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New Jersey enacts law to regulate the sale of GAP waivers

August 25, 2017
A New Jersey law that takes effect Nov. 11 will regulate the sale of guaranteed asset protection (GAP) waivers sold by the state’s motor vehicle dealers. GAP waivers usually are offered at the time of the purchase or lease of a vehicle and classified as addenda to vehicle financing agreements. 
Since GAP waivers once were considered to be solely a matter of private contract between vehicle purchasers and dealers, there previously were no statutes or regulations that specifically applied to a dealer selling them. On the other hand, "GAP insurance," referred to in the state’s applicable laws as "automobile dealer gap insurance," is an insurance product that a dealer obtains through a third party (i.e. not the lender or lease funding source) and sells to a consumer. 
The coming New Jersey law specifically defines GAP waivers provided by a lender or lease funding source in a manner so that they are not to be considered insurance policies subject to New Jersey’s insurance laws. Additionally, the law requires motor vehicle dealers to provide a Notice to all borrowers that the extension of credit, finance, sale, or lease may not be conditioned upon the purchase of a GAP waiver or insurance. 
The law also requires that GAP waivers to disclose (1) the name and address of the initial creditor and borrower; (2) the purchase price and terms of the GAP waiver; (3) that the purchaser may cancel the GAP waiver during a "free-look" period (of a minimum of 30 days); (4) the procedure for receiving GAP waiver benefits; (5) whether the GAP waiver is cancellable after the "free-look" period ends; (6) that in order to receive a refund for a cancelled GAP waiver, the borrower must submit a written request to the lender within 90 days of the event terminating the finance agreement; and (7) the methodology for calculating any refund of the unearned purchase price of the GAP waiver. 
Most important, the new law requires motor vehicle dealers who offer GAP waivers to obtain insurance or contractual indemnification for their GAP waiver obligations. However, the statute provides that such insurance may be obtained by an administrator for the GAP product being sold by a dealership to cover the dealer’s obligations. 
Thus, unless a dealership is selling its own GAP waivers, they can avoid having to obtain insurance directly, as long as the administrator of the GAP waiver they are selling has obtained the required insurance on their behalf. In addition, dealers who are lessors of motor vehicles are not required to insure obligations related to GAP waivers on their leased vehicles. 
The new law sets fines of $500 to $10,000 for violations of its provisions.