DALLAS — State National Companies provides Collateral Protection Insurance (CPI) to approximately 340 credit unions and John Pearson, executive vice president, national sales manager thinks it's still a misunderstood product, but an often necessary one.
"I'm asked all the time by credit union CEOs, 'What's the value to my credit union?' and I tell them that a credit union is a bottom line-driven institution as much as it is a member-driven one. But we've done a number of studies where we have taken a slice of a large credit union's repossessed cars. We calculate what the CPI would provide the credit union, as opposed to what the CU would get if they sold the car. I can come up with a pretty good figure, considering that one-in-three repos are damaged, and some say it's more like two-out-of-three. With the average repo damage of $3,500 its not hard to see how CPI coverage can save a credit union money," said Pearson.
Pearson uses the competitive auto loan marketplace with its tight margins as a sales tool for protecting a CU's auto loan portfolio. He recently authored a short white paper on the subject, noting, among other things, that a blanket insurance policy on the book raises program costs, which provides no incentive for borrowers to obtain their own insurance. Pearson said it only penalizes good borrowers.
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CPI's appeal is that it protects the CU against loss while transferring premium payments to the borrower/member. Having insurance is required when a loan is financed, yet Pearson said there is about 2%-3% of borrowers who let it lapse and just don't care. But while most CU members typically keep insurance, anyone can fall behind, suffer a financial reversal or miss a payment. Those members are informed, very politely, said Pearson, through a letter or friendly phone call and promptly restore coverage. Those who don't have CPI coverage imposed on them.
Credit union CEOs always ask, "what'll it do to my member base? I don't want to hear member noise." Pearson reminds them that members are okay with paying for services they use and expect to absorb a charge for an overdraft, for example.
As more CUs adopt indirect lending, which is a more distant relational connection, CPI is simply smart coverage to protect the CU, he said. More community charter CUs also ought to consider it for the same reason.
Pearson said that the technology enables State National Companies, which specializes in CPI coverage to go directly into the database of the largest auto insurance companies to verify if coverage is in place. "They allow it; even like it," he said, "because we used to have to call agents to verify coverage, and companies would rather have their agents selling insurance than verifying it."
Credit unions should think of force-placed coverage as the same protection it would have if the member maintained the required coverage. "Usually, the premiums members pay for force-placed insurance are often no greater than what members would be paying if they carried the insurance required in their contract," said Pearson. And it's impossible, he said, to force insurance on someone who is insured.
Electronic data interface enables the provider to receive automatic updates when a borrower's insurance is renewed, thereby eliminating manual data entry and lowering the chances for unwelcome notices and placement errors caused by acting on out-of-date information, he explained.
The coverage can also serve as a predictor, rather than a cause, of larger loan problems, Pearson noted. "Our program monitors exposes and identifies trends within a loan portfolio."
"CPI coverage is 98% of our business and of course we have competitors, but we're dedicated to this segment of the business and that counts for something. We have 22 sales people around the country that call on CUs and an agency in California with eight agents. In addition to them, we have 10 independent agents," said Pearson.
Finally, CPI isn't right for all credit unions, he said. But it works well if a CU has at least 2,000 auto loans, a portfolio with typical loan balances or a delinquency rate of more than 40 basis points.
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