Many credit union professionals have probably seen the recent news surrounding the Guaranteed Asset Protection (GAP) coverage, class action litigation. CUNA Mutual Group (CMG) staff would like to share some of the work they’ve been doing to educate their credit union GAP/payment protection customers.
Recent class action litigation involves GAP that was sold by dealers on retail installment sales contracts (RISC) and then sold/assigned to credit unions and other lenders. The class action generally alleges that the lenders breached the terms of the GAP agreement by failing to refund the unearned GAP fee when the RISCs paid off early. It is important to understand that, in most states, GAP sold by dealers on RISCs generally follows a separate set of laws than GAP sold by credit unions on direct loans. While not at issue in the class action, other ancillary products may have refunding requirements as well.
GAP Sales By:
A. Credit Unions on Direct Loans
Credit union direct loans are not at issue in the class action. However, credit unions may be offering a GAP product that requires the credit union to automatically refund a portion of the GAP fee upon early termination of the loan, such as from an early loan payoff. Because GAP can be designed in many different ways, credit unions are encouraged to review any refunding obligations under their specific GAP program.
While credit unions will have to confirm their own product features and verify any nuances with their own provider, we understand GAP generally is designed as follows:
- Federal chartered credit unions largely are not offering GAP that is automatically refundable after a “free look” period.
- State chartered credit unions in CO, FL, GA, IN, IA, MO, RI, SC, VT, UT and WI typically offer a refundable GAP product.
B. Dealers on Retail Installment Sales Contracts
If a credit union purchases RISCs from a dealer with GAP, the credit union should review those GAP contracts/policies to understand any refund obligations, which can vary significantly based on product type and design.
This CUNA Mutual Group RISK Alert, Rise in Litigation for Failing to Refund Unearned GAP Premiums, which was provided to CUNA Mutual Group Fidelity Bond policyowners on November 17th, offers more information and suggested steps to help mitigate potential risk.
Other Ancillary Products:
Credit unions also should review the terms of credit insurance, debt protection and Mechanical Repair Coverage (MRC) programs to understand their refunding requirements, if any:
- Monthly-pay credit insurance and debt protection generally don’t have a refund requirement.
- Single-premium credit insurance likely requires a refund if a loan terminates early, much like refundable GAP.
- MRC generally won’t require a refund if a loan terminates early, but credit unions should review their product and processes to understand if there is an obligation to obtain a refund if a vehicle is repossessed or totaled and apply the refund to the loan.
This CUNA Mutual Group RISK Alert, CFPB Focuses on Auto Loan Servicing Violations, which was provided to CUNA Mutual Group Fidelity Bond policyowners on August 9, 2019, provides more information and suggested steps to help mitigate potential risks.
Risk mitigation in this area begins with understanding the refund obligations under all GAP products and any other ancillary products. Then credit unions should ensure they are providing their members any refunds that may be required and that robust processes are in place to ensure refunds are provided into the future.
Nebraska Revised Statutes
Revised Statutes sections 45-1101 to 45-1107 are known and cited as the Guaranteed Asset Protection Waiver Act. Sections 45-1105 and 45-1106 in particular discuss requirements for disclosures, cancellations, refunds, and more.
Gerry Singleton, Vice President, CU System Relations @ CUNA Mutual Group
CUNA Mutual Group is a Nebraska League MVP – Most Valuable Player