legal entity,” which would include a credit union. The DFR has also promulgated Regulation I-2007-02, establishing a limited lines producer license for the sale of credit insurance by natural persons.
Section 5 of both Regulation I-2007-01 and Regulation I-2007-02 says that an insurance producer license under Title 8 V.S.A. Chapter 131 is not required for the solicitation, sale, and negotiation of credit insurance. However, if you do not have an insurance producer license you need a business entity limited lines producer license under Regulation I-2007-01 or a limited lines producer license under I-2007-02.
Therefore, in order to sell, solicit, or negotiate credit insurance a credit union employee would need to be operating under one of the following circumstances:
1. The individual employee is licensed as an insurance producer under Title 8 V.S.A. Chapter 131 (Note that an unlicensed credit union employee who is working for a credit union that is licensed as an insurance producer could also play a limited role as described in Title 8 V.S.A. §4813d);
2. The employee is individually licensed as a natural person with a limited lines producer license for the sale of credit insurance under Regulation I-2007-02;
3. The employee is working an as employee or representative of a credit union that has a business entity limited lines producer license for credit insurance. The scope of the employee’s work would be subject to the requirements of Regulation I-2007-01 Section 7, which are described below.
Section 6 of Regulation I-2007-01 sets forth the requirements for obtaining a Business Entity Limited Lines Credit Insurance Producer License. The business entity must submit an application on a form prescribed by the Commissioner with required fees as set forth in Title 8 V.S.A. §4800. In addition, Section 6 Specifies that the applicant must have a certificate from a licensed Vermont insurance company appointing the applicant to act as its agent. The certificate must recite that certain competency, trustworthiness, and training requirements have been met. Furthermore, for each appointing insurer the applicant must have a “Designated Responsible Licensed Producer.” The “Designated Responsible Licensed Producer” must be a natural person who is a full-time supervisor or owner of the applicant/business entity who has been appointed to act as an agent of the insurer and who is a licensed insurance producer or limited lines credit insurance producer. The Designated Responsible Licensed Producer is responsible for the applicant business entity’s compliance and must certify on a form prepared by the Commissioner that he/she has read and understands the requirements of Regulation I-2007-01 and has complied with applicable requirements of Title 8 V.S.A chapter 131.
According to Section 7(A) of Regulation I-2007-01 once a business entity is licensed as a Business Entity Limited Lines Credit Insurance Producer an employee or representative of the business entity may sell, solicit or negotiate credit insurance under the authority of the Business Entity Limited Lines Credit Insurance Producer License, without such person being individually licensed, if all of the following conditions are satisfied:
1. The employee or representative is 18 years of age or older;
2. The business entity has taken reasonable steps to ensure the employee or representative is competent and trustworthy;
3. The employee or representative has completed a training and education program consistent with the requirements of Regulation I-2007-01; and
4. The employee or representative complies with the requirements of Regulation I-2007-01.
Section 7(B) says that the Business Entity Limited Lines Credit Insurance Producer, the Designated Responsible Licensed Producer, and the appointing Insurer are responsible for all actions and for the conduct of the business entity’s employees and representative relating to the sale, solicitation or negotiation of credit insurance.
Section 7(C) of Regulation I-2007-01 sets forth the minimum standards for the training and education program each appointing insurer must provide for each employee and representative of the business entity prior to allowing such a person to sell, solicit or negotiate credit insurance.
Section 7(D) of Regulation I-2007-01 describes the information that an employee or representative must provide to the consumer in writing in a format and manner established and approved by the appointing insurer.
Section 7(E) of Regulation I-2007-01 says that an employee or representative is not deemed to be engaged in sale, solicitation or negotiation of credit insurance if his or her activities are limited to referral of a customer to the Designated Responsible Licensed Producer, to a Licensed Producer, or to a qualified employee under Section 7, without any discussion of insurance coverage terms and conditions.
Note that Section 4D of both Regulation I-2007-01 and Regulation I-2007-02 defines “credit insurance” as “…credit life, credit disability, credit property, credit unemployment, involuntary unemployment, mortgage life, mortgage disability, and guaranteed automobile protection (gap) insurance… and any other form of insurance offered to a consumer in connection with an extension of credit to such consumer that is limited to partially or wholly extinguishing such credit obligation and which the Commissioner designates as a form of limited line Credit Insurance for the purposes of this Regulation. ‘Credit Insurance’ shall not include Private Mortgage Insurance (‘PMI’).”
Section 8 of Regulation I-2007-01 says that a business entity limited lines credit insurance producer cannot sell, solicit or negotiate insurance pursuant to the Regulation unless at every location where it sells credit insurance it provides brochures or other written materials containing certain information, as described in Section 8, clearly and conspicuously, for each consumer applying for credit insurance, prior to sale.
Section 9 of Regulation I-2007-01 prohibits certain misleading advertising and payment of commissions to non-licensed employees, as described in that section.
Section 10 of Regulation I-2007-01 sets forth certain requirements for trust accounts for moneys collected from applicants purchasing credit insurance, with reference to the requirements of Regulation I-1995-01.
Section 11 of Regulation I-2007-01 says a Business Entity Limited Lines Credit Insurance Producer must keep records of the transactions under the license granted pursuant to the Regulation and must comply with all record retention requirements set forth in Regulation I-1999-01.
The Vermont Department of Financial Regulation issued Insurance Bulletin No. 157 clarifying that pursuant to Title 8 V.S.A. §4813h(d) it is the Department’s policy and practice to issue credit insurance limited lines producer licenses to both resident and non-resident applicants.
Sales and Issuance of Credit Life Insurance and Credit Accident and Health Insurance
Title 8 V.S.A. Chapter 109 regulates all life insurance and all accident and health insurance sold in connection with loans or other credit transactions, except such insurance sold in connection with a real estate first mortgage loan, or where the issuance of that insurance is an isolated transaction on the part of the insurer not related to an agreement or plan for insuring debtors of the creditor (See Section 4102 Scope).
“Credit life insurance” is defined as insurance on the life of a debtor pursuant to or in connection with a specific loan or other credit transaction. Title 8 V.S.A. §4103(1).
“Credit accident and health insurance” is defined as insurance on a debtor 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. Title 8 V.S.A. §4103(2).
Title 8 V.S.A. §4104 says that credit life insurance and credit accident and health insurance shall only be issued in the following forms:
(1) Individual policies of life insurance issued to debtors on the term plan;
(2) individual policies of accident and health insurance issued to debtors on a term plan or disability benefit provisions in individual policies of credit life insurance;
(3) group policies of life insurance issued to creditors providing insurance upon the lives of debtors on the term plan;
(4) group policies of accident and health insurance issued to creditors on a term plan insuring debtors or disability benefit provisions in group credit life insurance policies to provide such coverage.
Title 8 V.S.A. §4105(a) says that the amount of credit life insurance shall not exceed the initial indebtedness. Where an indebtedness repayable in substantially equal installments is secured by an individual policy of credit life insurance the amount of insurance shall at no time exceed the scheduled amount of indebtedness and, where secured by a group policy of credit life insurance shall at no time exceed the amount of unpaid indebtedness. Notwithstanding the provisions of subsection 4105(a), agricultural loans not exceeding one year may be written up to the amount of the loan commitment on a nondecreasing or level term plan.
Title 8 V.S.A. §4105(b) says that the amount of periodic indemnity payable by credit accident and health insurance in the event of disability, as defined in the policy, shall not exceed the aggregate of the periodic scheduled unpaid installments of indebtedness and shall not exceed the original indebtedness divided by the number of periodic installments.
Title 8 V.S.A. §4106 says that the term of any credit life insurance or credit accident and health insurance shall, subject to acceptance by the insurer, commence on the date when the debtor becomes obligated to the creditor, except that, where a group policy provides coverage with respect to existing obligations, the insurance on a debtor with respect to such indebtedness shall commence on the effective date of the policy. The term of such insurance shall not extend more than 15 days beyond the scheduled maturity date of the indebtedness except when extended without additional cost to the debtor. If the indebtedness is discharged due to renewal or refinancing prior to the scheduled maturity date, the insurance in force shall be terminated before any new insurance may be issued in connection with the renewed or refinanced indebtedness. In all cases of termination prior to scheduled maturity, a refund shall be paid or credited as provided in Section 4109 of Title 8.
Title 8 V.S.A. §4107 describes the documentation that must be delivered to a debtor to evidence the sale of a credit life insurance or credit accident and health insurance policy and the information and disclosures it must contain.
Title 8 V.S.A. §4108 describes the process by which all forms of policies or contracts, certificates of insurance, notices of proposed insurance, applications for insurance, endorsements, and riders must be filed with the Commissioner for approval before being used, with a fee.
Title 8 V.S.A. §4109(a) says that each insurer issuing credit life insurance or credit accident and health insurance shall file with the Commissioner its schedules of premium rates for use in connection with such insurance. Any insurer may revise such schedules from time to time, and shall file such revised schedules with the Commissioner. No insurer shall issue any credit life insurance policy or credit accident and health insurance policy for which the premium rate exceeds that determined by the schedules of such insurer as then on file with the Commissioner. The Commissioner may require the filing of the schedule of premium rates for use in connection with and as a part of the specific policy filings as provided by section 4108 of Title 8. Each such filing shall be accompanied by payment to the Commissioner of a nonrefundable fee of $50.00 per schedule of premium rates.
Title 8 V.S.A. §4109(b) states that each individual policy, group certificate, or notice of proposed insurance shall provide that in the event of termination of the insurance prior to the scheduled maturity date of the indebtedness, any refund of an amount paid by the debtor for insurance shall be paid or credited promptly to the person entitled thereto; provided, however, that the Commissioner shall prescribe a minimum refund and no refund which would be less than such minimum need be made. The formula to be used in computing such refund shall be filed with and approved by the Commissioner.
Title 8 V.S.A. §4109(c) says that if a creditor requires a debtor to make any payment for credit life insurance or credit accident and health insurance and an individual policy or group certificate of insurance is not issued, the creditor shall immediately give written notice to such debtor and shall promptly make an appropriate credit to the amount.
Title 8 V.S.A. §4109(d) says that the amount charged by the creditor to the debtor for any credit life or credit health and accident insurance shall not exceed the premiums charged by the insurer, as computed at the time the charge to the debtor is determined.
Title 8 V.S.A. §4109(e) says that nothing in Chapter 109 shall be construed to authorize any payments for insurance prohibited under any statute or rule governing credit transactions.
Title 8 V.S.A. §4111 outlines the proper procedure for reporting, payment, settlement or adjustment of claims.
Title 8 V.S.A. §4112 says that when credit life insurance or credit accident and health insurance is required as additional security for any indebtedness, the debtor shall, upon request to the creditor, have the option of furnishing the required amount of insurance through existing policies of insurance owned or controlled by him or of procuring and furnishing the required coverage through any insurer authorized to transact an insurance business within this State.
Title 8 V.S.A. §4113 describes the Commissioner’s powers to issue rules and regulations pursuant to Chapter 109 and order compliance when the Commissioner finds a violations or Chapter 109 or the rules and regulations. Title 8 V.S.A. §4114 describes judicial review of an order of the Commissioner. Title 8 V.S.A. §4115 describes penalties for violating a final order of the Commissioner.
The Commissioner has promulgated Regulation I-84-1 on credit life and credit accident and health insurance. The Regulation interprets and implements Title 8 V.S.A. Chapter 109. In some places it supplements Chapter 109 and goes into more detail, and in other places it cross-references Chapter 109. Credit unions should examine both Regulation I-84-1 and Title 8 V.S.A. Chapter 109 when a question arises about credit life and/or credit accident and health insurance.
Vermont Laws Governing Debt Protection Agreements
Debt protection agreements in Vermont are regulated under Vermont’s consumer protection statute Title 8 V.S.A. Chapter 200 section 10405.
Section 10405(a) says that debt protection agreements that meet the requirements of section 10405 are not considered to be insurance and are not governed by Vermont insurance laws.
Section 10405(b)(1) defines “debt protection agreement” as a loan term or contractual arrangement that may be part of, or separate from, the loan agreement or retail or motor vehicle installment contract that modifies the loan or retail or motor vehicle installment contract terms governing the extension of credit under the loan agreement, or retail or motor vehicle installment contract, and under which the creditor agrees to provide one or more of the following protections:
(1)“Debt cancellation,” which is an agreement to cancel all or part of a borrower’s obligation to repay an extension of credit from that creditor upon the occurrence of a specified event and shall include a guaranteed asset protection waiver agreement wherein the creditor agrees to cancel all or part of a borrower’s obligations to repay an extension of credit to the extent that there is an outstanding balance on the loan or retail or motor vehicle installment contract after application of property insurance proceeds in the event of total physical damage or theft of the property; or
(2)“debt suspension,” which is an agreement to suspend all or part of a borrower’s obligation upon the occurrence of a specified event.
Section 10405(c) sets forth certain requirements for a debt protection agreement:
Section 10405(c)(1) says that in the case of credit granted by a seller or retail seller of motor vehicles of other goods and services that is not required to be licensed under Chapter 73 of Title 8 (Chapter 73 regulates licensed lenders, mortgage brokers, mortgage loan originators, sales finance companies and loan solicitation companies), such retail seller or seller of motor vehicles or of other goods and services shall, within 15 business days sell, assign, or otherwise transfer the loan agreement, motor vehicle installment contract, or retail sales installment contract, together with the related debt protection agreement in accordance Section 10405(c)(2).
Section 10405(c)(2) says that all assignments, sales, or transfers of a loan agreement or motor vehicle or retail installment contract to which a debt protection agreement relates and the related debt protection agreement, shall be to a financial institution as defined in subdivision 11101(32) of this title, a credit union or an entity licensed under subdivision 2201(a)(1) or (3) of Title 8 to engage in lending or sales financing.
Section 10405(c)(3) says that in the event that a retail seller or seller of motor vehicles or of other goods or services cannot within 15 business days sell, assign, or otherwise transfer the loan agreement or motor vehicle or retail sales installment contract and the related debt protection agreement as required by Section 10405(c)(1), or in the event that an assignment is made contrary to Section 10405(c)(2), the provisions Section 10405(a) shall not apply and the debt protection agreement shall be considered to be insurance governed by the insurance laws of the State of Vermont.
Section 10405(c)(4) says that the debt protection agreement forms part of the loan agreement or sales contract or retail or motor vehicle installment contract to which it was originally related and must be assigned, sold, or transferred together with any assignment, sale, or transfer of such loan agreement or contract.
Section 10405(c)(5) says that a creditor must make the following disclosures in writing, which must be conspicuous, readily understandable, and designed to call attention to the nature and significance of the information provided:
(A) That neither the extension of credit, the terms of the credit, nor the terms of the related sale in the case of a motor vehicle or other good or service are to be conditioned upon the purchase of a debt protection agreement;
(B) the charge for the debt protection agreement; and
(C) the terms and conditions of coverage, including the eligibility requirements for coverage, conditions, or exclusions associated with the contract, a clear representation of the parties to the agreement, procedures for making a claim under the agreement, and the length of the term of coverage.
The buyer signs or initials an affirmative written request to purchase a debt protection agreement after receiving the required disclosures. Any buyer in the transaction may sign or initial the request. Title 8 V.S.A. §10405(c)(6).
Neither the extension of credit, the terms of the credit, nor the terms of the related sale in the case of a motor vehicle or other good or service are to be conditioned upon the purchase of a debt protection agreement. Title 8 V.S.A. §10405(c)(7).
The fees charged for debt protection agreements shall not vary as between individual borrowers except in relation to the amount and maturity date of the underlying loan or extension of credit. Title 8 V.S.A. §10405(c)(8).
Creditors may not offer debt protection agreements that contain terms that allow the creditor to modify unilaterally the contract, unless the modification is favorable to the borrower and is made without additional charge to the borrower, or the borrower is notified of the proposed change and can cancel the debt protection agreement without penalty. Title 8 V.S.A. §10405(c)(9).
Creditors cannot offer debt protection agreements where the terms require a lump sum, single payment, for the contract payable at the outset and the debt protection agreement is for a residential mortgage loan, including primary or secondary residences and including first or subordinate liens. Periodic payments made in relation to a residential home loan must be evenly distributed over the same term as the term of the residential home loan. Title 8 V.S.A. §10405(c)(10).
The borrower may cancel the debt protection agreement at any time and for any reason. In the event of termination or cancellation of the contract, the creditor must refund any unearned fee according to a formula fully disclosed to the borrower at the time of entering into the debt protection agreement, unless the contract provides otherwise. A debt protection agreement that does not provide for a refund may only be offered if an offer is also made of a bona fide option to purchase a comparable contract that provides for a refund. The refund must be fair and reasonable, and the method of calculating the refund must be at least as favorable to the borrower as the “actuarial method”; provided, however, that if such method produces a result of less than $5.00, no refund shall be required. Notwithstanding the foregoing, if cancellation by the borrower occurs within 30 days of entering into the debt protection agreement, the borrower shall receive a full refund. Title 8 V.S.A. §10405(c)(11).
The creditor must manage the risks associated with debt protection agreements in accordance with safe and sound financial principles. The creditor must establish and maintain effective risk management and control processes over its debt protection agreements. Such processes include appropriate recognition and financial reporting of income, expenses, assets, and liabilities, and appropriate treatment of all expected and unexpected losses associated with the debt protection agreements. The creditor also should assess the adequacy of its internal control and risk mitigation activities in view of the nature and scope of its debt protection agreement programs. Title 8 V.S.A. §10405(c)(12).
Debt protection agreements shall not state that the borrower does not have a right to bring an action to enforce the terms of the debt protection agreement or otherwise challenge the denial of a claim, or that any civil action brought in connection with a debt protection agreement must be brought in the courts of a jurisdiction other than Vermont. Title 8 V.S.A. §10405(c)(13).
Title 8 V.S.A. §10405(d) says that the Commissioner may conduct an examination of any creditor to determine compliance with Section 10405 and describes the Commissioner’s examination powers.
Title 8 V.S.A. §10405(e) gives the Commissioner the power to take any action that is reasonable, necessary, or desirable, for enforcement of any violation, including but not limited to the following. These powers are in addition to any other powers of the Commissioner to enforce penalties, fines, or forfeitures with respect to violation of any other law under Title 8 or Title 9:
(1) Order the creditor to cease and desist from offering debt protection agreements.
(2) Revoke or suspend the license or authority under Title 8 of any person including creditors offering debt protection agreements.
(3) Impose a penalty of not more than $1000.00 for each violation that the Commissioner finds to exist.
(4) Order the creditor to make restitution to the borrower.
A Final Note About Creditor Placed Insurance/Vendor’s Single Interest Insurance:
There are no current statutes or regulations in Vermont that directly regulate Vendor’s Single Interest (V.S.I.) insurance. This type of insurance, which may also be referred to as “creditor-placed insurance,” “collateral protection insurance,” “force-placed insurance,” or “lender-placed insurance,” is a type of policy purchased by a lender when a borrower fails to meet the minimum insurance requirements of a loan. Credit unions should, at a minimum, be careful not to use this type of insurance in a way that could be construed as unfair or deceptive according to Vermont’s consumer protection statute Title 9 V.S.A. Chapter 63.