Industry’s response to California’s new GAP waiver law, AB 2311, offers a textbook case in how to address complex regulations on a rushed timeline – and how Informed.IQ can help.
Assembly Bill 2311
For those not familiar, AB 2311 imposes even more restrictions on the sale of Guaranteed Asset Protection (GAP) waivers as part of car purchases in California.
In a GAP waiver, the seller waives, for a fee, any amounts the buyer still owes in the event of a “total loss or unrecovered theft.” GAP waivers appeal to consumers who worry about paying off a loan for a car they no longer have.
Among other requirements, AB 2311 prohibits the sale of GAP waivers where:
- The waiver costs more than 4% of the total amount financed to purchase the vehicle;
- The amount financed exceeds the maximum dollar amount covered by GAP waiver;
- The loan-to-value ratio of the sales contracts exceeds the gap coverage (with some exceptions), or
- The amount financed is less than 70% of the manufacturer’s suggested retail price (MSRP) of the vehicle.
The law has an extraordinarily quick timeline for compliance. Enacted on September 13, 2022, the law became effective January 1, 2023, giving people approximately 90 days to comply.
Usually, under new regulations or laws industry has a year or more to reconfigure their systems. Given so little time it’s easy to imagine how this law would be a source of confusion, and massive noncompliance.
Informed conducted a study of ~5,000 anonymized California car sales contracts with GAP waivers across multiple lenders between January 1, 2022 and March 31, 2023. Our study focused on: (i) the prohibition of GAPs costing more than 4% of the total amount financed, and (ii) the restriction on GAPs where the amount financed is under 70% MSRP.
The results show a tremendously proactive industry adjustment to the new requirements.
1. Limit to 4% of amount financed
Prior to passage, an average of 35% of vehicles studied had GAP waivers costing more than 4% of overall financing. The percentages fell off a cliff starting January 1st of 2023. In January 2023, just 7.42% of deals had waivers above 4%, and by March, this had dropped to 2%.
2. Amount Financed must be less than 70% MSRP
The auto industry has a similarly impressive story in complying with the new California requirement prohibiting GAP waivers where the amount financed is less than 70% of MSRP.
This table shows GAP waiver sales before and after the passage of the California law. In 2022, an average of 1.41% of GAP waivers would have exceeded this provision. In the first three months of 2023, less .08% of the deals exceeded this prohibition – a 15x decrease. This amounts to less than five car sales in total from the study population.
With short notice, holders, providers, and sellers of GAP waivers made significant strides in satisfying their regulatory obligations. Informed’s clients benefited from our capacity to digitally interpret contracts and identify the key data elements needed to confirm compliance. We can alert the lender, even before a loan is approved, that a GAP waiver may not comply with California requirements, and work with them to fix it. We can also partner with companies to do “lookbacks” on older agreements, help them quickly resolve items from audit findings, and help identify and remediate any potential customer harm.
If your organization is interested in leveraging our technology to assure real-time compliance, please Contact Informed to see how we can help!
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.