Financial institutions and consumers face a similar set of unknowns and risks when it comes to debt cancellation-providing both challenges and opportunities.
The financial institution's risk rests in the economic losses that result when borrowers default or are unable to meet their loan obligations. Besides the economics of the loan itself, there are community and social issues that cause equal consternation. Financial institutions do not like the idea of placing customers into collection or forcing an economic action that may be to the customer's long-term detriment. They also would prefer to avoid costs that are an inevitable part of legal proceedings.
Consumers face such risks as job loss, disability or poor health that could endanger their ability to make their required payments. Consumers that miss payments can damage their banking relationships and lower their credit rating. In some cases, they also could lose a critical asset such as an automobile that may be imperative in their time of crisis.
A well-planned debt-protection offering often can solve the concerns of both parties quickly, efficiently and economically.
Today's economic environment that is characterized by mergers, acquisitions, downsizing and outsourcing has caused many borrowers to be understandably concerned about loan repayment if they become victims of involuntary unemployment. Moreover, borrowers who rely on the incomes of two parties can be devastated economically when one of the parties dies or suffers a disability that makes it difficult to earn an income.
Today, as the ratio of savings to income is falling, many borrowers do not have the cash reserves that permit them to meet their obligations when their plans are disrupted for these unforeseen events. That is the essence of debt protection.
Debt protection offers a way to help the borrower across "troubled waters"-whether temporary or permanent. The oldest form of debt protection is credit life insurance, which continues to be a fair and reasonable solution for many financial institutions and consumers.
Other financial institutions, however, are taking advantage of debt-cancellation or debt-suspension programs to better tailor their products to the demographics of their lending base. Debt protection is used to describe a variety of agreements between lenders and borrowers.
Credit insurance is a three-party agreement, whereby the insurer agrees to indemnify the lender if a predefined unforeseen event occurs. Credit insurance is regulated by state insurance departments on a state-by-state basis. Product filings are rigorous and rigid, and rates and coverage terms vary from by state as well. This causes particular consternation for financial institutions that operate across multiple states.
Debt protection in the form of debt cancellation or suspension provides consistency throughout their enterprise, and all customers receive consistent offerings and pricing. This form of debt protection is far more efficient for the financial institution in creating and delivering effective and homogenous solutions regardless of geographical location.
The additional advantage of debt-protection and debt-suspension products is their inherent flexibility in product design and delivery, forming the basis of this positive scenario. Financial institutions that depend upon this strategy target or attract borrowers and customers from diverse economic and social environments. They also find that the types of loans that constitute their portfolio shift over time.
Installment-loan borrowers, for instance, may gravitate over time to home equity lines of credit and other lending products. But while their lending patterns may change, the risks of default to lender and borrower do not. And protection against this risk can help both lenders and borrowers breathe a sigh of relief.
K. Ned Hamil is president of Life of the South Corp., a Jacksonville, Fla.-based company that provides financial products and services for financial institutions, auto dealerships and consumer finance organizations. He can be reached at 800-888-2738 or by e-mail at NHamil
(c) 2005 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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