You ask…
“What is Collateral Protection Insurance”?
Our competitors have done a marvelous job making Forced Placed Collateral Protection (FPCP) programs synonymous with simply saying “Collateral Protection Insurance (CPI)” and they do this because “Forced Placed” has an obvious negative connotation. These Forced Placed policies are just that, they are FORCED onto a member that is already experiencing a hardship.
In the world of CPI most Credit Unions do not realize there are two options that can be used to protect the Credit Union’s collateral.
The alternative CPI program is known as “Blanket” Lenders Single Interest (LSI) and has the same if not better protection as the FPCP.
LSI policies are added to each collateralized consumer loan the Credit Union closes, and the entire existing loan portfolio is included in the coverage, hence the term, “Blanket.”
In the Credit Union movement of People Helping People, I simply do not understand the resistance of Credit Union executives to migrate their FPCP program to a member and staff friendly Blanket LSI program that provides the same, if not better, protection to the Credit Union, without all the noise.
Since we started our CUSO “Credit Unions First” in 2022 we have been pulling back the curtain to see what really goes on and here is what we discovered:
- In the 20+ years our colleagues have worked at AMOCO FCU, never once were they made aware that an alternative CPI program existed, even though every one of their providers had access to them. Have your providers shared alternative programs with your Credit Union?
If not, you should wonder why. - Do providers make more money when they sell Credit Unions a FPCP?
Our co-founder Jon Jorgenson has had his own insurance agency for over 30 years. At one time he sold the FPCP program to his credit union and community bank customers. When he discovered that there was an alternative program called Blanket LSI (15 years ago) he quickly converted his entire portfolio to an LSI program and guess what? He took a cut in pay by almost two-thirds. - Are you aware of all the undisclosed expenses of your Forced Placed program?
Our partner, AMOCO FCU, discovered that they had been charging off FPCP premiums. The significant amount of premiums impacted their repossessions, charge offs, allowance for loan loss, and ultimately, their bottom line. The year prior (2022) to moving to our unique Blanket LSI program they had charged off almost $200k in FPCP premiums and in 2023 it was still around $80k. We’ve yet to speak to a Credit Union that was aware of this exposure. - We have heard our competitors in the past say to Credit Unions that are considering the Blanket LSI, “Why would you punish every member that gets a loan, instead of just those bad actors that cancel their insurance?”
When a Credit Union makes that statement, we ask them these questions:
- Does your member whose loan is charged off turn around and repay the charged off loan or does your entire membership pay for them?
Answer: Your entire membership does. - Who pays for your cost of funds, servicing fees, and all expenses?
Answer: Your entire membership does.
of default?
Yes, and here is a quote from our Board Chair, and CFO of AMOCO FCU, Jeremy Silva, “I’m not sure what % of our auto portfolio had forced placed CPI on them, but I can tell you that 90% of our repossessions had CPI on them!” What percentage of your repossessions have CPI policies on them, and at what cost to your Credit Union financials and reputation risk?
Members that let their insurance lapse are likely in some kind of hardship. Adding premium to their loan balance or increasing their payments only exacerbates that hardship.
6. What about stop gap loss clauses in your FPCP contract?
- Are claims ineligible to be paid and/or refunded when your loss ratio hits 50%, 60%?
- Who pays for those losses above your loss ratio?
Again, your entire membership! - Who benefits in the above scenario?
Your provider does. - Does it make fiscal sense to send $1 dollar in premium to a provider, knowing your credit union will at most only get $.60 back in benefit?
7. How do you measure the success of your CPI program?
Amoco created a “Net Benefit” calculator to compare how much return it received from its previous FPCP provider, and they received $.52 in return compared to $.78 on the dollar on our Credit Unions First LSI program, and that does not include the savings they experienced from having 2 FTE administering their old program. This increase in return equated to .09% net basis points in ROA.
8. Our competitors have also emphasized that if you stop tracking insurance losses will go up.
What did we find out?
AMOCO has not seen any increase in losses from no longer tracking Insurance. They do collect it at loan closing, the member knows they need insurance, they only let it lapse when they are in a hardship.
I have been watching the actions of the CFPB regarding Forced Placed programs, and they have brought the regulatory hammer down on some national lenders such as Fifth Third Bank, and Wells Fargo.
Here is the link to the CFPB’s Consumer Complaint database:
https://www.consumerfinance.gov/data-research/consumer-complaints/
If you search for CPI in the database, you shouldn’t be surprised to find numerous Credit Union member complaints regarding the same issues with FPCP premiums being added to their loans as did those FI’s the CFPB brought legal actions against and consider that the NCUA has been following the CFPB’s lead on many of these consumer issues.
Is maintaining your Forced Placed program worth your members aggravation, employee frustration, increased losses, and the reputation risk that comes along should a regulator find fault in your program?
The answer seems easy to this Author, and I would be happy to have that discussion with any Credit Union.
To learn more about Credit Union’s 1st Unique Blanket LSI contact the author and CSO of Credit Unions First, Dan Daggett at Dan@CreditUnionsFirst.org
