GAP waiver refund litigation and legislation are bubbling up and making waves in the regulatory waters. Specifically, FIs are grappling with the growing responsibility around premature vehicle service contract (VSC) cancellations tied to early loan payoffs and subsequent GAP waiver refunds.
Key Takeaways
- 38% of loans are being paid off early and have one or more ancillary VSCs attached to the loan.
- A tough regulatory environment is punctuating the refund landscape with questions. There is varying guidance between regulatory bodies and state-level requirements, with some states restricting the sale of GAP waivers and establishing refund protocols and other states passively deferring to contractual agreement between borrower and creditor.
- There are several blind spots of refund compliance and lenders need a proactive approach to identify and remove these blind spots.
It’s important to note that GAP waivers aren’t the only product facing this refund pressure - they are simply the most common.
Loan Terms are Affecting GAP Waivers
Loan terms are trending longer with the average sitting at 68 months (there is marginal difference between new and used financing.)1 With loan terms trending longer, it is not uncommon for vehicles to be bought out or turned in early. Approximately 75% of auto vehicle loans are being paid off early, and more than half of these loans have an ancillary product, like GAP, attached.2 With the anticipated loan growth of 2025 and beyond, the volume of GAP waivers could increase proportionally, or could decline with the restricted availability of the sale of the waiver across different states. Only time will tell.
Dual Regulatory Pressure
Regulatory bodies have not backed down from targeting ancillary product refunds. Plus, more states are following the pattern of class action lawsuits as case studies for future bills regulating GAP waivers. Multiple states have settled litigation and paid out millions of dollars in refunds to borrowers who had unused portions of GAP waivers.
It’s important to note that these are not small dollar amount refunds. According to our automated refund system, the average GAP waiver refund is $380.3
How the refunds are calculated adds another layer of complexity to the refund process. Each state has different requirements for refunding the member and there is confusion on the measures for calculating the final refund amount.
Dual regulatory scrutiny is holding lenders liable to ensure that borrowers are receiving refunds and is causing several blind spots for refunding GAP waivers in the event of early loan payoff.
Compliance Blind Spots for Refunding GAP Waivers
Blind Spot #1: Product refunds apply to indirect loans too. Many FIs fall under the assumption that if they did not sell the GAP product that they are not responsible for processing a refund. However, as litigation continues to unfold, this is proving untrue. Refunding GAP waivers is falling to the lending institution, not the dealer that sold the product.
Blind Spot #2: Dealers are not responsible for determining the refund amount. In most cases, the borrower purchases GAP through the dealer. When the product is canceled due to early loan payoff, the dealer is often unaware and may not prioritize refunding your borrower. This puts your institution at risk of your borrower not receiving their refund within the timeline that your state requires - or even at all. Historically, it was acceptable to rely on dealers to initiate the process, determine the refund amount, and deliver the refund to the member, but this is becoming both risky and time-consuming, and quite frankly, not in compliance with state and Federal guidance.
Blind Spot #3: Lenders must manage the entire GAP refund process. FIs can no longer manage a quarter, half or even 75% of the refund process. Unless a lender manages 100% of the process, start to finish, there is potential for inefficiencies and error leading to litigation and breach of compliance. To remain compliant and proactive, lenders need a holistic, cradle-to-grave approach to see the refund through from cancellation to calculation to delivery of refund payment to the borrower.
Removing Compliance Blind Spots
GAP waivers are a smart way to protect the borrower’s financial interest and build non-interest income. The latter is crucial in the face of rate stagnation and a semi-frozen lending landscape. Knowing the blind spots for refunding GAP waivers will help creditors maintain compliance and proactively execute oversight processes while confidently growing non-interest income with GAP.
Stay ahead of the litigation and maintain a proactive stance around processing GAP waiver refunds. Steer clear of UDAAP (unfair, deceptive, or abusive acts and practices) violations by using an automation that supports the sale of the GAP product, like Refund Plus from Allied Solutions, to accurately calculate straightforward and complex refunds.
Now is the time to probe your risk management blueprint and gain a clear line of sight from the GAP claim to the final refund.
1According to Allied Solutions data. 2024
2www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/2024/experian-safm-q3-2024.pdf
3According to Allied Solutions Refund Plus. 2024