Two recently passed California bills, Assembly Bill 2311 (“AB 2311”) and Senate Bill 1311 (“SB 1311”), were signed into law by Gov. Gavin Newsom on September 13 and September 27, respectively, and provided new restrictions on the sale of waivers on Guaranteed Asset Protection (“GAP”) in California. The new laws limit the price of GAP waivers, add new disclosure requirements, prohibit the sale of GAP waivers in certain cases, and prohibit the financing of GAP insurance on auto loans to service members.
GAP coverage protects borrowers from the depreciation of their car in the event of a claim by covering the difference between a car’s insured value and the balance of a borrower’s car loan. GAP insurance generally refers to liability insurance purchased by a consumer in a separate transaction from the actual vehicle purchase, typically as additional coverage to their automobile insurance. A GAP waiver is an optional contractual obligation during the financing of a car, whereby the seller agrees to waive the remaining debt of a car loan in the event of a total loss. The two new laws, which go into effect on January 1, 2023, reflect concerns from consumer advocates such as California’s Attorney General, who sees cap waivers as an unnecessary add-on product for many car buyers.
In this regard, an essential requirement of AB 2311 is a new notice to be presented with a headline of at least 12 bold type and a body of at least 10 bold type that reads as follows:
HOLD AND READ:
YOU MAY NOT BE OBLIGATED TO PURCHASE ANY GAP-WAIVER OR OTHER OPTIONAL ADDITIONAL PRODUCTS OR SERVICES. IT IS OPTIONAL.
NO ONE MAY REQUIRE YOU TO PURCHASE A GAP WAIVER OR ANY OTHER OPTIONAL ADDITIONAL PRODUCTS OR SERVICES IN ORDER TO OBTAIN FINANCE, OBTAIN CERTAIN FUNDING TERMS, OR OBTAIN CERTAIN TERMS FOR THE SALE OF A VEHICLE.
IT IS ILLEGAL TO REQUIRE OR ATTEMPT TO PURCHASE THIS GAP WAIVER OR ANY OPTIONAL ADDITIONAL PRODUCTS OR SERVICES.
In addition to the new disclosure, the new law will:
- Prohibit the term of credit extension, credit term, or the terms of a conditional purchase agreement when purchasing a GAP waiver and allow the buyer to cancel the GAP waiver at any time without penalty.
- Prohibit the sale of a GAP waiver if the loan-to-value ratio (“LTV”) exceeds the GAP waiver’s maximum loan-to-value ratio, unless the terms of the GAP waiver disclose that restriction and the buyer is informed of that restriction. This provision is similar to the prohibition in the Federal Trade Commission’s proposed Motor Vehicle Dealership Regulations, which would, among other things, prohibit a car dealer from charging for GAP coverage that cannot actually be used by the consumer, e.g. B. Where the LTV is low and the insurance payout for a totaled vehicle would likely cover any outstanding debt.
- Require that the required GAP waiver information appear on a separate document from the conditional purchase agreement and be signed separately by a buyer or prospective buyer.
- Governing the termination of a GAP waiver, including reimbursement of GAP waiver costs upon termination.
- Require a statement in the contract that the buyer is generally entitled to a prorated refund of the unearned portion of GAP waiver fees, as specified.
AB 2311 also allows recovering triple the amount of any GAP fee paid by the consumer for a breach by the seller or holder of the contract of sale.
The other bill, the Military and Veteran Consumer Protection Act of 2022, or SB 1311, contains several provisions related to military personnel, including a ban on GAP waivers by auto finance creditors. Specifically, SB 1311 voids any security interest in a motor vehicle if it would result in a loan obtained by a military member in connection with the purchase of the motor vehicle being exempt from the Military Lending Act (“MLA”) and if the loan also funds the purchase a credit insurance product or a credit-related ancillary product. This effectively amounts to a ban on CAP exemptions for soldiers, since loans made specifically to finance the purchase of a car and which are secured by the car are otherwise exempt from the MLA definition of “consumer credit”. 10 U.S.C. § 987(i)(6).
For a creditor to extend a loan to purchase a car with a GAP waiver under the new law, the loan would need to be unsecured and subject to the MLA’s 36% MAPR limit. Even if a lender were willing to provide an unsecured auto loan, the added cost of the CAP waiver could push the MAPR above the 36% ceiling. As a result, service members in California may find it more difficult to finance a car purchase, and service members who finance their purchases must pay higher auto insurance premiums if they want GAP coverage because they must purchase it through their auto policy financing as part of the purchase.
The American Financial Services Association (“AFSA”) and several other trade associations opposed the bill because it denied service members access to a voluntary protection product from which they could benefit. In a letter opposing the law before it was passed, these trade associations also questioned it as a final run to Congress’ federal intent to exempt secured auto loans from the MLA’s requirements. By structuring the bill in this way, California appears to move beyond concerns about the disclosure, suitability, or cost of CAP waivers (addressed in AB 2311), regardless of how CAP waiver funding might be addressed under the MLA.
Unfortunately, the Department of Defense (“DOD”) appears to have made another U-turn when it comes to handling CAP waivers under the MLA. At first, the plaintext of the MLA and DOD regulations seemed to indicate that a purchase money loan that also funds a GAP waiver would be exempt if it was secured by the car. In 2017, the DOD released a “clarifying” question and answer in an interpretative rule that states, among other things, “A lending transaction that also finances a credit-related product or service, and not a product or service that expressly… real estate relating to the motor vehicle or the personal person does not fall under the exceptions [32 CFR] § 232.3(f)(2)(ii) and (iii). For example, a credit transaction involving the financing of guaranteed auto protection insurance or a credit insurance premium would not qualify for the exception under Section 232.3(f)(2)(ii) or (iii).” See December 2017 Questions and Answers on Interpretation Rule #2.
In 2020, however, the DOD withdrew this Q&A guidance specific to GAP insurance to further analyze the issue amid concerns that creditors would not be able to provide credit to service members if they were prohibited from the MLA, in the circumstances described, a security interest to be included in the instructions. That seemed to signal a possible change in the Defense Department’s position. However, no further interpretative rule has been issued and the DOJ, DOD and CFPB have recently argued in litigation that a “hybrid” loan, i.e. a purchase loan to finance a car and a GAP waiver, falls within the MLA and outside the car loan exemption. Submitted in an amicus brief Davidson v United Auto Credit Corporation, USCA4 Docket 21-1697, the United States petitioned the Fourth Circuit to reverse a district court finding that the loan in question was exempt under the MLA as an auto loan because it was a hybrid loan that provided funding for GAP coverage included. A decision on this complaint is still pending.