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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 Should I Know About Blanket VSI and Regulations 

Regulation Z Truth in Lending (226.4 D2) covers the Blanket 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.

Benefits of a Blanket Mortgage policy:

What Does a Blanket Mortgage Insurance Policy 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 under a Blanket Mortgage Policy? 

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 for a Blanket Mortgage Policy?

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. 

What Should I Know About Blanket Mortgage and Regulations 

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.

Actual Blanket Equipment Claims 

How is Premium Calculated for a Blanket Equipment Policy?

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.

Limits of Liability of a Blanket Equipment Policy

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.

Are you comfortable with the current insurance tracking processes within your institution on complex loans that have multiple collateral pledges? 

Is Blanket Equipment right for your portfolio?

Why are the above mistakes so common in the Collateral Protection Insurance? 

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. 

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