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 Waiverand 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.
Transferring Your GAP RISK
In consideration of the lender/dealer fee and premium, the insurance company will cover the lender’s payable loss sustained during that policy period as specified in the declaration page and in the terms and conditions of the GAP policy issued to the lender/dealer. This CLIP or RIP provides indemnification to the dealer/lender as the insured under the policy.
This indemnification may, in turn, be assigned by the dealer/lender to a subsequent lender who will assume the terms and conditions of that loan. In that case the obligation of the carrier is owed to the assignee-lender. In this waiver program no contract exists between the borrower and the insurance company. The agreement is still between the dealer (you) and the customer, so it is important to make sure all parties are able to honor their obligation.
The Role of Your Administrator
In most cases, the responsibilities of your administrator are to:
1 Obtain insurance to cover losses that may occur as provided in your waiver
2 Provide marketing materials and waiver forms
3 Obtain lender and state approvals when necessary
4 Process new business, cancellations and pay the carrier on your
5 Process claims and submit them to the carrier for payment
6 Handle customer calls and questions
Because of the involvement with your customer, it is just as important to choose a reputable administrator as it is a carrier. Most who are in the market today are very capable of exceeding all of your expectations, but make sure you ask as many questions as you need to feel comfortable with your decision.
Recent Alarming Trends
Recently, dealers and lenders have found out that what they believed to be a reputable program was really a scam. In these cases, dealers were offered a GAP product by a person claiming to be an agent. This person claimed to have a direct relationship with a carrier and touted low overhead. This agent also claimed he/she would be able pass along savings on to the dealer that resulted in lower costs.
To keep cost down, dealers were also told to pay their fees directly to these so-called agents. However, after months of selling hundreds of waivers, these dealers suddenly realized no relationships existed between the agent and a carrier. Phone calls went unanswered, or telephone numbers were disconnected. This meant customer claims went unprocessed. Most importantly, since the GAP waiver served as an agreement between the dealer and the customer, the risk was placed on the dealer.
Make Sure You’re GettingWhat You Pay For
Most providers in the industry are reputable and experienced enough to support your needs. Most dealers have no issues, but it’s those few fraudulent agents that you have to be on the look out for. How can you do that?
1 Ask for information about the company you are looking to do business with, and get referrals from other dealers.
2 Ask who the underwriter is and make sure that you are issued a CLIP or RIP from that carrier in a timely manner.
3 Limit the number of programs you offer from multiple providers. In some cases we have seen dealers sign up with 10 different GAP programs, which makes it difficult for them to keep track of all the submittals.
4 Call the underwriter or administrator to ask if the agent is authorized to market the company’s products.
Tony is the president of Allstate Credit Division, based in Jacksonville, Florida. Companies under ACD include First Colonial Insurance Company and American Heritage Insurance Services.