July 14, 2020

How Big Is the Gap?

As dealers and lenders scramble to offer much appreciated payment relief to consumers at this time of crisis, the adage, “no good deed goes unpunished,” comes to mind. The definition of “Gap” that most dealers and consumers understand, is the difference between the loan payoff amount and the value of the totaled or stolen vehicle. However, what exactly is the definition of the loan payoff amount as it applies to Gap? For the purpose of this article, when Gap is mentioned, I am referring to Gap waivers. My understanding is that there are still a couple of states that allow Gap insurance, so those contracts have different rules.

Knowing the details of the valuable protection products that you sell, allows you to provide the best coverage for your customer, keeps you compliant, and translates to the best CSI for you.

Lenders are currently allowing many qualified consumers to defer or skip a payment, or two, or three. We usually see the “skip-a-payment” offer around the holidays, as a gift to consumers. However, before you exercise this option, you should understand that the payment is not forgiven. That amount is added to the end of the vehicle loan. That means you will continue to pay interest on it. You should have all the information before you decide if you want to take advantage of this gift.

There is another sales tool that lenders are utilizing to assist dealers in selling vehicles during these challenging times –the deferred first payment option. Dealers are advertising that if you purchase from them and finance through a specific lender, your first payment will not be due for 120-180 days, or even longer. That can be a very appealing incentive to purchase now rather than wait. Although interest usually accrues during this time, that is a personal choice for you to make and is not what this article is meant to address.

Both the deferred payments and deferred first payment option will affect the Gap amount that is paid in the event of a total loss. The Gap claim is triggered when a vehicle is stolen and not recovered; or totaled as a result of an accident. There are several calculations, that the Gap company makes, to determine the Gap benefit amount. One of the first is to determine the actual “covered” balance of the loan. After getting a payoff from the lender, the Gap company will compare that amount to the scheduled balance on the original amortization schedule for the loan. In accordance with the terms of the contract, the lower value of the two is the Gross Payoff used to begin to establish the Gap.

This is where those skipped payments, and the number of days to first payment, are important. Missed payments, late fees, or any other charges that were added to the original loan are not covered. And, there is no differentiation between a missed payment, or a payment that the lender allows to be deferred. Most Gap waiver contracts also have a maximum number of days before the first payment. This is typically 90 days, but can differ greatly. It can be as few as 30 days. So be sure you know what your Gap contract allows. It is also very important to know how they handle claims for loans that exceed the specified number of days. If the first payment was deferred for longer than the Gap contract allows, there are at least two ways the Gap company can handle the claim:

1. Re-amortize the loan using the max number of days to first payment (better consumer option); or
2. Deny the claim and void the contract.

There are even more calculations that need to be made to establish the covered Net Payoff. That is the payoff – which is compared to the Actual Cash Value (ACV) as defined in the Gap contract – to establish the Gap benefit. Refunds that the customer has, or will receive for the unearned portion of cancelable protection products purchased (i.e. vehicle service contracts), must be subtracted from the Gross Payoff.

The last calculation used by most Gap companies to arrive at the Net Payoff is the Loan to Value (LTV) calculation. This is determined at the time of sale and does not change during the term of the loan. The LTV limit, if there is one, is the fraction of Loan Amount/MSRP (or NADA retail if pre-owned) expressed as a percentage i.e. 125%, 150%, etc. For example, if the original loan amount was $30,000 and the MSRP or NADA retail value of the vehicle at the time of sale was $20,000, the LTV would be 150%. The process by which the Gap company considers the excess amount of the loan, at time of claim, can differ substantially among the Gap claim departments. Suffice to say, for the purpose of this article, that the excess loan amount is not covered when calculating the Gap benefit amount. So, as a rule, the higher the limit on the Gap contract, the better.

As mentioned, the purpose of this article is to draw attention to the effect that payment relief has on a potential Gap claim. Although not covered here, there are many other considerations when choosing the Gap waiver contract that you decide to offer to your dealership customers. For example:

-Is ACV defined as the amount the insurance company paid? Or is it based on some other calculation? The former is the better definition.
-Is the Gap contract canceled at claim, which makes the unearned amount potentially subject to dealer chargeback? Or, better yet, is it earned at claim?
-Is the insurance deductible covered?
-What if there is no underlying property insurance?
-What is the strength of the underlying insurer, if there is one?
-Is there a maximum APR allowed?

Those are only a few of the questions to ask your agent or provider. Knowing the details of the valuable protection products that you sell, allows you to provide the best coverage for your customer, keeps you compliant, and translates to the best CSI for you.

Previously printed in F&I and Showroom by George Spatt on July 14, 2020.