GAP Waiver Litigation: Protecting Your Credit Union

Farleigh Wada Witt shares insight on refunding unearned GAP Waiver fees.

11/10/2020

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Editor’s Note: The following is an update from credit union law firm, Farleigh Wada Witt.

Earlier this year, a consolidated class action was filed in Colorado against a number of creditors, including seven credit unions. The complaint asserts a claim for breach of contract based on the creditors’ failure to refund unearned GAP fees on indirect loans. In this alert, we provide some information about that claim and the risk to credit unions in the Northwest.

Class Action Complaint

The Complaint indicates that the credit unions purchased retail installment contracts which included GAP Waiverforms: a type of debt cancellation providing that if a borrower suffers a total loss and the borrower’s vehicle liabilityinsurance is insufficient to pay off the borrower’s remaining loan balance, the creditor will waive the difference. Thecomplaint alleges that the single premium GAP fee was financed as part of the contract balance. When each loan was paid off prior to maturity, the creditor failed to refund the unearned portion of the GAP fee.

Colorado law specifically requires that creditors refund borrowers any unearned fee paid for a GAP waiver when the borrower pays off the loan early and no GAP claim has been made for a total loss.

Applicability to Northwest Credit Unions

It is important to note that the product at issue in the class action is a debt cancellation product, which an agreementbetween the creditor and the member. Many dealers in the Northwest do not sell debt cancellation products. Rather, they sell GAP insurance, which involves an insurance policy between the borrower and the insurer. When purchasing a loan with GAP insurance, or if the credit union offers GAP insurance, the credit union does not have a duty to act on the borrower’s behalf to obtain a refund from the insurer. Also note that this issue does not even arise for GAPwaiver agreements that are paid on a monthly basis (rather than on a single premium/fee basis). When the GAP waiver fee is paid monthly, early payoff does not result in any unearned fee.

For those credit unions that do purchase indirect loans with single premium GAP Waivers (debt cancellation), we recommend proactively refunding any unearned GAP fees to borrowers upon early payoff. Oregon and Washington each have statutes similar to the Colorado statute, requiring the creditor to refund unearned GAP fees upon early payoff, subject to certain conditions. Idaho has no such statute. And while credit unions are actually exempt from such statutes, proactively refunding the unearned GAP fees to the borrower will help mitigate the risk of UDAAP related claims.

For questions related to GAP product compliance or risk, contact Hal Scoggins, Brian Witt, or Kelley Hodney.