Pub. 16 2017-2018 Issue 2

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S I S S U E N O . 3 , 2 0 1 7 22 new jersey auto retailer BY ANTHONY M. ANASTASIO, ESQ. GAP REVISITED: A NEW STATE LAW PROVIDES FURTHER CLARIFICATION N J CAR has received multiple inquiries in recent months regarding guaranteed asset protection ( “GAP” ) products, ranging from Sales Tax ob- ligations to licensing requirements to sell them. Unfortunately, the tangled web of law and regulation governing the sale of GAP has generated significant confusion over the past two decades. This article serves to examine the sources of that confusion and to clarify the road forward for New Jersey dealers selling GAP products. What Is GAP? In simple terms, GAP products provide for payment of an outstanding loan balance that exists after a borrower’s liability insur- er declares a financed vehicle to be a total loss and submits an insurance payment for such loss to the lender/lienholder. Before the turn of the century, GAP was not con- sidered an insurance product by dealers, but rather, referred to as a “waiver” or “protec- tion”. The reason for this treatment of GAP stemmed from historical limitations on the products that lenders could sell. That is, lenders were previously prohibited from selling or underwriting “insurance,” and therefore, a dealer functioning as a lender on a motor vehicle retail installment sales contract could not sell an insurance product at that time. GAP was deliberately struc- tured as a debt cancellation agreement to avoid legal classification as insurance. In other words, in offering GAP to borrowers for a separate charge, dealers were agree- ing to “waive” a borrower’s obligation to repay the loan balance under defined circumstances. New Jersey regulators determined that this arrangement did not amount to in- surance, and thus, dealers were permitted to sell GAP free from State insurance reg- ulation for decades. This understanding of GAP led the New Jersey Division of Taxation to conclude that charges paid by consumers for GAP were subject to New Jersey’s Sales and Use Tax. Insurance premiums are generally exempt from that tax, but since GAP was not considered insurance by New Jersey tax authorities, GAP charges were not afforded the insur- ance Sales Tax exemption. When Did Things Start To Change? In 1999, the United States Congress enact- ed the Gramm-Leach-Bliley Act, which formally disposed of many long-standing limitations on lenders, including their ability to sell and underwrite insurance. However, this federal law imposed a requirement on the states to adopt uniformrules for insurance producer licensing. In accordance with this federal requirement, New Jersey enacted a new insurance producer licensing law in 2001 and New Jersey’s Department of Banking and Insurance (“DOBI”) adopted related regulations in 2004. DOBI’s new licensing regulations required dealers and their per- sonnel who sold GAP to obtain limited lines insurance producer licenses. TheDOBI regu- lations expanded thedefinitionof insurance to include dealerGAPproducts, andDOBI took theposition that anyGAPproduct resulting in