Help Predict Delinquency with Collateral Protection Insurance

Will force-placed insurance increase delinquency or predict it?




There is a common fear among credit unions that adding the cost of force-placed Collateral Protection Insurance (CPI) to loan balances and payments will increase loan delinquency. However, experience shows most repossessions covered by CPI were delinquent before loan payments were adjusted.

"Having CPI doesn’t increase your losses," says Jesus M. Cruz, vice president of lending at Belco Community Credit Union ($335.8M, Harrisburg, PA). "Borrowers who are going to pay their loans will make sure they get rid of CPI premiums quickly by obtaining the private vehicle insurance they are supposed to have. Those who are not going to pay their loans in the long run are going to default whether or not you add CPI."

In fact, CPI can be a predictor of delinquency. A good CPI provider monitors in-force vehicle insurance and updates policy status. The availability of that information through online tracking systems warns credit unions when policies lapse, which can indicate deeper financial problems. With that information, credit unions can take proactive measures and head off payment problems before they occur.

CPI can also motivate borrowers to procure private vehicle insurance, which benefits borrowers and credit unions. Often when CPI coverage is added to a loan, borrowers realize they can obtain their own insurance for less cost.

Although CPI is designed to protect the interest of the credit union, it commonly provides benefits to borrowers as well. CPI can reduce delinquencies and charge-offs for credit unions because it does not always require repossession in order to make repairs on damaged vehicles. When repairs are made on damaged vehicles that are not repossessed, borrowers keep their vehicles and remain motivated to make loan payments. If collateral is damaged and repossessed, CPI will reduce the deficiency balance, thereby lessening the ultimate liability for the borrower.

Good insurance tracking systems also provide recordings of all calls with borrowers, a complete history of every transaction made with a borrower for the life of a loan, and copies of notices sent requesting proof of vehicle insurance. This type of information helps credit unions gain a complete picture of borrowers and provides additional contact resources for credit union collectors.

Insurance tracking systems offered by CPI providers can integrate seamlessly into the collections process and are an important resource in predicting, detecting, and preventing delinquencies. Predicting delinquency helps credit unions respond proactively and keeps members current. Unfortunately, not all delinquencies can be avoided. The most important benefit of CPI to credit unions remains the protection it provides credit unions by indemnifying them for uninsured damage to loan collateral.  

To learn more about CPI and the importance of the right provider, click here.