4 Reasons A Standardized Cancellation and Refund Process is Necessary
August 19, 2020 | Produced by Anne Holtzman, Senior Vice President of Claims & Recovery
When purchasing a vehicle, consumers typically have the opportunity to add on additional products to their loan contract. These products are designed to help provide additional protections for the vehicle, particularly due to an unexpected event. Examples of these ancillary products can include:
- Guaranteed Auto Protection (GAP)
- Credit Life/Disability
- Vehicle Service Contracts
- Tire & Wheel Protection
- Maintenance Plans
- Weather Protections
- Theft and Vandalism Protection
Many lenders are re-examining their ancillary product cancellation and refund strategies due to continued regulatory pressure, including a recent lawsuit filed in Colorado citing unfair refunds of unearned GAP fees by several lenders.
What triggers a product refund?
Ancillary product cancellation refunds typically result due to a ‘triggering’ event. These can include:
- Early loan payoff
- Total loss
- Customer request
Historically, lenders have relied upon dealerships to issue cancellation refunds to consumers. However, recent regulatory scrutiny and changing state laws are demanding lender diligence on compliant refund processes and confirmed accuracy of refund amounts to the consumer.
4 Reasons A Standardized Refund and Cancellation Process is Necessary
Reason #1: Legal implications for financial institutions
At both the Federal and state level regulatory scrutiny on lenders regarding ancillary products has intensified. Regulators are holding lenders accountable to ensure consumers receive appropriate product refunds in a timely and accurate manner. In 2019, the CFPB Supervisory Highlights listed “unfair and deceptive practices regarding rebates for certain ancillary products” as a matter of concern and continued examination, particularly to avoid excessive deficiency balances to the consumer upon collection. This has resulted in state regulations changing to specifically speak to institutions on their duties as a loan creditor regarding total loss, repossession, and early loan pay-off.
These legal impacts pertaining to lenders’ product refund liability are already being felt with a class action lawsuit in Colorado announced in July for several lenders regarding unearned GAP fees originated and sold by dealers and serviced by credit unions. Further investigation of unfair, deceptive, or abusive acts or practices (UDAAPs) seem likely to continue and financial institutions need to be prepared for the legal implications and financial liability.
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Reason #2: Consistent consumer experience
Reports from the CFPB and FTC both highlight consumer confusion related to the type and amount of ancillary products added to their loan contract, including:
- Limited or lack of discussion around products
- Lack of understanding on product limitations or coverage
- Introducing products late in the buying process with limited time for consideration
- Actual cost of auxiliary products or assuming products are free
- Significantly different pricing for the same product
- Impression that products are mandatory additions to purchase the vehicle
Consumers face an inconsistent experience regarding costs, refunds, and product coverage which, in turn, can lead to difficult conversations as lenders deal with the confusion and inconsistent dealer experience at purchase. With a strategic, standardized process in place lenders can help serve consumers and provide a more standard experience that helps alleviate some of the confusion surrounding these products.
Reason #3: Accurate data management
Currently, the industry standard for cancellations and refunds has an unclear owner and many stakeholders. This means confusion can arise among the dealer, lender, product provider, and consumer regarding the correct refund amount and where the funds should be distributed. The process only becomes more complicated when considering the number and variety of ancillary products available from a diverse pool of providers. Additionally, a lack of standardized process makes it difficult to track fund distribution and stakeholder responsibilities.
By establishing a standardized process, lenders can more accurately manage funds and properly account for the cancellation being appropriately refunded. This can help consumers feel confident in their lender and trust the process, while lenders can accurately track cancellation data and work more efficiently with dealers and providers, as well as be prepared for regulatory audits.
Reason #4: Clear communication with all stakeholders
Multiple failure points exist where, ultimately, the refund is not issued. The complicated process also can have a long cycle time or confusion among lenders, dealers, and providers on where funds need to be directed and who holds certain responsibilities in processing the refund. It can also be difficult to definitively provide proof a refund was issued.
With a standardized process, lenders can help communicate clearly and efficiently with dealers and providers in order to fulfill the regulatory obligations on issuing consumer refunds. Clear process guidelines enable communication among stakeholders to be accurate and timely, which can help close previous process gaps and track refund progress.
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Stricter regulations surrounding the timing, accountability, and amount of product refunds has placed an increased burden on lenders. A compliant, standardized process needs to be in place to ensure refunds are issued in a timely and effective manner to consumers. Allied Solutions is keenly aware of the ongoing challenges facing our industry and have been proactive in monitoring product refund liability requirements so we can offer support to financial institutions operating through indirect lending channels.
About Allied Solutions
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 4,000 clients, along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions maintains over 16 regional offices and service centers around the country and is a subsidiary of Securian Financial Group, Inc.
Content in the blog posts are the opinion and views of the writer, and don't necessarily reflect the opinions or views of Allied Solutions.