State AGs ratchet up pursuit of GAP refunds

Though some lawmakers are still drafting legislation related to guaranteed auto protection (GAP) policies, financiers are already starting to feel the sting of increased scrutiny. In recent weeks, four lenders have been ordered to provide refunds to 24,000 consumers for unused portions of their GAP coverage. Earlier this month, GM Financial (GMF) settled for $1.8 million with Massachusetts Attorney General Maura Healey to resolve allegations concerning refund practices for GAP enrollment fees and notices on some repossessions. In Colorado, Ent Credit Union , Premier Members Credit Union (PMCU) and Credit Union of Denver reached GAP-related settlements totaling $6.5 million with Attorney General Phil Weiser. At issue in these cases is GAP insurance, which protects borrowers whose cars are repossessed or damaged beyond repair before they have repaid their auto loans. Borrowers pay the full GAP fee when they buy their car, but typically the fee is only earned gradually over the life of the loan. If the borrower pays off the loan early, or if the car is repossessed before the loan is repaid, the law in some states requires that the borrower receive a refund of the unearned portion of the GAP fee. GAP insurance has been on the Colorado AG’s radar for several years. In 2018, the AG’s Office settled with Wells Fargo for $9.5 million — part of a broader $575 million multistate settlement; in September 2021, it settled with BBVA USA for $1.7 million and with Air Academy Federal Credit Union for an as-yet-determined amount. The case against GMF, filed in Massachusetts’ Suffolk Superior Court, focused on allegations that the lender had failed to pay legally required interest to consumers after delays in providing refunds of their GAP enrollment fees. According to state law, a creditor who fails to make a good-faith effort to refund a credit balance as required, “shall pay the customer interest thereon at the annual percentage rate of 18%.” In each of the recent GAP cases, refunds averaged a couple hundred dollars each. For instance, the average refund to PMCU members was $309, while the average refund to Credit Union of Denver members was $164. In GMF’s case, the average amount of restitution per consumer was closer to $925, but a portion of that settlement was unrelated to GAP, centering instead on inaccurate auto repossession notices. Though GAP refunds are only mandated in 11 states so far, lawmakers in other states are drafting similar regulations. In fact, AFSA Senior Vice President for State Affairs Danielle Arlowe noted that 30 pieces of GAP-refund legislation have already been introduced in the 2021-2023 legislative session, and that number will likely double within the year. Just last month, California Assemblymember Brian Maienschein introduced a Bill AB 2311 requiring creditors to promptly refund unearned, prepaid GAP waiver charges if the loan or waiver agreement is terminated early. It would also cap the amount that can be charged for a GAP waiver relative to the loan amount, and it would prevent partial waivers and valueless waivers from being sold as GAP waivers. Finally, the bill calls for auto dealers to make certain disclosures to consumers regarding GAP waivers, including that the product is entirely optional and cannot be a condition to the loan or sale terms. Lawmakers in Georgia have proposed revisions to the state’s definition of a GAP waiver. Bill HB 733 passed the House on March 15 and is pending in the Senate. Similar legislation in North Carolina, Bill SB 425, went into effect Jan. 1. Michigan lawmakers introduced House Bills 5429 to 5432 in October 2021 to amend different acts pertaining to GAP waivers on motor vehicles. In general, these amendments specify that GAP waivers on motor vehicles are not insurance products and are subject to regulation under the Guaranteed Asset Protection Waiver Act instead of the Insurance Code. Further, these waivers are contractual agreements in which a creditor agrees — for a separate fee — to cancel or waive all or part of amounts due on a borrower’s finance agreement in the event of a total physical damage loss or unrecovered theft of a motor vehicle. The amended law would grant borrowers a 90-day window to request a refund for canceled GAP waivers. Auto Finance Risk Summit, the premier event for risk and compliance management in auto finance, returns April 25-26 in San Diego. This event is the central resource for education and networking focused on best practices in risk management and will prepare your team for the dynamics of the evolving auto finance market. To learn more about the 2022 event and register, visit www.AutoFinanceRiskSummit.com .

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