GAP policies are often important to auto credit customers, especially those who can’t afford to continue making payments when their cars are total losses and they are under water on the financing. They are also important to dealers, who have found it increasingly hard to make money without revenue from their finance and insurance departments. Many customers don’t understand the GAP product and how it can benefit them, so GAP administrators often prepare advertising that helps the dealer promote the policies. If the advertising is misleading, both the dealer and the GAP administrator can find themselves in a pickle.
Imagine that you are a bank or sales finance company that offers a branded GAP product. You provide dealers with marketing information that says:
“Today comprehensive and liability insurance combined still don’t provide true full coverage. You have to fill the GAP.”
“Your auto insurance may be inadequate to protect you financially in case of a total loss through accident or theft. If your loan balance is greater than the current cash value of your car, GAP can be a great way to protect you.”
At first glance, these sound like reasonable descriptions of GAP. Depending on the fine print in the GAP terms and conditions, these claims might be completely true. But does the GAP policy always “take care of the rest?”
If the GAP policy has a coverage limit, such as 125% of the car’s value, the customer will still be facing a deficiency if his or her debt is more than the coverage limit.
It also matters how the GAP policy defines the car’s value. If the GAP policy uses the lowest value, which it often does, even customers who did not finance negative equity can find that they still owe the finance source after GAP pays.
I can hear the grumbling now: “Hey, you are being really picky! These are common claims. Besides, the ad says GAP ‘can be’ a great way to protect you. The ad doesn’t promise GAP will always cover every dollar of “debt!”
In my defense, I can only say that if you think I am being picky, you can be sure that the Bureau of Consumer Financial Protection is equally picky.
The press has been full of stories recently about how happy the consumer financial services industry has been with the “new” BCFP under Acting Director Mick Mulvaney. And there have indeed been some changes worth celebrating. But I doubt the auto finance industry will find much to celebrate in this action.
What are the takeaways from this enforcement action?
• If you are an auto finance company offering a branded GAP policy, make the same careful comparison between the policy’s terms and the promotional material.
• If you are a dealer, take a close look at any limitations in the GAP policies you sell. Take an even closer look at all promotional material for GAP that you offer customers. Are there any “gaps” between the claims and the terms of the policies? You should probably have your counsel look them over, too.
• Ignore the fact that someone else might have prepared the promotional material. If you give it to your customers or if it has your company’s name on it, you “own” it, and you’d better be sure it is accurate.
• While you are at it, don’t stop with GAP. Take a good look at all your marketing materials for voluntary protection products and the contracts that spell out their limitations and exclusions. If you don’t know whether the claims are completely true, ask for written substantiation from the vendor. Be prepared to stop selling (or branding) the product if you are not satisfied with what you get.
• Finally, don’t be lulled into believing that you can let down your compliance guard—even a little bit—because the Bureau has become “industry friendly.” It is hard to imagine that a consent order on these issues under former BCFP Director Richard Cordray could have been any tougher.