Lenders have several different options to protect their collateralized portfolios in the event that a borrower fails to maintain insurance. For many years, Collateral Protection Insurance or CPI, also known as force-placed, has been the prevailing product lenders have used to cover this risk. But now that blanket protection or VSI is available, many lenders are trying to choose between CPI and VSI.
CPI, also known as Lender-placed Insurance, is a product that protects lenders that have loans on which the borrower-provided insurance has lapsed or been canceled. Most CPI programs incorporate a computer-based member insurance tracking system, which produces a series of letters. These letters are then sent to the borrower advising that they must provide acceptable insurance by a certain deadline or the lender will force-place insurance on the collateral to protect their exposure.
Unfortunately, tracking-based options often create borrower irritation, resulting in contact with the lender. In some cases, clerical errors occur and the borrower’s insurance has not lapsed or been canceled. By this point, a borrower becomes upset about the repeated letters and large premium imposed.
Because premiums are placed only on borrowers whose insurance has lapsed or been canceled, the individual premiums can be as high as 12% to 18% annually, of the outstanding loan balance. This can be an expensive proposition for a customer who cannot afford traditional insurance coverage.
CPI can be burdensome to the loan operations department:
The requirement of reviewing and managing reports generated by the tracking system, then posting new or canceled premiums to borrower accounts can be highly administrative and time-consuming.
Borrowers who let the required insurance lapse tend to be under financial duress and the excessive annual premium of a forced-placed policy further aggravates the situation.
The potential of the loan defaulting and the lender incurring a charge off increases significantly, ultimately affecting all customers of the lending institution.
Read our blog post: The High Cost of Tracking.
VSI as an Alternative to CPI
The blanket nature of insurance provided by VSI protects all coverages in the policy which can include automobiles, motorcycles, watercraft, ATVs, mobile homes, and recreational vehicles. It provides a simplified solution to the cumbersome task of tracking insurance and eliminates borrower dissatisfaction.
The main advantages of a VSI program are:
VSI eliminates the need for tracking insurance on collateral.
It’s as simple as verifying the insurance on the collateral at the loan closing.
A small premium is assessed for every new loan (even if the borrower has his or her own insurance), but in our experience it’s much easier to collect that small amount than a $1,000+ annual premium from a borrower who likely cannot afford it and may already be in default.
Regulation Z allows the VSI premium to be passed onto the borrower without affecting the APR (in most states)*.
With Golden Eagle Insurance, physical damage claims are typically settled within 3 to 5 business days from the date the provider receives all necessary claims documentation.
*Subject to terms and conditions of the policy.
Read our blog post: The Four Options to Protect Consumer Loan Collateral for Lenders
Is your institution ready to simplify loan operations? At Golden Eagle Insurance, we strive to help lending institutions streamline their processes and provide administrative relief. Our borrower-friendly blanket protection, Vendor Single Interest (VSI), does just that by eliminating the need for tracking insurance on secured loans, saving time, money, and providing compliance peace of mind.