Vendor Single Interest (VSI) insurance safeguards lenders against potential losses in their vehicle portfolios. This strategic solution offers many benefits but requires careful tracking management for efficient use.
If your institution is considering VSI to enhance your risk management and asset protection, this article will serve as a comprehensive decision-making resource. Now, let’s explore the pros of Vendor Single Interest insurance and examine the regulations.
How Lenders Use Vendor Single Interest Insurance
By securing VSI insurance, lenders significantly reduce the collateral risk associated with vehicle loans by transferring it.
We know the borrower is contractually obligated to maintain physical damage insurance on the vehicle, but if coverage lapses, borrowers can create collateral risk for the lender.
VSI insurance serves as a critical layer of protection, allowing lenders to more efficiently improve the financial health of their vehicle portfolios.
VSI Insurance protects the value of the vehicle during the life of the loan. This type of coverage also protects the borrower by extension. Even though it’s termed “single interest”, a borrower can potentially benefit from their lender holding this type of policy because a VSI claim payment will reduce a borrowers’ charge-off balance. The borrowers benefit as their unpaid loan balance is reduced and sometimes eliminated.
How Does VSI Insurance Work?
VSI Insurance is used by large, indirect lenders as well as smaller banks and credit unions throughout the USA. VSI Insurance has passed the scrutiny of the CFPB and other regulators, and is legal in all states. Vehicle Single Interest insurance is most widely utilized in pocket regions specifically due to focused efforts by brokers in those regions back in the 1980’s. This tool is available across the US for any interested institutions.
A blanket VSI policy offers rate stability to the lender in both good and bad economic cycles. It involves charging the borrower a small premium at the time of their loan origination. If a borrower’s coverage lapses for any number of reasons, that premium pays for repossession damage & skip claims.
There are many coverages incorporated with VSI, including:
- Physical damage & theft
- Skip & confiscation
- Instrument non-filing
- Repossessed vehicle coverage
It’s clear that VSI has many benefits, but are there any drawbacks?
As with all insurance products for lenders, VSI policies must be compliant and Miniter Group is positioned to ensure our clients maintain all regulations.
VSI Insurance Compliance
Lenders are responsible for complying with a series of regulations under TILA. Miniter Group’s modern tracking solution takes the TILA communication burden off lenders, streamlining their process and adding a layer of security for their compliance efforts.
VSI TILA Disclosures
- The VSI Insurance premium can be charged to the borrower at loan origination as long as the Retail Installment Sales Contract (RISC) uses the proper disclosures as defined in TILA.
- This disclosure states that the lender requires VSI Insurance, but the borrower may obtain coverage elsewhere.
- Also, but not shown in the disclosure, the VSI Insurance company may not subrogate against the borrower.
VSI is not popular in eight states because the APR calculation must include VSI premiums:
- AL
- DE
- IA
- MI
- NJ
- PA
- TX
- WI
The remaining 42 states allow the APR exclusion for VSI premium, making it a more attractive solution.
Conclusion
The benefits of VSI insurance extend beyond lenders' interests, positively impacting borrower relationships. Lenders seeking tools to strengthen their vehicle portfolios should consider VSI as a viable option.
For more detailed information, consider reading Miniter’s Complete Guide to Vendor Single Interest Insurance (VSI) or visit our Vehicle Solutions page.
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