Drivers may get break on policy

But financing firms again oppose bill on MAIF premiums

March 04, 2007|By Laura Smitherman | Laura Smitherman,sun reporter

Three decades ago when then-Gov. Marvin Mandel heard from constituents about the high cost of automobile insurance, he bucked opposition from industry and pushed through legislation that set up a unique state agency to act as an insurer of last resort.

Now a provision of that 1972 law has come under fire for contributing to today's high costs for 70,000 Maryland motorists who rely on the state for their auto insurance.

The provision requires that residents insured through the Maryland Automobile Insurance Fund pay the entire annual premium upfront - an average of $1,700. The majority of policyholders, who are concentrated in Baltimore City and Prince George's County, can't afford that sum and are referred to little-known finance companies. Their main business is to extend short-term loans at rates as high as 30 percent, adding on hundreds of dollars in fees and interest.

Gov. Martin O'Malley says the loans put undue burden on working families, illustrating the maxim that "it is expensive to be poor," and the attorney general's office has identified the issue as one of its top consumer-protection priorities. Some state legislators and community activists say the companies are needless middlemen that gouge policyholders, many of whom are low-income residents and minorities.

But new legislation aimed at bypassing premium finance companies has failed in the General Assembly in the past two years and on at least three previous occasions. The legislation - vigorously opposed by the premium finance industry - has been introduced again this year and would allow the state fund, known as MAIF, to receive monthly payments at a lower price than what the finance companies charge.

"The cost to the consumer is so high, it's almost usury," said Sen. Lisa A. Gladden, a Baltimore Democrat who sponsored the bill in past years. "We have created a monster because now we can't change the law. The premium finance companies are too powerful; they are too strong."

Premium finance company owners say the legislation would take away their livelihood while creating a bigger bureaucracy at the state fund. They also contend that MAIF does not have the resources to provide the kind of customer service that they can.

"This business is the sole income for our families," said George Voxakis, owner of American Liberty Financial Services Inc., a three-person premium finance operation. "For me to have to compete with a government agency I think is wrong."

The premium finance companies have formed an industry group and engaged a team of lobbyists to make their case. They also organized a political action committee that last year contributed about $25,000 to lawmakers who sit on committees that would consider the legislation.

Assistant Attorney General Steven A. Silverman said the legislation is critical "in terms of its impact on the poorest consumers and in terms of fairness." He said the bill is "not designed to put premium finance companies out of business but to address a monopoly that has occurred for many, many years."

Diana Velasquez of Silver Spring obtained insurance through the agency when she started driving at 21 years old. At the time, she was a student at the University of Maryland, Baltimore County and fell behind on her payments. She said that by the time she submitted a payment, her policy had been canceled, and she had to reapply.

"It was expensive, and being a student and working, it was a bit of a challenge, but I didn't have much choice," she said. "MAIF is intended to help relieve the burden to new drivers like me, so if they're the ones who are providing the services, then they should be in charge of it completely."

The legislation has a broad coalition behind it, including the Hispanic Chamber of Commerce, the National Association for the Advancement of Colored People and Baltimore City Council President Stephanie C. Rawlings-Blake.

The General Assembly created MAIF soon after making auto insurance compulsory. The new agency was not allowed to offer monthly installment plans, and upfront payment of premiums allowed it to amass a capital reserve so the state wouldn't be on the hook for losses.

The premium finance industry, which also has commercial customers such as trucking companies, blossomed by providing loans to the fund's newly created individual motorist market. There are now more than 70 premium finance companies in the state.

MAIF wrote $153 million of premiums last year. More than 95 percent of the policyholders pay through premium finance companies, and turnover can be high because the companies cancel more than half of the policies for late payment in the first few months. Presumably some motorists then go without insurance; many return and go through the application process again.

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