Product Refunds and Rate Caps – What You Need to Know



May 26, 2021 | Allied Solutions  

Loan growth, resource deficiencies, and increasing regulations are some of the pain points financial institutions are currently feeling. Additionally, state by state regulations on rate caps are causing lending confusion, subprime originations are down, and the CFPB is enhancing operating laws for lender accountability on ancillary products, repossessions, and collections. 

Some market conditions influencing these pain points include:
•  Increased unemployment leading to consumers struggling to make payments
•  New regulatory scrutiny stemming from a new presidential administration 
•  Lack of consumer education around payment deferment versus forgiveness  
•  An expected surge of repossessions as moratoriums end

These changes are a catalyst for lenders to look for additional protections, expand access to repossession and collection services, and increase understanding of state and federal guidelines.

Listen to our webinar for 5 practical tips to drive auto loan success in the midst of these challenges.


What to Know About Product Refunds and the All-In-Rate Cap 


As new regulations bubble to the surface, it is becoming critical that financial institutions understand the role product refunds and rate caps play in their risk management strategy. 

Specifically for product refunds, the CFPB, in alignment with UDAAP, is calling for more audit scrutiny towards processes surrounding how vehicle protection products are cancelled and refunded. As the liability shifts away from the dealer and/or product provider and towards the financial institution, lenders are starting to take responsibility for the process. For a successful product refund process, it is vital to have attention to detail, robust reporting, and a consumer-first mindset.

Regardless of financial institution type or size it is considered industry best practice to adhere to the CFPB and UDAAP guidance, even if it’s not yet being enforced. 

Download the white paper to learn more about product refund liability

In addition to product refunds, talk of an all-in APR measure attracts both lender attention and concern. For example: in April 2021, the state of Illinois enacted legislation that models the Military Lending Act capping interest rates at 36%. Unlike the finance charge excluded with the traditional APR, the all-in rate cap includes the cost of credit insurance and other ancillary products when calculating and charging the borrower. Although interest rates are a necessary part of credit lending, all-in rate caps would essentially penalize high risk borrowers, further reducing their options of accessible credit options.

Read the full update here


How to Respond

Regulations around product refunds are expanding and increasing, and rate cap discussions will continue to evolve. Further developing your risk management strategy can ensure that, despite these challenges, your portfolio is both protected and agile.  Here are 3 ways to prepare and respond to these market conditions: 

1. Optimize your risk management 

To optimize recovery while staying compliant, additional risk management protections are needed. 

Protections can include:
• Review collection best practices
• Evaluate risk profiles
• Examine contracts and negotiate rates
• Implement borrower self-service options to aid in delinquency management 
• Review vendor relationships and best practices 
• Aggregate with other financial institutions for the best rates and accessibility 
• Review past transactions to remedy issues

Neglecting these protections can lead to inefficiencies, or in some cases, penalties. These could be financial penalties or damaged brand reputation. The right protections can allow your institution to buy deeper, reach more consumers, remain compliant, and protect your portfolio.

2. Secure recovery resources 

According to TransUnion, agencies that support collections, repossessions, and remarketing have consolidated at an alarming rate. This consolidation is so significant it has created a resource deficiency. 

With an expected surge of repossessions, securing reliable resources ahead of time will help to optimize recovery and allow your internal staff to focus on other lending and member service areas. 

3. Stay educated on regulations 

State regulations are fluctuating, especially when it comes to ancillary product refunds. To stay abreast of class action lawsuit news, ongoing cases, and upcoming legislation, reach out to your legal department and other industry resources.

The current economic environment has thrown new risk management hurdles at lenders. As you learn to color outside the lines of normal, an experienced vendor partner with ready-made solutions can provide additional protections and guidance for navigating the murky risk management waters.


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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 over 4,000 banks and credit unions, along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions maintains over 10 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.

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