Auto lenders in Massachusetts can't charge GAP cancellation fees

Massachusetts lenders can't charge fees when a consumer cancels a guaranteed asset protection waiver financed as part of an indirect auto loan, the state's Division of Banks confirmed this year.

Nisen & Elliott Managing Partner Kenneth Rojc, whose law firm's specialties include auto finance, asked the division in August 2020 about GAP cancellation fees on behalf of a national bank client. The agency provided a formal opinion Feb. 10.

GAP coverage pays the difference between the amount a borrower owes on a vehicle and the actual cash value paid out by a traditional auto insurer in the event of a total loss. Rojc told the commonwealth that GAP termination fees don't appear in the retail installment sales contracts dealers sell lenders because the customer might not cancel GAP, and the fees when they do aren't financed.

Rojc asked whether banks could charge GAP cancellation fees of $25 to $60 in Massachusetts.

Deputy Commissioner of Banks Barbara Keefe said Massachusetts General Laws do not address debt cancellation products or termination charges.

"It has been the Division's longstanding position regarding permissible fees that no fees or charges may be taken, received or contracted for except the fees described" in the General Laws, Keefe wrote. "Therefore it is the position of the Division that a Massachusetts consumer may not be charged a cancellation fee for cancellation of a GAP Waiver.

"Your client may wish to pursue legislation amending [the General Laws] to expressly permit charges for the cancellation of GAP."

Rojc told Automotive News few states allow lenders to charge cancellation fees.

Massachusetts is silent on which party is responsible for providing the GAP refund, he said. Other states' regulators and courts have ruled the lender should refund the cost of GAP to the consumer when the customer cancels that coverage, Rojc wrote to the Division of Banks.

Under such a scenario, the lender would find out the refund amount from the GAP provider, refund it to the customer and seek reimbursement from the dealer, he wrote.

The provider would deduct the cancellation fee from the amount disclosed to the lender, and the consumer would end up with a refund reduced by the cost of the fee, Rojc explained to Automotive News.

Keefe characterized this as the lender "essentially passing the provider's cancellation fee onto the consumer in the form of a reduced refund amount."

Based on Keefe's letter, this type of "net" refund short the cancellation fee amount wasn't permitted for lenders in Massachusetts, according to Rojc.

American Financial Services Association Senior Vice President Danielle Arlowe said last month that she viewed GAP relationships as a key auto finance industry focus in 2022.

"From my perspective, the state legislative and regulatory perspective, I think that we're at a real turning point with GAP and how the relationship between the creditor and the dealer and the provider works," Arlowe told Automotive News. "Because [the lenders are] being held responsible in more cases for making the refund."