Ancillary products are under scrutiny by attorneys general, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. These regulators are evaluating creditors’ policies and practices related to refunds of ancillary products upon early termination of the underlying contracts.

Many ancillary products are statutorily governed as insurance, and there are legal obligations that borrowers receive refunds of unearned premiums — though no particular party is bound to make those refunds. Once ancillary products are financed, states regulate the transactions. Many states require borrowers to request refunds upon termination of the underlying contracts or require creditors to notify dealers or providers when refunds are due. Other states require creditors to initiate refunds upon early termination of the underlying contracts.

State attorneys general regulate creditors in consumer finance transactions, but not insurance companies, dealers or ancillary product providers. Therefore, regulators mandate creditor responsibility to ensure that consumers receive refunds. Creditors may work with dealers or providers to process refunds, but regulators hold lenders responsible for accuracy and completion of the actual refund.

Mere notification of prepayment to dealers or providers will not relieve creditors of refund obligations. Ultimately, creditors are responsible to ensure that consumers have received their refunds. The best evidence for lenders — in case of an audit — are copies of the canceled refund checks.

To that end, creditors should follow up with providers and dealers when refund obligations are contracted out. If the dealer or provider can’t provide evidence of the return, the creditor may refund the consumer directly and “true-up” with the dealer or provider on a predetermined basis. In other words, the amount that the creditor refunds the consumer would be deducted from any amounts that the creditor owes the dealer in the regular course of business.

When creditors are unable to deliver refunds to consumers, they must report and deliver the refunds to the state’s unclaimed property authority. Creditors’ obligations to refund property in their possession may extend as far back as the effective date of the refund requirement statute, and unclaimed property laws are not subject to statutes of limitation.

Kristi W. Richard and Jean-Paul “J-P” Perrault are members in McGlinchey Stafford’s Baton Rouge, La., office. Kristi can be reached at krichard@mcglinchey.com or (225) 382-3704. J-P can be reached at jperrault@mcglinchey.com or (225) 382-3641. McGlinchey Stafford is the Compliance Partner of Auto Finance Excellence (AutoFinanceExcellence.org), a sister service of Auto Finance News.

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Fair, which offers an automotive subscription app, will reduce its staff by 40% in an effort to increase profitability, according to an internal company memo sourced by TechCrunch. 

TechCrunch estimated that 215 employees would lose their jobs at Fair.

Among the employees let go is Chief Financial Officer Tyler Painter, brother of Chief Executive Scott Painter, who signed the memo. Kirk Shryoc, managing partner and co-founder of Hard Right Solutions LLC, a software and consultancy firm, and an investor in startups, will step in as the company’s interim CFO. It could not be determined at press time whether Shryoc is an investor in Fair. 

To date, Fair has raised more than $2 billion of venture funding, more than any other auto finance startup to date. Softbank, the venture firm behind WeWork and Uber, is among Fair’s largest investors. Ally Financial has also provided Fair with a $100 million credit facility. According to published reports, the company has a current valuation of approximately $1.2 billion.

The job cuts come one month after Mizuho Bank backed the three-year-old startup with a $500 million revolving credit facility. 

In what is described as “proactive steps” to ensure the Fair’s future as a profitable public company, Painter said the remaining resources will be focused on “strengthening Fair’s core technology and reducing costs associated with the capital-intensive supply side of our business.”

Moving forward, Painter said the company will spend the next few months to “transform the supply side of our business” while building a profitable model. 

Since its inception in August 2017, Fair has provided cars for 45,000 users through its 3,000 dealer partners in 30 markets across the country.

The job cuts appear to be already limiting some of Fair’s business operations. Auto Finance News has learned that Fair’s “Escalation Department” in Phoenix, which fields some customer service inquiries, was closed today. It is not common for that department to be closed on a Thursday.

Additionally today, two Fair executives — Chief Product Officer Jay Trinidad and Chief Strategy Officer Craig Nehamen — dropped out from speaking engagements next week at the 2019 Auto Finance Summit in Las Vegas, according to an email sent to AFN by Rebecca Brancato, an executive assistant at Fair.

Fair was not available for comment at press time.

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As yearend approaches, we at Auto Finance News are reaching out to readers to vote for the inaugural Auto Finance Executive of the Year award, celebrating the highest achievement in the auto finance industry.

The 2019 Auto Finance Executive of the Year will be named and profiled on the cover of the December issue of Auto Finance News. The award is presented for the notable contributions made to the industry during the calendar year. We will also highlight several Executives to Watch in 2020.

Please vote by clicking here. 

As the flagship publication for the auto finance industry, we are thrilled to recognize auto finance leaders in our yearend issue, but we want to have your input as well.

The final decisions will be based partly on the input received by you, our readers. The goal of this initiative is to celebrate auto finance and to set the bar for great achievement in the industry. We hope this effort acts as a continuing catalyst for industry growth and innovation.

Below is the list of five finalists for the 2019 Auto Finance Executive of the Year:

• Ian Anderson, Group President, Westlake Financial
• Dan Berce, President and CEO, GM Financial
• Renee Horne, Vice President, Consumer Lending Experiences, USAA Federal Savings Bank 
• Chuck Jones, Head of National Indirect Lending, SunTrust Banks
• Ian Smith, CEO Americas Region, BMW Financial Services

Respondents may also nominate write-in candidates from finance companies.

Please note that executives are not permitted to nominate themselves. Also, each industry member is permitted to vote only once. All responses will remain confidential.

Nominations may be submitted until Friday, Nov. 1, 2019. Any questions regarding the survey can be directed to Nicole Casperson at ncasperson[at]royalmedia[dot]com. 

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Upstream Security, a cybersecurity startup specializing in connected vehicles, closed a $30 million Series B funding round, the company announced today. The funding round was led by Renault Venture Capital and includes Volvo Group Venture Capital, Hyundai Motors, Hyundai AutoEver and Nationwide Ventures. Charles River Ventures, Glilot Capital and Maniv Mobility also returned for the second investment round.

Upstream’s technology allows OEMs and fleet managers to detect, monitor and respond to attacks targeting any part of connected vehicle’s systems, including vehicles that are on the road. “This investor syndicate is a testament to the severity of the problem the industry is tackling,” said Yoav Levy, co-founder and chief executive.

Cybersecurity has become of increased concern for fleet managers and OEMs over the past 18 months. In fact, many digital attacks on fleets and OEMs in the past decade were “executed indirectly via connected services and applications from a long distance,” according to the statement.

Herzeliya, Israel-based Upstream has secured a total of $41 million since its founding in 2017.

Join us for Auto Finance Summit 2019, October 28-30 at the Bellagio Las Vegas. The summit continues to bring together the best and brightest executives in auto lending and leasing for unparalleled networking and education. Register now at www.autofinancesummit.com.

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Large banks and lenders will likely move most, if not all, of their computing needs to cloud platforms within the next five to ten years. 

In response, regulators are scrutinizing how banks are hosting mass amounts of consumer data in the “cloud,” according to a hearing today with the Task Force on Artificial Intelligence of the House Financial Services Committee. 

Financial institutions mainly adopt cloud computing because of the benefits found in managing IT, compliance with regulatory requirements, and situations that require high-performance computing. However, migrating away from data centers and systems increases operational risks, especially without in-depth regulatory examination or guidelines, the Task Force said during the hearing. 

Operational risk refers to internal controls, people, systems and external events, including cyber risks like data breaches, insufficient customer data backups, and operating system hijackings, the Task Force said, noting that the July 2019 Capital One cybersecurity breach illustrates how operational risks have the potential of causing harm to consumers. 

“Somewhere in never-never land there is a cloud taking care of my financial information,” said Rep. Sylvia Garcia (D-Texas) during the hearing, noting that there needs to be better training for cloud computing employees. 

Moreover, as financial institutions become dependent on digital infrastructure, those that lack the in-house expertise to set up and maintain technologies are increasingly relying on third-party services, including cloud service providers. 

“If a financial institution uses a third-party cloud service, regulators expect the activities performed by the cloud provider to meet the same regulatory requirements as if they were performed by the bank itself,” the Task Force said. 

One point of contention is a lack of clarity around liability, whether it’s the bank or third-party service provider, said Rep. Anthony Gonzalez (D-Ohio). “There is this finger-pointing going on, and there is a gap between who bears the liability and who bears the cost,” he said. 

To that end, the Task Force suggests a collaborative approach between regulators, banks and technology companies with a focus on security around the lifecycle of the data itself. 

“This scares me more than Dracula,” said Rep. Emanuel Cleaver (D-Mo.) on the cybersecurity threat landscape. The Task Force has drafted legislation — the Strengthening Cybersecurity for Financial Sector Act of 2019 — to combat the issues presented during the hearing. 

Join us for Auto Finance Summit 2019, October 28-30 at the Bellagio Las Vegas. The summit continues to bring together the best and brightest executives in auto lending and leasing for unparalleled networking and education. Register now at www.autofinancesummit.com.

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