California’s New Regulations on Auto Lending Impact Your Credit Union

(Last Updated On: September 18, 2023)

Does your credit union offer auto loans in California? Then read on, as this concerns you!

California’s Governor signed two new bills into law in September of 2022 which have a large potential impact on the sale of GAP waivers at your credit union.

These rules went into effect January 1, 2023 and may require changes to processes and practices by California lenders. The following is a brief overview of both pieces of legislation and our input on their impacts.

CA SB 1311

The legislation renders loans for active military members void if they include the purchase of a credit insurance product or credit related ancillary product. This would include GAP waivers and other debt cancellation products.

By voiding the loan due to the financing of these products, the lender is unable to perfect the title on the motor vehicle.

This bill overrides an exemption that was affirmed by the U.S. Department of Defense in 2020. Their rule exempted securitized loans for personal property, enabling service members to purchase GAP waivers and other vehicle protection products. No longer.

This bill leaves our military members in the difficult position of not being able to adequately protect themselves from financial harm due to a number of different perils that face today’s borrowers.

In other words, this could create the negative financial spirals we often wrote about.

Industry trade groups have been outspoken in highlighting the harmful and discriminatory impact this will have on military members. All efforts have so far been unsuccessful and the legislation is scheduled to take effect on January 1, 2023.

Already familiar with the legislation? Skip to our roundup and a solution for ensuring you have solid records on ancillary products from all members (and when they are entitled to refunds).

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CA AB 2311

This bill amends Section 2981 of the CA Civil Code pertaining to conditional sale contracts (retail installment contracts).

At this time, there is no indication or mention of extending these new requirements to loans made between lenders and borrowers (direct loans), so there are no changes to your direct loan GAP waiver program in response to the legislation.

Financial institutions engaged in indirect lending and the purchasing of conditional sale contracts from dealers will need to make sure that any GAP waiver financed in conjunction with these contracts comply with the new regulations.

Specifically, the new regulations applying to GAP waivers sold in conjunction with conditional sale contracts include:

• Setting a floor for loan-to-value (LTV) of 70% for eligibility of GAP waivers sold in conjunction with a conditional sale contract. The note indicating reduced LTV from 80% to 70% only refers to a change from the original draft of legislation. Prior to this legislation, there was no stated floor.
• Requiring a disclosure for any GAP waiver sold on a conditional sale contract that exceeds the maximum LTV covered under the GAP waiver that states the method by which the limitation is applied and includes written acknowledgement by the buyer indicating conditional sale contract exceeds the GAP waiver’s maximum LTV limit and that the waiver will not cover the total amount owed.
• Caps the amount charged for a GAP waiver at 4% of buyer’s financed amount under a conditional sale contract. The note indicating the maximum was raised from 2% to 4% only refers to a change from the original draft of legislation. Prior to this legislation, a maximum charge for the GAP fee was not stated.
• Adding the following notice to be included in GAP waiver with header in at least 12-point bold type and the text in at least 10-point bold type that reads as follows:

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STOP AND READ

YOU CANNOT BE REQUIRED TO BUY A GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES.  IT IS OPTIONAL.

NO ONE CAN MAKE YOU BUY A GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES TO GET FINANCING, TO GET CERTAIN FINANCING TERMS, OR TO GET CERTAIN TERMS FOR THE SALE OF A VEHICLE.

IT IS UNLAWFUL TO REQUIRE OR ATTEMPT TO REQUIRE THE PURCHASE OF THIS GAP WAIVER OR ANY OTHER OPTIONAL ADD-ON PRODUCTS OR SERVICES.

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• Requires that GAP waiver is refundable on pro rata basis upon early termination of conditional sale contract or cancellation of waiver by buyer without penalty (no cancellation fee). Refunds must be tendered within 60 days from termination of GAP waiver.
• Requires seller or holder of conditional sale contract to maintain refund records for 4 years from date refund was tendered and provide electronic access to the records in response to any subpoena or other enforceable request.

Responsibility Falls On Credit Union Lenders

So, who is responsible for making sure that the GAP waivers financed by your financial institution meet the new requirements? Turn your gaze inward, because it comes down to you!

The GAP waiver is an addendum to the finance agreement and the lender is responsible to make sure that the finance agreement and any addenda thereto meet requirements put forth by the state.

Handling this challenge requires diligence and participation in the regulatory process. It is key to understand what portions of the regulations impact your operations and what segments of your credit union are impacted. Additionally, continue to the final section to learn about a solution to ensure you have accessible records of all refunds upon request.

Read the full bills signed into law by the Governor.

Tracking and Processing Challenges?

We keep an eye out to share auto lending-related compliance challenges. Unfortunately, this issue is not the only topic you need to watch: Auto Product Refund Liability: Is Your Institution Exposed?

Since you’re here, a quick primer: If members require a refund on their protection products (due to a total loss, repossession, or paying off the loan early), do you have the necessary information to know and process it smoothly?

Most credit unions are not equipped to track and process GAP refunds from their indirect dealer network. Often, you simply don’t receive the necessary information to even keep appropriate records. This challenge has not gone unnoticed.

We did our own research and discovered a company which built a solution to assist credit unions in this tracking and processing effort. Their automated solution brings all needed information into one system for seamless refund offering, when needed.

Once again, if your credit union has an indirect network, this concerns you. Learn about our partner’s solution, then when ready, set up a quick chat to discuss how it could work at your credit union and see the system in operation.

Our thanks to Jim Tenhundfeld at Frost Financial Services for contributing his insights to this article.