MOB Credit Insurance Premiums: It's the Rounding

With the inception of the 2002 HOEPA revisions, we saw a dramatic increase in the use of outstanding balance (aka "monthly remittance") credit insurance premiums in conjunction with closed end credit transactions.  That, of course, was due to the inclusion of single premium credit insurance premiums being included in the points and fees trigger introduced with the Act.

Since that time, outstanding balance (aka "MOB") insurance has continued to be a staple employed in the consumer finance industry when credit insurance is offered on a closed end product.

 At first glance, the coverage seems rather simplistic; the monthly premium is remitted along with the monthly P&I portion of the payment on the due date.  But, like so much in this industry, there are some properties inherent in MOB coverage that are not particularly self- evident.

Monthly payments calculations including traditional MOB insurance are not as straight forward as simply taking a "no insurance" payment and adding monthly premiums that amount.  That is because the majority of lenders desire the amount due by the borrower each month to be a level amount and not one that is constantly fluctuating.

Think about the premise of "monthly remittance" premiums; the monthly premium is computed each month by applying a rate to the outstanding balance.  The outstanding balance of a loan decreases by the amount of the principal portion of the monthly payment applied.  So the monthly premium amount is determined on the basis of a declining balance meaning the premium amount will change every month.

If the goal is to provide the consumer with a level and equal total amount due each month, then the variable premium amount needs to be combined with a  P&I payment that also changes each month in order to arrive at that level total payment the borrower pays.

That process of combining a variable premium payment with a variable P&I payment each month to arrive at the total payment amount gets quite complicated.

Also, finding the monthly insurance by multiplying a rate times the balance produces a mathematical number that, in our code at least, is potentially 32 decimal places long.  That's simply the math involved.

 In order to have a  practical amount to collect, the insurance needs to be rounded to a dollar and cent value, each month.  That's, for instance, 60 roundings in a 60 month loan or perhaps as many as 120 if both life and A&H are involved.

That's the reason that you can't directly compare the interest from a no insurance transaction to one with identical parameters that has MOB insurance coverage.  It is not "apples and apples."

The rounding of the premium(s) each month to a dollar and cent amount can slow down the liquidation of the principal of the loan, even though it is ever so slight.  The result is that the interest from a loan with MOB coverage is slightly higher than that of its counterpart that has no insurance coverage.

Since Regulation Z allows voluntary MOB premiums to be excluded from the finance charge, only the P&I portion of the payment is used in the calculation of the APR.  That means 60 separate and differing payment streams to compute the APR for a 60 month loan.  And once again, the rounding of the P&I payment each month influences whether the computed APR, when devoid of prepaid charges, ends up as the same value as the starting interest rate.

The next time you hear someone say "it's just rounding", remember the implications can be quite significant.