Collateral Protection Insurance Act shields lenders

SAN ANTONIO, Texas – Created to protect financial institutions against loss of or damage to collateral on which they hold a lien, collateral protection insurance was intended to be a good thing. Texas credit unions, however, have only halfheartedly embraced this coverage because of a growing consumer trend toward class action lawsuits surrounding placement of such coverage. Enactment of a new Texas law September 1, the Collateral Protection Insurance Act, should allay many credit union concerns. Credit union members looking to finance a new or used vehicle generally must purchase physical damage insurance on the vehicle as a loan prerequisite. But once the loan is granted and the vehicle is purchased, some drivers cancel their coverage. If one of these uninsured vehicles is wrecked, damaged or stolen, credit unions risk not being paid outstanding loan balances. In these situations, borrowers seldom have the desire and/or the financial means to fulfill their loan obligations. To help avoid these losses, a financial institution has had the ability to purchase collateral protection insurance on behalf of a borrower failing to maintain their own insurance coverage, and to charge it back to the borrower. Unfortunately, because procedures for putting this coverage in place have not been codified, financial institutions have been hit with a number of lawsuits. “Some attorneys got the idea that financial institutions were vulnerable and began soliciting this type of business. Among other things, consumers alleged that premiums were too high, or that premiums were being calculated on the loan balance rather than on the actual value of the vehicle. This Act provides rules that are fair for borrowers and that will also protect lenders,” said Marvin Cook, attorney with Southwest Business Corporation. SWBC, a San-Antonio-based provider of insurance, investment and mortgage loans to the credit union movement, was instrumental in forming a coalition of credit unions in support of the Collateral Protection Insurance Act. As Chapter 307 of the Texas Finance Code, the Collateral Protection Insurance Act establishes creditor duties for notification and disclosure of the insurance and the underlying debt to the consumer. It also establishes premium refund and liability parameters and sets forth the rights of the parties involved. The Act contains a “safe harbor” provision that provides lender immunity from lawsuits as long as the lender places collateral protection insurance in compliance with the Act. Offered in the Texas Senate by John Carona (R-Dallas), and in the House of Representatives by John Shields (R-San Antonio), the Collateral Protection Insurance Act was supported by both the financial and insurance industries. “Three credit unions were sued over collateral protection insurance prior to the new law. Ford Motor Credit Corporation in California was hit with a $58 million settlement,” said Cook. “Financial institutions are extremely vulnerable without the proper procedures in place. Hopefully, this Act will help.” -