GAP Regulatory Compliance and Ethics 2 — Questions and Answers
Question 1: Under UDAAP standards enforced by the CFPB, which GAP sales practice would be considered an 'unfair' act?
- Charging a GAP fee that far exceeds the actual risk and benefit to the consumer (Correct answer)
- Requiring customers to read all GAP contract terms before signing
- Offering GAP only on financed vehicles
- Disclosing the GAP cancellation policy in writing
Correct answer: Charging a GAP fee that far exceeds the actual risk and benefit to the consumer
UDAAP's 'unfair' standard applies when a practice causes substantial consumer harm that consumers cannot reasonably avoid and is not outweighed by countervailing benefits.
Question 2: Which federal agency has primary supervisory authority over GAP products sold through bank-affiliated auto dealers?
- Federal Trade Commission
- Consumer Financial Protection Bureau (Correct answer)
- National Highway Traffic Safety Administration
- Securities and Exchange Commission
Correct answer: Consumer Financial Protection Bureau
The CFPB has supervisory and enforcement authority over consumer financial products, including GAP coverage sold in connection with auto financing.
Question 3: A state requires a 'free-look' period for GAP waivers. What must a dealer do if a customer cancels within this period?
- Provide a pro-rated refund only
- Provide a full refund of the GAP fee (Correct answer)
- Deny the cancellation unless a total loss occurred
- Transfer the GAP benefit to another vehicle
Correct answer: Provide a full refund of the GAP fee
Free-look provisions entitle the consumer to a complete refund if they cancel within the specified window, typically 30 days, without any deduction.
Question 4: Which document must be provided to a consumer at the point of GAP sale to satisfy federal Regulation Z disclosure requirements for financed products?
- A copy of the dealer's GAP reserve agreement
- A Truth in Lending disclosure showing GAP as part of the finance charge if applicable (Correct answer)
- The lender's internal GAP pricing matrix
- A signed arbitration agreement
Correct answer: A Truth in Lending disclosure showing GAP as part of the finance charge if applicable
Regulation Z requires that any amounts financed, including optional products like GAP, be reflected accurately in the Truth in Lending disclosure so consumers understand their total financing cost.
Question 5: An ethics code for GAP professionals prohibits 'churning.' In the GAP context, churning means:
- Canceling and rewriting GAP contracts to generate additional fees without consumer benefit (Correct answer)
- Processing GAP claims more than once for the same total loss
- Transferring GAP coverage between multiple vehicles
- Selling GAP to customers who already have comprehensive coverage
Correct answer: Canceling and rewriting GAP contracts to generate additional fees without consumer benefit
Churning involves canceling and reissuing GAP products primarily to earn additional fees or commissions, which harms consumers and violates ethical standards.
Question 6: Which of the following best describes the distinction between a GAP insurance policy and a GAP waiver?
- GAP insurance pays the lender directly while a waiver pays the consumer
- A GAP waiver is a contractual provision in the loan agreement, while GAP insurance is a separate insurance contract (Correct answer)
- GAP waivers require state insurance licensing while insurance policies do not
- There is no legal distinction between the two products
Correct answer: A GAP waiver is a contractual provision in the loan agreement, while GAP insurance is a separate insurance contract
A GAP waiver is a debt cancellation addendum to the credit agreement that waives the deficiency balance, whereas GAP insurance is a standalone insurance policy regulated under state insurance law.
Question 7: A compliance officer discovers a dealer has been enrolling customers in GAP without their signed consent. Under consumer protection law, this practice is best classified as:
- Negligent misrepresentation
- Unauthorized cramming (Correct answer)
- Unfair competition
- Vicarious liability
Correct answer: Unauthorized cramming
Cramming refers to adding unauthorized charges or products to a consumer's account without their knowledge or consent, which violates UDAAP and state consumer protection statutes.
GAP Regulatory Compliance and Ethics 2
Under UDAAP standards enforced by the CFPB, which GAP sales practice would be considered an 'unfair' act?