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The Colorado governor recently signed HB 23-1181 (the “Act”) to codify and amend rules relating to guaranteed asset protection (GAP) agreements (designed to relieve “all or part of a consumer’s liability for the deficiency balance remaining, after the payment of all insurance proceeds,” upon the total loss of a consumer’s motor vehicle that served as collateral for a loan). In addition to adding new definitions and outlining exemptions, the Act also, among other things, (i) establishes conditions, notices, and provisions that must be included in order to offer, sell, provide or administer a GAP agreement in connection with a consumer finance agreement; (ii) establishes that the maximum fee that may be charged for a GAP agreement must not exceed four percent of the amount financed in the consumer credit transaction or $600, whichever amount is greater; (iii) provides that a creditor may contract for, charge, and receive only one GAP fee as part of an agreement regardless of the number of co-borrowers, co-signers, or guarantors; (iv) lays out the process for calculating a deficiency balance and how much a consumer is owed in the event of a total loss; (v) establishes requirements in the event a GAP agreement is cancelled; (vi) details when a consumer must submit a GAP agreement claim after a total loss; and (vii) prohibits the sale of a GAP agreement in specific circumstances.
The Act is effective January 1, 2024, and applies to GAP agreements entered into on or after this date.
On May 1, the U.S. District Court for the Northern District of California preliminarily approved a $300 million class action settlement resolving claims that a national bank hid misconduct relating to its auto insurance practices. The lead plaintiff alleged that, between November 3, 2016 and August 3, 2017, the defendant made materially false or misleading statements in violation of the Securities Act, which artificially inflated the price of the defendant’s stock. Specifically, the plaintiff maintained that the defendant concealed that it allegedly force-placed unneeded collateral protection insurance (CPI) on many of its customers and failed to refund unearned guaranteed auto protection (GAP) premiums to other customers, which led to more than 20,000 customers having their cars repossessed. The plaintiff further alleged that the defendant was aware of these issues but failed to disclose them to investors or the public, and claimed that the facts did not emerge until they were published by the media in July of 2017. As a result, class members who purchased defendant’s stock during the relevant period allegedly suffered economic losses when the stock price declined as a result of two corrective disclosures that revealed the CPI and GAP issues to investors. A hearing later this year will determine the service fee award and attorneys’ fees and expenses (to be no more than 25 percent of the settlement amount). The defendant denies all claims of wrongdoing.
On April 12, a split U.S. Court of Appeals for the Fourth Circuit held that loans borrowed in part to finance the purchase of a car are not governed by the Military Lending Act (MLA), even when the loan covers additional related costs. While the MLA’s requirements apply to the extension of consumer credit to covered members, loans procured “for the express purpose of financing” the purchase of a car (and are secured by the car) are excluded from many of the statute’s protections. Plaintiff purchased a car with an auto loan that included guaranteed asset protection coverage (GAP). The plaintiff then filed a putative class action against the defendant claiming the loan violated the MLA because it mandated arbitration (which is prohibited under the MLA) and failed to disclose certain information. The plaintiff argued that the loan should be protected under the MLA because part of his “bundled” loan went to GAP coverage. The district court disagreed and dismissed the case, ruling that the plaintiff’s contract was exempt from the MLA because GAP coverage and other add-on charges were “inextricably tied” to his purchase of the car.
On appeal, the majority concluded that loan, which was used for both an MLA-exempt and non-exempt purpose, can be treated together under the statute, because “[i]f a loan finances a car and related costs, then it is for the express purpose of financing the car purchase and the exception can apply.” The key issue was how to interpret the MLA exception that covers loans made for the “express purpose” of financing a car. “If that phrase, as used in the [MLA], means merely ‘for the specific purpose,’ [the defendant] wins. If it means ‘for the sole purpose,’ [plaintiff] wins,” the majority wrote. “We do not care and we do not ask” if the loan also financed GAP coverage, provided the loan was made for the specific purpose of financing a car, the court said, explaining that the loan is exempted from the MLA, “no matter what else it financed.”
The dissenting judge warned that the majority’s conclusion undermines the purpose of the MLA. “There is no reason to suspect that Congress regulated the marketing of financial products to service members, only to allow them to be smuggled in through a vehicle-loan back door,” the dissenting judge wrote, criticizing the majority’s conclusion and noting that opening up the MLA’s exception to include additional loans “permits lenders to piggyback virtually any financial product onto an exempt vehicle loan” at the expense to service members.
Notably, the CFPB, DOJ, and Department of Defense (DOD) filed an amicus brief last year on behalf of the United States in support of the plaintiff’s appeal, in which the agencies argued that the “hybrid” loan at issue must comply with the MLA. As previously covered by InfoBytes, the agencies wrote that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car.” The agencies noted that GAP coverage is identified as a “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for [GAP] insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.
On January 4, the Colorado attorney general announced settlements with two credit unions that will pay a combined $4 million in refunds to borrowers in the state who were entitled to “guaranteed automobile protection” (GAP) fee refunds. An investigation conducted by the Consumer Protection Section of the Colorado Department of Law found that the credit unions historically failed to refund unearned GAP fees owed to consumers. According to the state, the credit unions act as creditors by purchasing retail installment sales contracts from auto dealers that include GAP purchased by Colorado consumers. The state explained in its announcement that borrowers pay the full GAP fee when they purchase a car (the fee is typically only earned gradually over the loan’s lifetime). However, should a borrower prepay the loan prior to maturity or the car is repossessed and sold at auction before the loan is paid off, Colorado law requires lenders to refund the unearned portion of the GAP fee to the borrower, the state said.
The assurances of discontinuance (see here and here) apply to all consumer credit transactions entered into with consumers in the state related to any alleged unfair conduct committed by the credit unions related to GAP fee refund practices. In additional to paying consumer remediation and $100,000 each to the state, the credit unions also agreed to alter their business practices to ensure that applicable refunds will be provided to consumers going forward.
On December 20, the CFPB announced a consent order against a national bank for allegedly mismanaging auto loans, mortgages, and deposit accounts. According to the Bureau, the bank allegedly engaged in deceptive or unfair acts or practices in violation of the CFPA by, among other things: (i) incorrectly processing auto-loan payments; (ii) assessing borrowers erroneous fees and interest due to technology, audit, and compliance failures; (iii) incorrectly denying mortgage loan modification applications; (iv) failing to ensure that unearned Guaranteed Asset Protection fees were refunded to borrowers who paid off their loans; (v) incorrectly denying mortgage loan modification applications and miscalculated fees; and (vi) charging “surprise” overdraft fees on debit card transactions and ATM withdrawals because, according to the Bureau, consumers “believed that if they had enough money to cover the relevant transaction when it was authorized they would not incur an [o]verdraft fee.”
Under the terms of the consent order, the bank is required to pay redress totaling more than $2 billion to allegedly harmed customers. Specifically, the bank is ordered to pay approximately: (i) $1.3 billion in consumer redress for affected auto lending accounts; (ii) $500 million in consumer redress for affected deposit accounts, including $205 million for illegal surprise overdraft fees; and (iii) nearly $200 million in consumer redress for affected mortgage servicing accounts. Among other things, the bank is prohibited from charging overdraft fees for deposit accounts when the consumer had available funds at the time of a purchase or other debit transaction, but then subsequently had a negative balance once the transaction settled. The bank is also ordered to pay a $1.7 billion civil penalty to the Bureau. CFPB Director Rohit Chopra released a statement following the announcement saying the order does not provide immunity for any individuals nor does it release claims for any ongoing illegal acts or practices.
The bank issued a press release stating that “[c]urrent leadership has made significant progress to transform the bank,” and noting that “the CFPB recognized that since 2020, the company has accelerated corrective actions and remediation, including to address the matters covered by today’s settlement.”
On September 13, the California governor signed AB 2311, which amends provisions regarding vehicle finance disclosures. The bill establishes provisions to govern the offer, sale, provision, or administration, in connection with a conditional sale contract, of a guaranteed asset protection waiver (GAP waiver). Specifically, the bill requires creditors to automatically refund the unearned portion of a GAP waiver if a consumer pays off or otherwise terminates their auto loan early. The bill prohibits: (i) conditioning the extension of credit, the term of credit, or the terms of a conditional sale contract upon the purchase of a GAP waiver; and (ii) the sale of a GAP waiver pursuant to certain provisions where the loan-to-value ratio exceeds the maximum loan-to-value ratio of the GAP waiver. The bill, among other things, authorizes the buyer to recover three times the amount of any GAP charges paid. The bill is effective January 1, 2023.
Recently, the Colorado attorney general announced three separate settlements (see here, here, and here) with three credit unions resolving allegations that they neglected to refund unearned Guaranteed Automobile Protection (GAP) fees to Colorado consumers. The administrator of the Uniform Consumer Credit Code (UCCC), who is part of the Consumer Protection Division of the Department of Law and who led this investigation, concluded that the credit unions engaged in unfair and deceptive trade practices under the Colorado Consumer Protection Act by failing to provide GAP refunds automatically without waiting for a request from the consumer. Under the terms of the assurances of discontinuance, the credit unions have agreed to comply with all legal obligations and issue refunds to affected borrowers, and: (i) must comply with the UCCC rule’s GAP refund requirements; (ii) are subjected to an audit to verify the accuracy of their self-audits; and (iii) must send a confirmation letter pre-approved by the administrator to each consumer to whom a GAP refund was paid because of the self-audits. The AG noted that the “settlements are part of our office’s efforts to ensure lending institutions follow Colorado law and do not cheat hardworking consumers out of money they are entitled to under their lending and coverage agreements.”
On January 6, the CFPB, DOJ, and DOD filed an amicus brief on behalf of the United States in support of a consumer servicemember plaintiff’s appeal in Jerry Davidson v. United Auto Credit Corp, arguing that the hybrid loan at issue in the case, which was used for both an MLA-exempt and non-exempt purpose, must comply with the MLA. The loan included an amount used to purchase Guaranteed Auto Protection (GAP) insurance coverage, and the plaintiff alleged that, among other things, the auto lender (defendant) violated the MLA by forcing the plaintiff to waive important legal rights as a condition of accepting the loan and by requiring him to agree to mandatory arbitration should any dispute arise related to the loan. The plaintiff also alleged that the defendant failed to accurately communicate his repayment obligations by failing to disclose the correct annual percentage rate. The case is before the U.S. Court of Appeals for the Fourth Circuit after a district court held that the plaintiff’s GAP insurance fell within the car-loan exception to the MLA as “inextricably tied to” and “directly related” to the vehicle purchase.
Arguing that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car,” the agencies’ brief noted that GAP coverage is identified as “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for Guaranteed Auto Protection insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.
On September 27, the Colorado attorney general announced that a financial institution has agreed to refund approximately $1.68 million to Colorado borrowers after allegedly failing to return guaranteed automobile protection (GAP) fees that were improperly retained by the financial institution. Under Colorado law, lenders are required to automatically refund borrowers any unearned GAP payments if a borrower prepays a loan prior to maturity or a vehicle is repossessed before the loan is paid off. Under the terms of the assurance of discontinuance, the financial institution (without admitting or denying liability) has agreed to comply with all legal obligations and issue refunds to affected borrowers. The financial institution will also pay $75,000 to the AG as reimbursement for costs. The AG noted that the financial institution voluntarily provided information concerning GAP payments to Colorado borrowers, fully cooperated in good faith, and has “committed to a robust oversight system to ensure” future compliance. The AG also noted that a separate credit union is currently determining the amount of GAP refunds it owes to consumers.