It wasn’t that long ago consumers realistically had only one option when obtaining flood insurance. The National Flood Insurance Program (NFIP), which was initially authorized by the National Flood Insurance Act of 1968 and reauthorized by the Biggert-Waters Flood Insurance Reform Act of 2012, provided that lone option. Earlier this year, five federal regulatory agencies issued a Final Rule that becomes effective July 1, 2019, implementing the BW-12 “requirement that regulated lending institutions accept private flood insurance policies.” Privatization of any product or program creates pricing competition and more options, and flood insurance is no exception. Consumers are able to comparatively shop and lenders will have more opportunities to qualify borrowers.
A lender’s determination to extend a loan or not often depends on the value of the collateral and the stipulation that the borrower must maintain insurance coverage on said collateral. A lender must determine the loan to value ratio and what they could sell the collateral for in order to mitigate their loss if the loan defaults, and be assured that their interest in the collateral is always protected. The portfolio protection program your institution chooses can mean the difference in risk vs. safety for your loan programs.
Even in today’s dynamic environment of increased regulations and lending oversight, many community lenders remain committed to some old-school processes within their loan operations. In some cases, inefficiencies and frustrations can be common issues that are connected to these burdensome administrative processes. In a time when many community lenders are adopting a “get lean” approach to their operations, for some reason, these old-school philosophies remain entrenched. The phrase, “but that is how we have always done it” is uttered often. Why is it that simple change can be so difficult to embrace? Why, from the executives to the loan operations staff, is it often difficult for a community lender to let go of these old-school processes?
As new vehicle sales prices continue to rise, many lenders are feeling the pain in the way collateral protection premiums are calculated. Without any action at all on the part of the insurance company or the lender, your borrowers are paying more and more for coverage. The reason? Collateral Protection premiums are based on a percentage of the loan balance. As vehicle prices increase, loan balances are at all-time highs, and in turn, force-placed insurance premiums are higher than ever.
While many lenders are familiar with blanket coverages designed to eliminate the need to track and force-place insurance on mortgage and titled portfolios, fewer may be familiar with an alternative blanket coverage designed to protect the lender’s commercial equipment portfolio in cases of lapsed insurance coverage.
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.