Refunds and sales tactics: Navigating vague aftermarket oversight

It’s not easy these days for lenders to navigate increased regulatory oversight on aftermarket product sales. [caption id="attachment_58337837" align="aligncenter" width="1600"] (Photo/Canva) [/caption] The Consumer Financial Protection Bureau and the Federal Trade Commission are looking closely at lenders, according to Anthony Capizzano , senior vice president and head of consumer lending at San Diego-based Axos Bank . The regulators, he said, are homing in on: How lenders handle the addition of ancillary products within retail installment contracts, and How lenders issue refunds when an add-on product is canceled. Refunds a re a problem for lenders because regulations and guidelines vary by state on how quickly refunds must be issued and how they are distributed to consumers. As regulation increases, the sale of F&I products is also on the rise. A ccording to survey data F&I provider Protective Asset Protection gathered in 2023 from 350 dealership executives, 41.6% of participating dealers indicated F&I product sales rose between 5% and 10% Calculating refunds is difficult for lenders since seve ral factors determine the price of an aftermarket product and, thus, the refund amount, Tyler Gray , director of sales at Lender Compliance Technologies (LCT) , told AFN . LCT provides automated compliance solutions for lenders, including tools to calculate ancillary product refunds. “There's going to be more regulatory expectations that lenders pursue the refund on behalf of the borrower, regardless of if the state requires it or not, and then issuing those refunds back to the borrower,” Gray said. “That is the big expectation we're seeing framed by the CFPB, but then you have a lot of states as well setting up [similar legislation].” CARS Rule adds scrutiny On top of state requirements, the FTC is working on a rule that will limit aftermarket sales practices that the commission deems deceptive to consumers. The Combating Auto Retail Scams (CARS) Rule was to take effect July 30 this year, but the National Automobile Dealers Association (NADA) and the Texas Automobile Dealers Association on Jan. 4 filed a petition against the rule. NADA argued that the rule will add time, complexity, paperwork and costs to the car buying process, and “it must follow basic regulatory safeguards to avoid negatively impacting consumers and small businesses,” according to a letter the association published Feb. 6. The rule will not go into effect until the case is heard by the 5th U.S. Circuit Court of Appeals, with petitioners requesting a ruling by March 31, according to law firm Ballard Spahr . The CARS Rule’s main requirements, according to the FTC, are that dealers: Provide the full purchase price to consumers with add-on products included; Make it clear that ancillary products are optional; Get express consent from the consumer; and Refrain from adding products that don’t provide a benefit to the consumer, such as warranty programs that duplicate a manufacturer warranty. Regulators are targeting several issues regarding add-on products, Axos’ Capizzano said. Regulators are asking: Is the product unfair for the consumer? Does the lender think it's unfair, and what is being done about that? How are lenders coaching the dealership? Are lenders discussing fair lending with the dealership? The FTC is aiming for more transparency from dealerships and assurance that consumers are giving proper consent for dealers to add ancillary products to their retail installment contracts, John Redding , partner at Alston & Bird , told AFN . “There's more focus on taking steps to confirm that the consumer has given informed consent for the purchase, so they know what they're getting and understand that [the products] are optional,” he said. Transparency and accountability are the themes of the CARS Rule, Bob Lanham , senior vice president of retail development at digital retailing platform CarNow , told AFN earlier this month at NADA Show 2024 in Las Vegas. The rule should not have a significant impact on dealers since most should already be following the practices outlined, Lanham surmised. “If anything, maybe they'll take those minority of dealers that aren't following the process well and force them to follow the process,” he said. The FTC also wants to make sure consumers can see the difference in the monthly payment when products are added to the principal loan amount, so the consumer can decide whether it is worth paying more for a product, Redding said. Dealers should also be able to define each product and explain the value it offers, Rachael Benson , co-founder and managing partner of aftermarket refund advisory company Blue Elk Advisors , told AFN . How the FTC will evaluate the value of the product is still unclear, she said. Increasing transparency is good, but the question is how dealers can increase clarity for consumers, Rick Kurtz , senior vice president and chief distribution officer at finance and insurance solutions provider Protective Asset Protection , told AFN at the NADA show. Hopefully, we can find a way to put these protections in place while creating a better buying experience for the consumer, and one that's easier to manage for the dealerships. — Rick Kurtz, SVP and Chief Distribution Officer, Protective Asset Protection “What's been proposed right now ... becomes more onerous for the dealers, and less enjoyable for the consumer. I don't think that's the desired outcome, Kurtz said. [caption id="attachment_58337467" align="alignnone" width="1024"] (Photo/Canva) [/caption] Defining beneficial products The main question associated with the CARS Rule is how the FTC will decide whether a product is beneficial to the consumer to determine if the dealership is in compliance, Blue Elk’s Benson said. If the FTC looks at a deal jacket that includes “10 products that are sold to someone, how do they decide whether or not the products all add value,” she said. “That's where it gets into a gray area.” There are some “cut-and-dry” situations, such as if a vehicle comes with a manufacturer warranty but the dealer sells the consumer a service contract in addition, Benson said. The amount a dealership charges for certain products may also come under scrutiny, Mike Chalmers , co-founder and managing partner at Blue Elk, told AFN . However, determining whether a dealer is charging a fair price for an aftermarket product may be difficult for regulators since the cost varies depending on the make, model, brand and type of vehicle , Axos’ Capizzano said. “When you look at vehicle service contracts (VSC), there are different risk components that make some warranties more [expensive] than others,” he said. “All-wheel drive is going to be more expensive than a two-wheel drive. If the vehicle breaks down, it's more expensive to fix a Mercedes than it is to fix a Ford .” “There's also a frequency of failure on parts, so all that goes into determining the cost of products,” Capizzano said. “Those costs are also a cost to the dealership, but they're not shared with anyone else, so determining what is a fair go-to-market price for the consumer can be difficult [for lenders].” Variation in lenders’ back-end allowances for add-on products along with differing state caps and sales requirements affect what a consumer is charged for a product in any given deal, LCT’s Gray said. Determining whether aftermarket product sales are compliant isn’t just the dealers’ responsibility; lenders must also ensure that deals are completed in line with state and federal regulations, Blue Elk’s Chalmers said. Lender considerations under CARS Rule Although the CARS Rule puts the focus on dealers, lenders also are potentially subject to oversight as they must make sure dealer partners are following FTC guidelines, Chalmers said. “The regulators have been putting the onus on the lenders because they have a more difficult time getting to the dealer,” he said. “The FTC CARS Rule is directed at the dealers, so it’s a good step relative to making sure that people are doing business transparently, but in the event where regulators can't do that, the regulators are going to go to the lender, and ask the lenders to [oversee] the dealer." One strategy for lenders to ensure FTC compliance related to ancillary products is to closely check each product added to the consumer’s contract, Alston & Bird’s Redding said. If a product raises a flag, “don't fund [the deal], or go back to the dealer and require that particular product be removed from the deal before you purchase it,” Redding said. There have been rare cases where the [value] is within our limits, but I say, ‘No, we're not funding that loan. — Anthony Capizzano, SVP, Head of Consumer Lending, Axos Bank Axos Bank has sent deal jackets back to the dealership if it appears that an ancillary product is taking advantage of the consumer, Capizzano said. The bank also sends back a deal if the values of products attached to a contract come in above the lender’s cap, he said. “There have been rare cases where the [value] is within our limits, but I say, ‘No, we're not funding that loan. You're digging that customer. That is way too much profit. I'm not going to let you sell a $3,000 warranty on a 12-month [loan],’” he said. Axos will tell the dealer they can only add certain products on loans with short terms, Capizzano said. And one product Axos won’t finance is a vehicle protection program, because the lender deems it as not advantageous enough for the consumer, he said. A vehicle protection program covers a consumer's payment for a set number of months if the customer loses their job. Refund oversight Alongside regulators’ increased focus on aftermarket products is continued oversight of lenders’ processes in calculating and issuing refunds for those add-on products, Capizzano said. The CFPB and state regulators have made concerted efforts to ensure that consumers receive timely, accurate refunds for canceled products. In one example, the CFPB in November 2023 ordered Toyota Motor Credit Corp. to pay $60 million for infractions related to ancillary products and inaccurate data reporting to consumer credit reporting agencies, according to a release from CFPB. I don't think there's any question we are going to continue seeing an increased focus on ancillary products. — John Redding, Partner, Alston & Bird Bureau infractions alleged that TMCC had harmed consumers by preventing them from canceling “product bundles” — including Guaranteed Asset Protection (GAP) products and credit life and accidental health coverage — by making the cancellation process “unreasonably difficult,” according to the CFPB. The bureau stated that TMCC also delayed bundled product refunds by applying them to principal payments, withheld refunds and distributed incorrect refund amounts. Many states hold lenders accountable if consumers don’t receive correct refunds on GAP insurance, and more states are adding similar legislation. Since 2019, Colorado Attorney General Phil Weiser has reached settlements with 10 lenders over GAP refunds, amounting to $23.5 million in refunds issued to Colorado citizens, according to the AG’s website. Outsourcing refunds As state regulation evolves and states add legislation related to ancillary product refunds, many lenders are outsourcing the refund process because it is difficult to track each state’s requirements, Capizzano said. “Internally, you have to have your eye on the ball of which states approve new legislation as it pertains to a product and that you're refunding it correctly,” he said. “More [lenders] are outsourcing it in droves because it is so complex, and it moves so quickly. Different states are coming in, whether for GAP or VSC refunds, where the state says the lender must refund the customer directly versus just filing the refund and making sure that it's filed correctly. There's a lot of onus on the lender now, and it's gaining speed.” Calculating the refund accurately is not easy, LCT’s Gray said. “The problem that exists with [calculating refunds] is [the lender] has to have every version of the contract that exists out there [from] every single provider and every single vendor,” he said. “You also must have every single version of that contract vertically through time.” Contracts can change every quarter, so the values are difficult for lenders to track, Gray said. When outsourcing, lenders still must hold the third-party company responsible by running tests with the company regularly to ensure compliance, Capizzano said, noting that common CFPB questions to lenders include: How do you know the refund is right? How are you reconciling the refund? What's your management control? How are you validating the third-party company's process? Axos tests its refund compliance any time there is a regulatory change and at least once per quarter, Capizzano said. “Even though you're not doing the work and someone else is doing that work, you're depending on the compliance, so you still need to hold them compliant,” he said. “You still have to know regulations by state level, and you still have to test it on a regular basis.” A costly endeavor Managing ancillary product refund compliance across all 50 states has become costly for lenders, Blue Elk’s Chalmers said. In fact, Axos Bank has seen a 19% increase in the amount the financial institution has spent on ancillary product compliance from 2021 to 2023, Capizzano said. Lenders must continue keeping a close eye on regulatory guidance and legislation changes as scrutiny over ancillary products continues to ramp up, Alston & Bird’s Redding said. “I don't think there's any question we are going to continue seeing an increased focus on ancillary products,” Redding said. “In particular, on the refund process of who's responsible for it or who's expected to do it, even if not necessarily responsible under applicable state law.” Early-bird registration is now available for the second annual Auto Finance Summit East 2024 , May 1-3 in Nashville, Tenn., which gathers lenders, dealers and fintech innovators in an event designed to bring the power of technology to a cross section of industry players. Early-bird pricing ends March 15. Visit AutoFinance.Live to learn more.

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