The Hidden Benefit of Tracked Collateral Protection
Protecting collateral is critical for maintaining a healthy auto loan portfolio.
One might assume a credit union collections staff could think a collateral protection insurance (CPI) program that tracks whether vehicles are insured and then force-places physical damage coverage, if necessary, is counter-productive.
Collectors could argue some members will struggle to make higher monthly payments after a force-placed insurance premium has been added to the loan balance. And if the loan goes into default, the premium may increase the balance a collector is trying to recover.
But look at it from a larger perspective, advises Sally Reagle, director of collections for $700 million asset Meritrust Credit Union, Wichita, Kan. “Collections that include CPI may stand out. Collectors may say, ‘The last five auto loan collections I’ve had, the payment was raised by CPI.’ But the collectors may not know about the other 500 members who are paying the CPI premium.”
Reagle adds that Meritrust’s CPI program refunds earned premium for a repossessed vehicle with no physical damage claims, so that premium doesn’t add to the write-off amount.
And if there’s a physical damage claim, Meritrust recoups repair costs, “which can be tens of thousands of dollars,” Reagle says.
A symptom, not a cause, of default
Milton Balzer, Meritrust collections manager, says force-placing insurance doesn’t appear to cause members to get behind on payments.
“If they’re going to be delinquent,” he says, “they’re usually going to be delinquent whether they have force-placed insurance on it or not.
A 20-year veteran of collections, Balzer recalls that for two years, Meritrust replaced its tracked CPI program with a blanket policy. The policy didn’t cover as many loss situations as the tracked CPI program does, Balzer notes. “In our particular situation, the blanket policy was not paying for itself.”
Meritrust’s tracked CPI program “pays for itself,” adds Keenan Bender, director of consumer lending. Members pay for the coverage only if they don’t otherwise insure their vehicles.
Also, Meritrust is compensated for some administrative costs by the insurance provider, an alliance of State National Companies and CUNA Mutual Group.
The goal is for the CPI program not to pass along the costs of uninsured collateral to all members, Bender says.
A wake-up call
Meritrust members with uninsured collateral vehicles receive two notices within 70 days, and then coverage is force-placed. Bender says if the notices don’t prompt members to get insurance, the increased loan payment often will.
Protecting collateral is critical for Meritrust’s auto loan portfolio—the backbone of its lending operation—with 25,000 to 28,000 loans typically covered under the CPI program.
“We’re the largest credit union auto financer in Kansas,” Bender says. “We might have a few hundred certificates placed per month, but a large percentage of affected will quickly get their own insurance or provide proof of an existing policy.”
Tracked CPI helps maintain a high-quality auto loan portfolio, he continues. Meritrust’s auto loan portfolio has grown an average of 9% per year for the past 10 years. The credit union’s delinquency ratio (0.87%) and charge-off ratio (0.79%) remain below peer group levels, he adds.*
One key to Meritrust’s successful CPI program has been reviewing and adjusting coverages regularly.
“Over the years, we’ve added a number of different coverages to our program: repossession loss, premium deficiency, and other things,” Bender says. “They protect our collateral without affecting our entire membership.”
*State National Insurance Company underwrites all coverages and endorsements available through the CUNA Mutual/State National Tracked Collateral Protection Insurance alliance in all states except Texas where National Specialty Insurance Company, a State National company, also provides underwriting services. Product availability and features may vary by jurisdiction and are subject to actual policy language.