PROCEDURES FOR APPLICATION OF AUTOMOBILE LOAN DEFAULT PROTECTION Overview Automobile Loan Default Protection offered by Lenders Option Corporation, Inc. (LOC) is selectively applied at loan origination according to the credit union’s loan policy. Default Protection will reduce losses on repossessions or total losses from physical damage by providing a wholesale purchase offer based on LOC’s stated values less collision damage, mechanical defects, or $.08 per mile penalty in excess of 15,000 miles annually. LOC’s purchase offers for repossessed vehicles are consistently higher than bids or auction values. To further reduce the deficiency loan balance, LOC will pay a principal balance reduction up to $5,000 calculated as the difference between and the amortized principal loan balance at the time of repossession or total loss (less two payments) and LOC’s stated value for the vehicle. If loans are paid off prior to maturity, the credit union will receive a short rate refund by advising LOC of the pay off date. Default Protection benefits to the credit union: Additional C loan volume Increased finance income Increased yield from higher interest rate loans Increased portfolio profitability provided by Default Protection loss reduction Default Protection highlights include: The program is applied to both new and used passenger cars and light trucks financed up to a maximum of NADA retail for used vehicles or MSRP for new vehicles. Dealer add-ons are not covered. Loan officers must include all vehicle accessories when completing the Interim Order form. A copy of the NADA valuation should accompany the Interim Order form. If an amount greater than NADA retail value or MSRP is financed, claims will be paid based on NADA retail or MSRP. The credit union selects, according to our loan policy, the loans on which to apply Default Protection. The program fees are paid by the credit union and recovered through an increased interest rate of 1.5%. Maximum coverage for Default Protection is 60 months and may be applied to longer term loans (66 month, 72 month, etc.), however, a 60 month amortization schedule will be used to determine the principal balance reduction for loan terms exceeding 60 months. The credit union is not required to accept LOC’s offer for repossessed or total loss vehicles. If the credit union chooses to accept a higher bid, we report the higher bid to LOC and the principal balance reduction is calculated based on the higher bid. Page 2
Claims cannot be processed if the repossession or total loss occurs within the first 180 days from loan origination. The borrower must make at least four payments for LOC to process the claim. If the repossession or total loss date is prior to 180 days from loan origination, the credit union will receive a short-rate refund of the Default Protection fee. On total loss claims, the credit union advises LOC of the actual cash value payment made by the member’s insurance or CPI payment received by the credit union. LOC’s principal balance reduction payment is calculated the difference between the amortized principal loan balance at the time of the total loss and the actual cash value payment or CPI payment including any additional payments such as refunds. Suggested credit guidelines for applying Default Protection The purpose of risk-based pricing is to provide as many members as possible with reasonable interest rates. While we recognize that certain members represent a greater risk, these “marginal risk” members are being charged excessive interest rates by other lenders. Through the credit union’s managed risk program, we will enable these members to save a substantial amount of money and rebuild their credit. Default Protection will allow the credit union to increase lending to members who are rebuilding credit, have limited, or no credit history. The credit union will not approve loans if the probability of repayment is doubtful. Default Protection will be applied to the following marginal loans: FICO scores of 650 to 600 (18 months or more on Credit Bureau) Debt to income ratio exceeding 35% C loans with LTV of greater than 80% Minimum previous high credit limit of $2,500 Maximum delinquency of four 30 day or three 60 day within last 2 years Maximum $500 charge-offs, collections, judgments, etc. in last 2 years Previous bankruptcy with 2 years re-established credit Procedures New Policies Using the PC Windows based software provided by LOC: 1. Make sure the Default Protection option is selected. (Super Non-Lease balloon loan is the other option).
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2. Complete the Vehicle Value Option Interim Order form by referencing the Application Instructions for Automobile Loan Default Protection (yellow covered booklets). For used vehicles, include all of the vehicle accessories and attach the NADA valuation to the Interim Order form. For new vehicles, attach the dealer invoice. 3. Prepare a check to “Lenders Option Corporation” for the total amount of the fees from GL#XXXXXXXXXX. 4. On the 1st and 15th of every month, mail the Interim Order forms and credit union check to: Lenders Option Corporation, Inc. Post Office Box 52627 Shreveport, LA 71135-2627 Express mail: Lenders Option Corporation, Inc. 1943 East 70th Street Shreveport, LA 71105 Filing claims Repossession claim Before initiating a claim, the credit union must comply with the member’s redemption period. This process is coordinated with the Collections Department. After the redemption period has expired, continue as follows: Contact LOC at 800.256.2623 (phone) or 800.256.2625 (fax) and provide Interim Order number. LOC will fax or email Notification form and Option Call form to be completed and returned to LOC by the credit union. These forms provide file and system information on the vehicle necessary for LOC to make a purchase offer for the vehicle and make the principal balance reduction payment. LOC will assign a condition report on the vehicle and when received by LOC, will fax a stated value purchase offer (less collision damage, mechanical defects, and excess mileage) along with the condition report to the credit union. If we accept LOC’s offer for the repossessed vehicle, we will receive a bank draft envelope with instructions to transfer title to LOC. We mail the draft envelope with title documents to LOC’s bank and receive a cashier’s check as payment for the vehicle. We should receive the principal balance reduction payment including calculation sheets (Net Page 4 Payoff Report and loan amortization schedule) at approximately the same time. The
entire process should be completed with three to four weeks. If we reject LOC’s offer for the repossessed vehicle because we received a higher offer, we advise LOC of the higher offer on LOC’s purchase offer form and LOC will calculate the principal balance reduction using the higher offer. Total loss claim The procedure is similar to a repossession claim: If the vehicle is a total loss due to physical damage (not a theft or unrecoverable vehicle) and the member’s insurance company or the credit union’s Collateral Protection Insurance coverage pays an actual cash value payment (ACV) including salvage for the vehicle: Contact LOC at 800.256.2623 (phone) or 800.256.2625 (fax) and provide Interim Order number. LOC will fax or email Option Call form to be completed and returned to LOC by the credit union. This form provides file and system information on the vehicle necessary for LOC to make the principal balance reduction payment including calculation sheets (Net Payoff Report and loan amortization schedule). If the member’s insurance company or the credit union’s Collateral Protection Insurance requires title to the vehicle after paying a salvage value, LOC will not provide a purchase offer for the vehicle to the credit union.