CPI Rounds Out Protection
Another risk mitigation tool is collateral protection insurance (CPI), something credit unions typically take out to cover auto loans.
“CPI is a more proactive way of managing risk,” says John Pearson, executive vice president/national sales manager at State National Companies. The company monitors credit union loan portfolios to make sure each loan has adequate CPI coverage.
“If not, we notify borrowers that they need to take out insurance,” he says. “After three letters and no response, we do a ‘force place policy’ in which they must pay for insurance if they want to continue with the loan.”
About 3% of the population forces this solution. But a bad economy and high unemployment cause some good borrowers to go “bad” overnight.
“In the past, lenders could see a bad loan developing, such as a pattern of late or missed payments,” Pearson says. “Now this can happen suddenly, when people who have been current all along lose their jobs and can no longer make loan or insurance payments.”
Insurers’ expression for credit unions that don’t take out CPI is “running naked,” Pearson explains. “This is when a credit union makes a loan with no requirement for maintaining proper insurance. Often it’s a case of not wanting a member to have to take on an additional burden, or a belief that the credit union can manage its own losses. “In other cases, credit unions realize that even in a soft-volume lending market, they still have to make loans,” he continues. “This often means assuming more credit risk. That practice requires more protection against loss.”