Auto lending is vital to credit unions. These institutions nurture their auto loan business carefully, underwrite diligently, and put measures in place, such as collateral protection insurance (CPI), to safeguard against loss.
The goal for credit unions is to choose a CPI program that is efficient, flexible, and easy to administer. However, the greatest benefits of these plans are gained only when the program is allowed to work as designed.
A Balanced Program
A CPI program is built to work in equilibrium. The premiums collected for certificates placed should be sufficient to cover losses and expenses. This equilibrium is achieved when CPI programs are managed by the provider and certificates are placed by the lender according to the terms of the contract and loan agreements.
Lender staff can be pressured by borrowers to modify these terms as it relates to CPI. Borrowers are friends and neighbors, and waiving CPI requirements can feel like the right thing to do, particularly when no insurance losses have occurred during the time a certificate was — or should have been — in force.
However, making these types of exceptions creates several problems. It increases the ratio of losses to collected premiums, thus upsetting the equilibrium of the program. It raises the cost of the CPI program, which is then spread to borrowers who did not receive an exception. This causes borrowers to bear a greater portion of losses and creates additional and unnecessary work for the lender's staff.
Perhaps most problematic, waiving CPI requirements can put a lender at regulatory risk by creating inconsistency in borrower treatment. CPI should be viewed like any other loan term, with all terms uniformly applied across borrowers.
All the clauses in a loan contract are there for a reason, and the requirement to protect loan collateral is no exception. A borrower’s failure to carry proper insurance should be taken as seriously as the failure to comply with any other loan clause.
To maintain equilibrium, minimize work for staff, and stay on the right side of regulatory compliance, lenders must enforce loan requirements uniformly. They must allow CPI programs to work as designed by tracking insurance, force-placing, and collecting on borrowers who do not maintain insurance. Doing so is not only a best practice, but also maximizes the benefit lenders obtain from CPI.
Credit unions work hard to protect the valuable member relationships they have built. By choosing a CPI over other forms of coverage, such as blanket insurance, these institutions put a program in place that is fairest to their members — charging only those who don't maintain adequate private vehicle insurance. However, to be equitable to the members who do keep their private insurance in force, it's important that the institution allows CPI to be placed on noncompliant borrowers.
CPI not only safeguards the auto loan portfolio, but also creates positive changes in member behavior by encouraging the purchase of private insurance. It is a fair and balanced solution — when allowed to work in equilibrium.