In an effort to reduce so-called “undesirable products” sometimes included in auto financing, on September 14, Governor Gavin Newsom signed into law Assembly Bill 2311, further regulating conditional sales contracts for motor vehicles and the conditions for derogations from the protection of the assets guaranteed in these contracts. Like the regulations recently proposed by the FTC limiting so-called “junk fees and bait-and-switch advertising tactics” by car dealers, these new requirements appear likely to increase the regulatory and compliance burden on car dealers and financial institutions.

A Secured Asset Protection Waiver (“GAP Waiver”) is defined as an optional contractual obligation where the seller of a motor vehicle agrees to cancel or waive some or all of an amount due on the conditional sale contract in the event of total loss or unrecovered theft. of the vehicle.

Among other things, the newly enacted bill provides the following regarding GAP waivers:

  • Prohibited from conditioning the extension of credit, the duration of credit or the terms of a sales contract conditional on the purchase of a GAP waiver;
  • Allows the buyer to cancel the GAP waiver at any time without penalty;
  • Prohibited from charging more for a GAP waiver than 4% of the amount the buyer finances under the contract;
  • Prohibits the sale of a GAP waiver where the loan-to-value ratio of the conditional sale agreement exceeds any provision of the contract that specifies a maximum loan-to-value ratio covered by the GAP waiver, unless such terms are disclosed and the buyer is informed in writing of this limitation;
  • Requires a separate GAP waiver disclosure that must be signed separately by the purchaser;
  • Authorizes the buyer to recover from the holder three times the amount of GAP fees paid if the seller or the holder violates subdivision l of section 2982

At the federal level, the Federal Trade Commission received more than 20,000 comments in response to its proposed rule to ban “bait and switch” advertising, fraudulent or surprise “junk fees,” and requiring advance disclosure of costs and terms of sale. If enacted in its current form, the proposed rule would require the consumer’s “express and informed consent” for the purchase of any add-on product, require disclosure of a list of all add-on products and their cost, and prohibit the sale of any add-on product that the “consumer would not benefit from”, such as nitrogen-filled tires or GAP agreements for which the purchaser is not eligible for coverage.

The new legislation allows for collection from the contract holder, as does the Federal Trade Commission’s “Holder in Due Course Rule,” which subjects the consumer credit contract holder to all claims and defenses the consumer might assert against the seller. goods or services that have been financed by the consumer credit contract. As such, financial institutions that accept the award of automotive retail contracts by California-based automotive dealers should reevaluate their compliance programs to properly manage their potential exposure to these new requirements.