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Debt Protection

Debt Protection (many times referred to as Debt Cancellation or Debt Suspension) programs offer lenders new opportunities to add value to their consumer lending businesses. Debt Protection is considered a banking product by the OCC and NCUA, based on several legal rulings. It is used in place of insurance products when covering a loan.

Essentially, Debt Protection is an agreement between a borrower and a lender to have the customer’s debt either cancelled (paid in full for a specified time period) or suspended (interest-only payments are made for a specified time period and a loan extension is granted) in the event some specified event(s) occurs.

Usually, these programs are fully backed by an insurer, but many lenders may offer these programs, charge a fee for it and pay benefits without an insurer. This allows the lender to customize benefits, prices and fee income to suit their unique market needs.

Almost any type of protection may be offered as long as it correlates to an event that may cause a borrower financial hardship and might result in their being unable to repay the loan.

The typical types of coverage that are offered are:

  • Life
  • Disability
  • Unemployment
  • Divorce
  • Family Leave
  • GAP (for vehicle loans only)

The pros of the product are:

  • Ability to customize the program, including fee income.
  • Freedom from insurance regulation because it is a banking product.
  • You can easily offer the same product and prices across multiple states, thereby greatly simplifying processing, training and sales.
  • Large lenders may assume the risk and income from the product without an insurance company’s participation.

The cons of the product are:

  • Benefits paid to the borrower’s loan are taxable.
  • Retailers and Finance Companies may be excluded from offering this product, unless their lending source offers it.
  • Other than Auto Dealers, lenders must offer a monthly premium option, which means that your core processing system must be able to charge a monthly fee to the borrower’s loan. Also, it may mean a fairly significant temporary reduction in fee income if you switch from a single premium credit insurance program to a monthly debt protection program.
  • If the program is backed by an insurer and coverage is denied by them, the lender may be liable.
  • It may take more time to set up due to each lender’s unique status and/ or needs.
  • Small lenders may find that options are limited, due to the time and expense required to set up complex programs.

Debt Protection is a growing product line that offers many advantages to traditional credit insurance. TEJ Agency has the technical expertise and providers to help you implement a lender risk management program that will satisfy you and your customers.