State National has a lot of credit union clients, and we always recommend that they re-amortize loans after CPI has been placed. However, some of our competitors actually advise against re-amortization and recommend "stacking" premiums at the end of loans.
What's the right answer? We went to the NCUA to find out. Although there is no specific regulation that mandates how premiums must be recovered, the bottom line is that the NCUA strongly recommends that premiums be amortized and disapproves of stacking premiums to create a balloon payment at the end of the loan. Stacking premium payments also creates serious customer dissatisfaction and significant collection problems because borrowers may be unable or unwilling to pay the large deficiency balance created by a balloon payment.
Re-amortizing loans to incorporate CPI premium payments avoids these collection problems, generates smaller premium payments, and reduces charge-offs. It is also the fairest method of charging CPI premiums to borrowers, allocating costs during the loan in which the benefit of CPI is received. Additionally, by having CPI premium added to monthly loan installments, borrowers may be motivated to comply with loan insurance requirements.
Most important, avoiding end-of-loan problems helps maintain positive relationships with borrowers, allowing credit unions to focus on additional business opportunity-rather than premium collection.