Collateral Protection: How to Turn a Necessary Evil into a Strategic Advantage

Who wants it? No one. Who needs it? Every credit union. Collateral protection is an insurance product that protects lenders and sometimes borrowers from loss in the event of damage to collateral. A well-run collateral protection program ensures good relationships with members and minimizes the risk of lawsuits alleging false force-placement. On the other hand, if not properly administered, it can mean financial disaster for the credit union. Here’s what every credit union should know about collateral insurance for its own protection. It’s About Member Service For credit unions, the term “collateral protection” instantly brings to mind the specter of force-placement, a particularly painful subject given their member service orientation. Adding to the unpleasantness are occasions when a member has already obtained coverage, but the credit union’s records are not up-to-date. An unnecessary reminder to obtain insurance can strain the relationship with the member. That’s why a seamless collateral protection and insurance tracking program is vital for the customer-service mission of credit unions. A well-run collateral protection program insures the credit union against the full range of risks, pushes procrastinating borrowers to obtain their own coverage and provides a database for institutions to refer to in the event of foreclosure or repossession of collateral, allowing them to file claims if the collateral is damaged. The most efficient way for credit unions to manage collateral protection is by forging a strategic partnership with a risk management partner experienced in providing a seamless program that benefits both the credit union and its members. Following these simple guidelines will ensure a successful partnership: Superior communication. A steady flow of good communication in both directions allows the partner to be in tune with the credit union’s needs and objectives. Knowing about an institution’s needs and issues, a partner can identify more efficient ways of doing business and add new features, tools and services to its programs. Good communication also ensures that the credit union is adequately covered and informed on the regulations and laws concerning collateral protection. Efficient software. Look for the latest IT tools for program administration and 24/7 availability of data. About 40 years ago, collateral protection began as a manual, forms-driven product known as “vendor’s single interest” (VSI), cumbersome to manage and track. Via the worlds of mainframes and PCs, it has only recently entered the Internet arena with browser-based tools and 24/7 visibility of all the information the credit union needs. Minimize false force-placements. Ensure that every possible precaution is taken to minimize the danger of false force-placements, for example by sending repeated letters to borrowers with the correct wording, and by following up with phone calls to verify coverage. A simple mistake such as the wrong wording in a letter to a borrower may result in litigation. On the other hand, when force-placement is administered correctly, it can actually be beneficial to the relationship with members. Separate lender coverages. Careful separation of lender coverages on force-placed policies prevents litigation. Such lender coverages include, among many others, coverage for: confiscation, conversion, secretion and embezzlement, glass breakage, mechanical breakdown, mechanics liens, repossession and return expense, and towing and storage expense. Streamline proof of insurance. Make sure the risk management partner accepts verification of coverage from borrowers’ agents. While a risk management partner can relieve an institution of many burdens associated with collateral protection, it’s important to keep in mind that collateral protection is not the job of that partner alone. To reap the full benefits of a good collateral protection program, a credit union has to do its part by getting its house in order. Errors and omissions in loan documentation, such as misspelled names, missing social security numbers and wrong addresses, not only make everyone’s job more difficult, but increase risk. Managing the risk associated with collateral protection is vital for a credit union’s bottom line. Make the Best of It Simply put, a well-run collateral insurance program increases the lender’s profits and reduces its costs of doing business. So why not make the best of a necessary evil? A solid program protects the credit union from loss of collateral, as well as from litigation, while allowing the credit union to fulfill its customer-service mission.