On September 21st, the Consumer Financial Protection Bureau (“CFPB”) announced a $1.4 Million settlement with Lobel Financial, following complaints of abuse in Lobel’s use of Loss Damage Waivers (the “Waivers”). For several years the California subprime finance company had used the Waivers as an alternative to collateral protection insurance, effectively force placing them on customers who failed to maintain required physical damage insurance.

If you purchase Collateral Protection Insurance for your finance or lease portfolio and you’re wondering whether to reinsure the risk, the short answer is Heck YES (the caps tell you I’m shouting at you over the internet). Of course, there is a more nuanced answer, that socks up a few more words. Bear with me for a few hundred words while I try to make my point.

We all know that many BHPH customers often arrive at the finance desk without an actionable plan to insure the finance collateral. We also know that most BHPH customers can and will procure insurance when required for financing. So what’s the problem?  It’s this:  Buying insurance is not the same keeping insurance, and many BHPH customers fail in the latter.   So then, how does a BHPH dealer or special auto finance company respond to the inevitable uninsured exposure of its finance collateral?

Creditor Placed Insurance, or CPI, is a commercial insurance policy that protects a creditor’s lienholder interest in  financed collateral against the risk of physical damage. Financed collateral can only be placed on a CPI policy and charged to the customer when the customer fails to provide or maintain their own insurance. To clarify: CPI is not sold to or purchased by the customer. CPI is only placed in response to the customer’s decision not to insure the collateral.