Managing auto loan portfolios has become increasingly complex in recent years, in part because of the growing number of “skips” and increasing deficiency balances. These trends make it imperative to be proactive and diligent in your loss mitigation efforts, and your collateral protection program plays an integral part of that strategy. A regular review of the processes and approach to ensuring your portfolio is properly insured is critical. Objectives and scorecards must be properly aligned between the credit union and your business partner and what follows are key questions that should be asked routinely.

Have you established a risk management focus? By definition, risk management should be a proactive process, with the focus placed on actively determining and remedying exposures. Although counter-intuitive, the end game should be to force place as little as possible. Ultimately, the “can'ts” and “won'ts” will generate the revenue necessary to pay for tracking and customer service. If it does not, however, you are better off paying for the proactive benefits that both tracking and borrower communication provides. Your program should be customized to identify the unique aspects of your lending demographics. And if warranted, it might involve identifying and establishing different coverage and processes for each segmented portion of your portfolio (i.e. borrower demographics, credit tier, funding source, etc.). It is critical to stay involved and constantly work with your business partner to develop customized best practices. What and how you mitigate loan exposure should be unique to your portfolio.

Is adequate accountability established? Outsourcing risk management and insurance tracking processes is all about trust. What technology and reporting does your partner have in place to help you monitor whether false placement is aggressively discouraged? A lender needs to regularly evaluate its partner's communication resources and quality control measures in order to be confident that relationships with borrowers won't be damaged. Audit your partner's customer service records. Insist that all calls be recorded, and then routinely listen to samplings to ensure that documented service level objectives are established and attained. Hold your partner accountable by building service level penalties into your contract.

Do you have proper compliance in place? Class action lawsuits over forced-placed insurance have been common in the past. Although the industry as a whole has implemented new coverage and service designs to minimize or eliminate potential legal exposures, many lenders are not adequately disclosing to their borrowers at loan origination what could happen in the event the borrower does not maintain adequate insurance coverage. Your business partner should help you design full, complete, clear, and conspicuous disclosures up-front for at least the following: the scope of coverage provided by CPI, the fact the borrower has the right to choose their insurer, exactly what conduct will result in CPI placement, the lender's rights, the lender's intention to charge interest on the cost of CPI, and whether the lender or an affiliate will receive compensation. Evaluate the origination process up front to ensure your loan staff is properly communicating and disclosing your insurance requirements.

Does you partner make regular investments in technology? Tracking systems and the processes risk management firms deploy to capitalize on service accessibility, economies of scale, and the benefits of overhead reduction vary widely from company to company. Electronic transmission of insurance transactions, insurance document matching criteria, paperless workflow, optical character recognition, and telephony all play a critical role in the accuracy of determining who is insured and who is not. Does your partner have back up power supplies or generators? Evaluate whether your partner is utilizing and investing in technology to better serve your customer, lower costs, perform more reliably, and provide a higher degree of accountability.

Do you communicate with your partner regularly on program pricing? In reality, there is essentially very little difference between one collateral/mortgage protection policy and another, in terms of available coverages and endorsements. Pricing certainly should be a consideration, but ultimately proper rating will need to cover exposure and claim activity associated with your particular underwriting experience. You want your insurance company to be competitive, but don't be lured into a partnership solely because of premium rates. Understand that the insurance company will ultimately demand a positive bottom line as well. So it is best to communicate your pricing expectations up front to ensure there is a “win-win” partnership. The right risk management partner will frequently consult with the lender on a premium rating structure that achieves that balance.

Do you properly consider the basics of risk transfer? Obviously, the business of lending is not risk free and a lender shouldn't expect its insurance provider to cover 100% of every potential loss or deficiency balance-it is simply too expensive for both the lender and borrower. In other words, the more losses that are covered, the higher premium rate required and the greater the potential for repossession and charge off simply because the borrower cannot afford the CPI premium. The lender should strike a balance between insured/self-insured exposures to ensure they are not creating collection challenges down the road. Your partner should help you with the cost/benefit analysis.

Do you frequently perform proper business partner due diligence? Although you most likely performed due diligence prior to selecting an insurance tracking and underwriting partner update this review at least annually. You are trusting your partner to properly handle and safeguard sensitive borrower information, and it is very important that you understand their system security and network infrastructure. Your business partner should maintain and document a current SAS 70 Level 2 audit, quarterly system and network certification performed by an external audit firm, fully-tested disaster recovery plan, and proven business resumption and continuity initiatives. If need be, obtain additional assistance from a consultant, but it is important to place the proper priority on reviewing business structure and security.

A regular review of your insurance tracking and collateral protection program can decrease legal exposure, improve customer service, and reduce loan exposure. Installing proactive safeguards now, even if not previously in place, can help you minimize future exposure.

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Reviewing Your Approach to Auto Loan Portfolio Risk Management Could Save You in the Long Run

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