Understanding the Complexities of CPI in Auto Lending: A 2025 Perspective

Collateral Protection Insurance (CPI) has long served as a tool for financial institutions to mitigate risk when borrowers do not maintain required auto insurance. However, with increasing delinquencies, inflationary pressures, and rising operational costs, many institutions are reevaluating the total cost and complexity of CPI programs. This article provides a quick general overview of those costs and compares CPI with an alternative approach—Blanket Vendor’s Single Interest (VSI) coverage.

Collateral Protection Insurance (CPI) Coverage

Collateral Protection Insurance (CPI) is a type of insurance purchased by a lender (such as a bank or credit union) to protect their financial interest in a vehicle that secures a loan when the borrower fails to maintain required auto insurance per their loan agreement.

• • When a borrower takes out an auto loan, the loan agreement typically requires them to maintain insurance coverage on the vehicle for the duration of the loan.
    
    
  • If a borrower cancels their policy, allows it to lapse, or fails to provide proof of insurance, the lender may force-place CPI coverage—typically to cover the outstanding loan balance—on the vehicle to protect its financial interest.
    
    
  • The cost of the CPI premium is typically added to the borrower’s loan balance and may exceed the cost of a standard auto insurance policy, even though it often provides more limited coverage.

Delinquencies Are Driving Up CPI Placements

Auto loan delinquencies have reached their highest levels in over a decade. According to S&P Global, subprime 60+ day delinquencies hit 6.56% in December 2024, while prime loan delinquencies rose to 0.62%—indicating widespread financial strain.

These trends persisted into 2025. The Federal Reserve Bank of New York reported that in Q1 2025, total auto loan balances increased by $17 billion, reaching $1.68 trillion, while serious delinquencies (90+ days past due) rose to 3.01%. Higher delinquency rates are often associated with increased lapses in borrower insurance coverage, resulting in more frequent CPI placements.

In this challenging environment, some institutions are exploring alternatives like Blanket Vendor’s Single Interest (VSI) insurance, which may offer more predictable costs and reduce administrative burdens—providing a potentially more efficient approach to managing auto loan portfolios.

CPI: A Risk Mitigation Tool with Complexities

CPI premiums on average, range from $2,000 to $3,000 annually per vehicle, depending on factors such as provider, coverage level, and outstanding loan balance. While these costs are generally passed on to the borrower, collection and recovery can be inconsistent, which may lead to some costs being absorbed by the lender.

CPI programs also carry administrative requirements, including ongoing insurance tracking, issuing notices, processing refunds, managing policy changes, and handling borrower inquiries and disputes. These tasks often involve multiple departments and specialized systems.

Even when CPI is administered correctly, it can create friction between the lender and the borrower. Most borrowers are unaware of the CPI process until a premium is added to their loan balance, sparking confusion and frustration. These experiences frequently result in formal complaints, negative online reviews, and in some cases, regulatory attention—particularly from the Consumer Financial Protection Bureau (CFPB). The Bureau has issued multiple bulletins and enforcement actions over the past decade highlighting concerns around unclear disclosures, improper charges, and inadequate borrower communication related to force-placed insurance.

Internal Operational Considerations

Implementing and managing a CPI program may involve coordination across several departments:

• • Loan operations must oversee tracking of insurance policies, borrower notifications, and CPI placements.
  • Accounting may need to process and issue refunds.
  • IT maintains integrations with insurance tracking systems.
  • Compliance ensures adherence to state and federal regulations and provider due diligence.
  • Customer service manages borrower communications and disputes.

These responsibilities can impact internal resources and operational efficiency.

VSI: An Alternative Risk Management Approach

A Vendor’s Single Interest (VSI) policy offers an alternative approach. Unlike CPI, VSI typically provides blanket coverage for the entire auto loan portfolio after initial verification of borrower insurance at closing. With VSI, institutions are not required to track individual borrower insurance over time.

VSI claims are generally filed only in the event of a repossession and a verified loss has been confirmed. The coverage model may reduce administrative overhead since it does not require borrower notifications, CPI policy placements, or cancellations.

The cost structure of a VSI program differs from CPI and may include a flat annual premium, a per-loan fee, or a charge based on the portfolio's outstanding balance. The predictability of costs and reduced administrative involvement can be beneficial in certain lending environments, but coverage and claims processes also differ from CPI and may not suit every institution’s risk profile.

Assessing What Risk Strategy Fits Best

As economic conditions evolve in 2025, including rising delinquencies and increased auto loan volumes, financial institutions are reexamining how they manage insurance risk. CPI and VSI offer different models with varying trade-offs in terms of cost, labor, borrower impact, and regulatory considerations.

Understanding the full scope of each program—including direct and indirect expenses, internal operational impact, and borrower experience—can help institutions select the risk mitigation strategy that best aligns with their goals, resources, and risk tolerance.