The impact stemming from the pandemic on credit unions and auto loan servicing is ongoing. Original equipment manufacturers, or 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 (VPP) attached, and as a result, product refund liability is triggered.
What is Product Refund Liability?
When a loan with a 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.).
The timeliness and accuracy of these refunds are being called to question, and this is becoming known in the industry as product refund liability. Key events that trigger product refund liability include: early loan payoff, collection activity and charge-off activity.
3 Things to Know: Product Refund Challenges and Opportunities
- Legal risk
The GAP product is the primary focus for the increased regulation around product refunds. While currently only 15 states require the lending institution to automatically initiate a GAP refund to the borrower, class action litigation is pending and progressing in many states. The regulations hint that the lending institution is liable, regardless of if the GAP was sold directly or indirectly.
Even if the state of your lending institution doesn’t require an automatic refund of a GAP product, there is still increasing pressure for lending institutions to accept the liability for the product refund process.
Because of the heightened legal risks, Holtzman recommends that credit unions develop a strategy for product refunds. She says, “The CFPB and class action litigation suggest that there needs to be a strategy, not just an activity, to build out this area of service within your credit union.”
- Technology and transparency
Transparency in the product refund process is key. Regulators and auditors want a clear line of sight from inception/the triggering event to the funds being placed in members’ hands. The right technology that can accurately calculate formulas, track timelines and communicate with members and dealers/product providers is going to allow for maximum transparency.
Based on discussions with lenders, about half indicate they are managing refund processes internally, while some rely on the dealer or the product provider to manage the process. Relying on multiple dealers or product providers to manage the refund brings significant risk. This risk can be mitigated when a credit union manages the end-to-end process internally.
Peter Krall, Allied Solutions’ Vice President of National Markets says, “People that can operate the technology and manage exceptions help improve communication and timeliness.” Timeliness and accuracy are key in the product refund process, and they are enabled by the right technology and infrastructure.
- Member experience
The member experience is important for both direct and indirect member relationships, especially as many credit unions experience a growing volume of indirect members.
Often, a member isn’t aware that product(s) they purchased at the time of the loan are refundable. Many state regulations require a 60–90-day window in which the borrower must receive their refund on a canceled VPP. Yet, dealerships can take three times longer to provide a refund to the borrower, resulting in a poor member experience and additional risk too.
By taking on the responsibility to manage product refunds, credit unions have additional opportunities to interface with members to enhance the member experience, as well as deepen dealer relations.
In addition to increased vehicle demand, return of repossessions, and delinquencies projected to rise, credit unions are also facing increased regulation around product refunds. To maximize the member experience, avoid delays and errors in refund remittance, and improve an auditable trail of the entire refund process, credit unions can and should implement a product refund liability solution.
It is strongly recommended that credit unions work with their legal counsels and industry partners to establish a strategic and transparent process to optimize product refunds.
“When considering the changing compliance concerns, ensure that you’re taking the right technology, people and timeframe into account to establish a tight refund process to better serve your members,” says Krall.
For more information, check out our webinar Optimizing the Product Refund Process at nafcu.org/partnerlibrary/optimizing-product-refund-process.