|By Swedberg, Jamie|
How credit unions protect the items that back their loans.
What happens if a credit union needs to repossess a vehicle, but the vehicle turns out to be damaged or missing? What if a newly mortgaged home catches on fire and suddenly isn't worth the money the CU lent for it?
In a perfect world, members would always carry the proper insurance to protect those assets. But it's not a perfect world. Sometimes, under stress and financial pressure, members make poor risk management decisions and don't renew their coverage. Sometimes (although it's rare) they even skip town or trash the house. How can CUs best protect themselves from loss?
One of the main ways is by purchasing insurance. Collateral protection insurance might not be as well known as general liability or workers' comp, but it's just as necessary.
"I coined the term 'lender asset protection' because my industry is terrible at categorizing this stuff," says
Passing on the Cost
Insurance on lender assets takes many forms, but one of the most common and basic is tracked collateral protection insurance, also known as lender-placed or forceplaced insurance.
"The way a tracked program works is, the insurance provider gets the loan file from the credit union, matches up insurance to those loans, and any borrowers who do not have insurance would go into some type of notice cycle," explains
"The provider sends notices on behalf of the credit union to the members, reminding them of the requirement in their loan agreement to have valid insurance. They'll receive a series of notices if they don't provide proof of insurance. Eventually, then, the provider would force-place coverage (put coverage in place and bill the borrower) and a certificate would be issued."
Force-placed insurance is always significantly more expensive than insurance that a home or auto owner would buy on the market. The cost of it is borne by the borrower. Morgan recommends credit unions re-amortize loans when this happens, adding the cost of the insurance onto the monthly payment.
In most cases, because of the amount of time it takes to monitor asset insurance coverage and the expertise it takes to navigate the regulations surrounding it, credit unions outsource this task.
"Most of the medium and large credit unions would look at a tracked solution," which outsources the process of matching insurance to see which members do or don't have valid coverage, Morgan says. "If they do any kind of volume, it's just more efficient for them to contract with a provider to do all of this."
He says when shopping for a provider, credit unions should look for experts in collateral protection, find out which insurance company or companies they work with, and make sure they'll be able to integrate with the CU's core system.
"I would also evaluate how that company would treat their (credit union's) members," he says. "How are the notices worded, and how are phone calls handled? Can the credit union listen to those phone calls? Many of the best providers will record phone calls and let clients listen to them on demand. CUs differentiate themselves on relationships with their members, so that's a critical piece."
It's also possible for a credit union itself to decide when to place insurance on a car, home, or other asset. It's called an immediate-issue program.