New risks and solutions for product refund liability

Product refund liability is an evolving challenge for credit unions; complying with state-by-state regulations, avoiding legal challenges, and establishing the right processes along the way. When a loan is terminated due to early payoff, repossession, or total loss, what happens to the ancillary products attached to the loan? Recently, we have seen increased regulatory pressure on credit unions to manage and oversee the refund of canceled vehicle protection products, and this has become a significant liability.

There are several misconceptions involving the process, logistics, compliance, and risks.

Why it Matters

When a loan with a Voluntary Protection Product (VPP – GAP, for example) is paid off early the member may be owed a refund for the unused portion of the VPP, or in the case of a deficiency balance, the refund may be due to the lender. Repossession, charge-off, and total loss are other events that trigger the cancellation of the VPP. A typical vehicle loan may have at least one VPP attached, but there can be several VPPs on any given loan. The volume and complexity of canceled vehicle protection products should not be underestimated when evaluating the risk associated with not implementing a standard refund process.


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