In most cases, when an individual wishes to purchase a home, they will require some type of financing to complete the transaction. Typically, this comes in the form of a home loan that is issued by a bank or another lending institution.
A mortgage is the most common type of home loan arrangement. There are numerous different types of mortgages.
Each different type of mortgage has different payment plans as well as different interest rates. A mortgage allows a borrower to make monthly payments on their property to a lender.
Eventually, the individual will become the owner of the property once the mortgage is paid in full. A home loan may also address other aspects of a residential property, for example, a home improvement loan.
These types of loans are taken out for the purpose of upgrading or repairing a home or for making an addition to a property. The majority of home loans which are issued, however, are mortgages.
What is a Home Equity Loan?
Home equity loans are specific types of loans in which a borrower uses their home equity as collateral for the loan. These types of loans are typically reserved for larger projects and expenses, including:
- College tuition;
- Medical expenses; or
- Home repair and improvement projects.
A closed end home equity loan is a traditional, one time, lump sum payment loan. In the alternative, an open end home equity loan does not function as an actual loan but, instead, as a credit line that is based on the equity.
An open end home equity loan is also referred to as a home equity line of credit (HELOC). The repayment of a home equity loan is, in general, negotiated between the borrower and the lender.
In addition, closed end equity loan payments may be different when compared to an open end loan, which is more similar to credit card payments. With either type of loan, non-payment of a home equity loan may result in a collections lawsuit that may have a negative effect on the borrower.
What is Insurance Packing?
Insurance packing is a fraudulent practice that is associated with home loan and home equity arrangements. In insurance packing schemes, lenders add or pack insurance policy clauses into a borrower’s home equity mortgage contract.
This is done in such a manner that the borrower often does not notice the terms until they start noticing the effects of the insurance clause. Credit insurance typically costs additional money and is often not a part of the original contract negotiation terms.
In the majority of cases, the insurance clause is intended to benefit the lender only. This is done by insuring the lender on all or most of the loan funds in the event of a default.
In many cases, however, a borrower would not have agreed to the loan arrangement terms if they have been aware of the clause in the contract. It is important to note that insurance packing may be considered illegal and may constitute a legal violation that is based on:
- Misrepresentation; or
- Other legal theories.
What is Credit Insurance?
Credit insurance is an insurance policy that is associated with a specific loan or line of credit, for example, a credit card. Credit insurance pays back some or all of any money that is owed if certain things happen to a borrower, for example:
- Disability; or
Typically, credit insurance coverages includes:
- Credit life;
- Credit disability;
- Involuntary employment; and
- Credit property insurance.
What are the Policy Qualifications and Limitations of Credit Insurance?
Because credit insurance is sold without conducting a comprehensive application process or a comprehensive screening process, an individual must ensure that they qualify for the coverage they are purchasing when their policy arrives. In many cases, the only criteria that is used by an insurance company to sell an individual credit insurance is that they have some type of loan, credit, or deposit account.
Many individuals do not qualify for all of the types of credit insurance that may be bundled together for them to purchase. For example, an individual must usually be gainfully employed to qualify for involuntary unemployment insurance.
However, the majority of credit insurance applications do not ask for an individual’s employment status when selling credit insurance. Many insurance companies will impose a benefit cutoff at a specific age for credit life insurance.
Similar to involuntary unemployment insurance, the majority of insurance applications or telemarketers do not ask for an individual’s age when selling credit life insurance.
Is it Difficult to Cancel a Credit Insurance Policy?
Some customers do have difficulty locating contact information that is required to cancel a credit insurance policy because the insurance company is not the original lender, bank, or credit card company. In addition, it is common for a retail store account to be handled by a separate finance company that is unrelated to the original retail store.
Because of this, an individual may not be able to recognize the credit account that the insurance covers.
How can I Detect and Prevent Insurance Packing?
An individual may avoid being a victim of insurance packing by taking certain steps, including:
- Reading the fine print and all terms in a contract;
- Being sensitive to any unnecessary pressure, intimidation, or misrepresentation on the part of the loan representative; and
- Hiring a lawyer for guidance during negotiations.
In addition, an individual should check the background and credentials of the lender they are working with. An individual should take this step both for their individual representative as well as the company that they may be working for.
An individual should not be afraid to ask any questions that arise during the lending transaction.
What are the Legal Penalties for Insurance Packing Violations?
The legal penalties for insurance packing violations are typically based on contract laws. Remedies for an individual who was a victim of insurance packing may include:
- Voiding the contract entirely;
- Rewriting the contract; or
- Monetary damages for losses resulting from the violation.
These consequences and remedies will depend mostly on the facts which are involved in the insurance packing scam. In some cases, criminal fraud punishments may also apply.
What Else Should I Know about Loan Fraud?
Loan fraud is one of the most common issues that results in home equity loan lawsuits. Homebuyers should be aware of the different ways they can be taken advantage of during the home buying process in addition to insurance packing.
Predatory lending occurs when a financial institution offers a high interest rate loan to a borrower in exchange for valuable collateral, for example, the deed to the property. If the buyer cannot pay back the loan in full, which typically occurs as a result of the high interest rate, the lender may legally take the property and sell it at a higher value in order to make a profit.
It would be considered fraudulent behavior if a lender conceals or misstates the terms of a loan. It is also important for loan applicants to be aware of how they may perpetuate loan fraud.
Common examples of mortgage fraud include:
- Exaggerating income to receive a bigger loan;
- Claiming that an individual is employed when they do not have a job; and
- Attempting to avoid higher interest rates by claiming that they will occupy the property, when the actual intention is to buy it as an investment property.
Should I Hire a Lawyer for Help with Insurance Packing Lawsuits?
If you have any issues, questions, or concerns related to insurance packing, it may be helpful to consult with a mortgage lawyer. Your lawyer can help you file a claim for an insurance packing violation, if necessary.
Your attorney can also review any mortgage contracts you are considering signing before you sign them to ensure they do not contain insurance packing clauses. If you do have to file a claim based on a contract you already signed, your lawyer will provide advice and guidance throughout the process and represent you in court.