Murky waters: Navigating GAP state regulations

On July 1, Tim Mazza led a civil complaint against Air Academy Federal Credit Union , saying the creditor failed to refund him, and at least 40 similarly situated customers, their unearned GAP fees after they’d paid off their auto loans before the end of the loan terms. Class action lawsuits are popping up against auto lenders in Colorado, demonstrating the lurking issue of guaranteed asset protection (GAP) refund responsibility, which is a murky space in the industry. While regulators have enforced the refund process for years, irregularities in GAP laws from state to state make it unclear who is ultimately liable when GAP waiver terms are breached. While in some states it is clear that it is the creditor, rather than the dealer, who is required to provide a GAP refund, in other states the legislation does not specify who is legally accountable if the customer is not issued a refund. A prevailing misconception Traditionally, a GAP refund is available to a customer with a vehicle loan who pays off the outstanding balance of their loan prior to amortization. In most cases, the customer must submit a GAP waiver to their lien holder and then, depending on state regulations, the customer is refunded for the remaining GAP funds by the lender. For example, “if the total GAP fees for four years of GAP coverage are $800, but the customer pays off their finance agreement in two years, then the customer will be entitled to a refund of $400 for the unused half of the loan,” the Colorado court action complaint read. Despite Colorado statutes explicitly dictating that it is the lender’s duty to refund clients, the refunds have been fundamentally understood to be the dealer’s responsibility instead, said Kristi Richard , a member at McGlinchey . It has historically been the dealers making the refunds, Richard said, because they are the party to generally hold the funds from the GAP waiver. She has received pushback from dealers who want to disburse the refunds to their clients because they “have always taken care of it.” Another problem may be that some creditors still don’t have the systems in place to issue refunds to their consumers. “I think the issue came in when the regulator started examining the creditors, and they didn’t have proof that the refund was made or it wasn’t made within the prescribed time,” Richard said. Colorado’s laws stipulate a 30-day turnaround. Lawsuits hit Colorado lenders Mazza does not know for certain how many members there are in the class-action suit, but is aware of at least 40, according to the complaint. Mazza’s attorney estimates there may be an additional hundreds, if not thousands, of additional plaintiffs who were not refunded by the Colorado Springs, Colo.-based credit union over several years. All plaintiffs in the Colorado lawsuit were eligible for partial refunds at the time of early amortization, having financed the full cost of their GAP contracts at the time they purchased their loans. According to the complaint, Mazza reported that he bought a $300 GAP contract — which generally ranges industrywide from $300-$800 — and is due to be reimbursed $292. On July 9, eight days after the original complaint, Mazza’s counsel in a second document recommended his case be consolidated with 10 separate cases against the following lenders: Bellco Credit Union , Canvas Credit Union , Chase Auto , Credit Union of Denver , Ent Credit Union , Ford Motor Credit , Prestige Financial Services , Red Rocks Credit Union , Santander Consumer USA and Security Service Federal Credit Union . Bellco and Chase Auto told Auto Finance News the lawsuits against them had been dropped, and Santander declined to comment. The other lenders did not respond by press time. A majority of the cases may be still in discovery phases, said McGlinchey’s Richard, while larger lenders, like Chase, may have decided to settle with their respective plaintiffs. “The state law certainly provides for a refund of any unearned account,” said John Redding , a partner at Alston & Bird law firm in Los Angeles. “But it’s not as clear on who is responsible for making that refund. That’s where a lot of uncertainty comes in, and it’s part of the reason that we see these kinds of lawsuits.” State-to-state ambiguity Colorado may not be the only state in which lenders encounter turbulence with regard to GAP refunds. The issue of unclear legislation could be widespread nationally, as many states do not have the definitive legal infrastructure to determine responsibility. “I don’t know that this is ‘mismanaged’ as much as the state laws are less than clear in many instances,” Redding said. “In other words, it is frequently unclear who is actually responsible for making the refund, and whether it is one party or one of a number of parties who have the responsibility.” The process around GAP refunds has been enigmatic for years. Mississippi’s GAP legislation, for example, was enacted in 1972 and updated in 2018, and still does not have language citing which party is liable for refund distributions. Mississippi acknowledges the consumer’s traditional right to a rebate, stating the consumer must provide a refund request within 90 days of the loan’s early termination. Yet, the law fails to specify to whom the customer sends the request, stating only that it can go to the “creditor, administrator or such other party.” Regardless of who issues the refund, Mississippi’s law also states the creditor should hold the funds paid for the original GAP waiver in a trustee capacity. While some state governments have obscure GAP laws, others have regulations regarding who oversees the refunds. The Iowa Attorney General’s Office , for one, released an informal consumer advisory in 2003, which reads “the creditor, or, if the paper was assigned, the assignee holder, is the entity responsible for making the GAP refund.” Richard, who has been helping her lender clients navigate the space since 2010, says that she is "seeing more state regulators change their positions to require the creditors to be responsible for the refunds, thus, it is coming up more in examinations.” Her lender clients have already started refunding consumers directly in Alabama, Colorado, Connecticut, Illinois, Indiana, Iowa, Maryland, Massachusetts, Oklahoma, Oregon, South Carolina and Vermont. Mind the GAP To mitigate risk and prevent class action lawsuits from moving forward, Redding and Richard have some recommendations for creditors who are unsure of their legal GAP obligations. Regardless of the states in which lenders are conducting business and any potential legal obstacles, Richard recommends that a lender who has an affirmative obligation that the dealer will distribute the refund should ensure the refund has been completed. It is also vital that creditors mitigate risk by taking the time to understand the laws of their state, Alston’s Redding said. “My experience is, the industry wants to do the right thing because, quite frankly, the industry wants that customer back. If you find that you’ve made a mistake, fix it,” he said. Mazza’s class action complaint states that he and others “were harmed, [and] suffered out-of-pocket loss,” and stands as a clear indication that the industry must take a deeper look at GAP refunds as well as the state laws governing them.

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