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Lender’s Insurance on Loan Collateral

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Track in House, Outsourced Tracking, or Blanket Coverage?  Which is better?

While most lenders want to focus on lending, not insurance,  those who service loans have a necessary but annoying issue to deal with.  The insurance on the collateral you hold for security on the loan, along with the paper and correspondence that goes along with it, creates a lot of work and decisions.  With so many vendors claiming to have the ultimate solution for you (and they claim that their other solutions, which may be less profitable for them, aren’t the answer for you), how do you decide what solution is best for your institution?  There are positives and negatives to each solution that have to be evaluated properly to make the right decision.

Let’s start with tracking insurance in-house on your own.  If you have a quality staff that has a good handle on your loan portfolio’s insurance, and they can track it efficiently, then this might be your best fit.  The pros of handling in-house are control and quickness.  No third party mistakes, and no delays in routing information where it needs to go.  Your staff knows the local area and people better than an outside vendor.  And tracking insurance on your own, if done well, will give you the most up to date picture of your portfolio’s insurance status that you can have (no delays from transmitting info to third parties).  The cons are the expense (pay, benefits etc), changes in staffing can affect the quality of the work, and mistakes in-house could leave you unprotected Another con is that generally, insurance tracking is a “negative touch” with your customers and local agents that may affect their view of you.  In addition, insurance correspondence isn’t the most positive of interactions that you can have with your borrowers, and many times they are slow to respond or forget altogether.  As far as securing coverage goes, when tracking in-house you must order coverage for lapses thru a vendor that supplies Force-Placed Hazard and Flood coverage to prevent losses.

Outsourced tracking.  If the negatives of tracking in-house are too high you may want to consider outsourcing this to a company to track for you.  When searching for a partner to engage for outsourced tracking there are many factors to consider.  Their solution should be very efficient and cost effective compared to your own internal cost.  Many will have interfaces with insurance information providers that also eliminate needless notices or calls to the customers.  They will also handle correspondence with your borrowers, taking that off of your plate.  Most providers will also furnish you with an automatic coverage provision that covers you if they make a mistake in the tracking.  They will also automatically cover any lapses they discover for you, saving the time of ordering the protection.  In general, the overall tracking of insurance will be handled in a more efficient way (than being done in-house) by vendors who track as one of their specialties.  The cons are that their staff may not handle your customers as you would.  If their staff is not well managed and does not make customer service a priority, they could make costly mistakes and offend your clients and local insurance agents.  Most tracking providers also cannot keep records as up to date in real time as you can.  Those delays (although many times short) can cause troublesome and needless contact with your clients.  Outsourced tracking will also dictate reports and processes that someone will have to review and act on within your shop.  Tracking internally or outsourced also means force placing insurance (as opposed to Blanket Coverage that eliminates force placing).  Force-Placed coverage is normally expensive, and those high premiums have to be added onto customer payments and financed by the lender.

There is no doubt that Blanket Protection for all types of collateral is growing in popularity. Lenders can now purchase blanket protection for all types of loans, mortgage, consumer, home equities, commercial, and business equipment loans.  This allows the lender to eliminate the expense of tracking insurance in-house, as well as,  the negative “noise” with customers that results from tracking.  Employees can be reassigned to more productive projects and tasks that are more in tune with your mission of banking and lending.  The high cost of force-placed coverage is all but eliminated (some coverage will still be needed for Force-Placed Flood, high dollar collateral that is above blanket coverage limits, and specialty collateral that is not covered by Blanket Protection).  Blanket coverage is an ideal solution for collateral protection because it is truly “Blanket” and does not depend on any person’s action to place individual certificates of coverage on your members and borrowers.  In most states, the cost of the coverage can be passed on to the loan customers, and that helps, but you have to remain competitive with the overall fees charged by other lenders in your area.  A good insurance partner, however, will work with you on rates, deductibles, and coverage amounts to keep the blanket premiums affordable after periods of high losses.  There is a possibility that Blanket coverage may not be the best fit your portfolio.  If you have high delinquency or high percentages of loans that are escrowed, then Blanket can be more challenging.  Some also see Blanket coverage (where the cost is passed on to the consumer) as charging everyone for the few that don’t have their own protection.  Force placed coverage is only placed on the people that didn’t get the coverage themselves.

Tracking, Outsourced Tracking, and Blanket Protection are three very different methods of protecting your institution from the risk of uninsured loss to the collateral on your loans.  They are all valid and widely used.   Keep in mind that one portfolio can have one option and another portfolio could use another.  Each portfolio might dictate a different solution so you must find the right fit for your particular needs.  

Golden Eagle Insurance offers a variety of solutions to help you make sure that your loan collateral is protected. With years of insurance experience as well as lending and underwriting backgrounds, our agents can help find the best fit to protect the collateral in your loan portfolio. Contact us today for a free review.

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