Reducing risk in your loan portfolio

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.

 

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