FOR IMMEDIATE RELEASE
July 25, 2005
Contact OFIS Directly (toll-free): 877-999-6442
Media/Press calls: Andy Schor: 517-335-1700

Insurance Problems Solved for Those of Muslim Faith

Devout Muslims have always struggled with the conflicting requirements of their faith and the traditional mortgage transaction. The typical arrangement - which involves lenders who provide capital to borrowers, who promise repayment, plus interest - runs afoul of the Koran, which forbids the payment or receipt of interest. In order to accommodate Islamic borrowers, financial institutions have created special, interest-free financing arrangements commonly called “Islamic Mortgages.” These transactions, which are structured as lease-to-own agreements, build transaction costs into monthly lease payments, with the result being that at the end of the lease term, the buyer owns the home.

Just as in regular transactions, a buyer using an Islamic mortgage will contract to buy a home and provide a down payment. The lender funds the remainder of the purchase price. After the loan is funded, the lender and the homebuyer enter into a net lease and purchase agreement. The lender has legal title to the property, and monthly lease payments cover the costs of the lease payments, insurance and any taxes. By the end of the lease term, the lessee will amortize all cost of the transaction. Under the lease agreement, the homebuyer has the property for a specified term and, upon fulfilling the terms of the agreement, the homebuyer becomes the legal owner of the property. By prepaying the lease balance, the homebuyer may acquire title and is entitled to profits from the sale of the house. In the event of homebuyer default, the homebuyer is given procedural rights like those under a conventional mortgage. Collectively, these and other rights under the agreements confer equitable ownership upon the lessee.

This creative financing arrangement was a “win-win” for consumers and financial institutions. Recently, however, the Office of Financial and Insurance Services was notified of a consumer who was having trouble trying to buy a home insurance policy as part of the requirements to close the Islamic mortgage. After much wrangling, the consumer was forced to buy a less comprehensive commercial policy at a much higher price. After an investigation, OFIS Commissioner Linda A. Watters solicited input from representatives of the financial and insurance industries then issued a bulletin clarifying that individuals purchasing homes using these mortgages are, in fact, homeowners eligible to purchase a traditional homeowners insurance policy.

“The reality is that the American dream of home ownership starts with access to affordable insurance,” said Watters. “I have continued to fight for affordable insurance regardless of your religion, where you live, or your credit score.” ”

Michigan has one of the largest Muslim populations in the nation with more than 400,000 Arab Americans. Some banks are already offering these Islamic mortgages. University Bank in Ann Arbor has been a pioneer for Islamic Mortgages in Michigan and worked with OFIS on the bulletin.

Commissioner Watters said, “It has been a pleasure to work with members of the Islamic community and the industry to ensure equality in home insurance and ownership for people of the Muslim faith.”

The bulletin, which contains further information for consumers and insurers, can be viewed on the OFIS website at:

http://www.michigan.gov/cis/0,1607,7-154-10555_12900_12906-122478--,00.html

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