Article

Reducing Risk in Your Loan Portfolio

businessman holds and protects small car in his hands
Mark Baltuska Photo
VP/Finance Company Markets
State National

3 minutes

When it comes to protecting your credit union’s collateral, tracking alone is not enough.

We’ve all seen the recent headlines: Inflation is up. Purchasing power is down. Pandemic relief money to consumers has ended. Both new and used car values are inflated. Borrowers are taking out larger loan amounts. Any way you look at it, many of your members are feeling strapped—and when people are struggling financially, they look for any way they can to save cash. Unfortunately, a common “solution” is to let their auto insurance lapse, or raise their deductible.

That’s one of the reasons why many smart lenders maintain an insurance tracking program to ensure their borrowers are maintaining adequate private coverage. And that’s a good move, because uninsured or underinsured borrowers create a big risk of heightened charge-offs in a credit union’s portfolio.

Bad News: That’s Not Enough to Keep You Protected

But tracking alone is not enough. Research has shown that merely tracking who’s covered and who’s not does not effectively or reliably change borrower behavior. Even with repeated reminders to correct the deficiency, without an enforcement mechanism a significant percentage of borrowers simply won’t maintain the coverage they committed to in their loan agreement. Unless there is some consequence for noncompliance, many are unlikely to take the initiative to purchase a policy just because of letters or phone calls reminding them to do so.

What Actually Works to Motivate Borrowers?

On the other hand, when you combine a technologically sophisticated tracking system with a high-quality lender-placed insurance product, you’re getting the risk reduction you need, in two important ways:

  • First, you’ll have an insurance product in case there’s a repo damaged vehicle—a product that is affordable, collectable and has value for your member, too.
  • Second, many of your uninsured borrowers, when faced with certificate placement, will actually respond—they go out and get good insurance!

Relief, Not Regret

When a borrower who was incentivized to go out and purchase their own coverage has an accident, it’s their insurance company they’re going to call—not you. Meaning this member’s accident isn’t going to turn into your problem, your charge-off, or a ding on your balance sheet.

It’s More Important Than Ever to Keep ALL Your Risk Mitigation Bases Covered

As the risk of uninsured, underinsured, and cash-strapped borrowers increases, it’s vital to provide them with the kind of incentive that will keep your collateral covered. The more financially stressed a member is, the more unlikely they are to obtain coverage just because they received a letter in the mail or a phone call from your collections staff (if there’s even anyone with time to make those calls, with the challenges of finding, keeping, and training staff in today’s “Great Resignation” environment).

Protecting Your Members and Your Business

Uninsured borrowers and charge-offs can be a costly reality for any credit union. Combining accurate, technology-driven tracking WITH a high-quality insurance product is a proven way to mitigate the risk of charge-offs hitting your balance sheet. A comprehensive portfolio protection solution will not only be affordable to your members while providing your company with robust protection–it is the only strategy that will actually change the behavior of borrowers when it comes to purchasing and keeping the coverage they need to protect both of you.

With nearly 20 years of financial industry experience, Mark Baltuska is VP/finance company markets at CUESolutions provider State National, has a deep understanding of portfolio risk challenges. He works closely with risk mitigation professionals at credit unions, banks, and finance companies to help them find the right solutions for their institution’s unique needs.

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