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Product Refund Liability: Is Your Institution Exposed? [Guest Post]

Guest post from my business partner and dad, Keith Winn. Written by him, edited by me. It’s a big enough deal I think it’s necessary to share.

Something else to be worried about? Why not? It’s 2020.

In truth, the emerging risk shouldn’t surprise the banking industry. You’re already used to addressing NSF and OD fee class-action suits, ADA legal action, and, oh yeah, the effects of COVID-19. What’s one more thing?

It could be a lot. From a legal and compliance standpoint, this latest challenge could have severe implications for credit unions. Especially large institutions which embrace indirect in their auto loan portfolios.

As a great author once said, Don’t Panic. Let’s start at the beginning.

The Consumer Financial Protection Bureau

In March of 2019, the CFPB issued their Supervisory Highlights. The findings covered “examinations in the areas of automobile loan servicing, deposits, mortgage servicing”. Since we’re talking auto lending, let’s look deeper at why that topic was important to the CFPB.

According to the report, they wanted to review “auto loan servicing activities, primarily to assess whether servicers have engaged in unfair, deceptive, or abusive acts or practices (UDAAPs) prohibited by the Consumer Financial Protection Act of 2010 (CFPA).”

You’re not doing anything unfairly, deceptive, or abusive, right? So why is this even relevant? Digging further, we discover their real reason:

Reviewing “[u]nfair and deceptive practices regarding refunds for certain ancillary products.”

Ancillary Product refunds

Accounting Chart and Calculator
See your charts? That’s why this all needs a system.

Your borrowers do sometimes purchase ancillary products. It’s a great way to build non-interest income while protecting people from the financial effects of unexpected breakdowns, totaled vehicle insurance claim gaps, and more.

These products are financed within the loan. If the borrower later experiences an event such as trading or selling their covered vehicle, or has a total loss or repossession, the servicer (that’s you, the lender) or borrower may cancel these ancillary products.

Following cancellation, the borrower or lienholder would receive prorated refunds of the premium amounts for the unused portion of each product.

In these cases, the loan servicer initiates the cancellation refund with the provider. However, that process wasn’t always completing. The CFPB examiners identified several examples wherein borrowers did not receive the correct refunds on their extended warranties (VSC).

This finding addressed actions after a total loss or repossession.

Refund Issues

In one case, the examiners found the mileage was calculated on the vehicle’s total mileage instead of the actual miles driven by the borrower. Other cases showed that the servicer never requested a refund after the vehicle was reported as a total loss.

The average unclaimed refund was about $1,700.

These missed refunds caused the borrower to have a larger-than-expected deficiency. The CFPB deemed it unfair, calling them instances of UDAAP.

While the CFPB reached agreements and set up appropriate resolutions with the lenders and servicers involved, the wheels of future litigation were now in motion.

Which Protection Products?

Blue Umbrella
The issue is about as dizzying.

You offer auto loans. You and your dealers also offer ancillary products which can receive pro-rata refunds. The liability exists. Which protection products? As of publication, the following are worth your attention (keep in mind, others may also apply):

  • Credit Disability Insurance
  • Credit Life Insurance
  • GAP
  • Limited Auto Coverage (Tire & Wheel, Dent & Ding)
  • Vehicle Service Contract

The NADA Reacts

The National Association of Automobile Dealers (NADA) wasn’t sitting idly by. In April of 2019, they released their Voluntary Protection Products Policy (VPPP) (Requires login).

The focus of this new policy was to:

  • Affirm the dealer’s unequivocal commitment to a transparent and professional VPPP process
  • State how the dealership will implement and maintain the policy
  • Identify tasks the dealership will perform throughout the lifecycle of VPPPs. This starts with product selection and moves through a process for:
    • Product pricing, advertisement, presentation, sale, cancellation and, should the need arise, customer complaints

The VPPP is a comprehensive system with specific focus on this topic in Section VII: Product Cancellation. The new policy helps build a methodology to make the offering, sale, and cancellation processes simpler, and more consumer friendly.

However, use of the VPPP is optional. Unlike federally-chartered credit unions, there are no federally-mandated regulations.

Yes, in this case, life is easier for them. There’s no CFPB peeking under the hood. Nor is there any true Federal compliance expectation on the dealership. This, despite the fact they also work with product providers and administrators, as well as loan servicers/lenders.

Based upon previous and current CFPB opinions, agency actions, and overriding state laws, it appears the legal onus for timely and proper refunds on protection products may fall directly to the lender.

Which is why we are all here right now. Because that question is about to be tested.

Class Action: Breach of Contract

Scales with Coins and Clock
Time and money. Isn’t it always?

On July 1st, 2020, a class action lawsuit was filed in Denver, CO. The suit, on behalf of the plaintiff, is against 10 financial institutions, 7 of which are credit unions. Attorneys stated the defendant list may expand to 40, involving, “hundreds, if not thousands, of members.”

What’s at issue?

The allegation includes: “All persons who: (1) entered into finance agreements with GAP Waivers in Colorado that were assigned to (named institutions) (2) who paid off their finance agreements before the end of the original maturity date, and (3) who did not receive a refund of the unearned GAP fees.”

Sidenote: In the state of Colorado, regulations require all GAP waivers sold must be refundable.

They are seeking records going back 6 years. Are you prepared or equipped to pay out that many years of potentially missed refunds?

Going Beyond GAP?

Keep in mind: Refundable GAP may only be available in 14 states, so if your institution is not doing business in one of those states, you will likely not be named in this suit.

However, other products, such as VSC, are generally refundable in all states…so you may not be out of the woods.

Direct or Indirect Loans?

iPhone Calculator and Cash plus Notebook
Step 1: Add numbers. Step 2: Continue reading.

That’s the million-dollar question. Literally. Are the risks higher for one category? Should credit unions consider changing their lending policies?

Direct

Direct lending puts you in control, with lines of communication to the borrower and product administrator. When cancellations arise, that administrator knows the regulations for each of your servicing states, so the process occurs smoothly.

Once notified of an early cancellation by the borrower or financial institution, your administrator processes the refund and forwards it to the lienholder. It is then checked for accuracy, and applied to your borrower’s outstanding balance or as a direct refund.

That’s it. Uncomplicated. No lawyers necessary.

Indirect

Indirect lending is…different. Combine the many dealers in your network with their own providers, which can vary with each protection product. You could end up with hundreds of variables and permutations. In other words, a lot to manage.

After that complexity, what information does your institution get? A buyer’s order. On which you learn the name of the product and the price they charged your borrower.

You’re in the dark and at the same time, potentially exposed to liability. Imagine how that problem can compound with 100, 500, or 1,000 indirect loans each month.

And that’s where a growing list of institutions now find themselves.

Solutions

Rubiks Cube Solved
The easier solution?

Stop Indirect Lending

We realize this is an unlikely and undesirable solution. It doesn’t try to overcome the liability issue, rather, it sidesteps it altogether, reducing exposure moving forward. However, even if you stopped indirect lending today, you’d still have potential liability from previous years.

So even as a nuclear option, it’s still incomplete. Being ready to address the liability remains essential. Which leads us to…

Build a Process

Tracking these cancellations and earned refunds for all products in your loan portfolio (even when not your own) is a challenge. And it requires a process. Unfortunately, building this indirect “system” will not be quick, easy, nor cheap.

Your institution would need to invest in building a tracking platform with ongoing resources to ensure the timeliness and accuracy of refunds. Spell out dealer responsibilities in your agreements. Consider filtering out certain dealers (based on their product offering) to keep the workload lower.

That’s on top of maintaining your ongoing dealer relationships.

Of course, now your institution must account for these increased costs. Without any more income. Since these products are not your own, the only profit is from interest on the amount added to the loan. How are institutions handling this quandary?

One lender launched a “product return” fee, assessed against the dealer reserve at the loan origination. Is that strategy for you? We cannot say.

Subscribe to a 3rd Party Service

Unfortunately, even if your institution already subscribes to an indirect loan service, they may not currently have the technology to keep you out of this or similar class actions.

Since this is an emerging issue which will likely affect institutions across the country, we can make two “assumptions”:

  1. Indirect loan platforms are building solutions
  2. These solutions will be available at an unknown cost to your institution soon

Other “stand-alone” solutions may be available. We know of at least one company which claims to handle indirect-based product cancellation tracking and fulfillment. Contact your current vendor to see how their product lineup can help protect you.

Take Steps to Protect Your Institution Now

Knight Armor
Chivalry and swords stuck in stone. You know the drill.

The importance and impact of the CFPB actions, alongside the ongoing class-action cannot be over-emphasized. Auto loan protection products play an essential role in reducing risk for borrowers and lenders. Now, they can also become an unexpected cost to your institution.

All lenders need to take a close look at the CFPB actions as well as emerging class action suits. If you’re involved in indirect lending, attention today is even more crucial.

Begin researching the systems and process needed to address this new challenge. Then create a path for your financial institution to become (and remain) compliant, while ensuring fairness to borrowers.

To stay current on topics important to your position and the institution as a whole, be sure to Subscribe to the Learning Library. They dive deep into a wide range of protection services, highlighting risks and concerns you likely never considered.

Plus, find new ways to better serve borrowers while growing non-interest income. All that with just an email. So until next time, keep it honest!

It’s About The Members, Remember? (Payday Lending)

Update 8/31/18: A reader graciously made me aware of an NCUA program empowering credit unions to provide payday lending alternatives. It is used by a bit over 500 credit unions and discussion is invited from institutions on how to evolve it in the future.

See more direct from NCUA. Looks like a great opportunity to keep your members out of the payday lending debt cycle.

Originally published on CUInsight.com

This post is a continuation of “Your Mission Demands It“.  We’re focusing on payday lending and how its very existence should sadden all credit union supporters.

Credit. And. Union.

Your credit union members are everything to the institution.  Literally.  Without them, you’re not a credit union.  You’re a credit.  With no credit.  So I think it is important to bring to light the topics which are affecting members that others might have missed.  And then, how you can help fulfill your mission…you know, serving your members (even those who may not yet have a credit union relationship)!

Today, let’s have a little talk about payday lenders.  For many people in this country, they’re the closest thing they have to a bank.  Of course, you know the cost of such an arrangement. Or maybe not.  Spoiler: It’s substantial.

Some users understand this, unfortunately, they don’t have much of a choice, or they prefer the instant exchange of check for cash. It’s a big industry, with $38.5 billion in volume in 2009 (yeah, I know, I couldn’t find a newer figure…assistance?).

As of 2017, the industry collects $9 Billion (that’s billion with a B) in fees each year.  What does your credit union charge for depositing a check? And for cashing it? Not a gazillion dollars?  That’s what I thought.

Financial Insecurity Costs

Needless to say, payday lenders are commonplace for people without financial security. You read studies which mention them as living paycheck-to-paycheck. This means all their necessities are paid in the moment, and they hardly ever get ahead of debts.

Remember how I’ve said it’s expensive to be poor? Payday lenders provide the service of speed. When rent, electric, water, and car payments are all due, while the refrigerator and pantry are both empty, money from one check buys another week/month of security.

Getting that money as quickly as possible is essential. At that point, giving up some in the form of interest rates or fees is a small price to pay to keep the water running.

Not surprisingly, usage of payday lenders is rare for those with more financial security. If you have disposable income and savings, and a place your money can reside, why pay someone else massive interest rates to get only some of it in cash?

Piling the Expense. Over and Over.

A person who goes to payday lenders is likely to use them repeatedly. The average is 8-10 transactions per year, where 80% of them are re-borrowed within a month, with 25% building fees greater than what they received in credit. These can be at over 900% APR.

What’s your ceiling unsecured loan rate? Anyway, this isn’t illegal. Well, it is for members of the military, as Congress banned them (for being too financially dangerous) during the George W. Bush years.

But for everyone else, all’s good here. And these companies aren’t considered predatory lenders. But not for the reasons you may think.

Pre-2017 CFPB: The Actions

Remember the CFPB? While under the leadership of Richard Cordray (pre-2017), they looked at payday lenders to better understand if this rapidly growing industry was harming its customers. In October of 2017, they released a rule to help people avoid falling into payday lender debt traps.

It required lenders to determine upfront whether people could afford to repay their loans. Along with a number of other consumer-safety focused policies, it took 5 years to develop, using insights from more than 1 million public comments.

For the unbanked, it was good policy. In the case of consumers who truly needed this service, it presented an enormous opportunity for credit unions to step in and offer fair services for these people.

Post-2017 CFPB: The Inactions

But 2017 came around and Cordray was out and Mick Mulvaney was in. This rule was immediately scrapped. Entirely unrelated, Mulvaney took over $60,000 in campaign contributions from payday lenders.

He also dropped an investigation into one of the largest payday lenders that had been ongoing within CFPB for years before his entry. They also were Mulvaney campaign contributors.

Insulated from investigation or regulation, the payday lending industry is booming. Which means more people who can’t afford to pay are now paying outrageous fees to access their money. They’re just like the credit union movement, except without all of the core principles.

Credit Unions Speak Out…Right?

So, in pursuit of their missions, credit unions have been quick to speak out in support of the unbanked and the prior efforts of the CFPB, right?

Oh, you don’t hear anything, either?

I have heard a lot of grumbling over CFPB regulatory compliance challenges. And you’re right, most credit unions should not be subjected to the same regulatory burden as JP Morgan Chase.

But where is the speaking out for people whose lives are dictated by the debt they accumulate with these payday lenders?

Credit unions can be an enormous voice for “the little guy”. Besides it being the right thing, people who use payday lending are probably enormously profitable potential members of your credit union. And you’ll never hit them with 900% APR.

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