GAP Restrictions Revisited

GAP Restrictions Revisited Informed

In the last edition of Compliance Corner, we shared original Informed research describing how auto lenders and dealers have responded to the new California guaranteed asset protection (GAP) waiver law, AB 2311.  Automotive News included details from that blog and this one in their article covering that law. This edition extends our research to three other states with GAP waiver restrictions – Texas, Colorado, and Minnesota.

 Each of these three states offer their own GAP compliance wrinkle.

  • Texas (Texas Finance code § 354.002): prohibits a debt cancellation agreement from costing more than five percent of the amount financed;
  • Colorado (Rule 8(k) of 4 CCR 902-1): prohibits GAP waivers costing more than $300 or two percent of the amount financed, whichever is higher; and 
  • Minnesota (2022 Statutes Insurance Chapter 59D.02(Subd. 9)):  prohibits the sale of GAP waivers for used autos or trucks valued at $5,000 or less.

To assess dealer compliance, Informed examined 10,000 auto loans with GAP waivers from these three states, sourced from multiple lenders between March 2022 and March 2023. The sample population weighed more heavily toward Texas, with over 8,000 waivers from that state. We reviewed over 1,000 GAP waivers each from Colorado and Minnesota. Overall, we found about 1.3% of GAP waivers across all three states exceeded statutory limits. Drilling down state by state, about 2.5% waivers exceeded the charge cap in Colorado. In Minnesota, we observed that 1.9% of GAP waivers exceeded the state’s charge limits, and 1.1% of the Texas waivers exceeded the state’s charge limits.

In contrast to the California waiver law, each of these waiver restrictions are long-standing requirements, so dealers should familiar with them. The results show that the vast majority of dealers have implemented checks to comply with these GAP waiver obligations. However, we also saw a persistent, non-trivial number of waiver contracts that did not conform to state legal requirements.

From our perspective, dealers and lenders run risks if they do not implement automated checks to catch these loan defects. Because these violations are numerically driven, regulators can spot them quickly during compliance reviews. Automated systems can catch these defects with a high level of accuracy, bringing the risk of unintentional violation close to zero.

GAP Restrictions Revisited Informed
GAP Restrictions Revisited Informed
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Tom Oscherwitz and Husain Radiowala VP of Legal, Senior Data Analyst
Tom Oscherwitz is Informed’s VP of Legal and Regulatory Advisor.  He has over 25 years of experience as a senior government regulator (CFPB, U.S. Senate) and as a fintech legal executive working at the intersection of consumer data, analytics, and regulatory policy. Husain Yusuf Radiowala is Informed.IQ's Senior Data Analyst. He is an accomplished analytics professional with 9 years of experience in FinTech, Marketing, Sales and Supply Chain Analytics in which he leverages his expertise in Data to extract meaningful insights from complex financial datasets.

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