AB 2311 bans GAP sales on California car loans for less than 70 percent of a vehicle's value or which finance more than GAP would cover, and it caps the price of GAP at 4 percent of the amount the borrower finances. The average new-vehicle loan financed $40,290 during the second quarter, while the average used-vehicle loan involved $28,534, according to Experian.
Car deals with loan-to-vehicle-value ratios above the loan-to-value ratio limit in the GAP policy would still be permitted if buyers are notified of this imbalance "in writing, acknowledged by the buyer," the bill states.
The measure also requires GAP buyers to sign off on a separate form notifying customers the finance-and-insurance coverage and other add-on products are always optional, and it gives consumers the right to cancel GAP at any time without a fee.
"The sale of GAP waivers is just one example of vulnerable customers being taken advantage of when committing to a large purchase," bill sponsor Assembly Member Brian Maienschein, D-San Diego, said in a statement Sept. 14. "AB 2311 will strengthen California's consumer protection laws to ensure that car buyers can avoid the costly add-on when unnecessary."
University of Michigan Survey Research Center polling in 2020 found GAP products attached to about 39 percent of financed vehicles, according to a paper by two economists and a University of Mississippi finance professor analyzing the results. More than 90 percent of those covered by GAP said they thought the purchase was a good idea, according to the paper.
Auto lenders will need to be ready to automatically refund the GAP payments they've financed up front during a car deal should certain conditions described in the law arise.
A GAP contract is considered terminated and a refund due under AB 2311 if the consumer cancels the coverage, the vehicle is repossessed or the loan is repaid. The customer must receive a full refund within the first 30 days of the GAP policy's life; after that, only a prorated amount is required.
The lender must either return the money to the customer or direct the GAP providers to do so within 60 days of a GAP contract's cancellation. However, lenders also have the right to simply refund the remaining auto loan balance.
McDaniel, whose company reviews F&I products for lenders considering financing them within auto loans, said lenders have begun to establish partnerships with GAP providers to facilitate such refund obligations. GAP middleman firms also can bring the two industries together for the transactions, according to Keepers.
Worst case, lenders could simply refuse to finance GAP from unresponsive product providers, McDaniel said.
AB 2311 first passed the California Assembly 52-16 on May 25. An amended version cleared the California Senate 32-0 on Aug. 24, and the Assembly agreed to the amendments in a 60-3 vote Aug. 25.
Keepers said GAPA was able to work with AB2311 sponsor Maienschein and the office of bill champion California Attorney General Rob Bonta on more palatable legislation than was introduced.
Originally, the measure capped GAP pricing at 2 percent of the amount borrowed, banned GAP on loans for less than 80 percent of vehicle value and forbade GAP contracts that covered less than the sales contract's loan-to-value ratio. It also carried different consumer notification language and put more responsibility upon lenders.
"We're gonna be able to adapt," Keepers said. "The industry is still viable." He said it demonstrated compromise between thesides.