Common Objections to VSI (Part Two)
Many lenders I have connected with in the past three years have heard of blanket insurance coverages for their collateralized loan portfolios. However, CPI has become the industry standard for tracking and force placing insurance on auto loans, and that has come to the detriment to lenders, members, and borrowers. This article is the second in a series of two that discusses some of the most common objections to VSI that I hear from financial institutions. Read the first article here.
Why are we charging Members for coverage that protects only the lender?
This is another objection that I believe makes less sense on the surface, but once we dig into it a little bit more. On a blanket policy, the cost is nominal – a small, one-time fee per loan that typically amounts to less than a dollar per month on a 60-month term is nearly inconsequential. On the other hand, a CPI premium can ‘sink the ship’ of a member who is likely already having a hard time making ends meet. Blanket premiums help the bottom line of the lender by keeping staff costs lower, reducing charge-offs, and removing negative interactions with borrowers surrounding insurance documentation. Furthermore, the waiver of subrogation clause means that the amount of the judgment against a borrower is reduced by the amount of a VSI claim payment.
If we switch to blanket coverage, won’t we lose valuable data on borrowers that aren’t keeping up with their insurance?
Oftentimes, the information that a CPI provider gives is extremely inaccurate. All CPI vendors will talk about their system and its accuracy, but I would encourage some due diligence into how many members incorrectly receive a letter regarding force-placed insurance. On larger portfolio’s we often see that over 40% of borrowers with an auto loan have received a letter on an annual basis. Additionally, CPI has seen a number of class-action lawsuits regarding “free” tracking services due to high force-placed premiums. While a blanket policy eliminates the need to track insurance, many lenders continue to utilize insurance cancellations as an opportunity to touch base with their borrowers with a quick courtesy call. Instead of following up with borrowers to reprimand them, a VSI policy provides the opportunity to reach out to make sure everything is going well.
Our CPI provider gives an administrative reimbursement that goes towards our bottom line, won’t that go away with a blanket policy?
When I receive this objection, it is initially tough to overcome. Why would a lender give away an often six-figure administrative reimbursement by switching to a blanket insurance policy? The answer to this is multi-faceted. Administrative reimbursements are only the industry standard because of how much administrative work/headache a CPI policy places on the lending institution. Every single lender with CPI that I speak to expresses common frustrations (no matter the vendor): CPI is a cumbersome process that creates additional staff time. CPI vendors know this, and when there is enough CPI premium coming in the door, they give money back to the lender. With a blanket policy, there isn’t a need for the additional staff time (a current customer recently said “with our CPI policy, I had a headache on Monday, but when I switched to a blanket, the headache went away on Tuesday”). Additionally, administrative reimbursements have been subject to class-action lawsuits in the past due to their size and lack of tracking actual administrative expenses incurred by the lender. With a reinvigorated CFPB in 2021, I am confident that administrative reimbursements will come under even more scrutiny. Lastly, let’s go back to the idea that CPI force places exorbitant premiums on the most struggling borrowers within a portfolio. With large administrative reimbursements, why are we raising premiums on our struggling members in order to receive a large check at the end of the year? When looking at covering a portfolio, doesn’t it make sense to reduce the premium those borrowers will pay?
Won’t charging a fee on our loans make us uncompetitive in the lending space?
I have had multiple lenders switch to blanket insurance with a concern that this will be the case. When I visit them to talk about how their policy is benefiting them, they almost always tell me that there has been zero drop-off in lending due to a VSI fee. It is well known in the lending space that borrowers are oftentimes shopping for a lender based on the monthly payment for their auto loan. With VSI fees being so low, it almost never raises the monthly payment by more than $1.
The above list of common objections is far from exhaustive, but I would say I run into these questions/objections in nearly 90% of discussions about blanket insurance. At this point in my career, I commend CPI salespeople as the best in the business – they consistently promote and sell a product that causes headaches, pushes borrowers into delinquency, and is astonishingly expensive. Meanwhile, I talk every day to lenders struggling with the headaches and frustrations that their policy creates. Instead of looking for yet another CPI vendor that promises the sky in their sales pitch, it probably makes sense to look at a blanket policy for your lending institution. They are more efficient, cheaper, member-friendly, staff friendly, and compliant – but don’t take my word for it, I would be happy to provide a list of hundreds of lenders who are so happy with a blanket policy, they tell us that they will never go back to CPI.
