What is product refund liability?
Product refund liability is the responsibility of issuing a refund to a borrower for any unused portion of a vehicle protection product (VPP) attached to a loan. Examples of a VPP include Guaranteed Asset Protection (GAP), tire and wheel services, or credit life insurance. When a key event occurs (e.g. a vehicle loan is paid off early or the vehicle suffers a total loss), the necessity for a refund is triggered. Historically, the dealer, product provider, or even the borrower was responsible for initiating the refund. However, the regulatory landscape is shifting to hold the lending institution liable and many credit unions are adjusting to accommodate this process.
Let’s take a look at 3 risks and the coinciding best practice aimed at improving product refund performance and compliance:
Risk #1: Compliance Concerns
The initial compliance concern for refunding VPPs came from the CFPB’s Winter 2019 Supervisory Highlight indicating that there would be particularly close attention paid to, “unfair and deceptive practices regarding rebates for certain ancillary products.” Presently, financial institutions in many states are facing class action litigation for failure to refund borrowers for the unused portion of their GAP product.2
Product refund compliance risks and repercussions include:
- Class action litigation
- Legal fees and fines
- UDAAP violation
- CFPB attention
- Overall increased regulation
As regulation increases and litigation is pending, many credit unions feel pressure to take on the process of product refunds internally.
Best Practice #1: Be Proactive
To mitigate legal ramifications, credit unions should follow industry trends and insights and consult with their legal counsel on pertinent changes impacting vehicle protection products. To proactively stay ahead of these regulations, it is increasingly becoming a best practice for credit unions to adopt an internal process for initiating, calculating, and delivering refunds.
Risk #2: Poor Member Experience
In addition to class action litigation and other regulatory changes, the timeliness of product refunds is also being called into question. The timeline from initiation to delivery to the member becomes risky to manage as each state has varying requirements on the length of time required for a refund to be issued to the borrower. Many members wait months for a product refund, or simply are unaware that they are eligible to receive a refund, and this lack of timeliness is being scrutinized as UDAAP (unfair, deceptive, or abusive acts or practices).
Best Practice #2: Institute an End-to-End Process for Product Refunds
The member experience is crucial for both direct and indirect member relationships, especially with many credit unions seeing increased volume of indirect members.
In order to maintain compliance and create a positive member experience, credit unions can accept responsibility for and dictate the product refund process, instead of relying on the dealer. This provides an additional opportunity to interact with members, enhancing the member experience.
Risk #3: Increased Audit Scrutiny
Many auditors and legislators are asking for a transparent record of the product refund process, from loan signing to when the member receives the refund. This information is challenging to piece together if the credit union is not in control of the refund process and therefore must collect information for audits from the dealership and/or product provider.
Best Practice #3: Maintain a System of Record
In order to maintain a system of record, many credit unions will first need to create one. Consider partnering with a vendor that can streamline technology and processes to work directly with dealerships and product providers. Additionally, implementing a technology that tracks transactions allows dealers and product providers to participate in, rather than own, the process. Clear and transparent record keeping can also simplify the remediation process when previously cancelled product refunds need to be issued.
Strategizing for Product Refund Liability
Product refund liability is an evolving challenge for credit unions. Yet with a proactive approach credit unions can begin to minimize their exposure from compliance and reputational risk. Knowing the regulatory landscape, maintaining a member-focused approach, and keeping a system of record will contribute to constructing a product refund process and strategy at your credit union.
Allied Solutions, LLC is one of the largest providers of insurance, lending, and marketing products to financial institutions in the US. Allied Solutions uses technology-based products and services customized to meet the needs of over 4,000 banks and credit unions, along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions maintains over 10 regional offices and service centers around the country and is a subsidiary of Securian Financial Group, Inc.
1 CFBP. March 2019. Supervisory Highlights. https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-18_032019.pdf