3 challenges of product refunds (and how your credit union can be proactive)

Credit unions continue to face a myriad of changes and challenges as they service auto loans and grow their auto loan portfolio. Recently, the auto industry has experienced increased regulatory scrutiny and attention, particularly related to dealer sold guaranteed asset protection (GAP) policies.

GAP Refunds: An Evolving Compliance Concern

When an auto loan is paid off early and a vehicle protection product (VPP), such as GAP, is attached to that loan, the member may be owed a refund for the unused portion of the product. Historically, the liability for this process fell to the dealer or product provider, however, pending litigation in several states is calling upon the lender as the responsible party to manage the product refund process. This increased regulatory pressure is becoming known as product refund liability.

Challenges Presented by Increased Regulatory Pressure:

• The historic process isn’t efficient. Historically a canceled VPP passed through the hands of the lender, dealer, product provider, and dealer again before reaching the borrower. This process is lengthy, can be complex, and cause errors and delays.
• Regulations surrounding vehicle protection products change state to state. Each state has a different protocol for addressing product refunds. Additionally, each ancillary product may have different rules for how refunds are calculated. Staying compliant across different states can be challenging and cumbersome.
• The CFPB is paying attention on behalf of the borrower. In a recent Supervisory Highlight, the CFPB indicated that there would be increased attention on product refunds, paying particularly close attention to how the refunds are being calculated to avoid UDAAP (Unfair Deceptive Acts And Practices) violations.^[1]

Across all financial institution markets the liability, timeliness, and accuracy of product refunds are being called into question. Because of this, credit unions are facing increased vulnerability due to changing state guidelines and targeted class action litigation on refund responsibility.^[2]

3 Best Practices for Product Refunds

While product refunds are complex and the compliance around product refund liability is evolving, there are some ways that credit unions can stay educated and proactive. Here are 3 best practices when it comes to product refunds:

1. Work with your legal counsel to stay educated on product refund guidelines. Recent lawsuits are costing financial institutions millions in payouts to borrowers, in addition to the costs of legal fees and brand damage. Since the pending litigation and state guidelines for product refunds are ever-changing, be sure to include your legal counsel in operational discussions in order to stay abreast of changes that will impact product refunds and your credit union’s responsibility to manage them.
2. Proactively take on the responsibility of managing product refunds. In the new regulatory landscape, there is little room for unclear ownership, inaccurate tracking, or calculating errors regarding product refunds. Credit unions need a compliant process to ensure refunds are issued in a timely and effective manner. This may require hiring additional staff or working with an outside vendor to manage the cancellation, calculation, communication, and remittance process. Managing product refunds will also require the right technology and data integrations. Many credit unions are partnering with a vendor that provides product refund technology to calculate refund amounts, track when refunds are due, and validate that members received their refunds. The right technology can reduce errors through calculated formulas, customized reports, and reduced touchpoints between parties.
3. Put a product refund strategy in place. Managing ancillary products needs to be a strategy – not an afterthought. A reactive approach to product refunds opens the potential for regulatory scrutiny, or even a compliance breach. A product refund strategy can identify areas of risk exposure and examine where risk can be mitigated, while managing the process for future refunds and remediating past refunds.

Stricter regulations surrounding product refunds have placed an increased burden on credit unions serving auto loans. GAP has been and continues to be the primary focus of the regulatory pressure. What about other vehicle protection products? While GAP is getting the attention now it is a matter of when, not if, there will be regulatory scrutiny directed at other vehicle protection products. Credit unions should proactively implement a product refund process for all eligible VPPs, not just GAP. Examples include credit insurance, involuntary unemployment, single premium AD&D and other dealer sold loan protection products.

Taking control of this process will help maintain regulatory compliance, recover refunds faster, avoid delays and errors in refund remittance, and improve an audit trail for regulators of the entire refund process, overall reducing risk on your auto portfolio.

^[1] CFPB. 2019. https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-18_032019.pdf
^[2] CBS Denver. 2022. https://denver.cbslocal.com/2022/03/03/gap-refunds-colorado-attorney-general-auto-loans/