June 29, 2021
During times of economic uncertainty, having comprehensive portfolio protection takes on new importance. After all, when consumers are facing a period with no paycheck, they’ll have to prioritize their expenses – and for many, paying one’s auto insurance premium can seem like a low priority.
In response, lenders can seek protection through blanket lenders single interest (blanket LSI) or vendor single interest insurance (VSI). These coverages can ensure that your interest in a loan’s collateral will be protected if the borrower fails to meet their insurance obligations. Below, we discuss various types of coverage, and some of the coverage options available to the lender.
WHAT IS BLANKET LENDERS SINGLE INSURANCE?
Nearly all loans are secured with some sort of collateral, whether it’s a vehicle for an auto loan or other collateral, like watercraft or recreational vehicle loan. But what happens when this collateral disappears or is damaged or destroyed in an accident with no primary insurance cover the collateral loss?
While lenders can require borrowers to show proof of insurance coverage when they take out a loan, this unfortunately doesn’t guarantee that the policy will stay in force to cover future losses to collateral. As soon as a borrower lets their insurance coverage lapse, even for just a day or two, your collateral security is subject to significant risk.
This is where blanket VSI insurance comes into play. This insurance can cover a lender’s entire portfolio to protect against loss or damage to uninsured collateral. Additionally, there is no need to involve your staff in the time-consuming process of tracking of insurance coverage. All insurance mail can be shredded.
WHAT DOES VENDOR SINGLE INTEREST INSURANCE COVER?
Lenders can customize their blanket lenders single interest policies to fit their portfolio needs and may wish to add coverage as their requirements change. Some of the key coverage components available include:
- Uninsured physical damage and theft protection, which can cover both partial and total losses. In addition actual cash value (ACV) waiver coverage can be added to pay off the full balance of the loan when the collateral is a total loss and the loan is “upside-down:" the net balance owed is higher than the ACV (guidebook value) of the vehicle collateral.
- Errors and omissions coverage, which protects your interest if a lien is unintentionally missed or misfiled by the DMV.
- Repossession and towing expenses, which will reimburse a lender for costs associated with repossessing or transporting an uninsured and damaged vehicle.
Lee & Mason can work with you to decide which of these coverages will provide the most benefit to your organization.
SKIP VEHICLE COVERAGE
These days the most important part of blanket VSI coverage is the skip vehicle coverage. Not all lender losses occur when a vehicle is damaged and uninsured. Many automobiles simply “disappear” once the borrower can no longer afford to pay the loan. If you can’t find a vehicle, you can’t repossess it. The value of your collateral is gone, and you cannot make even partial recovery against the loan balance owed.
The value of skip vehicle coverage involves two major sources of recovery: First, Lee & Mason and its hired skip locate professionals will help you locate the vast majority of skip borrowers/vehicles. These located vehicles can then be repossessed and sold at auction to mitigate the lender’s charge-offs. Second, there are skips Lee & Mason and its skip locate professionals cannot find within the policy’s time-frame (generally 60/90 days). In those cases, the claim is paid as a total loss, and lender’s anticipated charge-off is reduced or entirely recovered. Last but not least, Lee & Mason will continue to look for a skip claim vehicle after the lender has been paid. It may take a few months more, but we find a good number of vehicles in the secondary locate process. Those located vehicles are repossessed and sold at auction by Lee & Mason, and the proceeds get credited back to the lender’s insurance policy, which benefits the lender’s insurance policy, leading to stable and lasting protection.
There are two basic types of skip coverage, outlined below:
STANDARD SKIP
This is the original or traditional skip vehicle coverage and provides the insurance company with 60 days to locate either the borrower or the vehicle. Generally speaking, once the borrower is located, the skip tracer will also find the location of the vehicle and will help facilitate repossession of the vehicle. In process of skip tracing, the borrower often reveals the vehicle’s location or the vehicle becomes visible and can be swiftly repossessed.
BROAD FORM SKIP
If the borrower refuses to reveal the vehicle’s location, broad form skip coverage provides an additional level of coverage. The insurance company has 90 days to locate the vehicle/collateral itself. Locating the borrower is not sufficient to close the claim.
WHAT ARE THE BENEFITS OF VENDOR SINGLE INTEREST INSURANCE?
The coverage types listed above provide a broad spectrum of benefits to auto lenders. Just a few of the advantages you’ll enjoy with LSI or VSI coverage include:
- A speedier loan approval and funding process, helping you remain competitive amid a low-rate lending climate.
- Covers all loans in portfolio (blanket protection) with a wide variety of loan collateral loss and expense exposures being covered.
- Eliminates the need to track coverage on your own, and avoids the need to force-place insurance upon recognizing the borrower’s lack of insurance coverage.
- LSI premiums may be passed onto the borrower (in many states, with a simple disclosure on the loan document). The premium then becomes part of the amount financed, without affecting the APR of the loan, and thus all premium cost is collected from borrower over the life of the loan.
By partnering with risk management experts like Lee & Mason to handle your insurance needs, you can significantly streamline your portfolio monitoring and collection costs, and in doing so, free up your time to focus on revenue-generating activities.
For more information about our services, contact us today!