Traditional collateral protection programs: An alternative look

Mention Collateral Protection Insurance (CPI) to a loan officer and in most cases you will receive a frown and the standard reply that it is a necessary evil. Mention to that same lender that they can have an alternative to CPI with monthly premiums that average between $50 and $90, as opposed to the typical $150 – $250, and the response is entirely different. Generally, when this concept is introduced to a financial institution, the reaction ranges from “how can that be done?” to immediate disbelief.  As unbelievable as it may seem, a refreshing alternative is now available that re-writes the usual approach to CPI.

As a lender, you take on a certain amount of risk when providing your borrowers with a loan. Of course, this often times requires the borrower to provide you with collateral to secure the loan. It has always been the lender’s responsibility to see that their interest remains secure by maintaining a procedure that tracks the insurance on the property securing the loan. Many credit unions have turned to third parties to provide this service since this practice can be very labor intensive.

Challenges with Insurance Tracking Programs

Throughout the years and the increased practice of tracking insurance, lenders have found themselves embroiled in litigation about CPI programs, arising from the practice of adding exorbitant coverage that did not directly benefit the borrower, but were unfortunately built into the premiums or were under the false impression that CPI should, or could be, a source for non-interest income. Now, after hundreds of millions of dollars have been paid in law suits, the trend is to simplify the practice of tracking insurance and the coverages that accompany those programs.

Enter the CFPB

Although almost everyone in the business of lending cringes at the mere reference of the Consumer Financial Protection Bureau (CFPB), creative changes have come about because of their existence, that virtually eliminate many potential dangers of having litigation brought upon their lending institution.

A Consumer-Friendly Alternative

Regulators have often pushed back on the idea of going through a series of notices, then placing a certificate of coverage on the loan that secured the collateral against damage for a year, without additional notices or caution to the borrower. In addition, most CPI programs are filled with coverages that are rarely used, that provide no benefit to the lender, or include repossessed expense reimbursement that causes premiums to become exorbitant, further stressing the member and ultimately resulting in the lender having to repossess the collateral. These alternative programs now provide monthly certificates with a flat rate charge—not a percentage of the loan amount—at 1/2 to 1/3 the cost of traditional CPI, and monthly notices cautioning the borrower to provide their own coverage.

Alternative CPI vs. Traditional CPI

Alternative CPI programs incorporate the “old school” CPI process, and apply certain changes to today’s industry needs. CFPB compliance, lower pricing, and reduced borrower confusion is the new borrower-friendly approach. In several cases, this approach has eliminated voluntary repossessions, which are most commonly associated with traditional CPI. The alternative program is easier to explain to the borrower, virtually eliminates most refunds, is dramatically less expensive, can virtually eliminate all of the work on the part of the lender, and is squarely aimed at addressing and mitigating the “problems” typically associated with traditional CPI. Those normal problems of lender cash flow and the borrower tipping point—pushing the borrower into payments they can’t begin to afford resulting in repossession —can soon become a problem of the past.

Lenders are finding that by making changes to a few aspects within their traditional CPI program and going with an alternative program instead, they can reduce the workload, reduce repossessions, and help to maintain a more consistent “sticking” point on premium cancellations, greatly reducing the workload on the part of the lender.

This approach issues monthly certificates to the borrower outlining the premium and coverage. Simply put, it falls in line with current processes and eliminates many refunds. Alternative policies result in the reduction of the life of a CPI policy to an average of five months because of the increased touching point or additional notices. And the inclusion of automated posting to your borrower’s loan virtually makes the alternative approach work-free.

Although lender coverage has been reduced slightly, coverages that protects the lender can still include Automatic Coverage, Worldwide Coverage, Repossession Expense, Repossession Storage, Mechanics Lien, and Repossessed Collateral Coverage. Often times, the alternative program can even be paired to include collection services, which eliminates reliance on skip coverage and dealing with premium charge-offs.

When checking the marketplace for a CPI alternative, always remember to find a CFPB-friendly program that will not put your institution in jeopardy. If you’d like to learn more about SWBC’s alternative CPI program, Hybrid CPI, call 866-316-1162.