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

What are the Typical Coverages Included on a Blanket VSI Policy?

• Mechanical Breakdown Expense
• Broad Form Skip

Coverages offering reimbursement include: 

• Mechanics Liens
• Repossession Storage Expenses
• Additional repossession and return expenses
• Primary insurance deductible up to maximum limits

How is Premium Calculated on Blanket VSI?

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).

• 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.

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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.

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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:

1. 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.
2. “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.
3. “Premium Deficiency” reimbursements. Your borrowers should not be footing the bill for CPI premiums that you can’t collect.
4. Benefits/rewards paid as “points” or “credits” into a separate fund because of the lender’s use of the CPI product.
5. “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.
6. Flat out cash payments for renewing a CPI agreement. This should never be offered or accepted.
7. 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).  
8. 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?”
9. 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. 

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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

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