CA SB 1311

The legislation renders loans for active military members void if they include the purchase of a credit insurance product or credit related ancillary product. This would include GAP waivers and other debt cancellation products.

By voiding the loan due to the financing of these products, the lender is unable to perfect the title on the motor vehicle.

This bill overrides an exemption that was affirmed by the U.S. Department of Defense in 2020. Their rule exempted securitized loans for personal property, enabling service members to purchase GAP waivers and other vehicle protection products. That is no longer the case.

This bill leaves our military members in the difficult position of not being able to adequately protect themselves from financial harm due to a number of different perils that face today's borrowers.

In other words, this could create negative financial spirals for members.

Industry trade groups have been outspoken in highlighting the harmful and discriminatory impact this will have on military members. All efforts have so far been unsuccessful and the legislation is still scheduled to take effect on Jan. 1.

CA AB 2311

This bill amends Section 2981 of the CA Civil Code pertaining to conditional sale contracts (retail installment contracts).

At this time, there is no indication or mention of extending these new requirements to loans made between lenders and borrowers (direct loans), so there are no changes to your direct loan GAP waiver program in response to the legislation.

Financial institutions engaged in indirect lending and the purchasing of conditional sale contracts from dealers will need to make sure that any GAP waiver financed in conjunction with these contracts comply with the new regulations.

Specifically, the new regulations applying to GAP waivers sold in conjunction with conditional sale contracts include:

• Setting a floor for loan-to-value (LTV) of 70% for eligibility of GAP waivers sold in conjunction with a conditional sale contract. The note indicating reduced LTV from 80% to 70% only refers to a change from the original draft of legislation. Prior to this legislation, there was no stated floor.
• Requiring a disclosure for any GAP waiver sold on a conditional sale contract that exceeds the maximum LTV covered under the GAP waiver that states the method by which the limitation is applied and includes written acknowledgement by the buyer indicating the conditional sale contract exceeds the GAP waiver's maximum LTV limit and that the waiver will not cover the total amount owed.
• Caps the amount charged for a GAP waiver at 4% of the buyer's financed amount under a conditional sale contract. The note indicating the maximum was raised from 2% to 4% only refers to a change from the original draft of legislation. Prior to this legislation, a maximum charge for the GAP fee was not stated.
• Adding the following notice to the GAP waiver with the header in at least 12-point bold type and the text in at least 10-point bold type:

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.

• Requires the GAP waiver to be refundable on a pro rata basis upon early termination of conditional sale contract or cancellation of waiver by the buyer without penalty (no cancellation fee). Refunds must be tendered within 60 days from termination of the GAP waiver.
• Requires the seller or holder of the conditional sale contract to maintain refund records for four years from the date the refund was tendered and provide electronic access to the records in response to any subpoena or other enforceable request.

Responsibility Falls On Credit Union Lenders

So, who is responsible for making sure that the GAP waivers financed by your financial institution meet the new requirements? Turn your gaze inward, because it comes down to you!

The GAP waiver is an addendum to the finance agreement and the lender is responsible to make sure that the finance agreement and any addenda thereto meet requirements put forth by the state.

Handling this challenge requires diligence and participation in the regulatory process. It is key to understand what portions of the regulations impact your operations and what segments of your credit union are impacted.

Read the full bills signed into law by the Governor.

Joe Winn is CEO of GreenProfit Solutions, a provider of loan and income growth programs for credit unions and community banks headquartered in Plantation, Fla.

Joe Winn

Jim Tenhundfeld is President of Frost Financial Services, Inc., a Cincinnati-based provider of GAP insurance services to credit unions and banks.

Jim Tenhudfeld