By Trace Ledbetter, SVP of State National Companies
Collateral Protection Insurance (CPI) is designed to help credit unions reduce their lending risk by safeguarding them against loan losses due to uninsured physical damage. Some CPI providers and agents believe it is easier to add premiums to the end of borrowers’ loans, rather than re-amortizing loans to spread out premium payment during the loan term (or over the term of the CPI certificate). However, this practice of “stacking” premiums conflicts with best practices recommended by industry regulators.
Recently, State National Companies retained legal counsel to obtain guidance from the National Credit Union Association (NCUA) around how CPI premiums should be added to borrowers’ loans. Although there is no specific regulation that mandates how premiums must be recovered, the NCUA strongly recommends that premiums be amortized and disapproves of stacking premiums to create a balloon payment at the end of the loan.
In addition to conflicting with NCUA recommendations, stacking premium payments creates serious customer dissatisfaction and significant collection problems for credit unions. Borrowers may be unable or unwilling to pay the large deficiency balance created by a balloon payment. Additionally, by stacking premiums at the end of the loan, borrowers are asked to pay for insurance that they no longer have at that time, creating confusion over why additional money is due.
Re-amortizing loans to incorporate CPI premium payments avoids these collection problems and reduces charge-offs. It is also the fairest method of charging CPI premiums to borrowers, allocating costs during the loan in which the benefit of CPI is received. Re-amortization also creates a number of smaller payments that are more affordable for borrowers than a large balloon payment. Additionally, by having CPI premium added to monthly loan installments, borrowers may be motivated to comply with loan insurance requirements.
Avoiding end-of-loan problems also maintains positive relationships with borrowers, allowing credit unions to focus on additional business opportunities rather than premium collection. CPI providers should be able to make the re-amortization process easy by offering several different re-amortization options and working with core processors to automate the process.
Trace Ledbetter is the Senior Vice President of Service for State National Companies. You can reach him by e-mail or call 800.877.5467.
State National Insurance Company underwrites all coverages and endorsements available through the CUNA Mutual Group/State National Companies Tracked Collateral Protection Insurance alliance in all states except Texas where National Specialty Insurance Company, a State National company, also provides underwriting services. Product availability and features may vary by jurisdiction and are subject to actual policy language.