What Is Lender Loss Payee?

A loss payee is the third-party beneficiary to any insurance policies that an owner may have on a property, be it auto, home, boat or any other real property. A lender loss payee is a legal name given to the mortgage company or finance company that has a lien against the property until the owner has paid the loan in full. This lender becomes the beneficiary of insurance payouts up to the amount of the loan owed on the property.

Features

1. Lenders still own the car, home, boat and other property until the owner pays the loan used to purchase the property. Until the loan is paid, the lender has what is called a lien against the property. This means that the property cannot be disposed of without permission first from the lender. Usually the loan must be paid off completely or some settlement or agreement reached before the lender releases the lien on the property.

Significance

2. Because of its interest in the property, the lender will require the owners to carry insurance on the property, to ensure that the lender is compensated in case of a full or partial loss. This way, the loan on the property gets paid back no matter what happens. Although the owner pays in the monthly premiums, the lender is the loss payee or third-party beneficiary of the policy.

Function

3. As the lender loss payee, the lender will receive will receive any payouts on the policy in the event of damage covered by the insurance. The amount owed on the loan is deducted from the payments and any leftover funds are sent to the owner. The loan is reported as paid in full and the appropriate documents are sent to the owner.

Considerations

4. In some cases, the insurance payout does not cover the entire loan. In those cases, the owners are still responsible for paying the balance left after insurance funds are deducted from the loan amount. Any new car, home or property purchase must be negotiated or consolidated with the balance owed on the first loan. The owner is then paying for both the new property and the old.

Exceptions

5. Some owners are successful in negotiating a debt cancellation with the lender loss payee. However, this practice isn't common, and requires several things like a relationship with the lender (other than monthly payments), good credit and a plausible reason for the loan forgiveness. Although many try for loan forgiveness, few actually succeed in receiving it.