If you look at the flurry of GAP-related state-level legislative bills proposed so far in 2022, you could surmise that this consumer protection tool is under fire. According to American Financial Services Association Senior Vice President Danielle Arlowe, the organization has counted 30 pieces of legislation in 2022, compared to 14 bills between 2019 – 2021. These new legislative efforts join existing statutes on the books in 11 states which require the lender to refund a consumer who cancels financed GAP coverage.
At the federal level, officials have again raised the issue that bundled GAP coverage renders the auto loan to be under the purview of the Military Lending Act (MLA). The Consumer Financial Protection Bureau, Department of Defense, and Department of Justice recently argued in the class-action lawsuit Davidson vs. United Auto Credit that loans containing a nonexempt product such as GAP would not be exempt from MLA.
These developments put retail automotive lenders in a difficult position. For example, the California Assembly Bill AB 2311 requires that customers be notified that GAP insurance is an option and requires that lenders automatically refund any GAP balances if the loan is paid early. Other components of the bill stipulate a cap on the price of the GAP insurance as well as banning its sale under certain criteria related to the amount financed. Arlowe believes the industry is at a turning point with GAP insurance and the relationship between creditor, dealer, and administrator.
The steep jump in legislative and judicial scrutiny has something to do with the meteoric rise in both new and used car retail prices as well as continued supply chain and vehicle shortages, inflationary pressures on consumers, and the economy in general. As consumers are forced to take out larger loans with longer terms to purchase a vehicle, the exposure for the lender on that deal increases. For example, a customer who buys a vehicle today at an inflated price would be significantly upside-down on their loan for much longer, especially as used car values begin to decline.
As a refresher, GAP coverage provides enhanced protection in the event of theft or damage to the vehicle that results in a total loss. In essence, it may cover the difference of the actual cash value and loan amount after the insurance settlement.
Minding the GAP
How can credit unions continue to support this lucrative value-add product for their members? First, make sure you are in alignment with the CFPB Supervisory Highlights and you have a robust system for managing refunds with your provider. Failure to correctly refund can prompt a CFPB flag and potential litigation. Also check with your dealer partners to make sure they are using the National Automobile Dealers Association (NADA) Voluntary Protection Products Policy (VPPP) which guides auto dealers in selling protection products including GAP. While not federally mandated, it is a recommended tool for dealers in those states who can sell GAP products.
Finally, work with a dedicated, best-in-class consumer protection product provider who offers easily-managed GAP products and works alongside your loan portfolio teams to not only grow your auto loan portfolio but effectively manage all aspects of the products it supports. At EFG Companies, our team of compliance and F&I experts are here to advise and assist our lending partners. We’re not just a provider, we’re a business partner.