Change Gears for Smoother Product Refunds
Broad – and often ambiguous – regulations around vehicle protection product refunds (think: GAP waivers, extended warranties, tire and wheel protection, etc.) are creating elevated risk for credit unions. Refunds are in the regulatory hot seat and bring major operational challenges for lenders. Done right, refunds protect consumers and reduce compliance risk. Done poorly, they can lead to penalties, lawsuits, and reputation damage.
Emerging Trends:
- States vary on pro-rata vs. Rule of 78s refund calculations, with most moving away from the Rule of 78s.
- Product refund volumes are climbing alongside delinquency rates.
- It’s not the CFPB alone watching refunds – state AGs are scrutinizing both the timing and calculation methods.
- Non-automated refund processes can become sloppy at best and fail audit scrutiny at worst.
The Refund Ripple Effect
Lenders face mounting risk as rising delinquencies, defaults, and repossessions signal increasing borrower distress, particularly in the subprime segment. With record-high monthly payments, widespread negative equity, and more households on the brink of default, portfolios are more exposed to credit losses.
These risks are materializing on balance sheets – but it’s not just the bottom line that is taking a hit. Many borrowers could be one bad budget month from default.
After a triggering event – like repossession – some states allow the product refund dollars to be applied to a deficiency balance, with any remainder paid out to the borrower. If there is no deficiency balance or where prohibited by law, the full refund is owed to the borrowers.
Yet, 62% of borrowers are uncertain if they are owed a refund at the end of the loan.1
This lack of awareness, combined with rising charge offs is creating losses from multiple angles. In the face of direct capital losses, credit unions are reassessing recovery processes and product refunds are surfacing as a costly leak in recovery dollars.
FIs are walking a fine line between doing right by the borrower and reducing losses. Anything but a fully compliant product refund process puts them at increased reputational and financial risk.
Mind the GAP: A Tale of Regulation and Risk
The CFPB isn’t the only watchdog scrutinizing how ancillary product refunds are processed. A growing number of state laws specifically address GAP refunds, with California and Colorado leading the charge for GAP waiver regulation.
The passing of Assembly Bill 2311 and Senate Bill 1311 in California not only restrict the sale of ancillary products to military members in certain situations, but also bans GAP waivers in certain situations and explicitly places refund liability for GAP waiver refunds on the creditor – not the dealer.
In Colorado, House Bill 23-1181 caps GAP waiver fees and sets stricter parameters around refund timing and calculation methods.
It’s worth noting that these laws didn’t arise in a vacuum – they are direct responses to class action lawsuits targeting lenders. The cautionary tale? Even in the absence of explicit state legislation, regulators can still hold lenders accountable for issuing timely, accurate refunds to borrowers.
Is AI the Answer?
You might expect the answer to be a resounding “yes”. And while product refunds are an ideal use case for AI – reducing delays and easing the resource burden – the technology alone isn’t enough. Without compliance-based rules built in, AI can’t navigate the patchwork of state regulations that dictate how refunds are calculated.
Automation, however, can transform refund management. It performs the work of full-time staff while allowing financial institutions to maintain control over the process. By automating refund calculations, lenders not only lighten staff workloads but also reduce errors that could surface under audit.
Product refunds demand a deep mix of contractual and compliance expertise – knowledge that is difficult, if not impossible – to scale through manual training alone.
Automation that adapts alongside evolving regulations is key to driving efficiency, transparency, and compliance. Manual processes, by contrast, leave institutions exposed to errors and regulatory scrutiny.
A Blueprint For Product Refund Management
It is a common misconception that managing product refunds in-house reduces costs.
In reality, manual processes increase compliance risk and drain recovery dollars. Time is critical: auto lenders need automation to calculate refunds accurately, issue them within ~30 days, and provide borrowers with full transparency throughout the process.
With a fully automated product refund management platform, financial institutions can take control of the product refund process, avoiding delays, miscalculations, and audit red flags.
RefundPlus® has earned industry recognition for its first-to-market innovation and measurable impact.
RefundPlus® is complementary to Asset Recovery Management, helping lenders maximize recoveries without added compliance risk.
1https://www.onbe.com/infographics/switch-gears-to-digital-payouts-for-smoother-automotive-refunds