Introduction to Blanket 360 Insurance
Tracking and force-placing insurance on collateral can be challenging, but necessary to protect your bottom line and maintain compliance for examiners. Many lenders struggle with the time required and the negative customer interactions that can occur with tracking, especially if coverage is force-placed in error. Loan officers and operations staff are inundated with endless paper trails and losing valuable administrative time tracking down insurance.
Blanket Insurance, a portfolio protection product that has gained popularity in recent years, is another option lenders can use to offset the risk of uninsured collateral. For the last decade, the use of Blanket Insurance has had a significant impact on lending institutions, as it eliminates tracking and force-placing while drastically reducing the administrative burden for lenders. Blanket 360 coverage allows you to focus on lending, not on being insurance providers. It covers your mortgage, commercial (including equipment loans), and consumer portfolios in three specialized policies with the same coverage as lender-placed insurance with less work and less risk!
Still, some lenders are not familiar with or have not taken the time to look at the new innovations and changes that have taken place in the insurance industry for this type of coverage. This short ebook will help you understand how blanket coverage works and what impact it can have on your institution.
Blanket Insurance protections are a very simple and cost-effective way to eliminate virtually all internal insurance tracking after a loan is closed. Unitas Financial Services offers a new bundle of products that can cover all real estate, commercial equipment, and consumer collateral loans. The only remaining loans left to track would be real estate loans in a flood zone or those with extremely large balances that would not be fully covered by a blanket product.
Think about the number of endless hours that your staff spends following up on insurance renewals and cancellations, not to mention the time loan officers spend getting involved to make sure everything is handled properly with customers and that coverage is in place. As you grow, your loan officers and staff might be more productive by focusing efforts on marketing and lending, rather than spending time trying to find insurance on a small percentage of your loan portfolio that isn't covered at any one time. Statistics show that the average community lender has about 97-98% of their loan collateral properly covered at any one time. Why spend all of the time and effort tracking insurance for only 2-3% of your customers?
Additionally, Blanket Insurance eliminates the negative interactions that can happen when you or your service provider contact your borrowers about insurance issues. Most borrowers carry the appropriate coverage, so being contacted about it by you causes needless annoyance. Blanket Insurance covers your risk and allows you to know uninsured risk is covered. Lenders across the country also appreciate the benefits of blanket protections when they are no longer written up for insurance exceptions by auditors and examiners. Examiners know that Blanket Insurance is superior to tracking and force-placing since the entire portfolio is covered without the need for action and chance for human error.
What types of collateral can be covered?
Blanket VSI protects consumer collateral from uninsured losses to repossessed or unrecoverable collateral and eliminates the need to track and force-place insurance after loan closing. The blanket nature of the policy reduces charge-offs with no minimum claim amounts, broad coverages, and flexible loan limits and terms.
Blanket Mortgage protection covers a lender’s entire mortgage portfolio for property damage and is an alternative to force-placed hazard insurance. This coverage is designed to cover unknown lapses in a homeowner’s insurance coverage. When a loss occurs to a mortgaged property and primary insurance is not in place, the lender is protected up to the outstanding loan balance.
Internal human error tracking is covered by the blanket policy. If you don’t receive notice from the primary agent of a cancellation, you have coverage.
Blanket Equipment protects from uninsured losses and eliminates tracking insurance on loans/leases when equipment is held as collateral. The coverage also satisfies auditor and examiner requirements for collateral insurance.
Blanket Equipment policies are designed to cover uninsured losses with higher limits than the typical VSI policy will insure. Many of these loans are "cross-collateralized" with real estate and are very difficult to track. The blanket nature of the policy eliminates these concerns.
All of these products together equal Blanket 360 coverage. Let’s dive deeper into each piece of the Blanket 360 coverage. It should be noted that these products can stand alone as well.
Blanket VSI - Vendor Single Interest
Blanket Vendor Single Interest (VSI) or Lender Single Interest (LSI) protection covers a lender’s consumer portfolio from uninsured losses to repossessed or unrecoverable collateral. All new and existing loans are automatically covered at policy inception. The blanket nature of the policy eliminates the need to track and force-place insurance after loan closing, and skip tracing services help locate missing collateral. Stand out features include:
- Prevents negative contact with borrowers regarding insurance lapses
- Eliminates the time and expense to track borrower insurance
- Reduces charge-offs
- Avoids uninsured losses due to unknown insurance lapse or cancellation
- Broad coverages customized to each lender’s titled/UCC’d portfolios
All VSI policies are not created equal. Many companies simply copy basic policies and provide a very limited set of protections. Some providers have customized the programs and enhanced them over the years to broaden the coverage for increased protection. For example, many policies have strict term and balance requirements that leave you completely uncovered on loans over those limits. Some policies also fail to provide a built-in GAP (Modified Actual Cash Value) protection when you have a covered claim. This results in only being paid the actual cash value (ACV) on the collateral which can be much lower than your loan balance. Other policies fall short when it comes to covering your various collateral types. A quality policy will have high limits, Modified ACV (Lender GAP), and cover UCC filed collateral, boats, recreational vehicles, motorcycles, ATV’s, equipment, and any other titled collateral in the portfolio. There are many other enhancements that can be added. When is the last time you have had a detailed policy review with your agent to discuss existing and additional coverages that can be added for broader coverage?
Physical Damage & Theft Protection provides blanket all-risk coverage for damage or theft prior to repossession. Partial and total losses from physical damage and theft are covered up to policy limits. Police reports are only required for theft if obtainable.
Skip and Confiscation Protection covers losses caused by the inability to locate a borrower or obtain collateral seized by a public official. Skip coverage includes professional skip tracing efforts with high success rates to help minimize claims. Repossession services are also available as part of the skip tracing efforts after a borrower and/or collateral has been located.
Modified Actual Cash Value (GAP) pays the difference between the actual cash value (ACV) of a vehicle and the principal loan balance in the event of a total loss up to a limit of $5,000. The actual cash value is based on an average of the NADA clean retail and NADA clean trade-in values.
Non-Filing (Errors & Omissions) covers losses caused by improperly filed liens or unfiled liens on covered collateral.
Repossessed Physical Damage covers physical damage losses sustained within one hundred and twenty (120) days after repossession of your collateral.
Additional Endorsements Available
- Mechanical Breakdown Expense
- Broad Form Skip
- Mechanics Liens
- Repossession Storage Expenses
- Additional repossession and return expenses
- Primary insurance deductible up to maximum limits
Blanket VSI premium is rated differently for each insured lender based on that lender’s portfolio. Delinquency percentages, repo levels, past loss history, loan volume, and expected portfolio changes moving forward are all factors. Types of collateral in the portfolio, loan terms, and average loan amounts are also considered. The primary drivers of rate are loan volume, loan portfolio quality, and past loss history. Loss history would primarily be made up of past uninsured damage losses due to repossessions and skip losses (borrower and/or collateral can’t be found). A good agent will price the premium level to last and be fair to the lender and insurer. Pricing from year to year after the program has been in force is primarily based on the ratio of claims to premium since the program started (the last 12-36 months being the most important).
What Should I Know About Blanket VSI and Regulation
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.
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 pass it on to the borrower, the conditions found in Regulation Z (listed above) must be met. *Certain state restrictions may apply.
Blanket Mortgage Insurance
Blanket Mortgage protection covers a lender’s entire mortgage portfolio for property damage and is an alternative to force-placed mortgage hazard insurance. This coverage is designed to cover unknown lapses in a homeowner’s insurance coverage. When a loss occurs to a mortgaged property and primary insurance is not in place, the lender is protected up to the outstanding loan balance or limit of liability for the policy.
Benefits of Blanket Mortgage
Blanket Mortgage provides all-risk property damage protection on uninsured and underinsured losses to residential and commercial mortgage portfolios. Loan types include 1st & 2nd residential mortgages, home equity lines, and commercial real estate loans.
- Blanket coverage eliminates renewal/cancellation insurance tracking after borrower’s own insurance has been verified at closing
- Eliminates the risk of false force-placement premiums on covered loans and unnecessary debits and credits
- Reduces negative borrower contacts with dual-interest coverage taking the place of force-placed notifications
- Properties are covered through the foreclosure process
- Eliminates compliance errors due to no borrower notices required
To fully protect your risk exposures, Unitas Financial Services can provide additional policies as needed, including:
- Force-placed Flood
- REO Liability
- Force-placed Hazard for properties with balances exceeding policy limits
What Does Blanket Mortgage Insurance Typically Cover?
The master policy in many cases is identical to what would be issued in the typical tracking and lender-placed scenario. The same limits can be obtained, and all the same coverages and exclusions still apply. Some companies offer other versions of Blanket Mortgage, so it is important to clarify exactly what’s covered and what’s not. Blanket Mortgage can cover all real estate loans in your portfolios and can be separated out by portfolio. For example, you can buy the protection on your commercial real estate loans or just on your first mortgages. Some lenders only purchase it on home equity and second mortgage portfolios, which are the least expensive to insure.
Can Secondary Market Loans be Protected on the Blanket Mortgage Program?
Many lenders of various sizes that have purchased the coverage have secondary market loans in their portfolios. Freddie Mac and Fannie Mae have not put in writing that they will accept the blanket coverage, however, their guidelines (section 8202.8, evidence of insurance) state that if you don’t track insurance documents, you must have a separate Blanket Mortgage policy in place. Additionally, many of the regional secondary market representatives have verbally stated that they understand why lenders buy it and that it is good protection. The concern is the transferability of the blanket protection on the loan. However, the same issue exists with individual hazard policies since the existing insurance company lists the initial lender as the insured and are under no obligation to cover whoever the loan might be transferred to. In the rare case where a loan is transferred to the secondary market or any other bank, lenders who have purchased the coverage have made the choice to buy the loan back if insurance is an issue. In actuality, the new owner of the loan would have their own Blanket Mortgage or lender-placed policy in place, and that individual loan would still be covered after transfer. Check with your Blanket Mortgage provider to ask for references of lenders with secondary market loans. Although not officially sanctioned by the secondary market entities, many lenders are using Blanket Mortgage, and have passed regulatory examinations with the coverage in place.
How is Premium Calculated on Blanket Mortgage?
What is the cost of Blanket Mortgage coverage? This varies depending on the size of your portfolio and risk factors, such as the amount of lender-placed protection you typically have in force and your past claims history on the lender-placed program. Commercial portfolios are usually the most expensive to insure, followed by first mortgages, with home equity and
junior lien loans being the least expensive. Many lenders simply add up all the costs of tracking insurance and compare that to the annual cost of the blanket protection and add the cost of the blanket policy on a per loan basis through allowable fees such as origination or application fees. Another factor that must be considered is the costs of hiring a new employee to track insurance as your portfolio continues to grow. Employees have overhead, Blanket Mortgage is scalable, and eliminates human error. Premiums will generally increase proportionally with the size of the portfolio. This policy is typically available in a two-year term, allowing the lender to pay the 1st and 2nd-year premium at the same amount without increases in premium based on growth.
Regulation and Blanket Mortgage Insurance
In addition to eliminating tracking, Blanket Mortgage has become attractive to more and more lenders because it makes examinations less painful. Regulators are positive about the product since they know that it offers better protection than having staff tracking and catching lapses, then individually force-placing policies, as it eliminates the possibility of human error. A regulator’s main job when looking at insurance procedures is to ensure that your institution is properly protected. There is not a safer or more sound protection than true blanket coverage. This product is in place at all times according to policy terms and does not rely on staff to adequately track the borrower’s coverage. The examiner should no longer request to see up to date policies on a sample of files.
Blanket Equipment Insurance
While many lenders are familiar with blanket coverages designed to eliminate the need to track and force-place insurance on mortgage and titled portfolios, fewer may be familiar with an alternative blanket coverage designed to protect the lender’s commercial equipment portfolio in cases of lapsed insurance coverage.
Collateral such as farm equipment, semis, dump trucks, and other business equipment are typically not covered under a Vendor’s Single Interest (VSI) policy, or the limit of liability provided for those collateral types is too low to offset larger loan balances. Furthermore, equipment loans are frequently cross-collateralized with real-estate, titled vehicles, or other commercial equipment. Finally, although the frequency of insurance claims on commercial equipment is somewhat rare, they can have a significant impact on the financial institution’s bottom line. Blanket Equipment Insurance was designed to fill this gap. Below are a handful of claims examples in which the institution carried Blanket Equipment coverage.
As stated above, a Blanket Equipment policy is designed to cover tangible collateral that a typical VSI program doesn’t offer, including agricultural equipment, semi’s, dump trucks, commercial autos, and general business assets and inventory. All-risk physical damage including collision, rollover, and fire to uninsured collateral, along with theft, are covered scenarios. Like VSI, valid customer insurance is required at closing and impairment is precedent to filing a valid claim. For this reason, a loss is normally identified at repossession. “General” business equipment encompasses a wide array of collateral—items such as office equipment and inventory. The broad nature of the “general” term allows most equipment taken as collateral to be covered under the policy. Excluded from coverage are accounts receivable, livestock and timber. Equipment used in mining, drilling and oil, and gas exploration is also excluded but can be added by endorsement for an additional premium.
Because of cross-collateralization with real estate on many equipment-secured loans, determining the accurate balance to insure can be a tough task. While VSI premiums can be passed on to borrowers in most states through a line-item charge, the Blanket Equipment premium is normally paid by the lender based on the monthly outstanding balance in the respective portfolio. In certain situations, and when this number is not realistic to obtain due to loan coding, carriers will allow an annual premium payment. Most lenders will recoup the cost of the policy by forecasting future volume and increasing allowable fees such as origination or application charges.
These policies also have higher limits of liability than VSI policies, most generally $250,000 up to $1,000,000 per credit agreement. Claims have historically been rare in equipment portfolios so premiums are very cost-effective, especially if a higher deductible is chosen.
A Blanket Equipment policy will eliminate the need to track and force-place insurance on covered loans after origination and lighten your administration staff’s workload. It also reduces negative contacts with customers and protects you from uninsured exposures you aren’t even aware of. With increased scrutiny on force-placed insurance, blanket coverage also satisfies auditor requirements since the tracking component is not necessary. In addition to eliminating tracking and force-placing coverage, Blanket Equipment policies can be a cost-effective way to mitigate the risk of uninsured losses on these collateral types.
Relief of Compliance and Legal Ramifications of CPI
Many lenders using Collateral Protection Insurance or a CPI/force-placed type of product for their consumer loan portfolios are unaware of the potential ramifications they may face if their programs are not administered correctly by the provider. I say “their” programs intentionally because to borrowers the CPI, or Collateral Protection Insurance product, is your program and to regulators and class action attorneys CPI was your choice to insure your loans - (and guess who has the deepest pockets)?
First, some general background on regulatory compliance requirements. In the 1980s and 1990s, there were quite a number of class-action lawsuits and regulatory changes concerning collateral protection programs and credit life and disability products. Most of the attention was focused on larger lenders, especially banks, but in the case of credit life and disability, there were so many “incentives”, cash payments, and other abuses that states stepped in and fully regulated the products for all lenders. In many cases, the regulations were so extreme that the products were no longer sustainable. During the mortgage crisis a decade ago, lender-placed hazard and flood insurance products came under heavy scrutiny for the same reasons.
Providers have a responsibility to administer their products in a fashion that won't damage a useful industry tool over the long run, and to also keep their customers (you, the lender) out of trouble. Unfortunately, many times this simply isn't the case. Those providers seriously damaged the credit life and disability product lines, and if administered recklessly CPI could be next (as some providers are ignoring established legal guidelines). The following are common areas where providers are leading some lenders astray with collateral protection insurance or CPI products:
- Lender coverages being paid for by the borrower (in the CPI premium). Coverages other than physical damage (“Mechanics Lien, Skip, Damage after repo”, etc.) should have a separate charge for each one of them that is paid by the lender.
- “Repossession fees, storage, and towing expenses” being paid for by the borrower. These “extras” are commonly included in CPI master policies and in the CPI premium and they are not coverages the borrower would have in their auto policy. The lender should be paying a separate charge for these.
- “Premium Deficiency” reimbursements. Your borrowers should not be footing the bill for CPI premiums that you can’t collect.
- Benefits/rewards paid as “points” or “credits” into a separate fund because of the lender’s use of the CPI product.
- “Administrative reimbursements” for your work, as the lender, administering the CPI plan. These are risky to take, but if taken should be reasonable and documented.
- Flat out cash payments for renewing a CPI agreement. This should never be offered or accepted.
- CPI providers that charge a policy fee over and above insurance premium. Especially if the fee is high (like a percentage of the premium policy fee for example).
- The policy fee isn’t refundable when the borrower shows they have obtained coverage. Always think, “if this CPI policy was placed on me, would I think the coverages, costs, and fees are fair?”
- Any other indirect benefit to the lender for using a CPI borrower funded product.
Physical damage to the collateral is the only coverage that directly benefits the borrower so this is the only coverage that they should be charged for on CPI. Think of it this way: You are only force-placing because the borrower didn’t have coverage—would their auto policy include skip tracing, skip trace fees, repossession, towing, and storage charges? Does your loan agreement say you can force-place coverage with protection the borrower wouldn’t have had to carry on their own? Obviously not.
Why are the above mistakes so common in the CPI product line?
Two main reasons: One is that some providers are irresponsibly ignoring the past and put “getting the business” ahead of safety and ethics. The second is that community lenders (for the most part) have escaped scrutiny over the last two decades on auto loan CPI products. However, many believe that will change soon. The states’ Insurance Commissioners are working on a plan they call the “CPI Model Act” which will restrict most or all of these areas. The basic intent is similar to what has already been done to regulate and restrict benefits to lenders in the mortgage area.
Most of the above addresses regulatory and compliance concerns but an even larger issue can be class action lawsuits. There is a growing awareness among the public and class action attorneys to look for any situation where a lender could be seen as taking advantage of their customers. Why take the chance of attracting that kind of attention and get into the middle of a class-action lawsuit that will damage your brand and be very, very costly? My strong recommendation is to review your current Collateral Protection Program on your consumer loan portfolio independently from your current provider who might gloss over some of these areas.
Many lenders are now recognizing the risks of a CPI product and are also counting the cost of all the work, hassles and negative interactions the CPI product brings to their borrowers. Many Collateral Protection Insurance providers cast a negative light on blanket protection but keep in mind - CPI insurance can produce three to four times the amount of premium that a Blanket VSI product would.Back to Top
The High Cost of Tracking Insurance
Financial institutions have always wrestled with one main issue when it comes to tracking insurance on their loan collateral: staying properly protected at an affordable price. Since uninsured losses are rare, especially large losses, lenders try to spend as few dollars as possible on staff tasked with keeping track of insurance. However, the risk of a large uninsured loss and the regulations dictating that loans be properly tracked, lead to costs that are much higher than desired, as well as negative customer interactions, all of which could be avoided. Here is a list of a few areas where you can save money, and human resources.
- Employee pay, taxes, and benefits
- Management time and expense
- System costs of tracking
- Postage and phone expense
- Letterhead and envelope costs for notification letters
- Training expense
- Examiner scrutiny
How Hard is it to Switch from CPI to Blanket Coverage?
Joe Jones, Nova Credit Union
Please note: Golden Eagle Insurance was rebranded to Unitas Financial Services in 2020. The information here is still up to date. We have the same products and exceptional service. Click here for more information.
Key Take Aways
With Blanket 360 coverage, you have the same type of protection that a lender-placed policy would provide for all types of collateral. Additionally, Blanket coverage is superior to typical lender-placed insurance because it’s automatic. There are no steps that need to be taken to obtain it, there are no employees depended on to catch a lapse of coverage on a borrower’s loan, and the protection is in place 24/7 365 days a year regardless of what actions your staff does or doesn’t take. Thus, the risks associated with human error are eliminated and you’re simply covered.
Furthermore, all of us have seen the endless series of legal challenges and settlements involving traditional lender-placed/force-placed insurance tracking programs. Blanket 360 Insurance eliminates the types of legal risks that come with the traditional use of force-placed coverage.
Finally, Blanket 360 is customer-centric as it relieves customers from annoying communications about their insurance and examiner friendly.
Why risk it with CPI? Contact your portfolio protection consultant at Unitas Financial Services today!
Claims are easy! Claims are paid remarkably fast and the team at Unitas Financial Services is always super responsive.
Nancy Scott Head of Collections, Merchants National Bank