GAP coverage is drawing more legislative attention

Guaranteed Asset Protection coverage has been receiving attention in state capitols, leading to speculation that lawmakers might be filing GAP bills at a rate not seen for more than a decade, an American Financial Services Association regulatory expert said this month.

During the organization's Vehicle Finance Conference & Expo on March 9, Senior Vice President Danielle Arlowe presented data tracking legislative activity on auto finance issues during multiple two-year periods — time frames meant to roughly capture different states' sessions.

The association counted 14 GAP-related bills during the 2019 to 2021 biennium. For the 2021 to 2023 period, the organization has already recorded 30 pieces of legislation. And it's early in the period, Arlowe said.

Arlowe predicted the auto finance sector would see a "spike" in GAP actions in statehouses, probably reaching the level of the 59 measures proposed during the 2009 to 2011 period.

Arlowe mentioned one measure during the conference: California Assembly Bill 2311, which would establish new rules for GAP sales and cancellation in that state. A common finance and insurance product, GAP coverage pays any loan balance not reimbursed by traditional auto insurers — which are only obligated to cover the actual value of the vehicle — after a total loss.

"It will go somewhere," Arlowe predicted of AB 2311, which as of March 19 was eligible to be heard in committee.

Guaranteed Asset Protection Alliance Executive Director Tim Meenan, of Meenan P.A., told Automotive News in February that his organization supported some elements of AB 2311, such as notifying customers that GAP is optional and automatically refunding GAP balances if the loan ends early.

But he said the alliance is opposed to other elements, including capping the GAP price at 2 percent of the amount financed under a vehicle sale contract and banning GAP sales under certain criteria related to the amount financed.

Arlowe said she viewed GAP as a key auto finance industry focus in 2022.

"From my perspective [and] 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 said. "Because [the lenders are] being held responsible in more cases for making the refund."

Currently, 11 states definitively require lenders to refund a consumer who cancels financed GAP coverage, Arlowe said at the conference. Twenty states explicitly say lenders don't have to issue the refund, she said.

"We're in a really difficult position, especially non-captives, because we don't have a relationship typically with the provider," Arlowe said. "And so we might not know how the calculation is supposed to be made. And, we've already paid for the product once. And so if we have to make the refund, if you don't have a floorplanning relationship with the dealer, then you're just somebody standing in line asking for money."

She called it "particularly unfair and challenging" for independent auto lenders.

"It's difficult for banks, it's difficult for captives, but it's almost impossible for independent vehicle finance companies," Arlowe said. "I think that the whole way everyone looks at the product and the way it works and the relationships among each other is really at a turning point.

"And I think in the end, it's going to be great for everyone. It's just changing right now."