Guaranteed automobile or asset protection products (GAP products) are nothing new in the vehicle finance industry. Dealers have been selling GAP products, which generally forgive the difference between the outstanding balance and the primary insurance carrier’s settlement upon a total loss, for years. Perhaps triggered by a rise in the sale of GAP products in uncertain economic times, state legislatures are passing new laws governing the sale and substance of GAP products. These new laws range from requiring entities that sell two-party GAP waivers (also known as debt cancellation agreements) to register with the state, imposing substantive disclosure requirements with respect to the waiver document, and imposing substantive requirements on the underlying contractual liability insurance policy.
In 2009, at least three states passed new legislation affecting the sale and substance of GAP products—Michigan, Texas, and Washington. While dealers and finance companies might be aware of what types of requirements state GAP laws generally impose, it is important to note these specific new changes to ensure that dealers are selling state law-compliant GAP products.
Michigan
On January 8, 2010, Michigan Governor Jennifer Granholm signed into law 2009 House Bills 4989 and 4990. House Bill 4989 is titled the “Guaranteed Asset Protection Waiver Act.” House Bill 4989 provides the general “lay of the land” for GAP products, and House Bill 4990 excludes two-party GAP waivers from the scope of Michigan’s Insurance Code.
In a significant departure from current Michigan law, House Bill 4989 authorizes a dealer to sell two-party GAP products. Dealers can sell a GAP waiver for a single payment, or can offer monthly or period payments options. Provided that the dealer discloses the charge for the waiver in accordance with federal Regulation Z, a dealer can exclude the charge of the waiver from the finance charge calculation. Like some other states, such as Tennessee, Michigan law requires a dealer that sells a two-party GAP waiver to insure the waiver under a contractual liability insurance policy issued by a licensed insurer (in other words, Michigan dealers are not permitted to sell self-insured two-party GAP). House Bill 4989 imposes a few substantive requirements with respect to the underlying contractual liability insurance policy as well. House Bill 4989 also imposes substantive disclosure requirements with respect to the GAP waiver itself, including a notice to the consumer that she can cancel her purchase of the waiver in the first 30 days for a full refund of the purchase price.
House Bill 4990 amends Michigan’s Insurance Code by excluding GAP waivers that comply with the requirements of the Guaranteed Asset Protection Waiver Act from the Insurance Code. Accordingly, in a deviation from Michigan law as it existed prior to the enactment of House Bills 4989 and 4990, dealers no longer need an insurance license or certificate of authority to market, sell, or offer two-party GAP waivers.
Texas
As was the case in Michigan prior to the enactment of 2009 Michigan House Bills 4989 and 4990, Texas law used to treat debt cancellation products as insurance products. The landscape of GAP changed in Texas on September 1, 2009, with the enactment of 2009 Senate Bill 1966, which specifically excludes two-party GAP waivers from the scope of the Texas Insurance Code. In addition to excluding two-party GAP waivers from the scope of the Insurance Code, the bill imposed various disclosure requirements in connection with the GAP waiver document.
The Texas Office of Consumer Credit Commissioner (OCCC) has been in the process of adopting safe harbor GAP waiver forms that creditors can use to ensure compliance with Senate Bill 1966’s disclosure requirements, and it has been a lengthy process. The Texas OCCC first “pre-proposed” regulations in July 2009 to various vehicle finance trade groups for their comments. After receiving those comments and making certain changes, the Texas OCCC officially proposed regulations, published in the Texas Register, in September 2009. The public comment period for those proposed regulations expired in October 2009, and the Texas OCCC was expected to adopt final regulations in December 2009. On January 1, 2010, however, the Texas OCCC proposed yet another set of regulations, published in the Texas Register. The comment period for those proposed regulations expires on January 31, 2010, which is the date listed in the proposed regulation as “the earliest possible date of adoption.”
Certainly, Texas dealers can continue to sell GAP products as insurance products; Senate Bill 1966 permits a dealer to sell a two-party GAP waiver, but does not require that all debt cancellation products take the form of two-party GAP waivers. Given the uncertainty regarding when the Texas OCCC will adopt final regulations and what the safe harbor forms will look like, however, Texas dealers should proceed with caution if they decide to sell two-party GAP waivers without the benefit of the Texas OCCC’s safe harbor forms. It appears that the Texas OCCC has been very responsive to comments received on its proposed regulations, and it is possible that the regulations as finally adopted will differ from the proposed regulations.
Washington
In the 2009 legislative session, Washington adopted 2009 House Bill 1530, titled the “Guaranteed Asset Protection Waiver Model Act.” House Bill 1530 codifies the Washington Insurance Commissioner’s informal position that two-party GAP waivers are not insurance products if the waiver complies with the requirements of House Bill 1530.
In addition to imposing substantive disclosure requirements in connection with the GAP waiver document, the new Washington law requires dealers marketing or selling two-party GAP waivers to register with the Washington Insurance Commissioner. Dealers that assign more than 85% of GAP waiver agreements within 30 days of originating the agreements are exempt from registration, but dealers that do not assign 100% of their GAP waivers within 45 days of originating the waivers must register. Interestingly, the new law also requires entities that purchase GAP waivers to register with the Commissioner. Effectively, the registration requirement for entities that purchase GAP waivers means that sales finance companies that purchase retail installment contracts that include a charge for a GAP waiver must register. The Insurance Commissioner has informally explained that ultimately, he wants to regulate whoever is the ultimate obligor under the GAP waiver, even if the waiver is administered by a third-party administrator. The Commissioner’s informal position is supported by the plain language of HB 1530, and is in line with the provisions of the bill that require dealers who do not assign their contracts (and waivers) to register. Prior to the enactment of House Bill 1530, Washington law did not require entities that purchased retail installment sale contracts to register or obtain a license. Like the Michigan bills discussed above, House Bill 1530 also imposes substantive requirements with respect to the underlying contractual liability insurance policy. Unlike the Michigan bills, however, House Bill 1530 does not require a dealer to insure its two-party GAP waivers under a contractual liability insurance policy.
Maya Hill is an associate in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Maya at 410-782-2356 or by email at mhill@hudco.com.