Another regulatory/legal issue to worry about? Sorry! We’re here to help you prepare.
In truth, the emerging risk shouldn’t surprise the banking industry. You’re already used to addressing NSF and OD fee class-action suits, ADA legal action, and, oh yeah, the effects of COVID-19. What’s one more thing?
It could be a lot. From a legal and compliance standpoint, this latest challenge could have severe implications for credit unions. Especially large institutions which embrace indirect in their auto loan portfolios.
Let’s get right to it.
Class Action: Breach of Contract
On July 1st, 2020, a class action lawsuit was filed in Denver, CO. The suit, on behalf of the plaintiff, is against 10 financial institutions, 7 of which are credit unions. Attorneys stated the defendant list may expand to 40, involving, “hundreds, if not thousands, of members.”
What’s at issue?
The allegation includes: “All persons who: (1) entered into finance agreements with GAP Waivers in Colorado that were assigned to (named institutions) (2) who paid off their finance agreements before the end of the original maturity date, and (3) who did not receive a refund of the unearned GAP fees.”
Sidenote: In the state of Colorado, regulations require all GAP waivers sold must be refundable.
Based upon previous and current CFPB opinions, agency actions, and overriding state laws, it appears the legal onus for timely and proper refunds on protection products may fall directly to the lender.
Attorneys for the plaintiff are seeking records going back 6 years. Are you prepared or equipped to pay out that many years of potentially missed refunds?
Which is why we are all here right now. Because that question is about to be tested.
Going Beyond GAP?
This class-action suit is focused on GAP. There are currently just a few states that require lenders to offer GAP as a refundable product and these rules are specific to state-chartered credit unions. However, as the list of defendants grow, so too might the list of products.
Like VSC, which is generally refundable in all states…so you may not be out of the woods.
Which Protection Products?
You offer auto loans. You and your dealers also offer ancillary products which can receive pro-rata refunds. The liability exists. Which protection products apply to possible litigation? As of publication, the following are worth your attention (keep in mind, others may also apply):
- Credit Disability Insurance
- Credit Life Insurance
- Limited Auto Coverage (Tire & Wheel, Dent & Ding)
- Vehicle Service Contract
Direct or Indirect Loans?
That’s the million-dollar question. Literally. Are the risks higher for one category? Should credit unions consider changing their lending policies? Let’s take a peek under the hood.
Direct lending puts you in control, with lines of communication to the borrower and product administrator. When cancellations arise, that administrator knows the regulations for each of your servicing states, so the process occurs smoothly.
Once notified of an early cancellation by the borrower or financial institution, your administrator processes the refund and forwards it to the lienholder. It is then checked for accuracy, and applied to your borrower’s outstanding balance or as a direct refund.
That’s it. Uncomplicated. No lawyers necessary.
Indirect lending is…different. Combine the many dealers in your network with their own providers, which can vary with each protection product. You could end up with hundreds of variables and permutations. In other words, a lot to manage.
After that complexity, what information does your institution get? A buyer’s order. On which you learn the name of the product and the price they charged your borrower.
You’re in the dark and at the same time, potentially exposed to liability. Imagine how that problem can compound with 100, 500, or 1,000 indirect loans each month.
And that’s where a growing list of institutions now find themselves.
As a great author once said, Don’t Panic. Let’s talk about what you can do now.
Take Steps to Protect Your Institution Now
The importance and impact of prior CFPB actions, alongside the ongoing class-action cannot be over-emphasized. Auto loan protection products play an essential role in reducing risk for borrowers and lenders. Now, they can also become an unexpected cost to your institution.
All lenders need to take a close look at the CFPB actions as well as emerging class action suits. If you’re involved in indirect lending, attention today is even more crucial.
Begin researching the systems and process needed to address this new challenge. Spell out dealer responsibilities in your agreements. Then create a path for your financial institution to become (and remain) compliant, while ensuring fairness to borrowers.