BY MARK HEIN
Insurance tracking and placement is a critical component of a lender’s risk management arsenal, albeit not always a very popular one.It is unpopular with credit union staff, and obviously, borrowers, who have either errantly or unfortunately been force placed. However, it’s unavoidable, right? Collateral Protection Insurance (CPI), with all of its shortcomings, has been around for decades, and it generally reduces the risk to your credit union’s lending portfolio. By tracking your auto loan portfolio and proactively communicating with your borrowers about the status of their insurance coverage, you can limit risk due to uninsured losses, at least in theory.
But as most credit unions know, some of the problems associated with CPI can be quite disruptive to their operations:
- Ensuring regulatory compliance
- Increased member complaints
- Deficiency balance exposure due to high premiums and subsequent payment increases
- An increased administrative burden due to refund activity
- Increased collection and repossession efforts due to subsequent payment increases
Ensuring Regulatory Compliance
Lenders face a unique set of challenges as regulations surrounding lender placed insurance are changing every day. Over the last few years, the industry has evolved because of regulations and fines passed down from state insurance departments, Fannie Mae, Freddie Mac, and the Consumer Financial Protection Bureau (CFPB).
Throughout the years and the increased practice of tracking insurance, lenders have found themselves embroiled in litigation about CPI programs, arising from the practice of adding exorbitant coverage that did not directly benefit the borrower, but were, unfortunately, built into the premiums. In addition, many institutions were under the false impression that CPI should, or could be, a source for non-interest income.
Now, after hundreds of millions of dollars in penalties have been paid, the trend is to simplify the practice of tracking insurance and the coverages that accompany those programs, leaving credit unions with a huge burden to ensure their CPI providers are compliant.
Increased Member Complaints and Administrative Burden
When the premium add-on from a CPI policy causes a borrower’s monthly auto loan payment to significantly increase, there will naturally be complaints, particularly if the CPI policy was errantly false placed. Either scenario is difficult for your employees to explain to your members, and time-consuming to make all of the necessary and manual account adjustments. Unhappy members puts a strain on your relationship, and in this day and age of intense competition in the financial services industry, an unhappy member could soon be a former member.
Deficiency Balance Exposure and Increased Collection and Repossession Efforts
In the worst of cases, a borrower can be pushed into delinquency because of a premium add on. By raising a borrower’s monthly loan payment to cover the cost of an annual CPI premium, some borrowers are forced into voluntary repossessions because they can’t afford the inflated price, leaving your credit union susceptible to charge offs and loan losses. As deficiency balances and delinquencies rise, collections workflow increases and cash flow is impacted. Delinquency and repossession as a result of CPI premiums are a lose-lose for everyone involved.
Evaluate Your Provider
Collateral protection insurance in general may be unavoidable; however the quality of your provider is in your control. Whether you’re in the market for a new CPI provider, or just want to conduct a high-level due diligence of your current provider, here are a couple of questions you can consider:
- Are the provider’s processes archaic?
The outdated way of insurance tracking goes a little like this: send letter, send another letter, issue a CPI policy, and then unwind after borrower presents proof of insurance. This process works, but it is certainly not the most efficient way of managing the process—not when there is technology available that allows you to “score” borrowers based on their past insurance history and communicate accordingly. By using information from credit bureaus on whether a borrower is likely to have the insurance coverage required for their auto loan, the technology is able to make predictions with 87% accuracy. Borrowers who score higher can then be sent additional automated messages, or be given more time to provide proof of insurance.
- Does the provider offer alternative policies?
As we all know, the traditional force placed insurance policy is costly. It can cost up to $2,000 for an annual policy. In general, if a borrower was in a position where they couldn’t secure a standard full coverage auto insurance policy, you can deduce that a $2,000 policy is going to cause financial hardship—in some cases pushing the borrower into delinquency and worst case scenario, repossession.
Is an annual policy the only option for you and your borrowers, or do they also provide a more borrower-friendly, monthly option? A monthly option with premiums in the $50-$90 range can be significantly more manageable for your borrowers, keeping them out of delinquency, and keeping your collections staff focused on legitimately delinquent borrowers and repossessions, as opposed to involuntary repossessions due to inflated premiums.
A Different Perspective
While “out with the old, in with the new” might be a great motivator for updating your wardrobe or buying a new car, when it comes to transitioning out of a CPI program that you’ve grown comfortable with over the years, it can be more difficult to let go of “the old.” However, the challenges and daily nuisances to both your staff and your members are hard to ignore, particularly if there is a better option available in the marketplace.
“Our deficiency balances are way down. We used to have two people spending one day per week posting insurance premiums to loans. Not having to change loan payments and the automation through our core has been a godsend,” said Randy Brown, SVP of Lending with Heritage Family Federal Credit Union, regarding his credit union’s transition to Hybrid CPI.
Hybrid CPI addresses many of the challenges faced by auto lenders with regard to compliance concerns, member noise, deficiency balance exposure due to premium add on, staff administrative burden, and increased collection and repossession activity due to payment increases. By reducing the premium amount from $2,000 annually to $50-$70 monthly, borrowers are less likely to experience “sticker-shock” and be pushed into delinquency.
Want to learn more? Our case study highlights the successes that three of our credit union clients experienced by transitioning from an older-generation CPI program to Hybrid CPI. Click here to read their stores.
Mark Hein is the CEO of SWBC’s Financial Institution Group. He manages the day-to-day operations and sets the strategic direction for the division. To connect with Mark on LinkedIn, click here.