This article was originally published on NAFCU
Guaranteed Asset Protection (GAP) is attractive to members as a vehicle protection product. But what happens after the product is sold? Credit unions are grappling with the growing legislation around the life cycle - particularly the cancellation - of this product.
GAP Waivers and Early Loan Payoffs
According to Experian, the 2022 average loan term is 69.48 months for new vehicles and 67.65 months for used vehicles. With loan terms trending longer, it is not uncommon for members to pay off loans early to save money on monthly expenses and interest payments, and to lower their debt-to-income ratio. In fact, 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. Ancillary products usually carry pro-rated provisions in the event of an early loan payoff. When a loan with a GAP waiver is paid off early, the member may be due a refund for the unused, or unearned, portion of the product.
Litigation is Bubbling Up
Increased litigation in many states, along with amplified attention from the CFPB, is holding credit unions liable to ensure that members are receiving these refunds on GAP waivers when a loan is paid off early. These are not small dollar amount refunds either. Three Colorado-based credit unions recently settled litigation and paid out more than $6 million in refunds to members who had canceled GAP waivers.
While credit unions are being required to accept this responsibility, what this looks like varies state-to-state. Each state has different requirements for refunding the member and there is confusion on the measures for calculating the refund amount, only adding to the complexity of this process. This causes several blind spots for refunding GAP waivers, so if your credit union feels underprepared for this process, you are not alone.
Common Compliance Blind Spots for Refunding GAP Waivers
Litigation and its repercussions are catching credit unions off guard. Knowing the blind spots for refunding GAP waivers will help credit unions maintain compliance and proactively execute oversight processes. Here are some common blind spots:
Blind Spot #1: Product refunds don’t apply to indirect loans.
Many credit unions fall under the assumption that if they did not sell the GAP product that they are not responsible for this process. However, as litigation continues to unfold, this is becoming untrue. Refunding GAP waivers is falling to the lending institution, not the institution that sold the product.
Blind Spot #2: Dealers will determine the refund amount.
In most cases, the member 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 member. This puts your credit union at risk for your member not receiving their refund within the timeline that your state requires. 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.
Blind Spot #3: Our credit union can manage just part of the GAP refund process.
An ideal first step for credit unions is to accept the responsibility for refunding canceled GAP waivers. It can’t stop here though. Credit unions can no longer manage 25%, 50%, or even 75% of the refund process. Unless a credit union manages 100% of the process, start to finish, there is potential for litigation and breach of compliance. To remain compliant and proactive, credit unions need a holistic, cradle-to-grave approach to see the refund through from cancellation to calculation to delivery to the member.
Allied Solutions is proud to be NAFCU’s Preferred Partners for Guaranteed Asset Protection (GAP) and Product Refund Liability (RefundPlus ®)