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United States Joins the War Against Voluntary Protective Products | Hudson Cook, LLP

When it comes to voluntary protection products, such as secured asset protection, debt forgiveness, credit insurance, service contracts and vehicle protection products, the hottest topic this summer appears to be the Federal Trade Commission’s Motor Vehicle Dealer Trade Regulation Rule, which targets “‘junk fees’ and ‘surcharges’ charged in connection with consumer credit transactions. While the rule proposed by the FTC is a significant attack, states are also waging an increasingly intense war against voluntary protection products.At the state level, battles continue on multiple fronts, with an increased focus on voluntary protection products in law, regulation and enforcement.Anyone selling and funding voluntary protection products in consumer credit transactions must Closely scout the battle lines to avoid becoming the next target.

In recent years, state legislation has increasingly addressed the sale and financing of voluntary protection products. The most significant trend in state legislation has been the passage of state laws governing GAP waiver agreements. In 2022, such a bill was introduced in Connecticut (House Bill 5385), although it has yet to pass. Additionally, many states have enacted legislation to expand the state law definitions of “service contract” and “vehicle protection product” to include products such as road hazard protection, tires and wheels, paint protection and key fob replacement. The most recent example of this type of legislation is South Dakota Senate Bill 160, effective July 1, 2022, which specifically exempts these products from regulation as insurance. In Alabama, a new law, effective Jan. 1, 2023, expressly permits motor vehicle protection products, which protect consumers against loss of vehicle value due to theft, damage, obsolescence, depreciation and other causes. These are examples of legislation that may be favorable to creditors selling and financing products, as the laws clarify how products are regulated by state law.

However, legislation is also a weapon with which states limit how and when products can be offered. For example, legislation currently pending in California (Assembly Bill 1311) would effectively prohibit installment lenders from financing voluntary protection products under specified military loans by providing that a security interest in a motor vehicle is void. if the loan finances the purchase of a credit insurance product or ancillary credit-related product. California also introduced legislation (Assembly Bill 2311) that would impose new GAP reimbursement requirements, cap the amount that can be charged for GAP, and require additional GAP disclosures. Through legislation, many states are undertaking efforts to strengthen their controls over GAP requirements. For example, in 2021, Wisconsin (House Bill 8) changed its law to impose new GAP reimbursement requirements. In 2022, Indiana (Senate Bill 383) amended its law to specify that the average retail value of a used motor vehicle subject to a GAP agreement must be determined using a supplier third-party appraisal services commonly used in the commercial used motor vehicle market (compared to the National Automobile Dealers Association average retail value, under applicable law).

Regulation has also proven to be an effective weapon that states can use to impose restrictions on the sale and funding of voluntary protection products. For example, in Massachusetts, the Banking Division issued Opinion Letter 20-005 (February 10, 2022), in which it expressly prohibited GAP waiver administrators from charging fees for waiver cancellation. GAP to consumers in connection with retail installment sales of motor vehicles. Chapter Vehicles. In Virginia, the Bureau of Financial Institutions changed its regulations in 2021 to effectively prevent lenders from financing any ancillary product or service offered as part of consumer lending.

Finally, the deadliest weapon in the arsenal of states is law enforcement. Currently, Colorado appears to be the most active in enforcement. Over the past two years, Colorado’s attorney general has been on an apparent warpath, reaching five settlement agreements with vehicle-secured creditors and GAP administrators who allegedly failed to provide required GAP repayments. Colorado isn’t the only active enforcer. Just last week, 18 states joined with the FTC to sue a national jewelry retailer, alleging, among other things, that the retailer misrepresented that its protection plan was needed to fund purchases and added purchase plan without consumer consent.

The war against voluntary protection products is advancing on all fronts, and creditors selling and financing these products are under fire. If you haven’t already, now is the time to strengthen your defenses. These defenses can include strong product training to ensure your sellers understand the products you offer, keeping abreast of recent legal and regulatory developments impacting products, regularly reviewing products to ensure that They comply with state law and monitor product sales practices and customer complaints about products you have funded. Just as a successful general on the battlefield has a tactical plan, if you’re selling and funding voluntary protection products in consumer credit transactions, make sure you’re ready with a compliance plan. solid.

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