Socially-Distanced Marketing, Strategy, and The Force

Tag: indirect lending

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!

Are You A Dumb Bank? (Part 4ish)

Originally published on CUInsight.com

This is a spiritual continuation of a series from a while back, titled Are You A Dumb Pipe. The idea is related; read on to understand how. 

For every 100 members buying a car, 8 will pay in cash and 30 will lease, leaving around 60 which continue to be an opportunity for your credit union.

Of those, many will simply finance at the dealer, signing with captive or another indirect lender.

Was it yours? Maybe. Probably not.

Since most people pay for cars at the dealer, it only makes sense to pour resources into indirect, right? Operating in this fashion reminds me of my post on being a dumb pipe.

Becoming A Dumb Bank

Skyscrapers and Plane
One of those has the main offices. Which one? Who cares?

Indirect lending is making your credit union a dumb bank. Your members won’t know who you are. They don’t care. You’re a line in their bill pay platform, and it’s probably set to automatic, anyway.

I’ve spoken to the lending teams at many credit unions. The allure of indirect is strong. Do nothing, get auto loans. As long as you approve and fund them in good time, you’re done.

I’ll be honest; I’ve lost some business to it. However, it’s costing credit unions like yours far more. It’s the same as the internet providers being just a dumb pipe (with the loss of Net Neutrality this will change).

It’s the path to becoming a faceless lender.

What’s Wrong With Being a Faceless Lender?

Credit unions see financial interactions in a different way than any other institution. It’s what makes you, well, you. And not a random bank. Right?

I mean, if I’m wrong, say so and continue down the path you’ve set. Become the faceless money storage and lending facility.

Faceless Woman Illustration
“I guess some people work there…”

It’s true, there are a lot of people who will never care about their bank, credit union…whatever. When it does what they expect, it’s another utility which receives little attention.

If something goes wrong, well…”geez, this bank just sucks!”

You can try to engage them, but the decision is theirs.

However, if you are in any way trying to fulfill your mission statement, this is not the path forward. As your services become commoditized, your interactions devolve into support requests and complaint resolutions.

So what’s wrong with becoming a faceless financial institution? It becomes nearly impossible to achieve your mission, which is a disservice to everyone.

You lose the ability to help your members in all the unique ways available to credit unions. Financial coaching? That would have been nice. Investment guidance? I’m sure they’ve got it handled.

Even a simple grasp of how fee structures or interest rates can affect someone long-term? Hey, if they don’t know you, they don’t engage.

And if you try to connect, well, you’re just that faceless money box. Have you earned their time and attention?

Where “Faceless” Works

Am I saying indirect and other “faceless” services are bad? Not at all. They can serve a valuable role in boosting asset volume in many credit unions.

Of course, indirect isn’t quite the money-maker some think it is. So I’d keep a close eye on that.

Sometimes, you just want to run a service that’s “set and forget”. If this fits your strategy, and is properly accounted, then enjoy the growth it delivers!

Stick Shift
I’m more of a manual kind of guy, myself. Automatic is good for certain things.

However, I have noticed a growing trend of institutions putting more resources into this basket…at the expense of their direct member engagement.

There are a lot of industries where your company can remain unknown while also a part of everyone’s life. That works if being faceless yet ubiquitous fits the mission.

I don’t believe it does for the credit union industry. Do you?

A Revisit. A Rethink.

Diligent readers of this blog may recall a rather odd situation I encountered while listening to music. No, I didn’t realize the connection between Wizard of Oz and Dark Side of the Moon. An ad on Pandora launched an investigation. It turned out to be a hunt for Space Coast Credit Union and their campaign, “Expose the Truth”. The marketing appeared to be quite smart; tease an idea which promotes a viral following, then present the information in a great reveal. Why were so many people overpaying, and what was this truth to be exposed?

Turns out, the credit union wanted to educate their members on the practice of rate markup. In an SD card-sized explanation (if we used a micro-SD card, we would be guaranteed to lose it under a fingernail or something…they’re so tiny! But I digress.), some lenders embrace a portion of the loan rate to offer compensation to their indirect dealers. As a result, the rates increase, and in some cases, this has caused discriminatory lending practices. SCCU, like most credit unions, compensate their indirect dealer partners through a flat-rate payment structure. One loan, this much money. The interest rate remains unchanged. It’s a different approach to the same problem; the dealers are doing the legwork to get the financing and should be remunerated for this task. In the interest of member transparency, SCCU disagrees with the use of rate markup, and that is ok. At the end of the day, you’ll always get the best deal on your financing if you contact your banks, credit unions, and other lenders directly. If it is determined that indirect lending (doing it at the dealership) is the best and easiest, then there you go.

So what happened to Expose the Truth? The campaign was pulled after objections were raised by NADA (National Automobile Dealers Association). Indirect dealers felt slighted by their partner, and appealed to their trade group, NADA. You can read the full details and statements from all parties; my intent is to provide commentary that may assist in the success of future endeavors.

I’ve heard it said that any news is good news, and in some cases, it may be true. I’m not sure in this case. I could be wrong, but it feels like the responses will only serve to create more member confusion in the market. Will rate markups be going away? Probably not. Do flat-rate dealer payments result in a lower interest rate for the member? I don’t know.

Do we fault Space Coast for their marketing campaign? I’m not. They presented an area where they believe to be superior to their competition. It was clever, and, given the response, spread as intended.

The part I wish to address is how to avoid such back-tracking in the future. At its core, why did the program need to be pulled? Its reception by their valued partners, dealerships, was not considered. I’m not here to market, of course, but our own company is working to develop a strategy on growing an indirect loan portfolio through strategic referrals. We understand that the dealers don’t want to feel slighted by their partners, and do deserve their fair share for the work they do. It’s a very challenging balance. Everyone needs each other to succeed…by keeping all parties in the loop, there may be ways to deepen relationships, grow portfolios, and sell more cars, while creating happy members!

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