Collateral Protection Insurance, or CPI, insures property held as collateral for loans made by lending institutions. CPI, also known as force-placed insurance and lender placed insurance, may be classified as single-interest insurance if it protects the interest of the lender, a single party, or as dual-interest insurance coverage if it protects the interest of both the lender and the borrower.
Upon signing a loan agreement, the borrower typically agrees to purchase and maintain insurance (that must include comprehensive and collision coverage for automobiles, and hazard, flood, and wind coverage for homes), and list the lending institution as the lienholder. If the borrower fails to purchase such coverage, the lender is left vulnerable to losses, and the lender turns to a CPI provider to protect its interests against loss.
Lenders purchase CPI in order to manage their risk of loss by transferring the risk to an insurance company. Unlike other forms of insurance available to lenders, such as blanket insurance that impacts borrowers that have already purchased insurance, CPI affects only uninsured borrowers or lender-owned collaterals, such as auto repossession and home foreclosure.
Additionally, depending upon the structure of the CPI policy chosen by the lender, the uninsured borrower may also be protected in several ways. For instance, a policy may provide that if collateral is damaged, it can be repaired and retained by the borrower. If the collateral is damaged beyond repair, CPI insurance can pay off the loan.
How CPI works
When a borrower takes out a loan for a home or vehicle at a lending institution, he or she signs an agreement to maintain dual-interest insurance, protecting both the borrower and the lender with comprehensive and collision coverage on the vehicle or hazard, wind, and flood on the home throughout the life of the loan. The borrower provides proof of insurance to the lender, which is verified by the CPI provider, which also acts on behalf of the loan servicer as an insurance-tracking company.
If proof of insurance is not received by the CPI provider, notices are sent to borrowers in the name of the loan servicer, prompting them to obtain required coverage. If responses to notices are not received, the lending institution may choose to have CPI coverage “force-placed” on the borrower’s loan to protect its interest from damage or loss, leaving the borrower empty-handed.
The lending institution passes the premium charge on to the borrower by adding the premium to the loan principal and increasing the loan payments. If the borrower subsequently provides proof of insurance, a refund is issued, otherwise, the premiums are rolled into the loan.
Throughout the life of a loan, the CPI provider monitors proof of insurance to ensure that policies remain in force. If policies lapse, notices are sent in accordance with the procedure outlined above, and CPI is backdated to fill in any coverage gaps.
Past problems
Interest in collateral protection insurance increased in the late 1980s when, in response to a bank crisis, regulators recommended that assets securing loans be insured and, if borrowers did not obtain insurance, that lenders obtain CPI. The rise in CPI activity generated by this recommendation also coincided with a number of consumer complaints, including suits from borrowers.
Borrower lawsuits were often prompted by lenders’ providing inadequate disclosure regarding the right to force-place CPI policies, force-placing policies with unnecessary coverages, and not disclosing they might be making a commission on the transaction. Additionally, some CPI providers had administrative problems with their programs, including the inability to receive and process insurance documents in a timely manner and ineffective tracking technology, and the inability of some providers to reamortize the loan payments resulting in the "stacking" of CPI premiums. These problems resulted in sending unnecessary letters to borrowers, issuing policies to borrowers who were in fact insured, and delays in processing premium refunds when proof of insurance was received, all of which served to exacerbate borrower complaints.
In July, 2017 a class action law suit was filed against Wells Fargo, and its CPI vendor, National General. The lawsuit alleged, among other things, that the CPI Policies they placed were duplicative, unnecessary, and overpriced. Wells Fargo and National General denied each and all of the claims and allegations of wrongdoing. However, a settlement was granted preliminary approval by the Court on August 5, 2019.