Blanket LSI Coverage vs CPI Programs
August 3rd, 2021
As lenders continue to weigh the option of bringing all employees back to the office or offering flexible remote working solutions, they are also evaluating programs/technology that will help streamline loan servicing in a remote working environment.
For this reason, many lenders are migrating from auto tracking and force-place program to a blanket LSI model. LSI coverage protects auto portfolios, while eliminating the need to track or force place insurance. It also removes the common issues associated with tracking programs; borrower complaints, false force placement, increase premiums & charge offs, etc. Most importantly it eliminates all insurance mail processing within auto portfolios. Overall, there are no administrative burden associated with VSI programs.
Not only will it reduce the manpower needed to service auto portfolios, VSI also helps lenders avoid unwanted regulatory scrutiny that Auto/Tracking CPI programs continue to encounter year after year. Many predict that regulations will tighten even more under the new administration, especially around programs that largely affect lower credit tiers.
Below is a summary of regulatory issues and lender issues that Auto/CPI programs create.
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, repossession 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
- Refunding: Return premium endorsement, that returns charged off premiums to lenders based on a loss ratio
- Administrative fees paid back to
- Force-placed 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.
AUTO TRACKING/CPI 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 members who pay their loan on time. Rather, it is the members 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 be viewed as borderline predatory to borrowers in that category (who are potentially paying a higher interest rate).
VSI is already the most preferred risk management approach in many states; and for the reasons outlined above, many lenders across the country are making the leap. Please reach out to your local rep for a VSI quote or consultation below.