AB 2311, introduced by Assembly Member Brian Maienschein, D-San Diego, adds GAP waivers to the list of add-on products California code requires be itemized to customers. The list also includes vehicle service contracts and “optional debt cancellation” deals, and California New Car Dealers Association President Brian Maas in a statement Feb. 18 called GAP “already regulated as optional debt cancellation agreements.”
“The protections provided in AB 2311 extend far beyond the existing requirements applicable to debt cancellation agreements in the indirect auto lending context,” Bonta’s press office wrote.
Under AB 2311, customers would also need to be notified that neither lenders nor sellers can make vehicle transaction terms contingent upon buying GAP. Consumers also would have the right to cancel GAP any time and see a prorated refund credited to their vehicle loan balance, and GAP would be automatically canceled and any balance refunded if the loan is repaid.
Meenan’s GAPA has backed language in other states to notify customers that GAP is optional and can’t be tied to the sale or loan terms. It also has encouraged having the balance of GAP’s cost automatically refunded if the auto loan ends early.
“GAPA actually supports some of the changes he’s seeking,” Meenan said.
But the organization disagrees with other aspects of the bill, he said.
AB 2311 bans sales of GAP contracts that cover less than the vehicle sale contract’s loan-to-value ratio, defining this as the amount borrowed compared with the sticker price on new models and the average National Automobile Dealers Association retail value on used vehicles. The bill also bans GAP contracts if the amount financed on new or used models is less than 80 percent of the sticker price or NADA retail value, respectively, once the cost of GAP, credit insurance and service contracts are subtracted.
Bonta’s news release said the bill would prevent “partial waivers and valueless waivers from being sold as GAP waivers.”
Meenan said partial waivers arise in situations such as negative equity from a trade-in rolled into a new loan. In many cases, GAP isn’t designed to pay off one’s previous vehicle, he said. “There has to be some limits,” he said. Otherwise, there’s a “moral hazard.”
Partial waivers might be appropriate if the customer keeps and sells the totaled vehicle or is behind on car payments, he said.
AB 2311 also caps the cost of GAP at 2 percent of the amount financed under a vehicle sale contract.
“GAP need not cost more than 2 percent of the loan value, particularly in light of the dramatically lower prices for GAP insurance that provides the same benefits,” Bonta’s press office wrote in an email.
