California is setting stricter rules on the sale of GAP insurance in the state. California Governor Gavin Newsom recently signed Assembly Bill 2311, which will limit the price of GAP insurance to four percent of the amount financed in an auto loan, and in certain cases, bans the sale of GAP insurance altogether.
The state is trying to curb the sale of finance add-ons, which dealerships tend to include at the final stages of a sale — sometimes without notifying buyers. In fact, there’s specific language in AB 2311 that legally requires sellers to tell buyers when GAP insurance has been added to their loan and to clearly outline the terms of the “Guaranteed Asset Protection” coverage. Buyers are free to reject the insurance if they so choose.
This has always been the case, but dealers will sometimes claim they have to add GAP coverage to all auto loans, which has let them get away with quietly rolling the cost of coverage into a deal. The new law will now make all of these finance riders into line items on invoices and make it harder for dealers to sell people coverage they may not need by banning GAP insurance in certain cases, as Auto News reports:
AB 2311 bans GAP sales on California car loans for less than 70 percent of a vehicle’s value or which finance more than GAP would cover, and it caps the price of GAP at 4 percent of the amount the borrower finances.
Car deals with loan-to-vehicle-value ratios above the loan-to-value ratio limit in the GAP policy would still be permitted if buyers are notified of this imbalance “in writing, acknowledged by the buyer,” the bill states.
Buyers will now have to sign off on GAP insurance, particularly when it’s not financially beneficial thanks to the new rules. Governor Newsom signed AB 2311 into law on September 13 along with SB 1311, which sets new policy for the sale of GAP insurance to service members in the U.S. military. More on that here.
Together, both laws establish a new framework to protect buyers from sales practices that dangle the threat of being upside down on auto loans in the event of insurance companies not covering the full balance after a theft or total loss.
Carrying insurance to cover that “gap” in the balance is sound, but the practices some dealers have adopted are unsavory. Dealers frame GAP insurance as a way to avoid out-of-pocket expenses, but they don’t mention that similar insurance is available elsewhere and for less money. Buyers can also now cancel GAP without having to pay fees. And lenders will have to refund money to buyers who cancel or pay off their loans, per Auto News.
The add-on insurance coverage has become lucrative for dealers, especially with the handwaving from salesman that makes GAP seem like a necessary evil for those who don’t want to be on the hook for balances not covered by insurance companies. The new law will bring some transparency into the buying process.