One of the themes from the recent P&A Leadership Summit was the industry challenge of F&I product cancelations related to operating processes and compliance issues for both F&I providers and lenders. I had the opportunity to moderate a cross-functional panel of representatives from some of the leading F&I providers in the industry to discuss these provider and lender challenges.
The panel included Rob Berger of Wise F&I, John Davenport of Safe-Guard Products, Jim Portell of Auto Trac System and Al Sacko from AmTrust Financial. The focus of the panel was to identify current challenges in the F&I product cancelation processes between F&I providers and lenders as well as to discuss workable solutions.
Here’s Your Problem
Recently, there have been numerous articles in major newspapers and trade magazines about lenders being out of compliance relative to GAP cancelation refunds at the time of payoff. This has resulted in lenders revisiting their compliance programs relating to product cancelations — not only on GAP payoffs but on repossessions as well. Many lenders are following Ally’s example by announcing wholesale process changes, including processes to cancel GAP contracts on all payoffs in all 50 states.
Challenges for lenders today related to F&I product cancelations include:
- Numerous states require lenders to ensure that consumers get a refund of unearned GAP premium within 60 days of payoff.
- Several law firms are recommending that lenders refund unearned GAP premiums on payoffs in all states from a UDAP perspective.
- Some lenders have relied on estimated cancelation refunds on repossessions versus actual refund amounts, which can result in reporting the wrong loan deficiency balance to credit bureaus.
- The CFPB is now reviewing how lenders process product cancelations on repossessions and how long it takes the lender.
- At various lender conferences, representatives of the FTC, DOJ and CFPB have all made vague statements about the role of the lender in ensuring that consumers are not taken advantage of.
Challenges for F&I providers today related to F&I product cancelations include:
- The operational aspects of providing lenders quotes for refunds
- The operational aspects of providing phone call updates to lenders on the status of cancelations
- F&I providers processing a greater number of cancelations
- Dealing with increased frequency and severity of claims while seeing increased cancelation rates and the overall impact to the profitability of the product
All F&I providers on the panel indicated that they are seeing an increase in cancelations from lenders over the past 90 days. This is the result of lenders adhering to the state laws requiring them to ensure the consumer gets their GAP refund within 60 days of payoff.
Texas enacted new legislation effective Sept. 1 that requires GAP to be canceled as well. They all indicated that more of the cancelations that they are receiving are “lender-initiated cancelations” versus the dealer initiated cancelations that they have historically seen. More of the F&I providers are evolving their internal processes to better accommodate lender-initiated cancelations.
Frequency and Severity
The F&I providers clearly understand the compliance and regulatory requirements lenders are facing. The increase in cancelations that they process plus providing the lender other related information has impacted provider staffing. The frequency and severity of the GAP contract cancelations are putting pressure on pricing. Providers are reporting one or more pricing increases this year with more to come. As the GAP premiums increase, it can hit against whatever maximum advance the lenders allow.
Dealerships also play a role in the equation. In a later session at PALS, a group of F&I directors, who very much supported the timely processing of cancelations, discussed a likely occurrence that is happening at some dealerships: After receiving a cancelation letter from a lender, it ends up in the trashcan or held in a “special file” for 90 to 120 days.
There are two things that F&I mangers don’t like: paperwork and chargebacks. The result of receiving product cancelations is both. This is one reason why lenders are moving to sending cancelations directly to the F&I providers to work around the processing delays that may occur at the dealerships.
The panel discussed the confusion that takes place based on different type of cancelations and different lender processes. One of the challenges discussed was a customer-initiated cancelation that is processed by the provider. The provider can process and send their portion to the dealer, but the dealer has no idea if the loan is active or paid off. There are no controls in place with most providers and dealers to ensure that, if a loan is still active, the refund check is sent to the lender rather than the customer.
There were various recommendations that came from the panel on how lenders and F&I providers can work better together:
- Form an industry task force that is multidimensional and for which the providers and lenders would work together to develop best practices for the industry.
- Automate the process between providers and lenders that would result in complete transparency between the lender, providers and dealers.
- Ensure that the consumers have confidence that if they deserve a refund, they get it.
- Offer no chargeback programs to dealers where reserves are set up for chargebacks similar to losses.
- Feel and express empathy for each other.
The end conclusion of the panel was that the best way for the industry to solve the problem of the processing of product cancelation process and related compliance challenges was for the F&I providers and lenders to engage with each other.
From an industry standpoint, lenders need to better understand the challenges of F&I providers and F&I providers need to understand the challenges of lenders better. If you are an executive in the P&A segment, and you are interested in joining a task force as described above, please reach out to me right away.