On January 1, 2023, new rules will go into effect concerning guaranteed asset protection waivers (“GAP”) in California. On September 13, 2022, Governor Gavin Newsom signed AB-2311 into law which amended California’s Rees-Levering Motor Vehicle Sales and Finance Act (Cal. Civ. Code § 2981, et seq. [“the Act”]). AB-2311 was sponsored by Attorney General Rob Bonta and supported by the Consumer Federation of California. In support of AB-2311, Attorney General Bonta stated:
Without specific consumer protections, unfair practices in the sale and administration of GAP waivers enable auto dealers and lenders to take advantage of vulnerable consumers and harm competition. GAP waivers are usually very costly. The product only benefits consumers who are underwater on their auto loan at the time that a triggering event occurs. In addition, the full cost of a GAP waiver is charged up front and typically financed at a high interest rate. […] Accordingly, AB 2311 would establish a number of consumer protections for GAP waivers within the Rees-Levering Act (Civil Code § 2981 et seq.) First, the bill requires the prompt refund of the unearned, prepaid GAP waiver charges when the loan or waiver agreement terminates early, as specified. Second, the bill caps the amount that may be charged for a GAP waiver relative to the loan amount, and seeks to restrict partial waivers and valueless waivers from being sold as GAP waivers. Third, AB 2311 requires the seller to make important disclosures to consumers regarding GAP waivers, including that the product is optional and cannot be a condition to the loan or sale terms. Finally, the bill makes violations of these provisions enforceable under the Rees-Levering Act.
(Assembly Floor Analysis to AB-2311.)
AB-2311 will mandate sweeping changes to GAP, including how it is sold, when it can be sold, under what circumstances it can be sold, how it can be cancelled, and how it can be administered.
Per AB-2311, the Act will be amended to include the following material changes to how GAP is sold and administered:
- GAP must be specifically disclosed on the purchase contract. ( Civ. Code § 2981(a)(1)(A).) [This was likely already required prior to AB-2311, the amendments merely add the newly defined term “guaranteed asset protection waiver.”]
- GAP must be specifically disclosed on the Pre-Contract/Optional Products Disclosure. ( Civ. Code § 2982.2(1)(B)(iii).) [This was likely already required prior to AB-2311, the amendments merely add the newly defined term “guaranteed asset protection waiver.”]
- GAP may only be sold/administered under the following conditions:
- GAP must be incorporated into the purchase contract and remains part of the purchase contract upon assignment of the same.
- The terms of the purchases contract, including financing, may not be conditioned upon the purchase of GAP.
- The terms and conditions of the GAP shall be on a separate document from the purchase contract, shall be separately signed, and shall:
- Conspicuously state that the guaranteed asset protection waiver is an optional addition to the conditional sale contract;
- That the holder of the conditional sale contract is the contracting party to the guaranteed asset protection waiver;
- State the name and mailing address of the seller of GAP;
- If the purchase contract and GAP are assigned, notice of that assignment must be provided to the purchaser(s) within 30 days of the assignment;
- Conspicuously disclose the name and mailing address of any administrator known as of the date of the sale; and
- Contain a notice with a heading in at least 12-point bold type and the text in at least 10-point bold type, circumscribed by a line, immediately above the contract signature line, that reads as follows:
STOP AND READ:
YOU CANNOT BE REQUIRED TO BUY A GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES. IT IS OPTIONAL.
NO ONE CAN MAKE YOU BUY A GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES TO GET FINANCING, TO GET CERTAIN FINANCING TERMS, OR TO GET CERTAIN TERMS FOR THE SALE OF A VEHICLE.
IT IS UNLAWFUL TO REQUIRE OR ATTEMPT TO REQUIRE THE PURCHASE OF THIS GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES.
A selling dealer is also prohibited by AB-2311 from:
- Charging more for GAP than four percent of the amount the purchaser finances under the purchase contract;
- Selling GAP if:
- The amount financed through the purchase contract exceeds a maximum dollar amount covered by GAP;
- The purchase contract’s loan-to-value ratio at the contracting date exceeds the maximum loan-to-value ratio covered by GAP, unless the terms of GAP conspicuously disclose the maximum loan-to-value ratio limitation, including the method by which the limitation is applied, and the buyer is informed in a writing, acknowledged by the buyer, that the amount financed in the buyer’s purchase contract exceeds GAP’s maximum loan-to-value limitation and therefore the waiver will not cover the total amount owed on the purchase contract; and
- The amount financed through a purchase contract is less than 70 percent of the manufacturer suggested retail price for a new motor vehicle or the average retail value for a used motor vehicle.
(Cal. Civ. Code § 2982.12)
AB-2311 also provides a number of new provisions regarding refunds of GAP. Specifically, dealers and holders must in connection with providing payoff amounts:
Conspicuously state that a buyer who purchased a guaranteed asset protection waiver is generally entitled to a refund of the unearned portion of the guaranteed asset protection waiver charges on a pro rata basis upon early termination of their conditional sale contract or cancellation of the guaranteed asset protection waiver, and that the buyer should contact the administrator identified in the buyer’s guaranteed asset protection waiver, or any other appropriate person designated by the holder, for identification of the amount of such a refund available to the buyer at that time.
(Cal. Civ. Code § 2982.12(a)(6)(B).)
With respect to termination of GAP, AB-2311 will have GAP terminate upon:
- Cancellation by the purchaser;
- Payment of all amounts due per the purchase contract;
- Expiration of any redemption and reinstatement periods after a repossession or surrender;
- Total loss or unrecovered theft of the motor vehicle specified in the conditional sale contract, after the holder has applied all applicable benefits required under the guaranteed asset protection waiver; or
- Termination by the purchaser who shall be entitled to a full refund if GAP is terminated within 30 days of purchase, or a pro rata refund if terminated after 30 days.
(Cal. Civ. Code § 2982.12(b).)
Given the significant changes to GAP coming to California in 2023, dealers and holders are strongly encouraged to review their GAP documents and compliance as failure to comply with the new GAP rules will likely expose dealers and holders to considerable liability under the Act, including liability for damages, injunctions, and attorneys’ fees for aggrieved purchasers.