Secured Asset Protection (GAP) waivers have always captured the attention of state regulators, but as vehicle price increases increase consumer demand for debt forgiveness agreements, regulatory scrutiny of these agreements is also on the increase. From multistate settlements and administrator subpoenas to class action settlements and proposed state regulations, lenders will want to keep an eye out for recent developments in calculating and paying refunds.
Reimbursements: Who pays the consumer?
Standard industry practice is for the dealer – rather than the lender or administrator – to issue a refund to the consumer when a GAP contract is terminated early. During audits, regulators have increasingly questioned lenders about repayment calculations and payment practices. However, consumer credit regulators in many states only have the authority to regulate lenders, not dealers and/or administrators. In recent years – in law or in practice – regulators have begun to require the lender to reimburse the consumer directly or at least to ensure that the reimbursement is made.
State Regulatory Requests
The Colorado Attorney General recently subpoenaed cases related to the calculation and payment of several administrators’ reimbursements. In a consent order, an administrator took a number of deductions in calculating the refund that are not allowed under Colorado’s Rule 8, including the pre-totalized condition of the vehicle; excess amount financed; excess mileage driven; previous unrepaired damage; and insurance recovery amounts. After a self-verification, the administrator discovered nearly 175 consumers who owed more than $120,000 because of these deductions.
The consent order also outlined escheat practices, which is the process by which unclaimed assets are returned to the state if the consumer does not receive a voided check within 90 days. Various industry groups are pushing to allow some of these deductions so that consumers are not paid twice, among other reasons. Lenders should keep a close eye on the attorney general’s response and review their own escrow practices.
The California Department of Justice followed suit in late 2021 by investigating how GAP refunds and disclosures were provided to several industry players. These investigations, combined with the increase in consumer cases and class action lawsuits alleging deceptive practices, have added California to the list of states considering GAP legislation in upcoming sessions. Here again, the professional associations are proposing changes to certain provisions, in particular those which encourage the consumer to contact the police if the GAP derogation is not presented as optional; limit the GAP waiver fee to 2% of the financed amount; allow a deduction for claims paid upon termination of the agreement; and increase the loan-to-value ratio of loans on which GAP waivers can be placed.
Legal developments affecting business practices
No lender is immune – independent lenders, major banks and captive finance companies have encountered BPA-related legal issues. Recent actions have included everything from multi-hundred-million-dollar class action lawsuits and Attorney General settlements involving violations of consumer protection laws to the payment of large trust funds to compensate Massachusetts consumers for interest on GAP repayments.
These events have prompted lenders large and small to review or change their business practices, including directly reimbursing borrowers who prepay their financing agreements. In fact, consumer advocates hope lenders will recognize this as a preferred business practice rather than relying on the dealership or administrator to make the repayment. We can expect state regulators to closely monitor any new business practice and take a more specific stance on liability for refunds in their statutes, regulations or practices.
In another notable case currently pending in Virginia, the US Department of Defense, justice department, Consumer Financial Protection Bureau and the Attorney General’s Office submitted court documents espousing the argument that auto loans that include GAP are hybrid loans where GAP is “separate and largely unrelated” to the purchase of the vehicle. Under this premise, GAP would not be subject to the Military Loans Act exemptions and would therefore be virtually excluded from auto loan financing for military borrowers.
Lenders should fully understand their obligations under each state’s laws. They should also leverage their longstanding relationships with dealers and administrators to implement strong and tight agreements regarding:
- Which GAP forms is the lender able to finance?
- How refunds are calculated;
- Which party will be responsible for paying repayments to the borrower;
- Repayment schedule; and
- Evidence needed to prove that a refund was paid.
As regulatory scrutiny continues to increase, having these foundations in place can make it easier for lenders, dealers, and administrators to work together to pivot easily as regulations change and effectively lobby for regulatory improvements.
Kristi Richard is a member (partner) at McGlinchey where she advises clients in the areas of insurance regulation and compliance. She represents insurance companies and producers in the structuring of credit insurance policies and programs, products and related services.
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