The Gap in GAP

In the automotive industry, “GAP” is an acronym for “guaranteed asset protection.” GAP exists to protect the borrower in the event of a total loss where the financed loan balance exceeds the actual cash value of the vehicle.

If your GAP product has an undisclosed gap in coverage, this can cost you millions!

Any good lawyer will tell you that the word “guarantee” should be used cautiously since it can create exposure — it implies complete coverage with no out-of-pocket expense. This concept was brought home to Santander Bank in an administrative proceeding brought by the CFPB in connection with the marketing of their ancillary add-on product S-GUARD GAP.

TRUE FULL COVERAGE MEETS LTV LIMITATION

Santander marketed S-GUARD GAP as a method to cover the gap between a consumer’s primary insurance payment and their outstanding vehicle loan balance if there was a total loss. More specifically, the marketing stated:

“Today comprehensive and liability insurance still don’t provide true full coverage. You have to fill the GAP. ... Your auto insurance may be inadequate to protect you financially in case of a total loss through accident or theft. If your loan balance is greater that the current cash value of your car, GAP … can be a great way to protect you. Your insurance payout could end here. GAP takes care of the rest.” (Emphasis added.)

Unfortunately the S-GUARD GAP product did not provide “true full coverage” as was represented, but it was subject to a loan-to-value limitation of 125%. Due to the LTV limitation, if the borrower’s loan balance exceeded 125% of the value of the vehicle at the time of the total loss, the borrower would have to reach into their own pocket to pay the balance of the auto loan.

When the product delivered does not match the representations made during the marketing and sales process, litigation or enforcement actions are sure to follow.

Here the CFPB found that over 44,000 Santander customers who were sold the S- GUARD GAP product had LTVs above 125% at the time of the vehicle purchase! These customers did not receive “true full coverage,” but were exposed to liability for sums in excess of the 125% limitation. The representation of “true full coverage” in the face of the 125% LTV limitation was found to be a material misrepresentation constituting an unfair, deceptive, or abusive act or practice, more commonly known as UDAAP.

This administrative proceeding also made claims about Santander offering loan extensions for delinquent borrowers, which, was also found to be a UDAAP violation. Santander paid $11.8 million dollars to settle these charges, which included $9.29 million in restitution and $2.5 million in fines.

THE AGENT’S ROLE

Eagle-eyed viewers may recall that Santander was in the news previously due to funding subprime loans to automotive dealers known to be engaging in illegal and fraudulent behavior. That conduct resulted in approximately $26 million in fines paid to Massachusetts and Delaware and new oversight policies.

Those oversight policies must not have extended to the ancillary marketing and sales departments given this case. In this case the CFPB required Santander to (a) provide templates of all future marketing materials for S-GUARD GAP, (b) enhance and strengthen its compliance management system relating to marketing and selling S-GUARD GAP, and (c) enhance and strengthen its training and oversight of all agents, employees and service providers involved in marketing and selling S-GUARD GAP.

So the takeaway here is that if your dealer clients are marketing and selling a GAP product (guarantee), you should closely review the script and the terms and conditions with your counsel to make sure that no misrepresentations are being made.

Undisclosed conditions and limitations, which erode or eliminate the represented benefit, are fertile ground for regulators and class action attorneys. In a broader sense, TPAs, agents, dealers, and everyone in the distribution chain for GAP products can greatly benefit from implementing and strengthening their compliance management systems (as was the case with Santander).

If your GAP product has an undisclosed gap in coverage, this can cost you millions!

DISCLAIMER: Content provided in this article is intended for informational purposes only and should not be construed as legal advice and should not be relied upon or acted upon without retaining counsel to provide specific legal advice based upon your particular situation, jurisdiction and circumstances. No duties are assumed, intended or created by this communication. No attorney- client relationship is being created by your review or use of this material.

© 2019 Robert J. Wilson, All Rights Reserved

ROBERT J. WILSON, ESQUIRE (BOB) IS A PHILADELPHIA LAWYER AND IS GENERAL COUNSEL FOR ARMD RESOURCE GROUP. BOB IS THE PRINCIPAL OF WILSON LAW FIRM AND HAS OVER 30 YEARS OF EXPERIENCE BOTH AS A COUNSELOR AND AS A LITIGATOR IN STATE AND FEDERAL COURTS. RISK MANAGEMENT, PROBLEM SOLVING AND DISPUTE RESOLUTION ARE HIS CORE COMPETENCIES. BOB’S PRACTICE IS LARGELY IN THE CONSUMER FINANCE SPACE AND HE REGULARLY CONSULTS WITH LENDERS AND CONTRIBUTES ARTICLES ON VARIOUS COMPLIANCE RELATED ISSUES.