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Mind the GAP

Robert Ebin /

For the past few months, much has been written about the new proposed FTC Rule (proposed FTC Motor Vehicle Dealers Trade Regulation Rule). And rightfully so, as its enactment could mean significant changes in sales and finance procedures for dealerships across the country.  One of the points of discussion about this proposed Rule is its treatment of so-called “junk fees,” and its specific reference to GAP in that context.  Even though this FTC Rule has been on the radar for a while, a couple of new bills that were recently signed into law in California seemed to perhaps slip under it.  Assembly Bill 2311 and Senate Bill 1311 were both signed into law by Governor Newsom and will both become effective January 1, 2023. They each will influence the way dealers sell GAP in California going forward.  This article will do a deeper dive into these bills to explain their potential consequences for dealers.

AB 2311

Assembly Bill 2311 was signed into law on September 13, 2022. At a high level, it prevents the sale of GAP to customers in certain instances and caps the price of GAP in other instances.

The new law first provides certain content requirements for GAP waivers.  Specifically, the GAP waiver must be on a document separate from the conditional sale contract to be separately signed by the buyer.  This separate document must state

  • 1) that the GAP waiver is optional;
  • 2) the name and mailing address of the GAP administrator; and
  • 3) the following notice with the heading in at least 12-point bold type and text in at least 10-point bold type:

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.

Now is the time to be speaking to your GAP vendor and/or forms provider to ensure they make proper changes to the GAP waiver form signed by customers.

The new law also does the following:

  • Prohibits conditioning the extension of credit, the term of credit, or the terms of a conditional sale contract upon the purchase of a GAP waiver. In other words (and as you should already know), a dealer cannot require a customer to purchase GAP, which is an optional product, in order to get a deal financed.
  • Allows the buyer to cancel the GAP waiver at any time without any sort of penalty. Note that this does not prevent a refund from being prorated (where appropriate) if GAP is cancelled, it simply means that the buyer cannot be made to pay a cancellation fee, termination fee, penalty, or other similar fee if they decide to cancel the GAP waiver.
  • Restricts the price of a GAP waiver to 4% or less of the financed amount under a conditional sale contract.
  • Prohibits the sale of GAP if any of the following applies:
    • The amount financed exceeds a maximum dollar amount covered by the GAP waiver.
    • The conditional sale contract’s loan-to-value ratio exceeds the maximum loan to value ratio covered by the GAP waiver. The only exception to this would be where the terms of the GAP waiver conspicuously disclose the maximum loan-to-value ration limitation, the buyer is informed in writing that the amount financed exceeds this limitation (i.e., that the GAP waiver will not cover the total amount owed on the conditional sale contract), and that this writing is signed by the buyer.
    • The amount financed is less than 70% of the MSRP for a new vehicle or the average retail value for a used vehicle (as determined by a nationally recognized pricing guide such as Kelley Blue Book, Edmunds, the Black Book, etc.).
  • Governs the termination of a GAP waiver. At a high level, the GAP waiver would be considered terminated (and a refund due) if the consumer cancels it, the vehicle is repossessed, or the loan is repaid in full.  The customer must receive a full refund if within the first 30 days of the GAP waiver’s term, and a prorated amount thereafter.  Also, the lender must either return the money (or direct the GAP provider to do so) within 60 days of the GAP waiver’s cancellation (note that lenders can also refund the remaining auto loan balance).

SB 1311

Senate Bill 1311 was signed into law on September 27, 2022.  Generally, this new law provides a variety of different purported protections for service members. Among the most important provisions of this new law as it concerns dealers is the following:

A security interest in a motor vehicle is void, and cannot be perfected, if it would cause a loan procured by a covered member in the course of purchasing the motor vehicle to be exempt from Section 987 of Title 10 of the United States Code, and the loan also funds the purchase of a credit insurance product or credit-related ancillary product.

What does this have to do with dealers, you ask? Well, here is the first hint–Section 987 of Title 10 of the United States Code refers to the Military Lending Act. For some of you who remember the MLA saga, it was truly a long and confusing journey that we hoped had ended in 2020. For those who do not, please permit a tiny bit of background for context. Initially, it was thought by those in the legal field that motor vehicle retail sales were exempt from the MLA.  This exemption can be found at 10 USC § 987(i)(6), and states:

“The term ‘consumer credit’… does not include… loan procured in the course of purchasing a car or other personal property, when that loan is offered for the express purpose of financing the purchase and is secured by the car or personal property procured.”

However, on December 14, 2017, the Department of Defense (DOD) issued an interpretation of the MLA essentially stating that selling GAP or other credit-related products to Covered Borrowers took dealers out of this exemption.

On February 28, 2020, the DOD withdrew the 2017 interpretation, leading most to believe that dealers could, once again, sell GAP and other credit-related products to active military members and their dependents.

While most in the dealer world would have enjoyed this happy ending, unfortunately, the story did not end there. Earlier this year, the Departments of Defense and Justice issued an amicus brief for the GAP class-action lawsuit, Davidson v. United Auto Credit, essentially arguing the same position from the withdrawn 2017 interpretation. Although the jury is still out (no pun intended) on how the case will be decided, the state of California took it upon itself to settle the suspense by passing SB 1311.

Distilling it down, what the language of SB 1311 is saying is that the security interest in the vehicle is void if you include GAP (or other credit-related products) in the sale of a vehicle to a covered service member or their dependent.

So, what does this all mean for dealers? Ultimately, starting on January 1, 2023, dealers will once again have to start performing “MLA checks” on customers to determine whether they are active military (or a dependent of a person who is active military).  The “MLA check” should be done prior to presenting F&I products to that customer.  If the customer is determined to be active military or a dependent of a person who is active military, the dealer must refrain from offering to sell GAP to that customer.

Questions?

If you have any questions regarding this, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or hotline@autoadvisory.com.

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