July 18, 2023

Industry Letter: Ensuring Auto Loan Borrowers Receive Pro-Rata Rebates for Cancelled Ancillary Products

To:      All Regulated Auto Lenders and Auto Loan Servicers

The New York State Department of Financial Services (the “Department”) is focused on protecting consumers from unfair, deceptive, and abusive acts and practices in auto lending and loan servicing. The Department has identified that certain regulated auto lenders and auto loan servicers (“Institutions”) have improperly failed to credit certain rebates to consumers whose vehicles were repossessed or were a total loss.

Many Institutions finance the costs to consumers of products that are purchased at the same time as the main vehicle purchase such as extended warrantees, vehicle service contracts, guaranteed asset protection insurance, and other ancillary products (“Ancillary Products”). The terms of sale of such Ancillary Products, as defined herein, provide that if the vehicle is repossessed or is a total loss prior to the product’s expiration, the consumer is entitled to a rebate for the prorated, unused value of the product (a “Rebate”), payable first to the Institution to cover any deficiency balance, and then to the consumer.

The Department has found during its examinations that certain Institutions failed to properly calculate, obtain, and credit to consumers, either by application to deficiency balance or direct payment, Rebates owed when consumers’ vehicles were repossessed or deemed a total loss prior to the Ancillary Products’ expiration. In some cases, Institutions were found to not have pursued Rebates from the issuers of the Ancillary Products at all. 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.

In a Supervisory Highlight issued in the Winter of 2019, the Consumer Financial Protection Bureau (“CFPB”) similarly noted that one or more of its examinations identified auto loan servicers that engaged in deceptive practices when they sent deficiency notices to consumers that listed a deficiency balance that purported to include credits/rebates even though the servicer had not sought Rebates for the Ancillary Products. The CFPB also found, in its Winter 2019, Summer 2021, and Spring 2022 supervisory highlights, that collecting, or attempting to collect, miscalculated deficiency balances that failed to incorporate the pro-rata refund to which the lender was entitled, is unfair.

The Department considers an Institution’s failure to obtain and credit to consumers Rebates from unexpired Ancillary Products to be unfair, because it causes or is likely to cause substantial injury to consumers who are made to pay or defend themselves against deficiency balances in excess of what the consumer legally owes. Such consumers cannot reasonably avoid the harm caused by an Institution’s failure to obtain and credit the Rebates because the Ancillary Product contracts give the Institution the right to obtain the Rebate and the consumer is not involved in the Institution’s Rebate calculation or request processes. In addition, the injury caused to consumers by Institutions’ failure to obtain and credit to consumers the Rebates from the products the consumers purchased is not outweighed by any countervailing benefits to consumers or to competition.

The Department considers an Institution’s statements and claims of consumers’ deficiency balances that do not reflect all correctly calculated and applied Rebates to be deceptive. A purported deficiency balance that does not reflect Rebates owed on Ancillary Products misleads a consumer by misrepresenting the amount that a consumer owes to the Institution after consideration of all setoffs. It is reasonable for a consumer to believe that a deficiency balance reflects the application of Rebates that the Institution has a contractual right to collect. In addition, such deception is material, as Rebates can total in the hundreds and sometimes thousands of dollars per transaction.

Accordingly, the Department instructs Institutions of its expectation that Institutions calculate, obtain, and credit to consumers, either by application to deficiency balance (if any) or by check (if there is no deficiency balance owed), Rebates from the cancellation of Ancillary Products in every case in which they are owed.

Sincerely,

Adrienne A. Harris, Superintendent
New York State Department of Financial Services