NAFCU Services Blog

May 16, 2022

New Risks and Solutions for Product Refund Liability

By Peter Krall, Vice President of National Group Markets | Allied Solutions

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

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.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.

Who Owns It?

There is also heightened confusion about who is ultimately responsible in these cases. Regardless of who sold the VPP, increased litigation is indicating that credit unions are the responsible party to issue a refund, but there’s a bright side. When a credit union takes ownership of the refund process, they can be proactive about meeting existing and potential legal requirements. This also provides a better member experience, all while strengthening dealer relationships.

How Does It Get Done?

As with all good things, the “how” isn’t always intuitive or easy. Many credit unions have been handling these refunds on an ad hoc basis, which is where the backlog, liabilities, and risks can quickly accumulate. In response to the recent increases in litigation and regulation, other credit unions have built, or are actively building, new processes and systems to solve the problem. Not surprisingly, it means additional work for back-office staff or in many cases, adding FTEs.

Key Risk Factors

Our risk management team has outlined some of the key factors to consider when setting up your process for managing these cancellation refunds.

  • Risk of error: Product refunds must be accurately reconciled, coordinated with the dealer/product provider, and delivered to the member, all without any errors in dollar amounts or timelines. Any error in this chain of events can result in additional audit attention or regulatory correction. \Risk of overburdening staff: To correctly process product refunds, it will require one dedicated full-time employee for every 200 cancellations per month. Our industry research indicates that nearly 50% of auto loans are paid off early and 60% of those have a VPP attached.
  • Risk of delays and long cycle times: Some states have specific requirements for the number of days from the time the product is canceled until the refund is in the hands of the borrower. If the appropriate timelines are not held, compliance concerns can surface.
  • Risk of harm to your brand: As noted, some credit unions are already facing litigation for failing to refund borrowers on canceled VPPs.[1] Pending litigation is costly both monetarily and for brand reputation; it can also be the recipe for negative member experiences.

Managing and Optimizing Product Refunds

Sometimes it makes sense and cents for a credit union to build a process in-house. Many credit unions are recognizing that the resource and compliance knowledge is better outsourced than built in-house. As you evaluate your risks, processes, and options, we highly recommend you engage a trusted outside partner. Choose the best partner for you, but be mindful to bring someone in to help your team navigate this challenge. As credit unions step up to take the responsibility of managing product refunds, they are reducing compliance concerns, providing positive member experience, and strengthening the image of the credit union industry as a whole.

We did a recent webinar on the topic that goes into more detail. Learn more.

[1] Top Class Actions. 2021.…

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