This can be a touchy subject because of the close relationship that many lenders have with automobile dealers. However, that does not change the fact that there are serious concerns that should be taken into account by lenders when they finance Gap Waiver. Most lenders don't realize that Gap Waivers state clearly that they are addendums to your loan agreement and affect the way your loan performs when there is a total loss. When you finance a Gap Waiver, did you know that you, the lender, are agreeing to waive much or all of the remaining balance when your borrower’s primary auto policy doesn’t pay off the loan?
Know the provider/administrator behind the auto dealer Gap program?
Most lenders do not know who the insurance company or administrator is behind a dealer Gap program. Dealer Gap plans could even be self-insured programs that are not backed by an insurance company at all. Or they could be insured, but the insurance company is small, poorly rated, and not in great financial condition. Consider the story of a Gap Waiver program written through dealers in Pennsylvania. Lenders financed the waivers sold at the dealers, however, the insurer behind the waivers was struggling. Reliance Insurance Company became insolvent and borrowers and dealers turned to-- you guessed it-- the lender who agreed to waive the remaining “Gap” thru the waivers they financed. The state of Pennsylvania became involved as thousands of borrowers who had purchased Gap Waiver at their local dealerships became effectively uninsured. Lenders were placed in a very uncomfortable position with their customers, and many chose to waive the Gap amount and take the loss themselves, rather than risk legal issues or force borrowers to wait on the PA Department of Insurance.
As a lender, you might want to consider taking more control of the Gap waiver product as a whole to avoid these problems.
You can accomplish this by talking to your dealers about using only your Gap product on the deals you finance through them. Explain all of the risks you take by financing changes to your loan agreement with no knowledge of who is behind the program. In most cases, as long as the dealer is allowed to mark up the product to make similar profits, they may be amenable. Furthermore, many lenders tell us their indirect Gap Waivers have very poor claims handling. There is a reason for this. The Gap company that works with your auto dealer has no relationship with you at all. They also have no relationship with your customer at all. This is a bad situation for you and your borrowers. The Gap companies in auto dealers normally only care about production. They generally water down the benefits to keep the price low, so that the dealer can make as much money as possible on the markup. The Gap company has no incentive to pay claims and deny many claims to keep the auto dealer price as low as possible. This is not the type of customer service that you are used to providing to your borrowers.
Consider using your own Gap Waiver product to solve these issues.
You will receive an actual insurance policy listing you as the named insured where you can file a claim for your risk in the Gap transaction (in Gap Waiver situations through auto dealers you are left with no insurance policy naming you as the insured in most cases). When looking for a partner to provide GAP Waivers, ensure they have great ratings and can pick the administrator that will handle your claims. Normally lender controlled Gap products are far superior on coverage, so you and your borrowers are not constantly nickel and dimed when it counts. Don’t allow your customers to be poorly served in claim situations. Save your collections department’s valuable time trying to track down payments from random dealer Gap Waiver companies.
Take Control of the Gap Waiver product you finance.
It may be time to take control of the Gap Waiver product. Discuss these serious issues with your dealers. The dealers that have a great relationship with you and see business as a two-way street will understand your need to protect your customers and your collateral interest and use your Gap Waiver product on the deals you finance.
Dealer relationships are important, yes. But your customers and your risk in waiving deficiency balances are more important. For questions related to dealer Gap and lender’s risks with Gap Waiver, contact us at 1-800461-9224.