Most states allow certain fees in connection with lending activities, such as loan
origination fees, acquisition fees, and maintenance fees. Some states allow for higher fees while keeping interest rates lower. Loan fees are additional charges to the customer and generally are included in the annual percentage rate shown in the
Truth in Lending disclosure that we make to our customers. The fees may or may not be refundable to the customer in the event of an early payoff, depending on state law. Fees are accrued to income over the life of the loan on the constant yield
method.
Insurance Income, Net.
Our insurance operations are a material part of our overall business and are integral to our
lending activities. Insurance income, net consists primarily of earned premiums, net of certain direct costs, from the sale of various optional payment and collateral protection insurance products offered to customers who obtain loans directly from
us. We do not sell insurance to
non-borrowers.
Direct costs included in insurance income, net are claims paid, claims reserves, ceding fees, and premium taxes paid. We do not allocate to insurance income, net,
any other home office or branch administrative costs associated with managing our insurance operations, managing our captive insurance company, marketing and selling insurance products, legal and compliance review, or internal audits. All of these
costs, which management estimates will approximate $6.7 million in 2018, are included in general and administrative expenses in our consolidated statement of income.
Our primary insurance products include optional credit life insurance, accident and health insurance, involuntary unemployment insurance, and
personal property insurance. The type and terms of our optional insurance products vary from state to state based on applicable laws and regulations. We generally require that customers maintain property insurance on any personal property securing
loans, and we offer customers the option of providing proof of such insurance purchased from a third party in lieu of purchasing property insurance from us. We also require proof of insurance on any vehicles securing loans, and in select markets, we
offer vehicle single interest insurance on vehicles used as collateral on small and large loans. In addition, before we ceased originating automobile loans in November 2017, we offered a guaranteed asset protection waiver product, which provides for
the forgiveness of any loan balance remaining if the automobile collateral is determined to be a total loss by the primary insurance carrier and insurance proceeds are insufficient to pay off the customers loan in full.
Apart from the various optional payment and collateral protection insurance products that we offer to customers, on certain loans, we also
collect a fee from customers and, in turn, purchase
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insurance from an unaffiliated insurance company for our benefit in lieu of recording and perfecting our security interest in personal property
collateral.
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insurance protects us from credit losses where, following an event of default, we are unable to take possession of personal property collateral because our security interest is not
perfected (for example, in certain instances where a customer files for bankruptcy). In such circumstances,
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insurance generally will pay to us an amount equal to the lesser of the loan balance or the
collateral value. As previously disclosed, in recent years, as large loans have become a larger percentage of our loan portfolio, the severity of
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claims has increased and
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claims expenses have exceeded
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insurance premiums. The resulting net loss from the
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insurance product has been
reflected in our insurance income, net. We have evaluated various ways to lower our
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insurance claims, and we have determined to reduce our utilization of
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insurance in the future, beginning in the fourth quarter of 2018. This policy change will cause substantially offsetting increases to insurance income, net and net credit losses in future quarters.
Therefore, we do not expect this change in policy to impact our profitability in future quarters. For additional information regarding this policy change, including its impact on our allowance for credit losses in the third quarter of 2018, see Note
3, Finance Receivables, Credit Quality Information, and Allowance for Credit Losses, of the Notes to Consolidated Financial Statements in Part I, Item 1. Financial Statements.
We issue insurance certificates as agents on behalf of an unaffiliated insurance company and then remit to the unaffiliated insurance company
the premiums we collect, net of refunds on prepaid loans and net of commission on new business. The unaffiliated insurance company then cedes to our wholly-owned insurance subsidiary, RMC Reinsurance, Ltd., the net insurance premium revenue and the
associated insurance claims liability for all insurance products, including the
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insurance that we purchase. Life insurance premiums are ceded as written, and
non-life
insurance premiums are ceded as earned. In accepting the premium revenue and associated claims liability, RMC Reinsurance acts as reinsurer for all insurance products that we sell to our customers and
for the
non-file
insurance that we purchase. RMC Reinsurance pays the unaffiliated insurance company a ceding fee for the continued administration of all insurance products.
As reinsurer, we maintain cash reserves for life insurance claims in an amount determined by the unaffiliated insurance company. As of
September 30, 2018, the restricted cash balance for these cash reserves was $7.0 million. The unaffiliated insurance company maintains the reserves for
non-life
claims.
Other Income.
Our other income consists primarily of late charges assessed on customers who fail to make a payment within a
specified number of days following the due date of the payment. In addition, fees for extending the due date of a loan, returned check charges, and commissions earned from the sale of an auto club product are included in other income.
Provision for Credit Losses.
Provisions for credit losses are charged to income in amounts that we estimate as sufficient to
maintain an allowance for credit losses at an adequate level to provide for estimated losses on the related finance receivable portfolio. Credit loss experience, delinquency of finance receivables, loan portfolio growth, the value of underlying
collateral, and
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