Our bank is thinking of self insuring VSI. If we should decide to do so should the fact that we are self insured be included on the itemization of amount financed or any where else?

The term "self insure" usually means that the bank has determined that the cost of adminstration outways the historical losses, so they just quit doing it. VSI is typically a forced placed insurance policy after the loan is closed and the customer has let their insurance lapse - it would not normally appear on the closing documents.

I agree with Randy. Or are you meaning you will instead buy a blanket policy for the portfolio and want to pass the cost to the consumer when the loan is done? (This would be difficult to justify since the person signing the loan docs has insurance, or you wouldn't be doing the loan.)

Better check with your regulator as they may not go along with this at all. We were alway were written up by examiners if insurane had lapsed and the bank had not obtained a policy.

VSI is a collateral protection program. By basically waiving insurance the bank is opening itself to loss and liability if things are not handled correctly and completely understood.

If you have a mortgage on a home that does not have insurance and the house burns down, is the bank going to pay out the cost of new construction, or write the loan off.

Auto loans are another can of worms that you do not want to open.

Sounds like the bank wants to play the odds on potential loss, probably because they haven't seen a problem in awhile. It only takes one big loss to wipe out any savings the bank expects to achieve in doing away with VSI.

Again check with your regulators and tell them the bank will have a portfolio of uninsured real estate and consumer loans that then bank will assume the insurance risk on and see what they tell you.

We did this years ago where we had a blanket policy with a third party where they charged us a fee on any loan that had a vehicle as collateral. The choice here is whether or not you are going to pass this fee on to the customer which is what we did but we disclosed it as a prepaid finance charge. Since it was a fee that was less than $10.00 at the time it made very little affect on the APR.

Don,

I have only witnessed banks self-insure on vehicle loans and not on real property loans due to the risks that you cited. The banks that self-insure actually create a specific reserve account for this process rather than paying the fee to a third party for a blanket policy. The regulators will not normally just let you quit tracking insurance without a formal reserve process, as you cited. I have seen this process save lots of money depending on the size of your vehicle portfolio.

Having a Blanket policy does not make you a self insurer.

If you have a blanket policy you are charged a fee on every loan. If you pass that fee on to customers, be prepared to answer the customers question as to why they will be paying for this.

Also understand the blanket policy does not provide the same type of coverage.

We do not plan to have a blanket policy we plan to collect the fee, disclose as VSI on itemization of amout financed, keep the fee and set aside a reserve for any losses. Thanks!!

Also recognize that the fee for the blanket policy may not be able to be passed on to consumers in every state - you'll want to check your state law to see whether this is allowed.

There are legal ramifications and disclosure issues that need to be checked into depending on what you call this fee.

Someone in the bank or the bank itself may have to be licensed by the state to sell insurance.

Its going to have to be disclosed as it is fee income to the bank. If you have a sliding scale of charges dependent on loan amounts its posible you could trigger HOEPA on Real Estate loans.

While everything may be A OK there are a lot of issures that need to be addressed. I don't think this is as slam dunk or as simple as just charging a fee and putting it in a reserve fund.

Don,

I concur. I think they have a lot of work to do to pass this fee directly on to the customer. You need someone well versed in your state's insurance and other consumer protection laws. This isn't as easy as just doing it. If you do go ahead, it would have to be considered a finance charge. A suggestion would be to just raise your loan origination fee to cover the reserve amount rather than try to break it out into a separate item as that could cause you all types of issues. I would additionally visit with your S&S examiner prior to implementing this for any input.

I hate to bring up a very old thread, but what if the bank does not want to charge the customer for VSI and just pays the VSI fee out of their own pocket? For a consumer non-real estate loan, would this need to be disclosed?

No. It would not be part of the amount financed. It would simply be a cost of doing business.

See Section 1026.4(a), OI #2.

Back again....I know Dan said that if the fee was being paid by the Bank, the fee would simply be a cost of doing business. And if the loan was a "no fee" loan, I agree with him.

However, what do you think if the loan in question had a documentation/origination charge. Couldn't one argue that the Bank is actually paying the fee with the documentation/origination charge regardless of what GL is used to pay the VSI premium?

Or am I thinking too hard on this one? Any help would be appreciated.