Demand Your GAP Refund As Soon As Possible

Guaranteed Asset Protection (GAP) insurance is an essential safeguard for many vehicle owners, providing financial coverage for the difference between a car’s market value and the balance of the loan in the event of a total loss.

If you paid a premium for GAP insurance, and suffered either a total loss, the car was repossessed or if you paid off the loan early, the golden rule is to make a demand for the refund of the unearned GAP premium to both the lender and the insurance company, and to do so by “return receipt requested” USPS certified mail. By doing so, this simple demand will require both the lender and the insurance company to act swiftly, and you have made a record.

In a recent lawsuit, the Consumer Protection Financial sued an insurance company that violated consumer protection laws by withholding over $1 million in GAP premium refunds. These funds were owed to borrowers whose vehicles had been repossessed or loans charged off. Notably, few consumers ever provided notice or made a demand of the return of the unearned GAP Premium.

While GAP insurance offers critical protection, when your vehicle is either repossessed or becomes a total loss, review the sales receipt again and determine if you paid for gap protection. If so, be sure to notify the lender that you are owed a refund of the unused premium due to the repossession or total loss.

Too often, lenders and loan servicers have exploited the “forgetfulness to make a claim for return of the premium” to the detriment of consumers. Among these exploitations, failing to refund unearned GAP premiums currently stands out as one of the most widespread and harmful practices impacting the industry.

This article delves into the regulatory framework of GAP insurance, examines the ramifications of withholding unearned premiums, and emphasizes the urgent need for enhanced consumer protections and oversight.

What are Unearned GAP Premiums?

Unearned GAP premiums refer to the portion of the GAP insurance policy that remains unused when the loan is paid off early, a vehicle is wrongfully repossessed, or the loan is charged off. In these situations, the borrower is entitled to a refund of the unearned portion of the premium, as they no longer benefit from the coverage.

For example, if a borrower pays for a five-year GAP insurance policy and pays off the loan after three years, the remaining two years of coverage are unearned. Laws in many jurisdictions require that these unearned premiums be refunded to consumers, either by the lender or the insurance provider.

The Legal Landscape Surrounding GAP Premium Refunds

State and federal regulations govern the refund of unearned GAP premiums. Here are a few different state requirements for the return of unearned GAP premiums:

1. State-Specific Laws

• California: California’s Civil Code mandates that unearned GAP premiums be refunded promptly when a loan is terminated early. Insurers must refund the unearned portion of a GAP premium within 60 days if the policy from when the policy is canceled early. In 2022, California also adopted new requirements for GAP premiums and waivers. Two new requirements were signed into law which limited the price of GAP waivers, added new disclosure requirements, banned GAP waiver sales in certain instances, and prohibited financing of GAP insurance in auto loans to servicemembers.
• Texas: In Texas, state law requires lenders to issue refunds within a specified time frame and imposes penalties for non-compliance. Pursuant to Section 5.7015 – Refund of Unearned Premium, (a) “Insurers must refund the appropriate portion of any unearned premium to the policyholder not later than the 15th business day after the effective date of cancellation or termination of a personal automobile or residential property insurance policy,…”
• Illinois: In Illinois, an insurance company must refund the unearned premium for GAP insurance on vehicles within thirty (30) days from either the date of the notice of cancellation by the company or the date the company receives the request for cancellation from the policyholder. The refund must be pro-rated to the date of cancellation and cannot be computed using a short rate table. Additionally, the term “unearned premium” refers to the premium for the unexpired period of a policy that has been terminated prior to the expiration of the period for which the premium has been paid.

2. Federal Regulations

While there is no uniform federal standard specifically for GAP premium refunds, the Federal Trade Commission (FTC) and the Consumer Protection Financing Board have monitored deceptive practices related to GAP insurance. Failing to refund unearned premiums could constitute an unfair or deceptive act under federal law. In general, the federal agencies have deemed it a requirement for an insurance company to refund unearned premiums for GAP insurance on vehicles was dependent on the terms of the contract and whether a refund request was made by the consumer.

In Herrera v. Wells Fargo Bank, N.A., 2020 U.S. Dist. LEXIS 187621, the court held that a written refund request was a condition precedent to receiving a refund when the contract provision contained mandatory language Herrera v. Wells Fargo Bank, N.A., 2020 U.S. Dist. LEXIS 187621. Similarly, in Consumer Fin. Prot. Bureau v. USASF Servicing, LLC, 2024 U.S. Dist. LEXIS 154236, the court noted that USASF would not submit a refund request to the administrator unless the consumer specifically requested a refund of unearned premiums, even though the request provided no new information and was not necessary for USASF to obtain a consumer refund from the administrator Consumer Fin. Prot. Bureau v. USASF Servicing, LLC, 2024 U.S. Dist. LEXIS 154236.

The golden rule is to demand the refund of the unearned GAP premium and do so by “return receipt requested” USPS certified mail.

3. Loan Contracts

GAP insurance terms are typically outlined in loan agreements. Courts have held lenders accountable for any breach of the loan agreements, particularly when they fail to refund unearned premiums in violation of state laws or contractual terms.

Case Study: CFPB v. USASF Servicing, LLC (2024)

The recent case of CFPB v. USASF Servicing, LLC highlights the gravity of failing to refund unearned GAP premiums. The Consumer Financial Protection Bureau (CFPB) found that USASF had violated consumer protection laws by withholding over $1 million in GAP premium refunds. These funds were owed to borrowers whose vehicles had been repossessed or loans charged off.

Additionally, the CFPB discovered that USASF failed to process refunds for borrowers who paid off their loans early, resulting in more than $6 million in lost refunds. This case underscores the systemic nature of the problem and the need for stricter enforcement of existing laws.

Arguments Against Failing to Refund Unearned GAP Premiums

• Consumer Harm: Withholding unearned premiums imposes significant financial burdens on consumers. Borrowers who have already experienced financial hardship, such as repossession or early loan payoff, are further disadvantaged when they are denied refunds to which they are entitled.
• Breach of Trust: Failing to issue refunds erodes consumer trust in financial institutions. Borrowers rely on lenders to act in good faith, and violations of this trust can lead to reputational damage and legal repercussions.
• Legal Violations: Lenders who withhold refunds risk violating state and federal laws, exposing themselves to fines, lawsuits, and regulatory penalties. These legal consequences can be costly and damaging to a company’s reputation.

The Case for Stronger Consumer Protections

While some states have enacted robust protections for borrowers, gaps in enforcement and inconsistent regulations leave many consumers vulnerable. Strengthening protections for GAP premium refunds is essential to prevent abuse and ensure fair treatment.

Here are several recommendations for improving consumer protections:

1. Mandatory Automatic Refunds

Lenders and servicers should be required to automatically issue refunds for unearned GAP premiums without requiring consumer action. This would eliminate barriers to accessing refunds and ensure compliance with the law.

2. Enhanced Disclosure Requirements

Borrowers should receive clear and detailed information about GAP insurance policies, including refund procedures and their rights under state law. Transparency fosters accountability and empowers consumers to advocate for their rights.

3. Stricter Penalties for Non-Compliance

Financial institutions that fail to refund unearned premiums should face substantial penalties. Stricter enforcement would deter violations and incentivize compliance.

4. Uniform Federal Standards

Establishing a federal standard for GAP premium refunds would ensure consistent protections across all states. Federal oversight could also address gaps in enforcement and provide a centralized mechanism for consumer complaints.

Consumer Rights and Recourse

If you believe you are entitled to a refund of unearned GAP premiums, here are steps you can take to protect your rights:

• Review Your Loan Agreement: Examine your loan documents to understand the terms of your GAP insurance policy and refund provisions.
• Contact Your Lender or Servicer: Request a refund in writing, specifying the reasons you believe you are entitled to one. Include any supporting documentation, such as proof of loan payoff or repossession.
• File a Complaint: If your lender refuses to issue a refund, you can file a complaint with your state’s attorney general’s office or the CFPB. These agencies can investigate and take enforcement action if necessary.
• Seek Legal Assistance: If you are unable to resolve the issue on your own, contact FS CORPS immediately. Our experienced legal team is dedicated to protecting consumer rights and securing the compensation you deserve. Let us help you navigate the complexities of your case.

Conclusion

The failure to refund unearned GAP premiums is a serious issue that undermines consumer rights and financial stability. Lawsuits such as  CFPB v. USASF Servicing, LLC illustrate the systemic nature of the problem and the urgent need for stronger enforcement and regulatory reforms in auto finance and repossession to protect consumer rights.

Consumers deserve fair treatment and transparency in all aspects of their financial transactions, including GAP insurance. By prioritizing consumer protection and holding financial institutions accountable, regulators can ensure a more equitable and trustworthy marketplace.