A Myth Worth Reopening: CPI Remains Smart Move
Collectors often balk at the idea of Collateral Protection Insurance (CPI) because they believe it will make their job more difficult despite the significant financial benefits to the credit union. They fear that adding the cost of force-placed insurance to loan balances and monthly payments will make collecting more difficult and increase delinquency.
However, the truth is that most repossessions covered by CPI were already delinquent before loan payments were ever adjusted. Rather than being a foe to collectors, CPI is really a friend for several very good reasons.
While the vast majority of borrowers fulfill their contractual obligation to maintain private insurance to cover the loan collateral, a few never purchase insurance or let their policy lapse. This non-compliance can be an early indication of financial difficulties. "Letting insurance lapse is definitely a red flag that the borrower is likely to default on payment," observed Helen Lowrey, coordinator of loss prevention at the $298-million Belco Community Credit Union in Harrisburg, Penn.
Sophisticated credit unions want to know when a borrower is headed in that direction so they can step up measures to protect their collateral. A CPI program monitors proof of insurance for a credit union's entire vehicle loan portfolio to ensure every borrower carries the proper physical damage insurance for the life of the loan. The program records any and all changes to insurance (expiration, renewal, cancellation, etc.), giving a snapshot view of activity that should interest a collector. Borrowers who let their policies lapse are sent notices requesting reinstatement. Should a borrower not respond, the credit union is notified and may choose to add CPI to the borrower's loan. Most borrowers take notice and obtain their own coverage, either when they receive the notice or when they see their increased monthly payments-particularly when they realize that they are paying for coverage that does not include liability and primarily protects the lender.
Collectors sometimes argue that financially challenged borrowers will not have the money to pay for force-placed insurance on top of car payments, and that CPI will increase delinquency. However, remember that when the loan was originally made, the borrower's capability to afford private insurance was assumed and taken into account by the lender. The truth is that most borrowers have the money to pay for insurance, but a select few choose to let it slip. Lenders that are aggressive in collecting on delinquent loans understand the dollars and sense of CPI. "Having CPI doesn't increase your losses," said Jesus M. Cruz, vice president of lending at Belco. "Borrowers who are going to pay their loans will make sure they get rid of CPI premiums quickly by obtaining their private vehicle insurance they are supposed to have. Those that are not going to pay their loans in the long run are going to default whether or not you add CPI."
Another benefit of tracking borrowers' coverage is that every contact is recorded and phone numbers are captured to facilitate locating borrowers who attempt to skip. Belco relies on a CPI tracking system to locate delinquent borrowers and recover collateral. "We also utilize the skip tracing service and have had several instances where it has helped us locate a vehicle," said Lowrey.
Repossession doesn't solve the problems with a loan that has gone bad. Informal research indicates that up to 97% of repossessed vehicles may be damaged. Unfortunately, these vehicles often lack the required physical damage coverage, putting lenders on the hook for repair costs or the loss of vehicle value. With CPI, lenders are indemnified for damage to vehicles they repossess, whether or not they make repairs before the vehicles are put up for auction or otherwise remarketed. If a borrower has disappeared with the vehicle, CPI typically covers the services of leading skip tracing firms for finding it.
When lenders repossess damaged vehicles, they not only lose thousands of dollars in principal, they also find themselves writing off other indirect costs, such as for towing and storage. A fully loaded CPI program can reduce charge-offs by as much as 30%. Even with an auto portfolio of, say, less than $50 million, a 30% reduction in charge-offs can be a six-figure number. "The biggest impact of CPI is that our losses have been reduced in a number of ways," said Cruz. "Obviously, when a claim is paid, it reduces deficiency. But more important, our losses are reduced because we're able to get to borrowers faster before delinquencies occur and get them back on track. When repossessions do occur, we're able to recover the cars sooner and get them to market quicker."
The alternatives to CPI are self-insurance or a blanket policy. With the latter, the credit union pays for the coverage, not the borrower. In some states it is permissible to pass along blanket policy fees to borrowers, but this is often done deceptively under the guise of a "document preparation fee," which raises eyebrows with smart borrowers. In any case, credit unions that buy a blanket policy are just exchanging dollars with an insurance company-each year the premium adjusts to cover last year's claims.
With a good CPI program, the credit union does minimal work and the costs of the coverage are passed on to delinquent borrowers. At the time a policy is force-placed, the credit union is billed for the entire policy term (and then re-amortizes the borrower's monthly payment), but when the borrower obtains a private policy, the CPI is cancelled and a refund is issued.
In these troubled economic times, protecting collateral is more important than ever. CPI is the most equitable source of protection for a vehicle loan portfolio because only uninsured borrowers pay the premiums. Since CPI is force-placed, it is important that a CPI program is handled efficiently to minimize unnecessary notices and placements which could result in poor member relations. Effective tracking technology combined with personalized, member-focused service will ensure that placements are made accurately, refunds are issued promptly, requests are handled expediently and that member information is safeguarded. CPI reduces losses (charge-offs) and helps collectors in collections and recovery.
John Pearson is Executive Vice President and National Sales Manager with State National Companies, a provider of collateral protection insurance solutions. For info: www.statenational.com or call 888-525-5977.
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