Rock Star Banker
BMF held a sales contest this past fall for those loan officers selling credit
insurance, term life insurance and GAP waivers. The winners received their
choice of a Guitar Hero video game bundle, a case of Rock Star Energy Drink,
or a $50 gift certificate.
Congratulations to our winners!
Monya McCully Marie Gilstad Tim Schmidt
West One Bank First Citizens Bank First Citizens Bank
Kalispell Missoula Butte
NAIC Guidelines for Force Placed Auto Insurance
There was an article in the Wall Street Journal last month about the rising incidence of people canceling their
auto insurance. The article pinned the blame on the poor economy and the struggle to find savings in already
tight budgets. Unfortunately, when borrowers cancel auto insurance in defiance of loan covenants it puts the
lender at risk.
Many lenders use a force placed collateral protection insurance (CPI) program to protect their portfolio.
Such a program requires that the lender or an outside tracking company monitor the insurance renewals and
cancellations of their borrowers. If a borrower does not maintain required coverage then the lender (or tracking
company) contacts the borrower and reminds them of their responsibility to do so.
When a borrower fails to maintain their insurance, the lender has the right to force place coverage. This is
accomplished with a group master policy issued to the lender allowing them the right to insure their collateral.
The lender passes the cost of the insurance to the borrower.
Force placed insurance is usually much more expensive than what a borrower could procure on their own.
This is due in part to the high risk that these individuals represent relative to the broader universe of drivers.
Ideally, the mere threat of force placed premiums is enough to coax borrowers into living right. Sometimes it
isn’t and force placements have to happen. The shock of the high premium will get a significant percentage of
borrowers to take action and renew their own primary coverage. The average length of a CPI placement is less
than 60 days.
Continue onto page 2.
NAIC Guidelines continued from page 1.
If your institution chooses to use CPI to protect the auto portfolio, it’s important to know that there are
guidelines that should be followed. The National Association of Insurance Commissioners (NAIC) adopted
the Creditor-Placed Insurance Model Act in June 1996. All lender placed insurance written in connection with
credit transactions for personal, family or household purposes, excluding real property, is within the scope of
The Model Act is very specific in many areas related to how insurance is placed. Some prescribed practices
are frequently overlooked by lenders and, likewise, there are some prohibited practices that are too often done
First, a lender must make “reasonable efforts to notify the debtor” of their obligation to carry insurance. The
Act judges this to be accomplished if the lender does the following:
1. The creditor mails a notice by first class mail to the debtor’s last known address, stating that the creditor
intends to charge the debtor for creditor placed insurance coverage on the collateral if the debtor fails to
provide evidence of the property insurance.
2. The creditor allows the debtor at least 20 calendar days to respond to the notice and provide evidence of
acceptable insurance coverage before sending a final notice; and
3. The creditor sends a final notice in compliance with this section by first class mail to the debtor’s last
known address at least 10 days before the cost of the insurance is charged to the debtor. Proof of the mailing
of the final notice shall be retained for at least three years
following the expiration or termination of the coverage.
CPI Model Act Requirements
Notice the required waiting time between each step of notification
and billing. Is your financial institution following these guidelines? • Allow borrower 20 days after first
notice to respond
A second item overlooked by lenders is the font they use in their • Allow borrower 10 days after final
letters. Everyone has received a notice in the mail which was notice before charging premium
written in type so small you could barely read it. The Model Act • Use 12 point type in letters to
seeks to eliminate this problem by requiring that the font used in
required notifications be at least 12 point type.
• Keep records of mailing for 3 yrs
On many occasions, a policy may be force placed and the borrower after coverage ends
subsequently proves that there was no lapse in the primary • No non-refundable placement fees
insurance coverage. In this situation, the Model Act requires that
“the entire amount of premiums, minimum premiums, fees or
charges of any kind” be refunded. Some lenders or tracking companies charge a placement fee in addition to
the force placed premium. This placement fee should be refunded in full to the borrower.
Any lender that has used force placed CPI has faced the backlash that results from the affected borrowers. It’s
really inevitable. What you can control is how you adhere to the established guidelines for a CPI program. By
keeping management and staff knowledgeable about the NAIC Model Act, you can minimize your institution’s
risk of litigation or other negative action from borrowers.
A copy of the full NAIC Model Act can be found at www.BisonMountain.com.
Credit Insurance: Beyond Consumer Loans
Credit life and disability insurance is not just for consumer loans. The misconception is so ingrained in some
lenders that it’s worth repeating. Credit life and disability insurance is not just for consumer loans.
Small commercial loans are a great fit for credit insurance. A borrower with his or her own business may have
more debt than your average consumer loan customer. They are just as likely, if not more likely, to have a
family depending on their income. Small business owners need life insurance, and although they may need
significantly more insurance than what you can provide, you may be the only provider of life insurance with
whom they will realistically follow through. Don’t underestimate the importance of convenience to this group
Perhaps more importantly, small business owners often have no access to disability insurance. What do you
suppose would happen to their business if they got seriously ill or injured and could not work? What do you
suppose would happen with your loan? It’s sad when you have to repossess someone’s truck when you know
they are sick, but it’s much worse if you have to repossess the equipment they previously used to earn a living.
If you are lending to a corporation, partnership or LLC, you can still offer credit insurance. The important thing
to remember is that a person needs to be named on the insurance certificate. This person named should be the
guarantor, if there is one, or an officer or other key employee of the company.
I know what you are thinking… the limits are too low.
Credit insurance limits are typically $100,000 per life and $1,000 per month for disability. If the loan amount
and/or monthly payment exceed these limits, then the borrower can purchase partial coverage. In the case of
credit life coverage, the proportion of insurance to the principal balance at the origination date remains constant
throughout the insurance term.
Exhibit A illustrates how the insured balance changes over time. This example assumes a $160,000 initial loan
balance, a maximum insurance amount of $100,000, a ten-year term and a 7.75% interest rate. The insured
balance remains at 62.5% of
the outstanding loan balance
until the loan is paid off.
If your borrower chooses a
loan with a balloon, a mix of
level coverage and decreasing
coverage can accomplish the
same end result. Your lending
software is likely capable
of applying the insurance
correctly in this situation, but
if you are unsure you should
consult your insurance agent.
Continued onto page 4.
Credit Insurance continued from page 3.
Disability coverage is a bit simpler. If the monthly loan payment exceeds the policy maximum, then the
insurance benefit will remain level at the policy maximum. Again, this is typically $1,000.
Commercial loans use the same rates and forms as all other loans. If you have been set up by a credit life
insurance company, you have the ability to offer insurance to all loan types.
By stressing to your loan officers that commercial loans are eligible for insurance, you may double your market
for insurance sales. A corresponding increase in fee income may make for a very happy new year.
Foreclosures May Threaten Mortgage Hazard Coverage
A little noticed court case in Tennessee could have serious repercussions on Montana lenders in the near
future. As foreclosures increase, the recent ruling could jeopardize the hazard insurance lenders rely on to
protect their collateral.
The case is US Bank vs. Tennessee Farmers Mutual Insurance Company filed with the Tennessee Court of
US Bank made a home loan and took a deed of
trust as security. Under the loan agreement, the
homeowner was required to obtain a fire insurance
policy on the home. Tennessee Farmers Mutual
Insurance Company issued the insurance policy
covering the house and included a standard
mortgage clause requiring the insurance company
to protect the bank’s interest and, in turn, requiring
the bank to notify the company of any increases in
The homeowner fell behind on her monthly
payments, so the bank initiated foreclosure
proceedings. The bank sent a letter to the
homeowner stating it had begun foreclosure
proceedings; it did not notify the insurance
company of these proceedings. Before the foreclosure process was complete, the homeowner and her husband
filed for bankruptcy, which stayed the foreclosure proceedings. Soon after that, the house was destroyed by a
The bank notified the insurance company of the loss. The insurance company refused to pay, asserting that
the foreclosure proceedings constituted an “increase in hazard” of which the bank was required to notify the
insurance company and that the bank’s failure to provide such notice constituted a breach of the mortgage
clause in the fire insurance policy.
Continues onto page 5.
Foreclosures continued from page 4.
US Bank then sued Tennessee Farmers Mutual Insurance for breach of contract and bad faith refusal to
pay an insurance claim. While the trial court originally ruled in favor of the bank, the Tennessee Court of
Appeals ruled in favor of the insurance company. The Court found that the requirement of the bank to notify
the insurance company included in the insurance policy was valid and the bank’s failure to communicate the
increase in hazard warranted the denial of the claim.
The clause in the Tennessee Farmers Mutual policy is one that appears in many homeowners insurance
policies around the country and in Montana. It’s quite possible that some of your borrowers have it in their
“Make it part of the
Let’s first examine the obvious implication that a mortgage lender
now has an obligation to notify insurers of foreclosure proceedings.
procedures that all This court decision, if followed by courts in Montana, will
undoubtedly have an impact on mortgage lenders that are foreclosing
foreclosure proceedings on defaulting borrowers. With the recession finding its way to
Montana, this may happen with increasing frequency. The admitted
include a notification to insurers in Montana are aware of this ruling and may take the same
the borrower’s primary course as Tennessee Farmers Mutual, given the same scenario. The
advantage they will have is a judicial precedent in the US Bank case.
It is impractical for a lender to pore over their borrowers’ policies
looking for these particular clauses referenced in the US Bank case.
It’s also quite likely that the lender does not even receive the policy but rather merely a declaration page.
It’s more reasonable for a lender to make it part of the procedures that all foreclosure proceedings include a
notification to the borrower’s primary insurance company.
After nearly a year of reviewing this case, many insurers cannot say for sure how they will respond when
lenders notify them of foreclosure proceedings. As of this printing, none can be confirmed to have a hard and
fast policy of cancellation, but instead reserve the right to cancel on a case by case basis. Lenders should be
notifying the insurers and then be prepared to force place coverage in the event of cancellation.
Beyond the foreclosure issue, this case opens a Pandora’s box of possible circumstances that could be
considered an “increase in hazard.” In our small towns where it’s easy to know everyone’s business and
personal affairs, would knowledge of a borrower’s impending divorce fall into the lender’s responsibility to
notify the insurer? What if the borrower’s business was failing, his child was mixed up in drugs or criminal
activity, or any other unfortunate scenario? What if the borrower reveals something to his friend, the lender,
at one of their homes on a Sunday afternoon? Where is the line drawn between lender and neighborhood
Hopefully some answers to these questions will come soon. US Bank has appealed to the Tennessee Supreme
Court, and oral arguments were heard on November 5, 2008.
Continues onto page 6.
Foreclosures continues from page 5.
I encourage any lender unfamiliar with the US
Bank case to review it with their attorney. You 2009 Continuing Education Class Schedule
can find the Court’s Opinion on the Internet at
the address below. Bison Mountain Financial offers a 4-hour continuing
education class in various locations throughout the year.
www.tsc.state.tn.us/opinions/tca/PDF/074/ “Credit Insurance for Loan Officers” is approved by the
USBankOpn.pdf State of Montana for those with a limited lines license.
March 12 Billings
March 31 Butte
May 19 Great Falls
June 10 Glendive
July 23 Helena
Oct TBD Missoula
Nov TBD Glasgow
Dec TBD Kalispell
Call Robert at 224-406-1187 to register!
Bison Mountain Financial, Inc.
713 Park Avenue
Lake Villa, IL 60046