Powersports lenders in Massachusetts need to be wary about how they utilize vendor single interest (VSI) insurance, which can raise the interest rate cap if not used for collateral damage, David Gemperle, partner at Nisen & Elliot LLC, told Powersports Finance.
VSI is insurance that helps to protect the lender if a borrower without insurance damages the collateral. In Massachusetts, an auto lender used VSI “in part to recover credit losses, and as a result of that practice, Massachusetts considered those charges to be interest, so they were going over the interest rate cap,” Gemperle explained.
The interest rate cap in Massachusets is 21% for any product that the state considers credit-related. Ordinarily, VSI would not fall under this umbrella, but the auto lender used VSI to help recover from defaulting borrowers.
“If you’re a subprime lender in Massachusetts, you’re going for that 21%, and then you’re trying to make up for your additional risk,” Gemperle said. “So, you’re allowed to require VSI, but then you can’t use VSI to claim for credit reasons. If you use it…to make up for people defaulting then Massachusetts calls it interest. It kicks in and pays that difference between the actual cash value and the total obligation.”
VSI is a lot more common in the powersports industry than in auto because there’s “not a lot of confidence” that the rider is going to maintain insurance coverage because motorcycle pricing can be costly, Gemperle added. “Be careful of what is financed in the contract in Massachusetts. In Massachusetts, you should know exactly what you are supposed to calculate to get the 21%.”