3 things to know about product refund liability

The impact stemming from the pandemic on credit unions and auto loan servicing is ongoing. OEMs have been shut down, stimulus payments have created a surprising decrease in delinquencies as well as an uptick in vehicle demand, resulting in a shortage of inventory. Repossessions are on hold yet are rebounding. All of these factors create an unsure credit picture coming out of the stimulus checks, especially for subprime borrowers.

In the regulation space, NCUA and bond providers have increased audits and business reviews, and are honing in on UDAAP violations and consumer sensitivity, particularly in regards to early loan payoffs. Notably, based on our experience interviewing hundreds of lenders, most indicate that about 50% of loans are paid off early and do not reach full term. Further, 60% have a vehicle protection product attached, and as a result, product refund liability is triggered.

What is Product Refund Liability?

When a loan with a vehicle protection product (VPP) attached does not reach maturity a refund of the unused portion of the product(s) may be applied to a deficiency balance or may be refunded to the borrower. Vehicle protection products include GAP, credit insurance, and vehicle service contracts (i.e. warranties, tire and wheel, etc.)


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