On January 4, the Colorado Attorney General announced that his office entered into assurances of discontinuance (available here and here) with two credit unions that will result in $4 million being refunded to Colorado borrowers who were entitled to refunds of guaranteed automobile protection (“GAP”) fees. These settlements follow an investigation by the Consumer Protection Section of the Colorado Department of Law, which found that the credit unions historically failed to refund unearned GAP fees owed to consumers.

GAP is an optional benefit offered to car buyers who finance their auto purchase. If a car is totaled after such a purchase, the consumer’s auto insurance usually pays only an amount equal to the car’s fair market value, which is often less than the outstanding amount owed on the consumer’s auto loan. GAP products are designed to cancel or pay off the remaining balance on a consumer’s auto loan. While consumers often pay for GAP through a lump sum at the time they purchase a vehicle, the coverage lasts the entire term of the loan. If the loan is paid off early, however, the consumer is entitled to a refund of the unused portion of the GAP fee under state law.

In addition to remitting refund payments to affected Colorado auto purchasers and a $100,000 reimbursement fee to the state, each credit union further agreed to alter their GAP refund practices in order to maintain compliant with Colorado consumer protections laws.

Putting it into Practice: These settlements are the latest in a series entered into between the Colorado AG and GAP providers dating back to March of 2021. Since then, the Colorado AG has secured over $23.5 million in GAP refunds for Colorado auto purchasers. Other states have similarly begun to increase their focus on unearned GAP fees, and the CFPB has also emphasized that it is closely monitoring auto industry conduct, especially as it relates to add-on products, ensuring affordable credit, and compliant servicing and collections (see previous blog posts here and here).

Auto finance companies should also be aware of the increased regulatory focus on fair auto lending and fair servicing and should consider implementing some of the best practices recommended by the CFPB (available here) or risk becoming the subject of a similar supervisory examination.