New IRS Auto Loan Reporting Rule Creates Major Compliance Challenge for Credit Unions

Credit unions that make auto loans need to begin preparing now for a significant new IRS reporting requirement that could create an especially heavy burden for smaller institutions.

Treasury and the IRS have finalized regulations implementing the new federal deduction for qualifying personal vehicle loan interest. While the tax deduction benefits borrowers, the responsibility for determining which loans qualify—and reporting the information—falls largely on lenders.

Beginning with interest received in 2026, lenders receiving $600 or more in qualifying interest on an eligible personal vehicle loan generally must file the new Form 1098-VLI with the IRS and provide a statement to the borrower. (Credit Union Daily)

The Review Goes Back to January 2025

One of the biggest challenges is that credit unions cannot simply apply the new process to loans originated in 2026.

Loans incurred beginning January 1, 2025, may need to be evaluated if they remain outstanding and generate interest during 2026. That potentially requires credit unions to review a substantial portion of their existing auto loan portfolio. Transitional relief available for 2025 reporting does not continue for 2026. (Credit Union Daily)

Credit Unions May Not Have the Data

The regulations require information that many loan origination systems and core processors have not historically captured in easily accessible fields. Among the information that may be needed are:

• Vehicle assembly location and other vehicle information

• Whether the vehicle's original use began with the borrower

• Negative equity from a trade-in

• Down payments and potentially manufacturer rebates

• Refinancing history and prior-loan information

• The portion of a loan attributable to qualifying versus nonqualifying financing

Negative equity is particularly complicated. If part of the financing represents nonqualifying negative trade-in equity, interest may have to be allocated proportionately between qualifying and nonqualifying portions of the loan. (Credit Union Daily)

No Broad Safe Harbor

Another concern is the lack of the broad safe harbor lenders had requested. Treasury rejected proposals that would have allowed lenders to rely broadly on dealer or borrower certifications or simply report interest on all vehicle loans and leave the eligibility determination to the IRS. (Credit Union Daily)

That means credit unions need a documented and defensible process for determining which loans require reporting.

What Credit Unions Should Be Doing Now

This should not be viewed simply as another year-end tax-reporting requirement. For many credit unions, it may be better viewed as a loan-data and compliance project.

Credit unions should begin reviewing loans originated since January 2025, determine what information their systems currently capture, identify information that may require manual file review, and obtain firm implementation timelines from their core and loan-origination-system providers.

New originations should also begin capturing important information—such as negative equity, down payments, vehicle information and refinance history—in structured, searchable fields rather than relying solely on documents stored in the loan file. (Credit Union Daily)

Credit unions should also work with their tax and compliance advisers to establish written positions on areas where the regulations require interpretation.

Why This Matters to Smaller Credit Unions

For larger financial institutions, this may become another specialized tax-reporting function. For smaller credit unions, however, the work could fall on a compliance officer or accounting department already handling numerous other regulatory responsibilities.

The article makes an important broader point: a tax benefit created for consumers can become a significant operational and compliance obligation for the financial institution holding the loan.

For first responder credit unions with active auto lending programs, the message is straightforward: do not wait until January to address Form 1098-VLI.

Credit unions should be talking with their core processors, LOS vendors, accountants and tax advisers now and determining how many loans may require review before the first borrower statements are due.

NCOFCU will continue monitoring this issue and its impact on smaller credit unions serving first responders.

The underlying Credit Union Daily article was published September 22, 2026, and goes into considerably more detail on screening the portfolio, VIN data, negative equity, refinancing and filing deadlines. (Credit Union Daily)