September 29, 1997
Daniel E. Best, Esq.
Weltman, Weinberg & Reis
323 Lakeside Avenue, West
Cleveland, Ohio 44113
You have asked whether federal credit unions (FCUs) that purchase
collateral protection insurance (CPI) are prohibited from adding
the CPI premiums to a member's loan balance more than once. You
also ask whether FCUs that add CPI premiums to a member's loan
balance are required to increase the member's monthly loan payments
by the amount necessary to recoup the cost of the CPI, over the
life of the CPI policy, as opposed to over the life of the loan.
You state that CPI protects an FCU from the risk of a loss when
a member fails to maintain the required insurance on a vehicle
securing a loan. You further state that, pursuant to the terms
of a promissory note, an FCU that has to purchase CPI normally
adds the CPI premiums to a member's loan balance, which results
in increasing the monthly loan payments or, in limited cases,
extending the term of the loan.
Although there are no specific regulations addressing how CPI
premiums should be handled, it is NCUA's position that an FCU
may add CPI premiums to a member's loan balance each time it has
to purchase CPI to provide insurance coverage on that member's
vehicle. Further, as a matter of safety and soundness, if CPI
premiums are added to a member's loan balance, the FCU must increase
the member's monthly loan payments by an amount equal to the cost
of the CPI, amortized over the life of the CPI policy, not the
life of the loan. This way, by the time the CPI policy expires,
the member would have fully reimbursed the FCU for the cost of
the CPI.
Since your questions on how CPI should be handled when added to
a loan are basically ones of safety and soundness, please feel
free to contact NCUA's Region IV Office at 630-245-1000 if you
have any additional questions on this subject.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/NSW:bhs
SSIC 4700
97-0737