Unnecessary Junk Products

By FOCUS, a Leonine Business

During the pandemic the auto industry struggled with supply chain shortages and depleted inventories, but finally new cars are once again becoming available to consumers. Unfortunately, at record high prices. The surging cost of financing a new vehicle can be attributed to many factors, such as the pandemic and inflation. Yet, the Federal Trade Commission (FTC) and state legislatures have zeroed in on “unnecessary junk products” sometimes included in automobile financing in an effort to protect consumers during the car buying process.

The FTC proposed a rule back in June to ban “junk fees” and “bait-and-switch advertising tactics.” The aim is to reduce unnecessary voluntary protection products, namely guaranteed asset protection (GAP) waivers, that can hike up the cost of a new car for consumers. A GAP waiver is defined as an optional contractual obligation where a motor vehicle’s seller agreed to cancel or waive part or all of an amount due on the conditional sale contract in the event of a total loss or unrecovered theft of the vehicle, as reported by Manatt, Phelps & Phelps, LLP.

In California, Democratic Gov. Gavin Newsom signed AB 2311/Chapter 283 into law on September 13. Effective January 1, 2023, the new law:

  • Prohibits conditioning on the extension of credit, the term of credit, or the terms of a conditional sale contract upon the purchase of a GAP waiver and permits cancellation by the buyer at any time without penalty.
  • Prohibits the sale of a GAP waiver where the loan-to-value ratio exceeds the maximum loan-to-value ratio of the GAP waiver.
  • Requires prescribed information on the GAP waiver to appear on a document separate from the conditional sale contract, to be separately signed by a buyer or potential buyer.
  • Governs termination of a GAP waiver, including the refund of GAP waiver costs on termination.
  • Requires the contract including the GAP waiver to include a statement that the purchaser is generally entitled to a refund of the unearned portion of the GAP waiver charges on a pro rata basis.
  • Authorizes the buyer to recover from the holder three times the amount of any guaranteed asset protection charges paid if a holder of a conditional sale contract includes a GAP waiver.
  • Includes GAP waivers in the existing required disclosures.

California isn’t alone; other states like Indiana and South Dakota have also passed GAP legislation this year.

Indiana Republican Gov. Eric Holcomb signed SB 383/Public Law 29 in March, which specifies that the average retail value for a used motor vehicle that is the subject of a GAP agreement would be determined by using a third-party valuation service provider customarily relied upon in the used motor vehicle commercial market (versus by using the National Automobile Dealers Association average retail value, under previous law).

South Dakota Republican Gov. Kristi Noem signed SB 160 in March as well, which requires certain motor vehicle service contracts or agreements to be stated separately from the price of the motor vehicle.

These new requirements are likely to increase the regulatory and compliance burden on auto dealers and financial institutions, and FOCUS will be monitoring similar expected legislation in the 2023 session.