CUNA Mutual puts debt cancellation on product offering table for credit unions

MADISON, Wis. – Debt cancellation is no longer the sole domain of the banking industry. NCUA’s recent expansion of federal credit unions’ incidental powers opened the door for credit unions to offer debt cancellation agreements, debt suspension agreements and letter of credit and leases as “loan-related products,” and now CUNA Mutual Group has developed what it says is the first debt cancellation product exclusively designed for credit unions – CU Choice Lending ProtectionT. CMG partnered with United Airlines Employees Credit Union and created the first prototype of CU Choice Lending Protection for the $3.3-billion credit union. UAECU began converting in July those of its members who had credit/life and disability insurance with the credit union, and as of Sept. 1, all borrowers had been converted to UAECU’s Member’s ChoiceT Protection debt cancellation product. CMG’s CU Choice Lending Protection product is now available to all credit unions. At first glance and to the untrained credit union eye, debt cancellation may seem like other credit insurance products, but in fact the two are vastly different. Those differences are key to understanding the liability, limitations and regulatory issues surrounding debt cancellation and CU Choice Lending Protection’s product feature distinctions. “There are a lot of vendors approaching credit unions about debt cancellation who aren’t counseling credit unions on the risks involved. They’re telling credit unions that `debt cancellation is the way to go,’ but not giving them all the information,” said CUNA Mutual’s Keith Nelson, vice president and product manager of CU Choice Lending Protection. Unlike credit insurance which involves the issuance of a group credit insurance policy to a credit union and a subsequent contract between a member and a third party, debt cancellation programs-also called debt suspension or debt deferment-is a loan product, not an insurance product. There are no agent licensing requirements. Instead, the two-party agreement is between the member and their credit union. The member pays a fee to the credit union instead of a premium, and the fee provides protection to the borrower if certain events such as death, disability, involuntary unemployment, and total loss of a vehicle, occur that prevent the member from repaying their loan obligations. Credit unions actually have been using a type of debt cancellation for awhile in the form of GAP (Guaranteed Auto Protection) waivers, but in general credit unions haven’t used nor are they familiar with debt cancellation products and that’s resulted in “a lot of lack of basic knowledge” about the product, Nelson said. “CU Choice Lending Protection is not designed to replace credit insurance, it depends on each individual credit union whether one or the other or both is right,” he emphasized. Since debt cancellation is not an insurance product, any initial risk is assumed by the lender. Under CU Choice Lending Protection, risks associated with claims volatility can be transferred to CUMIS Insurance Society through a contractual liability policy. In addition, since the credit union’s name is on the contract, Nelson advises credit unions include litigation liability insurance with their coverage. Beyond these risks, though, CU Choice Lending Protection has a lot of features that afford CUs more flexibility than they would otherwise have with credit insurance. It’s the very fact that debt cancellation is not an insurance product and that CU Choice Lending Protection allows credit unions the flexibility to choose either to use prepackaged versions of the product or use a customized program tailored for them, that appealed to United Airlines Employees CU, said Lance Vandenbroek, manager of training and product and project manager for Member’s Choice Protection. UAECU is offering Member’s Choice for all its home equity, consumer loans and Visa/credit cards. Vandenbroek said 60% of UAECU’s members had credit/life or disability insurance for all borrowers on these types of loans. UAECU doesn’t offer insurance on first mortgages. It endorses CUNA Mutual for their first mortgage insurance product. That product is not sold through UAECU nor are the premiums billed through the credit union. Vandebroek said UAECU opted to convert all of its borrowers to its debt protection product instead of giving members a choice of retaining credit insurance because its data processor – Aftech – had limited capabilities to handle both products. As for switching members over to Member’s Choice, Vandenbroek explained that there was a lot of discussion on the best way to handle the conversion – should the CU convert everyone’s insurance to debt protection and then allow members to opt out of the product? Should UAECU cancel everyone’s insurance and allow them to opt in to the debt cancellation? “We decided it was more dangerous to cancel borrowers’ insurance and expect them to opt in because some may forget or get side-tracked,” said Vandenbroek. So UAECU chose the former route. Vandenbroek said less than 1% of borrowers elected to opt out of Member’s Choice Protection. UAECU has priced its Member’s Choice Protection product from 70-cents to $3.60 per $1,000, depending if the coverage is for single, joint or blended. “Under credit insurance, we were only able to offer credit/life and disability. With that type of insurance you have regulators telling you how to do everything. CUNA Mutual’s debt cancellation product offers more flexibility with the product design. We can price it any way we want and add conditions and applicable circumstances we feel are necessary,” said Vandenbroek. He cautions credit unions considering debt cancellation to “know what your members need before you start to develop your product.” He also stressed that state-chartered credit unions should make sure their insurance regulators understand that debt cancellation is not an insurance product and doesn’t require a license. “Debt cancellation is the wave of the future,” said Vandenbroek. “The product can work for every credit union. I can’t imagine any credit union would want to offer credit insurance instead of debt cancellation.” -