June 2012, Auto Dealer Today - WebXclusive
*Co-authored with R. Glenn Knirsch, associate, Hudson Cook, LLP
A new car is a depreciating asset – oftentimes losing up to 20 percent of its value when it drives off the lot. This leaves a consumer with the risk that should he total his car in an accident or the car be stolen, he may be liable to the financing company for thousands of dollars more than the insurance proceeds. To protect against this risk, auto dealers and finance companies offer Guaranteed Asset Protection (“GAP”) waivers and other debt cancellation products (collectively, “GAP products”) which, if purchased, relieve consumers from liability for this “GAP amount.” For many years, Ohio law has left many wondering whether the cost of these GAP products can be financed. There are several good arguments to support the position in favor of financing, to be sure, but there was not the kind of express authority we lawyers love to hang our hats on. However, recent legislation has clarified this uncertainty.
Here’s the problem. Dealer financing in Ohio is governed by Ohio’s Retail Installment Sales Act (the “Act”). The Act limits the fees that may be charged to those specifically enumerated in the Act. A fee for a GAP product is not an enumerated fee, at least not in the way the Act reads today. However, it has never been entirely clear whether it is a “fee” or a “product with an identifiable cost.” Reasonable minds could differ on how to interpret the Act (fee vs. product), and we can see both sides of the argument. Ergo, many dealers who sell these products have treated them as services related to the vehicle transaction, the costs for which are expressly permitted under the Act.
Due to this lack of clarity, the legal community has been reluctant to sign off on the permissibility of including charges for GAP products in Ohio contracts. This is generally driven by an abundance of caution — neither lawyers nor their malpractice carriers (nor clients, for that matter) like legal uncertainty. However, a recent bill passed by the Ohio legislature shines a new light, at least on a going-forward basis.
H.B. 487 is Ohio’s bi-annual budget review. Tucked within this 1800-page bill is an amendment to Ohio’s Retail Installment Sales Act, specifically enumerating GAP products as permissible fees, mandating how the product must be disclosed in the contract, and imposing a condition on its sale — namely, that the terms of credit offered to the customer cannot depend on whether he or she decides to purchase the GAP waiver. The bill was enacted by operation of law without the Governor’s signature on June 11, 2012, and the amendment addressing GAP products becomes effective in early September. Uncertainty, no more.
*R. Glenn Knirsch, an associate of Hudson Cook, LLP, in the firm’s Hanover, Maryland office, co-authored this piece. Glenn can be reached at 410.865.5407 or [email protected].