New disclosure requirements being considered by the Federal Reserve Board (FRB) for loan insurance products aren’t the only threat to core F&I offerings like GAP coverage. In California, product providers are racing to notify dealers that one of the key selling feature of GAP might be barred since a new law took effect on Jan. 1.
In late September, Gov. Arnold Schwarzenegger signed AB 2782 into law. The Omnibus bill packaged, among other things, a new licensing requirement for sellers of accident and health insurance. How GAP got thrown into this new requirement is a case of unintended consequences. According to executives at the San Diego, Calif.-based OwnerGUARD, the California New Car Dealers Association asked the California Department of Insurance to clarify whether a GAP waiver would fall under the new requirement. In its response, the state agency said that the new requirement would not allow GAP waivers to cover a customer’s deductible.
Fortunately for the industry, the state's Department of Insurance has delayed implementation of the new law, because many broker agents were unaware of the new requirement.
“The department dropped this opinion 30 days prior to the [law’s effective date], which sent dealers, providers and the agent community in a mad scramble. This is, unfortunately, something that can’t be retracted,” said Michelle Dicks, OwnerGUARD’s general counsel. “At this point, the industry, the dealers and the product providers are really concerned, as this is a crucial component of the product.”
If left unchanged, California dealers will be prohibited from selling deductible coverage through GAP if they have not obtained an agent license. In the meantime, providers are adding language to their agreements that informs consumers that deductible coverage is void.
“GAP sales can continue, but the law is what the law is,” said Dicks. “The Department of Insurance has agreed to delay enforcement through March 31, which means the department, in looking at GAP waiver forms, is not going to fine someone or haul them into court for having a form that indicates that the deductible will be covered. However, you can’t cover the deductible.”
OwnerGUARD, which has reached out to the Guaranteed Asset Protection Alliance, the American Financial Services Association, the Consumer Credit Industry Association, and several other associations, is mounting a two-pronged effort to fix the problem.
With the California New Car Dealers Association in tow, the company is working closely with the California Department of Insurance on new legislation to solve the deductible problem. “We’re really close to having language that will fix this legislation,” Dicks said.
OwnerGUARD is also working with John Norwood, a noted California lobbyist who specializes in the state’s insurance and financial sector. OwnerGUARD officials are hoping he can clear the way for the state legislature to vote and pass its drafted legislation by June, but company officials admit there are several hurdles standing in the way.
“Our goal is to, hopefully, see something in June, but nothing is ever certain,” said Dicks. “If it doesn’t work the way we’re anticipating, we might be looking at a September vote. But if our legislation is not labeled as an emergency measure, we could be looking at Jan. 1, 2012.”
This threat to GAP couldn’t have come at a worse time for dealers. The industry is preparing to mount a campaign to remove credit insurance, GAP and debt cancellation agreements from a new set of disclosure rules proposed by the FRB. Legal watchers say the disclosure rules are designed to convince customers not to buy these F&I products.
The industry is also dealing with proposed revisions to the Truth in Lending Act’s Regulation Z, which the FRB has said is supposed to enhance consumer protections for home mortgage transactions. However, the new disclosures created by the proposal would also apply to auto transactions.
Letters opposed to the proposal, which was announced in August 2010, were submitted by the National Automobile Dealers Association and others in the industry to the FRB during the public comment period, which ended in December 2010. The industry argued that the FRB overstepped its bounds and that regulation of the auto industry would fall under the Federal Trade Commission and the new Consumer Financial Protection Bureau.
“This is a huge problem for the industry,” said Al Sacko, vice-president of sales and marketing at OwnerGUARD. “We submitted our letter in opposition to what the FRB is proposing. As for California, frankly, if no one had asked the question, there would be an interpretation levied. And as you know, any of these products are typically submitted to lenders for approval, so now we get into changing forms to get them compliant. Then the department comes out and says we don’t have to have the forms in place until March. That’s when we said, wait a second, we need to look at this closer. That’s when our management team decided we needed to take some action.”