Hoosier Banker 31 Indirect Auto Finance Programs GAP coverage considerations Brett J. Ashton Partner Krieg DeVault LLP bashton@kdlegal.com Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. This information is provided for general education purposes and is not MRXIRHIH XS FI PIKEP EHZMGI 4PIEWI GSRWYPX PIKEP GSYRWIP JSV WTIGMƤG guidance as to how this information applies to your institution’s circumstances or situation. Question: Our bank recently started ER MRHMVIGX EYXS ƤRERGI TVSKVEQ XLEX involves purchasing car loans from auto dealers across the state. Many of these loans will have GAP coverage, and we have heard of banks being sued over failing to refund unearned premiums. What does Indiana law require us to do with GAP premiums if an auto loan is paid off early? Answer: Depending on how much the GAP (guaranteed asset protection) premium is, you may not have to refund anything. If you do have to refund, though – either because a customer cancels coverage or, more likely, because of an early payoff – it is critical that the refund be handled correctly. The Indiana Uniform Consumer Credit Code provides that an additional charge can be made for GAP coverage, subject to the customer receiving all appropriate disclosures. In the indirect auto finance market, required disclosures are typically provided to the auto dealers by those third-party vendors that develop and offer GAP products. As a result, compliance with the disclosure requirements of the code are rarely of concern, although you should certainly include a review of these required disclosures in any audit you perform of your indirect auto finance program. Your concern is valid, however, about ensuring that appropriate premium refunds are made. Indiana law provides that GAP coverage involving a premium of $400 or less may be nonrefundable. In fact, many banks elect to limit the permissible GAP premiums associated with their auto finance loans to $400 or less to eliminate the risk associated with a potential refund. Oftentimes, though, indirect relationships will present auto loans with GAP premiums well in excess of this $400 threshold. 1 For auto loans consider consumer credit sales, see Ind. Code § 24-4.52-202(4)(e) and (f); for auto loans considered consumer loans, see Ind. Code § 24-4.5-3-202(3)(e) and (f). 2 For auto loans consider consumer credit sales, see Ind. Code § 24-4.52-202(4)(f)(3); for auto loans considered consumer loans, see Ind. Code § 24-4.5-3-202(3)(f)(3). 3 See Herrera v. Wells Fargo Bank, N.A., No. 18-332, 2020 WL 5802421 (C.D. Cal. Sept. 1, 2020); Jones v. PNC Bank, N.A., No. 21-2000 (N.D. Ill.); Fernandez v. Capital One, N.A. No. 21-2253 (C.D. Cal.). 4 See: coag.gov/press-releases/compass-bank-aafcu-gap-fees-refund In the event of a prepayment or cancellation, Indiana law requires that all GAP refunds be calculated using a method that is “no less favorable to the consumer than a refund calculated on a pro rata basis.”1 Perhaps most importantly, Indiana law provides: “[t]he seller of the GAP agreement, or the seller’s assignee, is responsible for making a timely refund to the consumer of unearned GAP agreement charges under the terms and conditions of the GAP agreement.”2 While the law is clear as to when and how to refund, it is critical that banks, particularly those which are involved in indirect auto financing, have a clear process to identify when a borrower should be refunded GAP premiums, and what their agreements with auto dealers indicate about responsibility for these refunds. Additionally, if you are relying on the auto dealer to process the refund, you must have an audit process in place to be sure that these refunds are in fact occurring as required. Several large banks have been targeted by the class action bar for failing to monitor this refunding process carefully.3 Also of concern, last year the state attorney general in Colorado announced settlements with several smaller institutions for similarly failing to appropriately refund GAP premiums.4 HB COMPLIANCE CONNECTION
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