California Enacts Legislation Regulating GAP Waivers

Financial Services Law

In an effort to reduce allegedly “unnecessary junk products” sometimes included in automobile financing, on September 14, Governor Gavin Newsom signed into law Assembly Bill 2311, further regulating motor vehicle conditional sales contracts and the terms of guaranteed asset protection waivers in such contracts. As with the FTC’s recently proposed regulations limiting so-called “junk fees and bait-and-switch advertising tactics” by auto dealers, these new requirements seem likely to increase the regulatory and compliance burden on auto dealerships and financial institutions.

A guaranteed asset protection waiver (“GAP waiver”) is defined as an optional contractual obligation where a motor vehicle’s seller agrees to cancel or waive part or all of an amount due on the conditional sale contract in the event of a total loss or unrecovered theft of the vehicle.

Among other things, the newly enacted bill provides the following regarding GAP waivers:

  • Prohibits conditioning the extension of credit, term of credit or terms of a conditional sale contract upon purchasing a GAP waiver;
  • Permits the buyer to cancel the GAP waiver at any time without penalty;
  • Prohibits charging more for a GAP waiver than 4 percent of the amount the buyer finances under the contract;
  • Prohibits the sale of a GAP waiver where the conditional sale contract’s loan-to-value ratio exceeds any provision in the contract that specifies a maximum loan-to-value ratio covered by the GAP waiver, unless such terms are disclosed and the buyer is informed in writing of such limitation;
  • Requires a separate GAP waiver disclosure that must be separately signed by the buyer;
  • Authorizes the buyer to recover from the holder three times the amount of any GAP charges paid if the seller or holder violates Subdivision l of Section 2982

On the federal level, the Federal Trade Commission has received more than 20,000 comments in response to their proposed rule to ban “bait and switch” advertising, fraudulent or surprise “junk fees,” and requiring up-front disclosure of costs and conditions of the sale. If adopted in its current form, the proposed rule would require the consumer’s “Express, Informed Consent” for the purchase of any add-on product, require disclosure of a list of all add-on products and their cost, and ban the sale of any add-on product that the “consumer would not benefit from,” such as nitrogen-filled tires or GAP agreements for which the purchaser is ineligible for coverage.

The new legislation allows recovery from the holder of the contract, as does the Federal Trade Commission’s “Holder in Due Course Rule,” which subjects the holder of the consumer credit agreement to all of the claims and defenses that the consumer could assert against the seller of the goods or services that were financed by the consumer credit agreement.  As such, financial institutions that take assignment of automobile retail installment contracts from California-based auto dealers should reevaluate their compliance programs to properly manage their potential exposure from these new requirements.

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