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The Obligation and Risk of Selling GAP

November 2006, F&I and Showroom - Feature

by Tony Wanderon - Also by this author

It’s amazing how well received and popular Guaranteed Asset Protection (GAP) has become in the last six years. Fueled by negative equity, longer-term financing, higher advance ratios and incentives, GAP has surpassed service contracts as the No. 1 selling product at many dealerships. However, as GAP sales continue to grow, so does the need for dealers to understand the risks and responsibilities.

Bottom line, GAP is one of the most valuable products offered to auto finance customers today, and it has covered hundreds of million of dollars in negative equity as it was designed to do. What’s important is that you don’t allow a few bad apples spoil your taste for such a great product.

GAP Waiver vs. GAP Insurance

The two structures of GAP are waiver/addendum and insurance. The product you offer is determined by your state’s Department of Insurance or related regulatory body. In all but four states, GAP is sold as a waiver/addendum to the retail installment contract.

The structure of a GAP waiver is between the dealer/lender and the customer. This is a key point since the obligation to relieve this debt lies with you, the dealer. In most cases, you can have an insurance policy that reimburses you the amount that you are required to relieve to the customer.

In the insurance structure, the GAP insurance policy is between the insurance company and the insured (i.e., customer). The obligation now falls on the insurance company to relieve the debt, with the dealer acting only as the selling agent of the policy.

Who Can Sell a GAP Waiver

and When?

A GAP waiver can only be sold by an authorized dealer/lender that has a risk. So, a dealer authorized to offer and sell financing on motor vehicle installment contracts can offer and sell a waiver product in the authorized waiver states.

However, this GAP waiver can only be sold when you offer the customer/borrower a retail installment contract. It must be fully disclosed as an optional product and the charge must be disclosed on your installment contract and on the waiver. Check with your state’s department of insurance for additional mandates related to the GAP waiver.

Can You Sell a GAP Waiver if You Are Not the Lender?

A waiver can only be offered by the lender. Unless you’re the lender you cannot waive someone else’s risk. A customer who brings outside financing into your dealership should not be offered your waiver. In most cases this would be considered a true insurance product, which you must be authorized to sell.

How Does a Waiver Work?

A GAP waiver program may be offered by a dealer/lender to its finance customers. This is a two-party agreement between the dealer/lender (you) and the borrower (customer). The GAP waiver program allows you as the lender to forgive the remaining debt in the event of a covered loss. So under this structure you are the “obligor.” To lessen your risk, you may purchase a contractual liability (CLIP) or reimbursement insurance policy (RIP) to cover the amounts you are contractually required to waive. Thus, the CLIP or RIP allows you to transfer your risk for all covered loans. This is the most common practice in the industry today.

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