The sale of unnecessary insurance as a condition for granting credit is pushing up the cost of major purchases for many unsuspecting consumers, according to Federal Trade Commissioner Michael Pertschuk.
Pertschuk told a House subcommittee yesterday that deficiencies in the 10-year-old Truth is Lending Act have led to many abuses, among them the practice of coercing credit seekers into buying excessive or unrelated insurance without including the premiums as a part of the finance charges.
In most credit arrangements life insurance to cover the unpaid debt in case of the borrower's death is not mandatory, but studies show that 99 percent of consumers "opt" for it.
Insurance extending beyond the risk created by the credit transection is becoming more common, according to Lee Richardson of the Office of Consumer Affairs, because it is "extraordinary profitable" for lenders. Insurance companies may grant credit givers up to half of the premium of each policy they sell.
The subcommittee cited examples of military personnel being told they would have to purchase disability insurance to get credit when they are already insured against disability by the government.
The FTC cracked down on a Texas finance company that sold a customer $420 worth of credit and non-credit related insurance in connection with a $300 loan.
Richardson told the subcommittee of a $15,000 mobile home sale where the life and disability insurance costs for the 10-year loan came to $3,500. Thus insurance (plus the finance charges paid on outstanding premiums) can boost the effective annual percentage rate much higher than the rate disclosed to the customer under the Truth in Lending Act.
Another critical shortcoming of the act, Pertschuk said, is in the area of open-end credit, typified by credit cards. "A consumer using a credit card to purchase goods costing several thousand dollars will receive disclosure of only the annual percentage rate and minimum monthly payment, not the total cost of credit, the number of payments to be made, insurance or other charges, or the total amount to repay," he said.
Creditors financing the sale of furniture, appliances and automobiles increasingly prefer to accept credit cards rather than make the complicated disclosures required by Truth in Lending, he added, even though these transactions are unsecured. There seems to be a consensus amoung industry, consumers and government officials that too much information must be given out, causing unnecessary confusion and cost.
Despite this consensus there is no agreement on what to eliminate. Creditors think data on late payment charges, rebate methods and security interests are superfluous; some consumer advocates don't.
Rep. Millicent Fenwick (R-N.J.) proposed a simplified model disclosure form in plain English.
Thomas W. Taylor, associate deputy Comptroller of the Currency, showed Washington Post real estate ads in which developers advertised 9 percent loans in big print and only in small print at the bottom noted the true annual percentage rate was 9.65 percent.
Consumer affairs subcommittee chairman Frank Annunzio (D-Ill.) chided the bank regulatory agencies for not requiring creditors to make restitution for Truth in Lending overcharges aising from misleading advertising or technical errors of calculation. He cited estimates of as much as $100-million owed to consumers.
Pertschuk asked that the FTC be granted the authority to force resitution when the act has been violated.