Maryland Legal Alert for Financial Services

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GAP Refund Concerns for Indirect Lenders

Indirect auto lending practices continue to be a hot topic for class action plaintiffs’ attorneys and state regulators.  Over the last three years, several a number of class action lawsuits have been filed against indirect auto lenders concerning refunds of certain ancillary products (such as Guaranteed Asset Protection products, or GAP).  Many of the lawsuits focus on state laws that place responsibility on the indirect lender to cause the proper borrower refund when a borrower cancels a GAP product.  States with these requirements that have been identified in several nationwide lawsuits include Alabama, Colorado, Indiana, Iowa, Massachusetts, Oregon, Texas, Vermont, and Wisconsin.  State law often includes specific requirements concerning how to calculate a GAP refund (e.g., pro rata refund after 60 days, full refund in first 60 days); and/or who is responsible for making the refund (e.g., GAP administrator or indirect lender). 

Class action claims can include allegations that:

  • Aauto dealers used GAP contracts at the time of sale that did not follow applicable state refund requirements;
  • Indirect lenders that purchased the related loans failed to provide required refunds under applicable state law; or
  • Indirect lenders that purchased the related loans provided refunds that do not follow the terms of the underlying GAP contracts. 

In a class action settlement approved in November of 2021, a large indirect lender agreed to provide GAP refund redress of more than $500 million.  In addition, there have been a number of recent state regulatory inquiries/enforcement actions related to GAP refund practices, including in Colorado, California, Massachusetts, and Virginia.  Indirect lenders must ensure that the GAP contracts used by auto dealers follow applicable state requirements and that refunds for ancillary products like GAP are calculated in accordance with the applicable contract terms and the state law where the dealer originates the loan.

Practice Point: Financial institutions should review their underwriting policies and ancillary products sold and ensure that they have appropriate controls over their dealer partners. This is also a good time to review dealer agreements to make sure that they contain adequate requirements for dealer compliance and strong indemnification and repurchase rights. In addition, financial institutions should pay particular attention to where they are engaged in indirect lending to verify that refunds are calculated in accordance with state law (as to amount and timing) and that refunds are properly provided to the borrower by the party responsible for making such refunds.

For more information concerning this topic, please contact Christopher R. Rahl.



August 12, 2022




Rahl, Christopher R.


Financial Services