New California legal guidelines place limits on GAP insurance coverage


Two recently-passed payments in California, Meeting Invoice 2311 (“AB 2311”) and Senate Invoice 1311 (”SB 1311”), had been signed into legislation by Governor Gavin Newsom on September 13 and September 27, respectively, putting new restrictions on the sale of Assured Asset Safety (“GAP”) waivers in California.  The brand new legal guidelines restrict the value of GAP waivers, add new disclosure necessities, ban GAP waiver gross sales in sure cases, and prohibit financing of GAP insurance coverage in auto loans to servicemembers.

GAP protection protects debtors from the depreciation of their auto’s worth within the occasion of loss by overlaying the distinction between an auto’s insured worth and the quantity left on a borrower’s auto mortgage.  GAP insurance coverage usually refers to 3rd social gathering insurance coverage bought by a shopper in a separate transaction from the precise automobile buy, sometimes as added protection to their auto insurance coverage.  A GAP waiver is an non-obligatory contractual obligation supplied throughout the financing of an auto through which the vendor agrees to waive any quantities nonetheless owed on an auto mortgage within the occasion of whole loss.  The 2 new legal guidelines, efficient on January 1, 2023, mirror the issues of shopper advocates, like the California Attorney General, who views GAP waivers as an unnecessary add-on product for a lot of auto patrons.

In that regard, a big requirement beneath AB 2311 is a brand new discover, which have to be offered with a heading at the very least 12-point daring sort and with textual content in at the very least 10-point daring sort, studying as follows:

STOP AND READ:

YOU CANNOT BE REQUIRED TO BUY A GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES. IT IS OPTIONAL.

NO ONE CAN MAKE YOU BUY A GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES TO GET FINANCING, TO GET CERTAIN FINANCING TERMS, OR TO GET CERTAIN TERMS FOR THE SALE OF A VEHICLE.

IT IS UNLAWFUL TO REQUIRE OR ATTEMPT TO REQUIRE THE PURCHASE OF THIS GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES.

Along with the brand new disclosure, the brand new legislation will:

  • Prohibit conditioning the extension of credit score, the time period of credit score, or the phrases of a conditional sale contract upon the acquisition of a GAP waiver and allow cancellation of the GAP waiver by the client at any time with out penalty.
  • Prohibit the sale of a GAP waiver the place the loan-to-value (“LTV”) ratio exceeds the utmost loan-to-value ratio of the GAP waiver, except the phrases of the GAP waiver disclose that limitation and the client is knowledgeable of that limitation.  This provision is much like the prohibition within the Federal Commerce Fee’s proposed Motor Vehicle Dealers Trade Regulation Rule which, amongst different issues, would prohibit an auto supplier from charging for GAP protection that can’t really be utilized by the buyer, comparable to the place the LTV is low and the insurance coverage payout for a totaled automobile would probably cowl any excellent debt.
  • Require prescribed details about the GAP waiver to look on a doc separate from the conditional sale contract, to be individually signed by a purchaser or potential purchaser.
  • Govern termination of a GAP waiver, together with the refund of GAP waiver prices on termination.
  • Require an announcement within the contract that the purchaser is mostly entitled to a refund of the unearned portion of the GAP waiver prices on a professional rata foundation, as specified.

AB 2311 additionally permits for restoration of thrice the quantity of any GAP prices paid by the buyer for a violation by the vendor or holder of the gross sales contract. 

The opposite invoice, the Army and Veteran Shopper Safety Act of 2022 or SB 1311, accommodates a number of provisions associated to servicemembers, together with what quantities to a prohibition on GAP waivers by auto finance collectors.  Particularly, SB 1311 voids any safety curiosity in a motorcar if it will trigger a mortgage procured by a servicemembers in the middle of buying the motorcar to be exempt from the Army Lending Act (“MLA”) and if the mortgage additionally funds the acquisition of a credit score insurance coverage product or credit-related ancillary product.  This successfully quantities to a prohibition on GAP waivers for servicemembers as a result of loans made for the categorical function of financing the acquisition of a automobile and that are secured by the automobile are in any other case exempt from the MLA’s definition of “shopper credit score.” 10 USC § 987(i)(6).

For a creditor to offer a mortgage to buy a automobile with a GAP waiver in compliance with the brand new legislation, the mortgage must be unsecured and topic to the MLA’s 36% MAPR limitation. Even when a creditor was prepared to make an unsecured auto mortgage, the extra price of the GAP waiver would possibly push the MAPR above the 36% cap.  Consequently, it might be more durable for servicemembers in California to finance an auto buy, and servicemembers who finance their purchases might want to pay greater auto insurance coverage premiums if they need GAP protection as a result of they might want to get it via their auto coverage as an alternative of financing it as a part of the acquisition.

The American Monetary Providers Affiliation (“AFSA”) and a number of other different commerce associations opposed the invoice as a result of it denies servicemembers entry to a voluntary safety product that will profit them.  In a letter opposing the invoice earlier than it handed, these commerce associations additionally took concern with it as an end-run round Congress’s intent on the federal stage in exempting secured auto loans from the necessities of the MLA. In structuring the invoice this manner, California seems to be going past issues about disclosure, suitability, or price of GAP waivers (which had been addressed in AB 2311), no matter how the financing of GAP waivers is likely to be handled beneath the MLA. 

Sadly, the Division of Protection (“DOD”) appears to have made one other U-turn in terms of the therapy of GAP waivers beneath the MLA.  Initially, the plain language of the MLA and DOD rules appeared to point that a purchase order cash mortgage that additionally financed a GAP waiver could be exempt if secured by the automobile.  In 2017 the DOD issued a “clarifying” Q&A in an Interpretive Rule which said, amongst different issues, that “a credit score transaction that additionally funds a credit-related services or products relatively than a services or products expressly associated to the motorcar or private property shouldn’t be eligible for the exceptions beneath [32 CFR] § 232.3(f)(2)(ii) and (iii).  For instance, a credit score transaction that features financing for Assured Auto Safety insurance coverage or a credit score insurance coverage premium wouldn’t qualify for the exception beneath § 232.3(f)(2)(ii) or (iii).”  See December 2017 Interpretive Rule Q&A #2.

Nonetheless, in 2020 the DOD withdrew that Q&A guidance specific to GAP insurance in order that it may additional analyze the problem in mild of issues that collectors may not prolong credit score to servicemembers in the event that they had been prohibited by the MLA from taking a safety curiosity within the circumstances described within the steerage.  That appeared to sign a possible change within the DOD’s place.  However, no additional Interpretive Rule has been issued and the DOJ, DOD, and the CFPB just lately took the place in litigation {that a} “hybrid” mortgage, that’s, a purchase order cash mortgage financing a automobile in addition to a GAP waiver, falls beneath the MLA and out of doors of the auto mortgage exception.  In an amicus brief filed in Davidson v. United Auto Credit score Company, USCA4 Docket 21-1697, america has requested the Fourth Circuit to reverse a district courtroom’s discovering that the mortgage in query was exempt beneath the MLA as a automobile mortgage because it was a hybrid mortgage that included financing for GAP protection.  A call continues to be pending on that attraction.



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