Also known as Lender-Placed Insurance or Forced-Placed Insurance, Creditor-Placed Insurance is a type of policy taken out by creditors (usually lenders) when an individual’s or group’s existing insurance is deemed insufficient or non-existent. This unilateral insurance decision is made by the lender or creditor, who becomes the named insured policyholder.
Definition
CPI is single interest (protecting only the lender’s interests) or dual interest (protecting both the lender’s and the borrower’s interests) credit insurance. This insurance is activated subsequent to a credit transaction on properties like homes, mobile homes, and other real estate assets as collateral. Its primary function is to protect against loss or damage to property which may impair the creditor’s interest or adversely affect the value of the collateral.
How CPI Works
After a credit transaction, if a lender finds existing property insurance inadequate or if the borrower fails to maintain insurance coverage as required by the mortgage agreement, the lender may decide to purchase CPI to ensure the property remains protected. The price of CPI, generally higher than typical property insurance, may be passed onto the borrower paying for the policy coverage cost.
Regulatory Aspects
Various U.S. states and federal regulations govern the implementation of Creditor-Placed Insurance, ensuring practices align with fair lending and insurance principles. Notably, provisions under the Real Estate Settlement Procedures Act (RESPA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act aid in monitoring the usage and enforcement of these policies to protect consumers.
Pros and Cons of CPI
Pros:
- Ensures continuous insurance protection against collateral damage or loss
- Protects lender’s financial interests in the collateral
Cons:
- Expensive compared to voluntary property insurance
- Potential increase in financial burden on the borrower
CPI is a vital back-up plan but controversial due to its cost impact to the borrower, importance of conveying its role and specific usage rights clearly is imperative from a regulatory standpoint.
This mechanism plays a crucial role in risk management for lenders but carries significant financial implications for borrowers to whom the cost is typically passed.
