Lending Services Bulletin
November 10, 2020
While these bulletins are designed to provide assistive and accurate information regarding the subject matter, Origence is not rendering legal, financial or other professional services or advice. Credit unions should seek the assistance of their legal counsel or compliance officer for their individual situation.
Guaranteed Asset Protection (GAP) Refunds
Over the last two decades, GAP has become a standard product in Finance and Insurance offices at auto dealerships, which is sold to consumers on nearly half of all indirect auto lending transactions. Auto dealers sell GAP to consumers to assist the consumer in paying the lender in the event of a total loss of the vehicle when the balance is greater than the value of the vehicle at the time of loss. When a credit union purchases a retail installment contract from the dealer, GAP may be part of that transaction, and there are certain assurances and obligations that credit unions may be responsible for under “holder in due course” laws. Is your credit union aware of its obligations if the loan has an early pay-off, repossession, or total loss?
State laws vary on how and when to process a GAP refund, and there is increased exposure when credit unions fail to process the refund. Currently, there is pending class action litigation by consumer advocate groups in at least two states, naming credit unions, banks, and finance companies as defendants. Credit unions should consider timely action to administer a GAP refund appropriately.
What can your credit union do?
- First and foremost, consult with your legal counsel and compliance department.
- Identify incoming and current loans with GAP as part of the transaction.
- Track the GAP administrator and underwriter for each policy that is part of the transaction.
- Understand how your state laws, GAP policy language, and loan status apply to each refund.
- Notify the member and apply the refund.
- Consider a 3rd party solution to fully manage the tracking and refund process.
Credit unions may also consider designating a team member to oversee the application and administration of product refunds when a loan pays off or terminates early. If the host system allows, consider calculating applicable GAP refunds in all pay-off quote and pursue the GAP administrator for reimbursement.
Please contact your local Director, Lender of Client Experience for additional questions.
David M Adams
VP of Lender Client Experience
