Your auto portfolio is key to your credit union, and you watch its performance carefully. You underwrite prudently and put measures in place, such as collateral protection insurance (CPI), to safeguard against loss due to uninsured collateral. And you try to ensure you have a CPI program in place that is efficient, flexible and allows you to get the most benefit possible. The greatest benefit of a CPI program, however, is only achieved when the program is allowed to work as designed.
A Balanced Program
A CPI program is designed to be in balance over the long haul. By that I mean the premiums collected for certificates placed have to be sufficient to cover the vendor’s losses (claims paid to you), expenses (for tracking) and margins (of the vendor and the carrier actually underwriting your program). Stability is achieved when CPI programs are managed efficiently by your provider and certificates are placed per your guidelines according to the terms of the loan agreements. This typically entails having insurance in place for the life of the loan, with no lapses in coverage, and you, the lender, listed as the lienholder.
Your staff can be pressed by borrowers to modify terms related to CPI. Your staff also has an inherent degree of sympathy in their treatment of members, and waiving CPI requirements can often feel like the “right” thing to do, especially when no claims have occurred during the time a CPI certificate was, or should have been in force. But please don’t allow the practice of giving exceptions to your program.
In my previous article I discussed the ‘tough love’ aspect of enforcing all the terms of a loan. And the insurance requirement should be like any other loan term. Think of it this way: could you stay in the lending business if you are willing to allow borrowers to:
- Skip whatever payments they want
- Not paying finance charges they don’t feel like paying
- Obtain a loan without a formal agreement
- Remove other clauses they don’t like from the deal?
You get the point. All the clauses in any contract or security agreement are there for a reason, and the requirement to keep the collateral insured should be no exception. A borrower’s failure to maintain proper insurance should be taken as seriously as the failure to comply with any of the other terms.
Making any CPI-related exceptions creates several problems. It increases the ratio of claims paid to you compared to the premiums collected, upsetting the goal of maintaining balance of the program. Over time, it raises the cost of the CPI program that is then passed on to borrowers who did not receive an exception –causing those borrower to bear an even larger share of the program’s costs. In succeeding articles, I’ll discuss these costs in detail.
For your staff, making an exception, often called ‘waiving coverage’ that should be force-placed, creates additional and unnecessary work. Waiving insurance requirements can also put you at risk from regulators for treating some borrowers differently than others. CPI should be viewed like any other loan term, consistently applied across all borrowers.
To maintain balance, take burden off you staff, and be on the right side of any possible regulatory issue, you must enforce loan requirements uniformly. That includes allowing CPI programs to work as designed by tracking all insurance and force-placing and collecting premium on borrowers who do not maintain proper outside insurance for the life of the loan. Doing so is not only best practice, but also maximizes the benefit you obtain from a CPI program.
By choosing CPI over other forms of portfolio protection, you’ve put a program in place that is the fairest to all your members –charging only those who don’t follow the rules. And to be truly equitable to the members that do keep their outside insurance in force, it’s imperative to force place CPI on non-compliant borrowers.
The ‘tough love’ aspect of a collateral protection insurance program acts as a catalyst for changing member behavior by encouraging borrowers affected by it to purchase and maintain outside insurance. It’s a fair and balanced solution –when the program is allowed to work as designed.