Lenders must apply F&I refunds after vehicles repossessed or totaled, N.Y. says

The New York State Department of Financial Services last month reminded lenders to give consumers refunds on their finance and insurance products if their vehicles are repossessed or deemed a total loss.

The agency said F&I products such as guaranteed asset protection and vehicle service contracts carry terms requiring a refund in those situations, though lenders may first apply the refund to the amount owed on the vehicle balance.

Department examinations of lenders and loan servicers have found some companies failed to apply refunds to the balance or give them to the consumer, Superintendent Adrienne Harris said.

"In some cases, Institutions were found to not have pursued Rebates from the issuers of the Ancillary Products at all," Harris wrote in July 18 industry guidance. "In other cases, Institutions failed to correctly calculate the amounts of Rebates owed prior to seeking such Rebates (and thus obtained too low a Rebate) or made an initial request for Rebates from the issuers of the Ancillary Products but made no further effort to ensure that such Rebates were actually received and credited to consumers."

It's unfair for a lender or servicer to fail to obtain and credit a refund to a customer, Harris said. She cited F&I product contracts tasking the financial institution, not the customer, with the refund request and balance application.

It's also deceptive to show a customer a balance that fails to reflect an F&I product refund when one should be applied, Harris said. "In addition, such deception is material, as Rebates can total in the hundreds and sometimes thousands of dollars per transaction," she wrote.

The Consumer Financial Protection Bureau also has objected to lenders failing to seek refunds on guaranteed asset protection insurance and apply them to auto loan balances following repossessions. In a summer 2022 supervisory highlights report, the CFPB said it encountered at least one financial institution with policies to obtain such refunds but which "frequently failed to apply for these refunds from third-party administrators" after a repossession. This led to customers receiving loan balances that still displayed the yet-unpaid part of the coverage — even though the insurance was useless because the vehicle had been repossessed.

"Consumers could not reasonably avoid the injury because they had no control over the servicers' refund processing actions," the CFPB wrote. "And they generally could not apply for such refunds themselves because they were unaware that the contract provided they could do so."