​Key Points

1.    Understand how each of the sales finance companies you have sold contracts to handles Guaranteed Asset Protection (GAP) refunds following early payoff or repossession.

2.    Maintain complete and accurate records of your GAP sales and refund activities.

3.    Know when it is/is not appropriate to offer GAP to your customer.

Refund Responsibilities

A dealership earns the enrollment charge for a GAP waiver it has sold over the life of the GAP agreement. GAP agreements terminate for various reasons, including early payoff of the related credit transaction, expiration of the customer’s redemption period following repossession, and voluntary cancellation by the customer. When a GAP waiver terminates before its scheduled expiration and no claim has been paid, the customer is entitled to a refund or credit of the unearned portion of the enrollment charge. When this happens, the dealership that sold the GAP waiver is responsible for forwarding unearned funds to the appropriate party.

How you are notified and whom you forward the refund to depends on how the holder of the credit agreement (sales finance company) handles GAP refunds. Some sales finance companies will notify the selling dealership of the terminating event and instruct the dealership to forward the GAP refund to the customer. Other sales finance companies will credit or refund the customer directly and seek reimbursement from the dealership. A dealership that sells GAP needs to have a complete understanding of refund policies employed by each of the sales finance companies it has sold contracts to.

If it is unclear or unknown how a particular sales finance company handles GAP refunds, the dealership should contact the company to verify their policy. Communication between dealerships, sales finance companies, and GAP administrators is essential to ensuring customers receive timely and appropriate refunds of unearned GAP charges.

When making a GAP refund, remember that the customer must be refunded the full enrollment charge if cancellation occurs within 30 days of sale. The refund must be calculated using a method no less favorable to the customer than the rule of 78s. No fee for processing the GAP cancellation may be assessed to the customer or deducted from the customer’s refund.

Recordkeeping Responsibilities

A dealership that sells GAP must maintain a log of its GAP sales and refund transactions in a format comparable to the GAP logs created by the Wisconsin Department of Financial Institutions (DFI). We suggest dealers maintain logs in an Excel-readable electronic file format such as .csv, .xls, or .xlsx. Whenever the dealership sells a GAP waiver, the customer’s name, finance company, sale date, policy term, and enrollment charge must be recorded in the log. When the waiver is cancelled or terminated, the termination date, amount refunded, refund date, and accounting reference (e.g., refund check number) must be recorded.

Dealers must record termination and refund information in their log even if the sales finance company is the party refunding the customer. The account payoff date and amount of a refund made by the sales finance company can usually be found on their reserve statements or similar reports.

Records underlying log entries, such as early payoff notices, reserve statements, and copies of refund checks should be maintained for a minimum of five years or from the date of the dealership’s last DFI examination, whichever is less.

Sales Considerations

Dealerships are permitted to offer and sell GAP waivers when the dealership is a creditor in the transaction. The GAP waiver must be a part of, or a separate addendum to, the finance agreement for the motor vehicle. This means dealerships should only market GAP to customers in transactions where the dealership is party to the motor vehicle installment sales contract or motor vehicle consumer lease agreement.

Transactions in which a dealership should not market a GAP waiver include:

• When a customer obtains financing outside the dealership for a vehicle purchase, such as a direct loan from their bank or credit union.

• When a customer purchases the vehicle outright, in cash.

• When the GAP product would provide no benefit to the consumer.
  

• When a customer cannot pay the GAP enrollment charge in cash and the sales finance company does not allow GAP charges to be financed as part of the credit agreement for the motor vehicle. DFI has observed dealerships using a second credit agreement to finance GAP charges in situations like this; however, this practice violates Wisconsin statutes (refer to footnote 1).
  

Credit Insurance

Many of the same refund and recordkeeping responsibilities that come with selling GAP apply when selling credit insurance. Like GAP enrollment charges, credit insurance premiums are earned over the life of the insurance policy. When a policy terminates early due to payment in full of the related credit transaction or otherwise, in most cases, the customer will be entitled to receive a refund of the unearned portion of the insurance premium. If your dealership sells credit life or disability insurance, be sure to record sales and refund transactions using a log comparable to insurance logs created by the DFI.


Footnote 1: Wis. Stat. s. 218.0148(2)(a):… A guaranteed asset protection waiver must be part of, or a separate addendum to, the finance agreement for the motor vehicle.

Wis. Stat. s. 422.303(1) In a consumer credit sale… the customer's obligation to pay the total of payments shall be evidenced by a single instrument… [emphasis added].