Many lenders using Collateral Protection Insurance or a CPI / force-placed type of product for their consumer loan portfolios are unaware of the potential ramifications that they may face if their programs are not administered correctly by the provider. I say “their” programs intentionally because to borrowers the CPI or Collateral Protection Insurance product is your program and to regulators and class action attorneys CPI was your choice to insure your loans - (and guess who has the deepest pockets)?First some general background on regulatory compliance requirements. In the 1980s and 1990s, there were quite a number of class action lawsuits and regulatory changes concerning collateral protection programs and credit life and disability products. Most of the attention was focused on larger lenders, especially banks, but in the case of credit life and disability, there were so many “incentives”, cash payments, and other abuses that states stepped in and fully regulated the products for all lenders. In many cases, the regulations were so extreme, that the products were no longer sustainable. During the mortgage crisis a decade ago, lender-placed hazard and flood insurance products came under heavy scrutiny for the same reasons.
Providers have a responsibility to administer their products in a fashion that won't damage a useful industry tool over the long run, and to also keep their customers (you the lender) out of trouble. Unfortunately, many times this simply isn't the case. Those providers seriously damaged the credit life and disability product lines, and if administered recklessly CPI could be next as some providers are ignoring established legal guidelines. Following are common areas where providers are leading some lenders astray with collateral protection insurance or CPI products:
- Lender coverages being paid for by the borrower (in the CPI premium) -Coverages other than physical damage (“Mechanics Lien, Skip, Damage after repo”, etc.) should have a separate charge for each one of them that is paid by the lender.
- “Repossession fees, storage, and towing expenses” paid for by the borrower – These “extras” are commonly included in CPI master policies and in the CPI premium and they are not coverages the borrower would have in their auto policy. The lender should be paying a separate charge for these.
- “Premium Deficiency” reimbursements – Your borrowers should not be footing the bill for CPI premiums that you can’t collect.
- Benefits/rewards paid as “points” or “credits” into a separate fund because of the lender’s use of the CPI product.
- “Administrative reimbursements” for your work, as the lender, administering the CPI plan – These are risky to take, but if taken should be reasonable and documented.
- Flat out cash payments for renewing a CPI agreement – This should never be offered or accepted.
- CPI providers that charge a policy fee up and above insurance premium. -Especially if the fee is high (like a percentage of the premium policy fee for example).
- The policy fee isn’t refundable when the borrower shows they have obtained coverage. Always think, “if this CPI policy was placed on me, would I think the coverages, costs and fees are fair?”
- Any other indirect benefit to the lender for using a CPI borrower funded product.
Physical damage to the collateral is the only coverage that directly benefits the borrower so this is the only coverage that they should be charged for on CPI. Think of it this way: You are only force-placing because the borrower didn’t have coverage—would their auto policy include skip tracing, skip trace fees, repossession, towing, and storage charges? Does your loan agreement say you can force-place coverage with protection the borrower wouldn’t have had to carry on their own? Obviously not.
Read our blog post: Worried about rising collateral protection premiums?
Why are the above mistakes so common in the CPI product line? Two main reasons: One is that some providers are irresponsibly ignoring the past and put “getting the business” ahead of safety and ethics. The second is that community lenders (for the most part) have escaped scrutiny over the last 2 decades on auto loan CPI products. However, many believe that will change soon. The state's Insurance Commissioners are working on a plan they call the “CPI Model Act” which will restrict most or all of these areas. The basic intent is similar to what has already been done to regulate and restrict benefits to lenders in the mortgage area.
Most of the above addresses regulatory and compliance concerns but an even larger issue can be class action lawsuits. There is a growing awareness among the public and class action attorneys to look for any situation where a lender could be seen as taking advantage of their customers. Why take the chance of attracting that kind of attention and get into the middle of a class action lawsuit that will damage your brand and be very, very costly? My strong recommendation is to review your current Collateral Protection Program on your consumer loan portfolio independently from your current provider who might gloss over some of these areas.
Read our blog post: An Alternative to CPI for Lenders
Another option for lenders to protect their portfolios that has grown in popularity over the last few years is called Blanket Insurance. For the last decade, the use of Blanket Mortgage Insurance has had a significant impact, as it eliminates tracking and force placing while drastically reducing the administrative burden for lenders. Blanket VSI coverage for auto loan portfolios is also on the rise. Many lenders are now recognizing the risks of a CPI product and are also counting the cost of all the work, hassles and negative interactions the CPI product brings to their borrowers. Many Collateral Protection Insurance or CPI providers cast a negative light on blanket protections but keep in mind - CPI insurance can produce three to four times the amount of premium that a Blanket VSI product would. Be sure to talk to a provider that has a balanced approach and can educate you on the best option for your institution, whether that be CPI or a Blanket Insurance solution. If you want to cover all of the risks on uninsured collateral, decrease your staff’s internal workload, bring efficiencies to operations, eliminate the legal and compliance risks, and be far more borrower-friendly; Blanket Insurance protection might be your answer.
This blog was updated on July 10, 2019 to reflect additional risk factors associated with CPI.