Your Vehicle Service Contract (VSC) program helps reduce auto loan portfolio risk. It also protects borrowers while providing them with peace of mind. Are you marketing it to maximize those outcomes or unknowingly working against your own best efforts?
First, let’s get on the same page. What we call a VSC is known by many names (just watch the video!). That leads to a Don’t we discuss below. Why? Because it may be misleading. It’s not just counterproductive; it could raise issues with your compliance!
We put together 5 Do’s and Don’ts to help you accomplish two goals:
- Ensure your borrowers understand the product they are buying (or may purchase)
- Minimize legal and regulatory “hot water” surrounding your representation of the VSC product
Note: GreenProfit Solutions offers VSC programs through Frost Financial Services. Despite representing many of the industry-leading providers, we get that working with us may not be a fit. That’s fine!
Our mission is to ensure you have needed information so you can decide what works best for your institution and borrowers. And no matter who you use for VSC, these tips are essential!
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Keep Me Informed!
Share these best practices with your lending, marketing, and compliance teams. Here’s some pointers for each department.
Use this to make sure your product descriptions are clear when presenting to borrowers.
Review all marketing collateral and outreach channels to ensure the message is consistent and accurate. These can include:
- Social media
- Product brochures
- Branch posters
- Staff sales scripts
- Follow-up e-mails
You know how important it is to present your products fairly and without any unintended discrimination. Take a close look at the words used in any materials, especially focusing on things including “will pay” or even just ensuring the name is consistent.
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VSC Do’s and Don’ts
DO: Include appropriate disclosures
While highlighting the benefits of VSC in all your marketing materials, you must clearly and prominently represent:
- Conditions of this voluntary protection product.
These disclosures should be easy to locate and read within the marketing collateral. Show it to your mother. If she doesn’t know what it says or can’t make it out, try again. Yes, that means the font size is consistent. 86 the fine print!
Add any required disclosures to all VSC marketing materials and ensure it is clear and prominently placed.
DON’T: Market VSC as Insurance or Warranty
A Vehicle Insurance Contract or “VSC,” is a voluntary, non-insurance program that may be included as an add-on product with the borrower’s loan agreement. Your program might be called something different. It’s the same concept.
One exception is in California where credit unions offer Mechanical Breakdown Insurance. That is an insurance policy issued by an insurer to the borrower. Let’s clarify.
Is VSC Insurance?
While the VSC agreement is typically backed by insurance, a VSC is not insurance.
The Administrator purchases insurance (a Contractual Liability Insurance Policy or CLIP) to help guarantee they will always have sufficient funds to pay for all covered claims.
Your borrower does not receive a policy issued by an insurance company. Instead, a contract or agreement is generated by your institution, specifying the terms & conditions, and given to your borrower at closing.
So, in all states besides California, a VSC is a promise to your borrower (the contract-holder) from your vendor’s Administrator to pay or reimburse the cost of repairs in the event the borrower’s vehicle incurs a covered mechanical breakdown.
Oof, in other words: A VSC may help pay for fixing a car if it breaks.
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Warranty & VSC: Different. Same with Extended Warranty.
Your VSC policy isn’t a warranty. It’s not an extended warranty, either. Stop using those terms immediately.
The phrase the “Extended Warranty” is popular when discussing a vehicle service contract. However, under Federal law, a VSC is not a warranty. A warranty is most often provided freely with a product.
In our world, a common example is the manufacturer’s 36 month/36,000 mile bumper-to-bumper warranty on a new vehicle. You don’t pay for it. The coverage is just included with the car.
Simply put: The word “warranty” can be used if the manufacturer is selling it. You’re not the vehicle manufacturer, so it isn’t applicable. I know, people recognize the term. But it’s not the same thing. Stay out of trouble and don’t use it.
That includes Extended Warranty. Which you also don’t offer. You’ve got a Vehicle Service Contract (or one of a few other terms, so long as it isn’t “warranty”).
Another difference is that the VSC generally has less coverage than a manufacturer’s warranty. Finally, a VSC always has an additional cost.
Review your institution’s website and all marketing materials. Remove any uses of “insurance” or “extended warranty” in association with VSC. Train your staff so they do not use the terms “insurance” nor “warranty” when referring to VSC products.
DO: Conduct regular staff training
VSC is a complex product, especially compared to the relative simplicity of GAP. It takes regular training for staff to feel comfortable offering it to borrowers. Skip that and one of two things happen.
First, it just doesn’t get mentioned, and your borrowers aren’t even introduced to the protection. That’s not just a disservice, but can be interpreted as discriminatory lending. Not ideal at all.
Second, unprepared staff may resort to using explanatory “shortcuts”, another path to compliance issues or, at the very least, unhappy members.
Over the years, we have asked financial institutions why they no longer promote their VSC program, or even offer one at all. The most common response is that they heard complaints from borrowers regarding its coverage, or lack thereof.
This is especially common when a borrower selects a top tier of protection. Their position is that it will cover everything, fully. Then, when it needs to get used, they have unexpected costs. Or the entire claim is denied. Unhappy member, indeed.
The typical comment we hear are, “Why didn’t my loan officer explain that to me?” or (we warned you!), “My loan officer said that VSC would pay for any out-of-pocket repair costs.”
You understand what the VSC, across its varied levels, can cover. Is that clearly understood by those on your front lines?
And what happens when a loan officer hears about a member’s bad experience? You guessed it. They don’t offer it again. Problem solved. Protection missed. Revenues lost.
You are all about delighting members. So let’s ensure you meet or exceed their expectations, simply by keeping your staff well-trained and excited about the program!
Conduct regular sales practices and product training for all staff involved in VSC marketing and sales.
We recommend performing twice annual training, minimum. In addition, conduct onboarding training for any employees moving into a new role which includes VSC sales.
DON’T: Use statements like “VSC will pay for repairs if your car breaks down” or “This coverage extends your manufacturer’s warranty”.
VSC may help pay or reimburse for the costs of repairs due to a covered mechanical breakdown.
There is no guarantee that a VSC will pay off the entire cost of repairs. All VSC programs include limitations and exclusions. Some can result in all or part of the repair costs becoming the responsibility of the borrower.
Most VSC programs offer several levels of coverage: Good, Better, and Best. “Good” is what we’ll call the lowest level. It only covers basic, major components, and so carries the lowest cost.
On the other end, “Best” is your top-tier, most comprehensive coverage available. Unsurprisingly, it’s the most expensive.
We see the most misunderstandings with borrowers using the top tier. They believe it to be “bumper-to-bumper” (avoid using this term), akin to the original manufacturer warranty. In their mind, everything is covered, 100%.
It’s critical for your staff to clearly explain that, while that may be their top level of coverage, it contains its own exclusions and limitations. These may preclude it from paying the entire repair cost for a specific scenario.
The term used is “Named Exclusion”. This means that everything is covered except what you find in your VSC terms. For example, components like shock absorbers or safety restraint systems may be specifically excluded from coverage.
Review your institution’s website and all marketing materials and remove any language which implies VSC will always cover the full cost of repairs. You should already be good on staff training!
VSC Can Be Complex. It’s Also Important.
VSC fills an important need in the marketplace. It ensures your members can continue using their vehicle after a costly mechanical failure. It also protects your portfolio, as a primary cause of delinquency is a broken vehicle the borrower could not afford to fix.
What do these numbers mean? More than half of Americans may need to tap into debt to afford a typical vehicle repair. And we’re assuming accessing debt is even an option.
VSC can help keep a member on the road while also preventing downward debt spirals.
Follow the Do’s and Don’ts above so you and your team can confidently and faithfully present VSC to all your borrowers.
Embrace Our VSC Knowledge Hub
Become a VSC expert! Dive into our entire VSC section of the Learning Library. Find a range of articles (and a catchy video!) to help you optimize your existing program. From myths to pros and cons, it’s full of valuable content.
Then, when it’s time to evaluate other VSC programs, you’ll have everything you need to assist in your Due Diligence.
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Here’s our disclaimer. Notice the text is the same size? 😉
These materials are intended to help lenders avoid common marketing and sales practices that could be considered deceptive. They serve as general guidance only, and do not represent a legal opinion or a guarantee against regulatory action.
Frost Financial Services and GreenProfit Solutions recommend you review these materials with your compliance experts and legal counsel before taking any action.
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