VSI and Excludability From Finance Charge

VSI or Single Interest Insurance is a customer-centric, efficient, compliant way for lenders to insure their entire consumer loan portfolio for a small one-time fee on each new loan. There are many advantages of the blanket product as compared to other options such as tracking insurance in-house or outsourcing tracking. VSI allows you to eliminate all insurance tracking and yet still cover all of your collateral without the needless hassles between you, loan officers, borrowers, and insurance companies.

Regulation Z Truth in Lending (226.4 D2) covers the VSI product and allows for the cost of it to be passed on to the consumer without impacting the APR as long as certain conditions are met. To be compliant, make sure you have a vendor that specializes in the coverage and is familiar with the regulation. In order to pass the fee on and be excluded from the finance charge, the following conditions must be met:

• There must be a disclosure on the note or in a separate addendum that specifies the consumer may purchase the coverage from an agent of their choice. Reg Z commentary (section 226.4, numbers 9 and 10) states that it is not the lender's responsibility to determine whether or not the borrower can obtain the coverage from somewhere else.
• The premium or cost for the coverage must be disclosed.
• The insurance company must waive their right to collect or subrogate against your borrower.
• The charges for certain coverages (other than physical damage and skip coverage) under the policy must be less than a certain amount.

Unitas Financial Services Blanket VSI policies contain these provisions and we help our insured lenders make sure they have the proper disclosure on their loan agreements or as part of their loan packets.  

An example of a proper disclosure should read "Single Interest Insurance:  I may obtain single interest insurance from anyone I want that is acceptable to you.  If I obtain the insurance from or through you, I agree to pay $_____ for ____ months of coverage."

Blanket VSI is an excellent way to protect your entire portfolio while eliminating all insurance tracking on covered collateral. However, to be excluded from the finance charge and be passed on to the borrower, the conditions found in Regulation Z and listed above must be met.