Auto Lender Insights: AFSA Extra Credit Podcast with F&I Sentinel on F&I Product Cancellations

Dan: Hi there, everybody. Thanks so much for joining us once again for the AFSA Extra Credit podcast. We are very lucky to have with us today Stephen McDaniel, the president and CEO of F&I Sentinel. Stephen, how are you?

Stephen McDaniel: Doing well, Dan. Doing well. Thanks for having us today.

Dan: Absolutely. Happy to have you. We are talking about some fun stuff today that is important for consumers, dealers, finance sources, and important for F&I Sentinel because that’s what they do. We’re talking about F&I product refunds and how it just seems like a quagmire. Hopefully, there are some good strategies and ways to make it better. We know that there are. So, Stephen, before we get too far into it, can I just get a little bit from you? Tell us a little bit about yourself, F&I Sentinel, and all that good stuff.

Stephen McDaniel: I am the CEO and one of the founders of F&I Sentinel. By trade, I lovingly refer to myself as a regulatory nerd. Started in regulatory compliance doing compliance for F&I products and finance companies probably 20+ years ago. Spent most of my career specifically focused on F&I products. Worked with AFSA over the years in a prior life helping to shape regulations and legislation across the country as it relates to F&I products and how they are regulated, with the goal of making them consistent from state to state. That is not always something we were successful in because state legislators have their own appetites. That led to founding F&I Sentinel in 2018 with the advent of the Bureau and other pressures on lenders to focus on F&I products. We created the company to help lenders with the full life cycle of F&I product compliance from the date it enters the lender’s portfolio to the date it goes to the grave via servicing or refunds, which is what we’re here to talk about today. We work with over 120 lenders now, including seven of the top 10, so a lot of volume pumps through our database and APIs. Really enjoy working with the folks and glad to be here.

Dan: Yeah, and we’re very happy for F&I Sentinel to join us. Very big supporter of AFSA as well. Stephen and the team are at all the meetings and calls and very active with AFSA. Thank you for that. So let’s dive in. Can you talk a little bit about the complexity of F&I products and the process of F&I product cancellations themselves?

Stephen McDaniel: Yeah, so it’s helpful to level set on what the issue is. When a loan pays off early, lenders are held responsible for facilitating cancellations and refunds, specifically of GAP waiver, which amends the finance agreement. Sadly, it becomes the lender’s product once the lender takes assignment of a loan from a dealership that sold GAP waiver on that loan. It’s not only GAP for repossessions and total loss, but also vehicle service contracts and prepaid maintenance that need to be canceled. This is necessary for the consumer and makes financial sense for the lender because the lender paid for the product on day one. When there’s a repo or total loss, recouping money on the refund is important to pay down outstanding balances before credit bureau reporting. There are intra-loan cancellations where consumers proactively cancel products without the lienholder receiving notice. Refund calculations vary by state law and product form, creating challenges. Lenders historically try to address the problem at the triggering event like early payoff or repo, but that creates inefficiencies and errors. Data issues are a big problem — for example, one product company had over 400 different administrator names entered in free-form fields by dealers, causing inconsistencies. Purchase prices and origination dates can differ between lender and product company data, complicating refund calculations. Traditional solutions pass data back and forth with no compliance overlay, which is risky because this issue is fraught with compliance, litigation, and reputational risk. It gets very complex from state to state and product to product.

Dan: Yeah, I am confused and lost just listening to that. We talked before about the Consumer Financial Protection Bureau and state changes. The more changes, the more complexity. Good that someone is looking out for folks. Let’s turn the other end of it. If there’s a triggering event and someone doesn’t have software or processes like F&I Sentinel offers, what are the consequences for a lender who can’t manage compliance and get on the right side of things?

Stephen McDaniel: The definition of insanity is doing the same thing over and over expecting different results. Historically, solutions focus on the triggering event, which is like putting a band-aid on a wound instead of healing it. A dynamic approach addressing the whole lifecycle helps. Knowing what you funded on day one is critical. Most lenders get just the first page of an F&I product form, but pages two through 12 have the details. We have over 200,000 product forms in a repository to standardize this information. Also, product companies’ risk tolerance and processes must align with lenders’. The lender feels the heat on this issue. Consequences include regulatory fines, litigation exposure (class actions), and financial losses from absorbing cancel fees due to lack of visibility. Intangibles include reputational risk and dealer friction if dealer reserves are debited incorrectly. So, having a dynamic, full lifecycle approach is essential.

Dan: Right. You touched on that. What are some common mistakes lenders and vendors make with F&I products and refunds?

Stephen McDaniel: The key mistake is waiting too late to solve the issue. Having visibility ahead of time avoids data integrity issues. We return correct administrator names via API at origination to standardize data. We verify and validate amounts and terms so finance agreements match product forms. Another mistake is lack of a compliance overlay. Many laws governing F&I products live in insurance codes, not finance codes, so lenders struggle to understand them. Implementing solutions without compliance guidance leads to errors. Lenders might get refund data from product companies with cancel fees that aren’t permissible in certain states. We help lenders understand if refunds are correct to avoid absorbing costs or dealer disputes.

Dan: Consumers like having F&I products. By relationship with their lender, it’s a better experience if refunds are correct. The last thing you want is to be on the phone sorting out money owed.

Stephen McDaniel: Exactly. Knowing refunds are correct and facilitating that for consumers is the ultimate goal. Making it easy for consumers, lenders, dealers, and product companies is key. We view the ecosystem as a stool with lender, dealer, and product company as legs, and the consumer as the seat. Connecting all three stakeholders efficiently supports the consumer.

Dan: What factors should lenders consider when evaluating solutions for managing this process? They want to make money, keep consumers happy, and not worry about this.

Stephen McDaniel: Connectivity with product companies is the first prerequisite. Every solution worth considering has that. We require every F&I product company in America to be a registered user of our platform to access funding at the front door. But connectivity alone isn’t enough. You need a compliance overlay to flag data or refund issues. Some lenders have compliance teams focused on F&I products and can build in-house solutions, but many can’t. So, compliance overlay is critical. Also, consider if the solution addresses the issue holistically or just at the servicing event. We want to drive behavior and responsiveness from product companies by guarding the front door at origination. If product companies can’t align with lender risk profiles, lenders may choose not to originate those products. The problem has been tackled incorrectly for 10+ years by focusing on servicing time only.

Dan: Makes sense. Looking to the future, other than holistic solutions, what do you see coming for product refunds? Any new tools, especially AI?

Stephen McDaniel: The future is connectivity on that stool. We’ve been hyper-focused on lenders but are now engaging dealers and product companies because they also face challenges. Dealers want to facilitate cancellations and refunds for consumers trading in cars. Product companies often don’t know who the lienholder is, and lenders don’t know the product company because the data is free-form entered by dealers. Solving data exchange among all three stakeholders is critical. Our existing lender solutions can help dealers and product companies, too. The goal is to facilitate the entire process end-to-end, including fund movement, so stakeholders can “set it and forget it.” Many lenders want to outsource the whole process to us and just get reporting back. That is where we’re heading.

Dan: Fantastic. Any final thoughts on refunds or the auto finance space?

Stephen McDaniel: We’ve hit the salient points on refunds. Everyone is focused on states right now; litigation may increase. Federal regulatory environment may change with elections. Also, new F&I products are being created rapidly, and lenders need to keep up. It’s critical to pay attention to AFSA’s ancillary product working group and state government affairs group for legislation tracking. Knowing what products exist and if you financed them is important.

Dan: Stephen McDaniel, thank you so much for joining us on the Extra Credit podcast.

Stephen McDaniel: Thanks for having me, Dan.

Dan: Thanks for listening to the AFSA Extra Credit podcast.