The CFPB is strongly scrutinizing how ancillary product refunds are processed. The scrutiny is being followed up with penalties in the tens of millions of dollars for violations to creditors with $10B or more in assets. It’s not just Federal regulations either: the number of state laws specifically addressing GAP refunds also increasing.
Mind the GAP
As a voluntary non-insurance product, GAP is attractive to many borrowers because it waives borrower’s deficiency balance in the event of a total loss. However, there are a number of circumstances in which a GAP waiver may be terminated, without continuing benefit to the borrower. The termination of an underlying vehicle finance agreement triggers a responsibility upon the creditor to ensure the borrower receives a prorated refund of the amount paid for the waiver.
These circumstances, called “triggering events” may include:
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- Early loan payoff
- Repossession and sale of collateral
- Total loss of collateral
When a triggering event occurs, and the obligation of the creditor to issue the refund commences, time is of the essence to contact the appropriate parties, request a refund, and issue those funds to the borrower or apply them to the deficiency balance (if any). A refund may be due to the borrower(s), which can typically travel one of two paths:
- After a triggering event, and if allowed by state law, the refund may first be applied to any deficiency balance, with the remainder allocated to the borrower.
- Where no deficiency balance exists, or where prohibited by law, the full refund should be dispersed directly to the borrowers.
Handling GAP Refunds: A Tale of Two States
As dealers and creditors increase their focus on revenue streams from ancillary product sales, regulators and legislators turn their attention to these products. GAP (Guaranteed Asset Protection) waivers are receiving the brunt of the regulatory focus and penalties. Two states are taking the lead on legislating the liability of GAP refunds: California and Colorado.
The states have taken different approaches, however.
California recently passed two pieces of legislation (Assembly Bill 2311 and Senate Bill 1311) which not only restrict the sale of ancillary products to military members in certain situations, but explicitly place liability for GAP refunds on creditors who receive GAP waivers sold by dealers in conjunction with the assignment of retail installment sales contracts from dealers to the financial institution.
In Colorado, the regulatory attention has been reactive and comes in the form of penalties and fines with lack of formal state legislation.
These two states tell a cautionary tale to financial institutions of all asset sizes: Financial institutions are being and will continue to be scrutinized by regulators to ensure they maintain a compliant and borrower friendly process to issue timely, accurate refunds to consumers.
Ensuring a Compliant Refund Process
Whether your institution is above or below $10B asset size, all auto lenders should implement a uniform and consistent process for calculating and issuing refunds, ensuring efficiency and transparency throughout the borrower experience.
Now is the time to ensure that your institution has a compliant solution for refunding borrowers.