05 Sep Blanket LSI Insurance vs. Auto Tracking/CPI programs
Forced placed auto insurance (CPI) has come under the scrutiny of various regulators as it relates to auto lending. The situation with Wells Fargo is a great example of recent regulatory issues with CPI Programs. Due to these recent changes, many Lenders are considering a blanket approach to their risk management strategy, ultimately avoiding unwanted attention from regulators and shielding their Borrowers from exorbitant force place premiums.
REGULATORY ISSUES SUMMARIZED
- Auto Tracking Programs are funded by the placement of premium on the Borrower’s loans
- Exorbitant force placed premiums subsidize tracking cost and the cost of ancillary coverages
- The ancillary coverages such as skip, repo expense, etc. are not required by the loan contract
- The minimal cost (paid by lenders) for these coverages does not come close to covering the actual claim
- Return premium endorsement, that returns charged off premiums to lenders based on a loss ratio
- Administrative fees paid back to
- Commission paid to controlled insurance agencies
- Auto Tracking force placed premium subsidizing the cost of Real Estate Tracking Programs.
- Inherent conflict of interest – the insurance tracker wants to maximize the placement of insurance to pay for the tracking/administrative costs and profit. Lenders want as little placement as possible. If there are not enough placements to cover costs and profit, force place rates will continue to
- The high cost of placing premium on a Borrower’s auto loan and adjusting the payment, often pushes the Borrower to repossession and charge-off.
ISSUES FOR THE LENDER
- Direct Costs – Staff to place coverage, modify payments, remove coverage and deal with
- Borrower dissatisfaction with constant mailings looking for proof of collision insurance
- Increased charge-offs – Insurance is not placed on the Borrowers who pay their loan on time. Rather, it is the Borrowers on the delinquency list that get placed. When these loans go to charge-off, the balance is significantly higher from insurance placement(s).
- Local insurance agents dislike having to constantly send in their customer’s insurance info.
Ultimately many Lenders feel that tracking and CPI programs create unnecessary regulatory risk and penalizes Borrowers that may already be struggling financially. Many times, force place premiums are only applied to the lesser credit tiers within auto portfolios which can potentially be viewed as borderline predatory to Borrowers in that category (who are already paying a higher interest rate). When asked why should a Lender charge all Borrowers an LSI fee, our answer is “why would a small percentage of Borrowers pay the tracking cost for all other Borrowers?”