August 24th, 2021
Certainly, the major auto lending risk to address is uninsured collateral physical damage and skip. However, compliance risk should not be neglected when it comes to gap waiver sales.
After some class action lawsuits and regulatory enforcement, notably in Colorado, many auto lenders are looking more closely at the issue of refunding gap waivers.
There are many factors to consider
First and foremost, a familiarity with state laws and regulations is important. You should seek qualified legal advice before selling a gap waiver as part of loan or allowing a dealer to add a gap waiver to a retail installment contract that you are purchasing.
Second, the requirement to refund a gap waiver may differ depending on whether the loan is a direct loan (2-party contract) or an indirect loan (3-party: retail installment contract). In many states, a gap waiver written as part of direct loan need not be refundable (though it’s customary to allow a full refund if the borrower requests cancelation in the first 30/60 days of loan term). State motor vehicle finance acts generally determine how a gap waiver can be written when it’s appended to a retail installment loan contract (indirect loan). Unfortunately, in some states the regulations are ambiguous or non-existent: Massachusetts, for example, doesn’t have clear regulations when it comes to gap waiver sales.
Finally, if it turns out the gap waiver must be sold as a refundable product, then a question arises as to who is responsible for making the refund; especially if loan is an indirect loan written with a dealer’s gap waiver attached. Indirect auto lenders often buy loans from multiple dealers; each dealer having their own gap waiver form. Reviewing the waiver the dealer is selling is important. Then, under the concept of ‘holder in due course’, making certain the dealer is actually making the refunds has increasingly become the lender’s responsibility. Typically, a pro-rata refund is required.
It’s a time-consuming task for lenders to chase after and to manage gap waiver refunds through multiple dealers operating in various states; but it’s become a compliance reality that must be addressed. If the task is too burdensome for your loan servicing staff, there are a few outside vendors who will manage the gap waiver refunding requirements for you.
A passive approach to monitoring gap waiver refunds is no longer an option. Lenders need to take a proactive approach — to make certain borrowers get the refunds they’re due.
Lee & Mason is a leading provider of gap waiver insurance. Let us know if we can help you with a proposal, whether it’s a non-refundable gap waiver or refundable gap waiver that you’re looking to offer to your borrowers. Connect with your local Lee & Mason rep for a consultation below.