Frequently Asked Legal Questions | New Law on GAP Insurance?

A:  No, it is now illegal to require you to purchase GAP coverage to get financed, and Yes, you can cancel it and get a full refund if cancelled in the first 30 days, and get a pro-rated refund after that, without any cancellation fee either way.  Beginning January 1, 2023, Assembly Bill 2311, introduced by Assemblymember Brian Maienschein, established specific protections for buyers of guaranteed asset protection waivers (GAP waivers).  According to AB 2311's legislative history, GAP waivers are meant to protect car owners whose vehicles are declared a total loss after an accident, or are stolen and unrecovered, while the owner still owes money on the underlying car loan.

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       The bill was designed to cure a number of consumer abuses, including the sale of GAP waivers that do not cover the full amount owed, and failures to refund balances when car loans are paid off early. The new law requires, among other things, that any unearned amounts that car buyers pay for GAP waivers are promptly and automatically refunded if:

1.  They pay off their loans early; or

2.  They cancel their GAP coverage.

       

       Among other things, the new law makes it illegal to require a buyer to purchase GAP coverage in order to buy the car and get financed.  Dealers can no longer tell the buyer they have to agree to add GAP to their sales contract in order to get financing, as some unscrupulous dealers did, as a way to earn more profit on the sale, since dealers normally sell it for a huge mark-up over the actual cost.

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       The new law provides that the GAP waiver remains a part of the sales contract after the sales contract is assigned to a finance company.

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       It also requires that the terms and conditions of the GAP waiver be set forth in a separate document, which must be separately signed by the buyer, and it must, among other things: (i) Conspicuously state that the guaranteed asset protection waiver is an optional addition to the sale contract, and that the holder* of the sale contract is the contracting party to the guaranteed asset protection waiver; (ii) Conspicuously disclose the name and mailing address of any administrator; and (iii) Contain the following notice in bold type:

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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.

 

       When the sale contract is assigned, which it normally will be, written notice of the assignment of both the sale contract and GAP waiver, and the assignee’s (finance company's) name and mailing address, shall be provided to the buyer in person or by mail, or by a means of notice that the buyer previously agreed to with the seller or holder in connection with the conditional sale contract within 30 days of the assignment.

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       The law also makes it illegal for the person selling the GAP waiver to charge more than 4% of the Amount Financed in the sales contract.  It also makes it illegal to sell a GAP waiver at all, if:

1.   The GAP waiver does not cover the full amount financed in the sale contract;

2.   The sale contract’s loan-to-value ratio** at the contracting date exceeds the maximum loan-to-value ratio covered by the GAP waiver, unless the buyer signs a writing acknowledging that the amount financed in the sale contract exceeds the GAP waiver’s maximum loan-to-value limitation and therefore will not cover the total amount owed; or

3.   The amount financed is less than 70 percent of the MSRP for a new motor vehicle, or the average retail value for a used motor vehicle, as determined by a nationally recognized pricing guide,

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       The new law further provides that when the holder provides a written itemized contract balance to the buyer, including a payoff letter, payoff quote, or any 15 days’ written notice after a repossession of intent to dispose of a repossessed or surrendered motor vehicle, they shall do either of the following:

1.   Identify as a credit or refund available to the buyer the unearned portion of all GAP waiver on a pro rata basis; or

2.   Conspicuously state that a buyer who purchased a GAP waiver is generally entitled to a refund of the unearned portion of the charges on a pro rata basis upon early termination of their sale contract or cancellation of the GAP waiver, and that the buyer should contact the administrator, or any other appropriate person designated by the holder, for identification of the amount of such a refund available to the buyer at that time.

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        Even still further, the law provides the following, which if violated by the holder, allows the buyer to recover three (3) times the amount of any GAP charges paid:

(1) A GAP waiver terminates no later than the earliest of the following:

(A) Cancellation of the GAP waiver by the buyer.

(B) Payment in full by the buyer of the sale contract.

(C) Expiration of any redemption and reinstatement periods after a repossession or surrender of the motor vehicle.

(D) Upon total loss or unrecovered theft of the motor vehicle, after the holder has applied all applicable benefits required.

(E) Upon any other event that occurs earlier than the events listed in subparagraphs (A) to (D), inclusive, as specified in the guaranteed asset protection waiver.

(2) Subject to paragraph (3), upon termination of a guaranteed asset protection waiver, the buyer is entitled to a refund as follows:

(A) If the termination occurs within 30 days after the date the buyer purchased the GAP waiver, the buyer is entitled to a full refund of the GAP waiver charges plus all finance charges attributable to them.

(B) If the termination occurs later than 30 days after the buyer purchased the waiver, the buyer is entitled to a refund of the unearned waiver charges, calculated on a pro rata basis (based upon  number of days remaining as related to the total number of days of the sales contract's full term).

(C) No refund if there has been a total loss or unrecovered theft of the motor vehicle specified in the conditional sale contract and the buyer has or will receive the benefit of the GAP waiver.

(3) Within 60 business days from the termination of a GAP waiver, the holder shall tender the refund required above or shall cause the refund required above be made by instructing in writing the administrator or any other appropriate party to make the refund.

(A) A refund may be applied by the holder as a reduction of the amount owed under the sales contract unless the sales contract has been paid in full.

(4) A GAP waiver may be canceled by the buyer at any time without penalty.

(5) No cancellation fee, termination fee, or similar fee may be assessed.

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