By Rick Hackett, former CFPB Assistant Director and F&I Sentinel Advisory Board Member
The Consumer Financial Protection Bureau (CFPB) recently released a special edition of its Supervisory Highlights, focusing a substantial portion of the auto finance industry-specific report on a longstanding issue: the servicing of auto loans with ancillary or F&I products. The bureau couldn’t have sent a clearer message: “We’re serious; lenders need to get this right, or else.” Lenders must ensure that add-on products are handled correctly, particularly regarding the refund of unearned premiums when contracts end early.
F&I products such as GAP (guaranteed asset protection) coverage and vehicle service contracts (VSC) include provisions for refunds when loans are terminated. In the former, refunds are due whenever the financing contract ends ahead of schedule. In the latter, a refund is warranted when the consumer no longer owns the vehicle, whether due to repossession or total loss. The CFPB’s stance is that lenders bear the responsibility in all cases and all states to ensure consumers receive the full benefit of refund rights “either by ensuring that dealers or [product] administrators provide refunds or by providing the refunds themselves.” As a former assistant director of the CFPB and a former attorney advising clients on regulatory matters, I can see the regulator’s perspective and the operational difficulties created by it for lenders.
From a legal perspective, the bureau’s directive may seem like a reach, particularly for VSCs, which are technically separate from the lender’s contract with the consumer. Many lenders do not even keep track of VSCs and other add-on contracts they finance. However, in the case of GAP coverage, which is far and away the most common F&I product that lenders finance, the GAP contract amends the finance contract itself. This places a clear obligation on lenders to accurately manage and service the refunds outlined in these contracts. The CFPB further underscores that consumers should not be required to initiate refund requests, “because servicers retain substantial control over the refund process” . . . . “and consumers may not understand . . . . that they are eligible for a refund.” With this, the Bureau has effectively excused consumers from taking affirmative action for refunds.
The bureau’s requirements go beyond simply ensuring that refunds are made. In section 2.4.7 of the report, the CFPB specifically called out lenders that “rely upon calculations performed by third parties that were not consistent with the terms of the add-on product contract.” In effect, lenders are expected to apply the same rigor to the ancillary product contract as any other element of their contractual agreement with the consumer.
This sounds straightforward, but the operational reality is more complex. Today, most lenders capture partial information on add-on contracts during the loan origination process, and that data often doesn’t transfer into the servicing system. This creates a “gap” for GAP — a provision of the loan contract that isn’t fully represented – or in some cases not represented at all – in servicing systems, making it difficult to ensure timely and accurate refunds.
It comes as no surprise that many lenders are asking product administrators for refund quotes through electronic means or by outsourcing the inquiry process to external parties. However, relying on product administrators for refunds is a risky approach. The administrator may lack the full context needed to deliver accurate refunds, potentially undermining CFPB’s standards for timeliness and precision. The CFPB has cited cases where refunds took an average of 84 days following contract termination — a delay that fails consumers. In its highlights, the CFPB demanded “timely and accurate refunds,” leaving little room for delays or inaccuracies.
The surest way to get this right is for lenders to treat provisions of the GAP waiver as part of the loan contract in the servicing system or have a database of previously approved GAP waiver forms and other F&I product forms, with all the data necessary to calculate accurate refunds. Both approaches come with similar drawbacks: It would take time, scarce technology resources and not insubstantial financial investment.
In the high wire act of balancing compliance investments with financial and reputational costs, there is a third way. This third way is made possible when lenders commit data accuracy and transparency. When evaluating the path to add-on product compliance, lender ought to consider only funding pre-vetted add-on products that meet state and federal requirements and storing these in a centralized database for easy retrieval when calculating refunds. Members among the country’s list of top 25 auto lenders have already adopted this approach, some have even gone one step further by leveraging technology to be able to calculate refunds by the method stipulated in each product form.
In sum, while turning to product administrators for refunds may be tempting, lenders that choose this path must still verify refund calculations against the original GAP contract. The CFPB’s message is clear: lenders must take accountability for ensuring accurate, timely refunds. The tools to bridge the gap between origination and servicing systems already exist, and it’s up to lenders to use them effectively. Failure to act risks regulatory consequences and, more importantly, fails to serve consumers who are counting on fair treatment in the auto loan process.
About F&I Sentinel
F&I Sentinel is the industry’s trusted provider of managed compliance solutions – from funding to servicing to refunds. With a repository of more than 120,000 F&I product forms, our tech-enabled Concierge Compliance Team helps auto lenders navigate the regulatory landscape surrounding the financing and resolution of voluntary protection products. Schedule a no-obligation meeting with a member of Concierge Compliance team today.
The information provided in this post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials referenced are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter.
