GAP Regulatory Compliance & Standards 2 — Questions and Answers
Question 1: Under CFPB oversight, which practice in GAP product marketing is considered an Unfair, Deceptive, or Abusive Act or Practice (UDAAP) violation?
- Failing to disclose the maximum benefit cap in plain language (Correct answer)
- Charging a premium before the loan is finalized
- Offering GAP only on new vehicles
- Requiring a minimum down payment of 10%
Correct answer: Failing to disclose the maximum benefit cap in plain language
UDAAP violations include obscuring material terms such as maximum benefit caps, which consumers need to make an informed purchasing decision.
Question 2: Which federal regulation requires creditors to include the cost of optional GAP insurance in the finance charge disclosure when the purchase is mandatory for credit approval?
- Gramm-Leach-Bliley Act
- Truth in Lending Act (TILA) / Regulation Z (Correct answer)
- Fair Credit Reporting Act
- Dodd-Frank Act Section 1031
Correct answer: Truth in Lending Act (TILA) / Regulation Z
Regulation Z (implementing TILA) requires that any product whose purchase is a condition of credit must be included in the finance charge and APR calculation.
Question 3: A state insurance commissioner requires GAP providers to file rates and forms before selling the product. This requirement is an example of which regulatory framework?
- Federal preemption under Dodd-Frank
- Prior approval regulation (Correct answer)
- File-and-use regulation
- Use-and-file regulation
Correct answer: Prior approval regulation
Prior approval regulation requires that rates and forms receive regulatory approval before they may be used, giving regulators direct gatekeeping authority.
Question 4: When a consumer cancels a GAP waiver product mid-term, the standard regulatory requirement regarding unearned premium is:
- The dealer retains the full premium as an administrative fee
- The lender absorbs the unearned portion through a rate credit
- A pro-rata or short-rate refund must be issued to the consumer or applied to the loan (Correct answer)
- No refund is required if more than 90 days have elapsed
Correct answer: A pro-rata or short-rate refund must be issued to the consumer or applied to the loan
Most state regulations and FTC guidance require that unearned premiums be refunded on a pro-rata or short-rate basis when a GAP product is cancelled.
Question 5: Which entity has primary authority to regulate GAP products sold as insurance policies through franchised auto dealerships?
- The Federal Reserve Board
- The state department of insurance in the state where the vehicle is sold (Correct answer)
- The National Highway Traffic Safety Administration
- The Consumer Financial Protection Bureau exclusively
Correct answer: The state department of insurance in the state where the vehicle is sold
GAP insurance products are regulated at the state level by each state's department of insurance, which governs product forms, rates, and licensing.
Question 6: A GAP waiver administered through a credit union is most likely regulated under which framework rather than state insurance law?
- National Credit Union Administration (NCUA) rules and applicable state credit union laws (Correct answer)
- OCC guidelines for national banks
- SEC Rule 10b-5
- FTC Holder Rule exclusively
Correct answer: National Credit Union Administration (NCUA) rules and applicable state credit union laws
Credit union-offered GAP waivers fall under NCUA supervision and applicable state credit union statutes, distinguishing them from insurance-based GAP products.
Question 7: Under the FTC's Used Car Rule, dealers must disclose certain warranty information on the Buyers Guide. How does this interact with GAP compliance?
- GAP replaces all Buyers Guide disclosures for used cars
- GAP terms must appear on the Buyers Guide instead of the F&I menu
- Dealers must ensure GAP disclosures are separate from and do not contradict the Buyers Guide warranty disclosures (Correct answer)
- The Used Car Rule exempts GAP products from any FTC disclosure requirements
Correct answer: Dealers must ensure GAP disclosures are separate from and do not contradict the Buyers Guide warranty disclosures
GAP disclosures must stand on their own and not create consumer confusion when presented alongside the FTC-mandated Buyers Guide warranty information.
GAP Regulatory Compliance & Standards 2
Under CFPB oversight, which practice in GAP product marketing is considered an Unfair, Deceptive, or Abusive Act or Practice (UDAAP) violation?