Opinion ID: 1796802
Heading Depth: 1
Heading Rank: 6

Heading: c. calculating the total of payments

Text: If Regency and Universal used the total of payments method to sell credit life insurance and that method was acceptable to the state agencies charged with regulating them, then Cindy McCullar should not be allowed to challenge that method after the fact any more than the buyer of a Cadillac should be allowed to claim he or she was defrauded because they could have purchased a Volkswagen at a much lower pricethat all they needed was some transportation, and not all the fancy items that came with the Cadillac. The buyer can perhaps claim to have been overcharged; the buyer should not be allowed to allege fraud simply because the Cadillac was more expensive. The total of payments principle reduces the risk of both the buyer and the seller to the lowest point possible. If the buyer falls behind in payments and then dies, insurance that covers only the principal will be insufficient to pay off the full indebtedness. The problem of having too little insurance is actually more serious for both parties than that of having too much. There exists precedent for Universal Underwriters to be sued for supplying too little insurance. In Applin v. Consumers Life Insurance Co. of North Carolina, 623 So.2d 1094 (Ala.1993), overruled by Boswell v. Liberty National Life Ins. Co., 643 So.2d 580, 582 (Ala.1994), this Court upheld the dismissal of an action for failure to state a claim. In that case, there was no damage because the plaintiff Applin had never filed a claim; further, the fraud allegation was not pleaded with particularity. Boswell, 643 So.2d at 582, overruled Applin on one issue. Boswell held that damage can occur to an insured even if the insured does not file a claim on the policy. In Applin, the plaintiff alleged that he paid for, but did not receive, an amount of coverage equal to the balance due on the note. Applin, 623 So.2d at 1098. Interestingly, in that opinion this Court defined the term amount financed. This Court said, `amount financed,' however, ordinarily includes the total amount payable in principal and interest over the term of the loan. Id. at 1098. If Alan McCullar had agreed to a simple interest loan, then Cindy McCullar may have a valid claim because the rule under Regulation No. 28 is different for the simple interest loan. The amicus curiae brief filed by the Automobile Association of Alabama gives a good discussion of the difference between the simple interest loan and the add-on/precomputed interest loan. In a precomputed interest transaction, the debtor agrees to pay the principal and a fixed amount of interest, but in a simple interest loan the debtor agrees to pay the principal and a fixed rate of interest. The difference between the use of the terms rate for simple interest loans and amount for precomputed interest loans is great. In a simple interest loan, the interest is calculated at the agreed-upon rate on the outstanding balance every time a payment is due. As the principal balance of the obligation is reduced, the dollar amount of interest likewise declines. See Ala.Code 1975, § 5-19-3(f)(1). In the simple interest loan, most of the interest is paid by the borrower in the earlier payments. In an add-on/precomputed interest type loan, the total amount of interest to which the creditor would be entitled over the life of the loan is calculated at the time the loan is made and is then added to the principal balance. See Ala.Code 1975, § 5-19-3(b). The add-on/precomputed interest loan makes recordkeeping simpler because all the interest due is calculated at the beginning of the transaction and then spread equally over the life of the loan. There is no need to calculate interest every time a payment is scheduled or actually made. The amount of insurance does not decline with each payment. It declines by the amount of the scheduled payment each month whether a payment is made or not. If the buyer has not paid some of the monthly payments, then the excess coverage helps the buyer pay that. If the buyer pays the obligation as and when the payments are due, a surplus in insurance coverage may result if the buyer dies during the term of the credit. In this instance, the insurance proceeds over and above what is required to pay off the debt in full are remitted either to a beneficiary designated by the consumer or to the estate. Universal Underwriters was contractually obligated to pay the full amount of the policy if Alan McCullar had died the day after the credit sale occurred. That is, Universal would have paid to the creditor the full amount of the installment contract plus earned interest, and the excess insurance would be paid to the person designated by Alan McCullar as the secondary beneficiary under the policy. In addition, as pointed out in the amicus brief filed by the American Council of Life Insurance, until recently lenders did not have the capability to make the daily calculations necessary to monitor the actual payoff amount of a loan. Today, only the largest and most sophisticated lenders have the computer capability to calculate credit insurance premiums on the monthly outstanding balance of all of their loan accounts. Such companies can know at any given time what amount is necessary to pay off the loan, and they can charge a premium that changes monthly based on whether and when the monthly payment was made. Community banks, automobile dealers, and other small financial institutions do not have this capability. In order to provide the most safety to buyers, who do not want their families burdened with an automobile debt after their loved one has died, the insurer insures for the total of payments. That is the best, but even then not a foolproof, way to ensure there is no shortfall. Anything less would not be serving the buyer/debtor. Even in the case of total of payments type insurance, the insurance may not be enough to pay off the debt in full. In the event the consumer is delinquent in payments, there is a risk of underinsurance. The amount of insurance declines with each scheduled payment, whether or not a payment is made. When a consumer is in serious arrears at the time of his death, the insurance may not pay the debt in full. By saying that the approximate unpaid balance of the loan excludes interest, the plurality opinion has ensured that the insurance will never be enough to pay off an add-on/precomputed interest debt, even if the customer is current on all payments. The key difference between a simple interest loan and an add-on/precomputed interest loan is that the interest in the latter is fixed. In the add-on/precomputed interest loan, the insured agrees to pay the total of payments, which includes interest over the life of the loan. The plurality opinion seems to have blurred the distinction between these two types of loans. This distinction between simple interest loans and add-on/precomputed interest loans has been accepted as part of Alabama law for a long time. Section 5-19-3(b) states: The maximum finance charge under subsection (a) of this section shall be determined by computing the maximum rates authorized ... on the original principal amount of the loan or original amount financed for the full term of the contract without regard to scheduled payments and the maximum finance charge so determined, or any lesser amount, may be added to the original amount financed. Section 5-19-3(f) indicates that the simple interest contract does not involve adding on to the original principal at the inception of the loan: In lieu of the finance charges set forth in subsection (a), ... a creditor may contract for and receive finance charges on any loan of money at the rate of not more than one and one-half percent per month as follows: (1) Charges shall be computed on unpaid balances of the principal amount outstanding from time to time, for the actual time outstanding. Each payment shall be applied first to accumulated charges and the remainder of the payment applied to the unpaid principal balance, except that if the amount of the payment is insufficient to pay the accumulated charges, unpaid charges continue to accumulate to be paid from the proceeds of subsequent payments and are not added to the principal balance. In contrast, the finance charge in an add-on/precomputed contract is added on at the beginning of the loan, not recomputed every payment. This concept was accepted by this very Court as early as 1980. In Centennial Associates, Ltd. v. Clark, 384 So.2d 616 (Ala.1980), this Court said, Additionally `maximum finance charges' in the Mini-Code are expressed in `add-on' terminology (i.e., these charges ... may be aggregated for the term of the loan, and added to the principal and then divided by the number of installment payments) as distinguished from the `simple interest' characterization, where an interest percentage is computed on the principal balance from time to time outstanding, for the period of time that the debtor has the use of the principal amount between installment payments. 384 So.2d at 617. Therefore, McCullar has made no showing that the amount of credit life insurance Regency issued was excessive. The amount insured was exactly what was needed for this type of loan. McCullar has failed to show a misrepresentation of any fact or that she relied on any misrepresentation to cause her damage of any kind. At best, she has shown that she agreed to credit life insurance that, in the event of death, would have paid off the loan on her car and then paid her secondary beneficiary any excess that may have existed after such payment. The loan contract did not conceal the amount that the credit life insurance covered. It did not conceal the amount of her premium. It did not underinsure her. And it did not overinsure her. Thus, she simply has no claim.