Editor’s Note: Vendor’s Single Interest and Collateral Protection Insurance are both really long terms. For brevity, we’ll be referring to them as VSI and CPI throughout the article, except in certain headers.
CPI & VSI: Insurances to Protect Lender
Lenders like you strive to reduce risk. When a loan is made based upon certain collateral, such as a car, the loan agreement requires the borrower to purchase and maintain physical damage insurance.
However, not all borrowers will keep it active, for a variety of reasons.
In order to minimize the risk of loss, lenders have two options:
- Vendor’s (Blanket) Single Interest
- Collateral Protection Insurance
Both forms of insurance protect the lender. However, your institution must choose which program to use. We did the homework to help you out! If you’re looking to start at the beginning, What is CPI? will get you on the right foot.
This guide dives deeper into what separates VSI and CPI. Then we look at why you might want one over the other. Finally, we share quick comparisons regarding major features of the programs.
The following comes from many industry providers. We reviewed their information to minimize bias. Naturally, we do offer CPI through our partner, ISI. However, we understand our products or services may or may not be a fit for your institution.
As always, we provide the info; you use it to make the best decision for your financial institution, borrowers, and staff.
VSI: Vendor’s (Blanket) Single Interest
Conveniently, this form of insurance tells a lot about it just from the name. Here’s a couple of things we can learn:
- Blanket coverage. With VSI, your entire portfolio (typically auto loans) is covered.
- Single Interest. The coverage has one party in mind…you. The financial institution is the “single interest”, as borrowers receive no protection from VSI.
VSI protects lenders against financial loss from damage to or loss of property (your collateral) on which the loan is made. This coverage applies in the event the borrower does not have physical damage coverage in place. VSI covers up to the outstanding balance on the loan.
Coverage typically includes:
- Physical Damage Losses: (Applies only when the following occurs)
- Collateral repossessed with physical damage
- No primary insurance was in effect for borrower or lienholder
- Non-Filing Losses: (Includes losses to institution due to the following)
- Inability to obtain possession (ie. collateral is lost)
- Inability to enforce the institution’s rights under the title (due to unintentional failure to perfect the lien)
- Conversion & Confiscation (Skip Coverage):
- Provides coverage when the borrower has sold, traded, or disposed of the collateral, or the borrower and the collateral cannot be found
- Repo Collateral Losses:
- Coverage for vehicles that sustain damage in the first sixty days following repossession, while in the institution’s care
A premium is charged to the lender for each loan. Once the lender reports the loan, they also submit the appropriate premium. Premiums may be based upon either a flat rate or a rate per outstanding balance of the portfolio total.
In some states that cost may be passed onto the borrower, according to IRMI.
There is generally no need for tracking as coverage is in effect for all loans in that group or class.
GAP (Waiver of ACV Settlement Option)
Another popular coverage is GAP (Waiver of ACV Settlement Option). Not to be confused with borrower-purchased GAP, this is a form of it which applies specifically to VSI coverage. Through it, claims are settled based upon 3 options:
- Actual Cash Value (ACV) of the collateral
- Outstanding Loan Balance
- Repair Estimate
Whichever is less…wins!
How GAP Claim Settlement Works
In a total loss, it’s possible the ACV will be less than the outstanding loan balance. The Waiver of ACV Settlement Option pays off this remainder, so long as it is within certain limits (generally $5,000).
Another way this coverage could pay off the balance (or to the policy limit) is if the following occurred:
- Claim was based on a Skip
- Insurer could not find the collateral
- Insurer could not locate any other obligee to the note within a specified time period
Collateral Protection Insurance (CPI)
VSI isn’t your only option for protecting uninsured collateral. Collateral Protection Insurance (CPI) can also fit the bill. A short summary of the product is below, but if you really want to dive deep, check out our comprehensive What is Collateral Protection Insurance (CPI) article.
Commonly referred to as “force-placed” insurance, CPI is another option lenders may use to protect against loss to loan collateral. What makes this insurance unique is that unlike VSI, it is only used when a borrower cannot or does not maintain the required coverage.
To be even more clear: VSI is “blanket” coverage. CPI is individual coverage.
Why consider a non-blanket program? It’s about the percentage of borrowers needing coverage. According to statistics from Allied Solutions (March 2019), that’s approximately 1-3%. So, rather than maintaining VSI coverage on your entire portfolio, CPI is much more targeted.
Premiums are assessed (force-placed) against the borrower’s loan for the physical damage portion. Most CPI physical damage coverage is dual-interest, which means the borrower can take advantage of the benefits.
However, unlike personal auto insurance, the borrower retains no liability coverage.
Optional Lender Paid Coverage
Like VSI, the lender may opt for additional coverages, at their cost, within a CPI program:
- Loan Balance Protection:
- Provides coverage up to the loan balance when a Lender/Creditor Placed Insurance claim is paid based upon the Actual Cash Value (“ACV”).
- Broad Form Loss Payee:
- Eliminates deductibles on repossessions with Lender Placed coverage and provides coverage where limitation in the customers’ insurance prevents your financial institution from collecting on a loss.
- Premium Deficiency:
- Provides for 100% premium return, when a deficiency exists due to the premium, after repossession of the collateral.
- Repossession Expense & Mechanics’ Liens:
- Coverage for repossession expenses incurred in order to take legal or physical possession of the collateral, storage, and make payment to release a valid mechanics’ lien.
- Conversion & Confiscation (Skip Coverage):
- Provides coverage when the borrower has sold, traded, or disposed of the collateral, or the borrower and the collateral cannot be found.
- Repossessed Collateral:
- Provides physical damage coverage once the lender has possession of the collateral for up to sixty days.
- Instrument Filing Error & Omissions:
- Provides protection for an unintentional error or omission in the recording of a lien which bars the lender from repossessing the collateral.
Since CPI is individual, not blanket, administering it requires the vendor to have a specialized tracking system. This communicates with the lender, borrower, and insurance companies.
That same system also handles borrower insurance verification, so everyone knows when to start or end coverage. However, before placing CPI, regulations require mailing a series of notices to the borrower. This allows them time to purchase their own insurance or provide proof of coverage.
Beyond “snail mail”, the CPI vendor will reach out to the borrower through a range of other means, including:
- Text (SMS)
- Phone (powered by call centers)
- Offering website verification
They may also directly interface with the borrower’s insurance carrier to get details on current coverage.
The goal is to reduce unneeded insurance issuance. Besides adding an extra cost for all parties, it creates borrower complaints and reduces satisfaction with their lender. Basically, it’s a pain for everyone. Only apply the coverage if it is absolutely needed!
Process When Insurance Coverage Resumes
Great, the borrower has full coverage again, and you have proof of insurance. Now what?
The financial institution gets their refund! Regulatory standards typically require this occurs within 15 days after receiving proof of insurance. (Source: Allied, White Paper). To make it simple, most vendors refund on a daily pro-rata basis.
Note: Some vendors also offer “hybrid”, or monthly billed, CPI programs. Due to their lower upfront costs, these will have a different (and sometimes less consumer friendly) refund process.
The Final Quick Comparisons
VSI: In states where the cost for the physical damage portion may be passed on to the borrower, the outlay for lenders would be minimal. However, passing on that cost runs the danger of potentially pricing your product higher than the competition. If that occurs, then consideration must be given for lost income.
Conversely, in those states which do not allow the cost pass through, VSI costs can be substantial, as premiums are required on every loan in the portfolio. This cost may become a substantial operational expense.
CPI: Generally, there is no direct lender cost, with the exception of the purchase of any specific (optional) lender coverage.
VSI: Simple – No tracking required. Applied to all loans in a specific portfolio.
CPI: Complex – Vendor systems must be robust enough to:
- Identify loans without current coverage,
- Verify newly placed or reinstated coverage,
- Place coverage,
- Bill the lender,
- Promptly process refunds.
Single or Dual Interest:
VSI: Single interest. Benefits only to lender, and only after collateral is repossessed.
CPI: Typically dual interest. Borrowers can use the coverage to pay for physical damage repairs. Lenders may also employ the coverage provisions after repossession.
Which Is Best?
As you can see, there’s no easy answer on which lender collateral protection program is best. However, we hope this and our other CPI/VSI content helps you make an educated and honest decision for your institution and borrowers.
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