Credit Union Risk Management: Marketing Vehicle Service Contracts to Members
Risk #1. Vehicle service contract marketing presentations: How are vehicle service contracts or “extended warranties” offered and explained to members at the point of sale?
Misunderstandings about optional product availability (in connection with financing); pricing and ultimate consumer cost; and contract benefits, member responsibilities, and terms and conditions create both the highest consumer protection compliance risks and risks of overall program failure to provide value for members and credit unions.
Strategy: Many members’ only experience purchasing vehicle protection products is the high pressure setting inside a dealership finance office where professionally trained salesman try to maximize revenue for their dealership. Credit Unions have a tremendous opportunity to educate members about product value and the critical details of how members can maximize the benefits these products provide. Not surprisingly, educated members make good buying decisions, and credit unions with the best processes for these marketing presentations are also the most successful in terms of product sales and product performance.
Risk #2. Service contract value: Are the program benefits actually valuable and applicable to each purchaser?
In the case of a vehicle service contract, that first means the member’s vehicle and intended use must actually qualify for the contract coverage, the duration of coverage, and the benefits sold. Then, the value of the coverage, in terms of cost and applicability to a particular member, should be considered. Some service contracts may limit claims payments to a specific dollar amount, or limit the amount allowed for a covered repair’s labor cost or replacement part cost – directly impacting member’s potential out-of- pocket costs for even covered repairs, and raising concerns about contract value, relative to members’ ultimate cost of the product. In the event of vehicles with existing remaining manufacturer warranty (remaining basic or powertrain-only coverages), some have questioned the value of optional service contracts that provide little or no additional coverage to the remaining factory warranty that already is included with the vehicle.
Strategy: Product knowledge and discovering members’ needs are the keys to managing value related risks. For credit unions with their own preferred service contract programs, fully understanding vehicle service contract terms, conditions and administrator claims adjudication policies are an essential part of up front due diligence, and internal product underwriting and marketing process design. Continually monitoring program performance to ensure your service contract programs perform as advertised, is an essential best practice for minimizing program value risks.
Risk #3. Service contract cancellations: In the event of a service contract cancellation, what happens to the money advanced to a dealership and paid for the purchase of a vehicle service contract in conjunction with an indirect auto loan?
Recovering complete product cancellation refunds from dealerships has long been a challenge for indirect auto finance providers. In 2021, it's also a consumer protection hot topic for state and federal regulators who argue the responsibility to ensure consumers receive accurate and timely cancellation refunds falls on the financing provider regardless of who actually sold the contract.
Strategy: Marketing of service contracts on direct loans and in conjunction with vehicle refinancing programs eliminates all of the additional compliance and financial risks raised by indirect loans and the dealerships that originate them. Credit unions with preferred or captive service contract programs of their own and direct relationships with service contract administrators are best able to manage product cancellation issues. Credit unions should have an internal product management process that includes procedures for handling cancellation requests, conducting cancellation refund calculation verification and providing timely member refunds. Credit unions who finance and advance service contract costs through dealerships face greater challenges in developing and implementing these same kinds of procedures, and for those, the first step is vetting and understanding the cancellation contract provisions and policies of the dealer sourced product administrators they finance.
Conclusion: The right vehicle service contract program together with an effective member marketing and education process at the time of sale create a win-win for credit unions and members. These products are proven to increase member satisfaction and improve vehicle loan performance. Keys to credit union success:
Choosing a protection program: Essential administrator and contract due diligence
Member marketing process design: Product knowledge and member needs
Program management: Monitoring performance and handling cancellation refunds
About CU AutoXL
CU AutoXL specializes in designing high value vehicle and member protection programs and creating efficient and effective credit union marketing and program management processes. We work for our credit union clients, not for a protection product company – your best interests are our priority.
Contact us for a confidential consultation. Call 1-888-973-9776.