Colorado Life Producer License Practice Test

What does coercion require in relation to a loan?

1. Mandatory collateral from the borrower

2. Payment of a higher interest rate

3. The applicant purchase insurance from a specific insurer

4. A cosigner for the loan

The correct answer is: The applicant purchase insurance from a specific insurer

The correct option highlights the concept of coercion in lending practices, specifically where a lender requires a borrower to purchase insurance from a particular insurer as a condition for granting a loan. This practice is considered coercion because it compels the borrower to adhere to the lender’s terms, rather than allowing them the freedom to choose their insurance provider. Coercion in this context often leads to a lack of fair competition, as borrowers may feel obligated to purchase services or products only from specified entities, which can result in financial disadvantages for the borrower if those products are overpriced or subpar. Other options do not accurately reflect the definition of coercion in relation to loan agreements. Mandatory collateral is a common practice in lending but does not imply coercion if the borrower agrees to these terms willingly. Setting a higher interest rate is part of the risk assessment process and doesn't imply coercion unless tied to unethical practices. The requirement of a cosigner indicates a need for additional security but does not necessarily force the borrower to engage in a specific, limiting agreement with an insurance provider. Understanding the nuances of coercion helps identify unethical lending practices and promotes fair lending.