Pub. 1 2018-2019 |Issue 2
NADA. According to Chris Arnold, Paul Metrey said service members should be able to buy the same credit protection products that civilians can buy, but they aren’t allowed to do that right now. According to Jared Allen, Paul Metrey actually talked about what GAP insurance is and why it is an important and comprehensive product. The only common point between the two quotes is the fact that both quotations are about GAP insurance. Going back to paragraph four, Christopher Peterson also talks about dealers telling customers what happens if they get in a car crash and their insurance company doesn’t pay off the loan completely. He doesn’t argue about that point, other than to present it as something dealers say without offering commentary about whether what they say is true, but he says car dealers push gap insurance hard and claims that the markup on gap insurance policies is substantial. He states that policies worth $20 to $30 per year are marked up to more than $1500 spread over the entire time of the loan. Jared Allen adamantly backs up what dealers tell customers: gap insurance is useful and fills a real need. He also argues the idea that car dealers are overly aggressive in selling policies. As he puts it, customers today are well- prepared when they buy cars. They can’t be forced to buy anything they don’t want, and they are smart enough and capable enough to know when a product is or is not to their advantage. Also, he points out that Chris Arnold does not offer any proof other than what Christopher Peterson had to say on the subject. What about the markup on policies? Essentially, a GAP waiver sold by a dealership is not the same as GAP insurance sold by an insurance agent. The GAP waiver costs more because it provides 150 percent of the cash value of a car and is for the life of the loan. GAP insurance sold by an insurance agent is for one year only and is limited to 25 percent of the actual cash value of a car. Suppose someone buys a car for, say, $25,000. • If you calculate 25 percent of that, you get $6,250. If you calculate 150 percent of that, you get $37,500. A policy where the insurance company might have to pay $6,250 is obviously going to cost less than one where the insurance company might have to pay $37,500, which amounts to six times as much money. • Most loans these days are for a six-year term. If you buy the $20-per-year gap insurance from an insurance agent, that coverage costs $120 after six years. Let’s assume someone goes for the dealer’s gap waiver and pays $1600 for it. (If it were more than $1600, that is probably the number that would have been used by Christopher Peterson; since this whole exercise is hypothetical, though, the only thing that matters is that it is more than $1500.) If you divide $1600 by 6, you get approximately $266.67 per year. That is still a big number, of course, but don’t forget that the potential payout is substantially bigger, too, and that the GAP waivers being sold by car dealers are much more comprehensive in what they cover than GAP insurance can claim to be. For example, they include coverage limits, coverage periods, deductibles, and negative equity. GAP insurance doesn’t. Jared Allen doesn’t stop there, however. He points out two things: Christopher Peterson offered no proof of these products being overpriced, and NADA had given data to Chris Arnold about large payouts that had been made to customers who bought the gap waiver policies. What about the claim in paragraph eight of the NPR story that says dealers have been prevented from rolling the cost of the gap waiver (incorrectly called gap insurance) into the car loan? It turns out the restriction only dates back to December 14, 2017. Before that day, someone in the military who used financing to buy a car, the purchase was not covered by the MLA. After that day, dealers and others had to follow the duties and restrictions of the MLA when including GAP waivers in a financing contract. NADA’s view, as expressed by Jared Allen, is that the new rule was flawed. Those in leadership positions at NADA don’t think it is consistent with Congressional intent, and they also think the process was flawed because the DOD, which is expert in many different areas but not in consumer credit, made a substantive change without giving other entities a waiting period for discussion, adjustment, and compliance. Why is the change a problem for dealers? One of the restrictions prevents lenders from taking a security interest in the car that is being financed. In other words, the loan is unsecured. The dealer, banks, and other financial institutions are suddenly put in a position where loaning money to a service member for a car loan does not make financial sense for them. And that, in turn, means service members can’t get the same credit protection offered to civilians unless they don’t buy GAP waivers. That’s not fair to any of the parties involved in contracts affected by the change. NADA and trade associations for financial service providers, including the Defense Credit Union Council, have all asked the DOD to withdraw the restriction that went into effect December 14, 2017 because it had a massive negative effect on military personnel who want to take out a loan and buy a car. This group of organizations has also asked DOD to please be more careful in the future (and to take more time) when making broad changes of this sort. Paragraph nine of Chris Arnold’s story characterizes this as an industrywide lobbying effort (with no detailed list of participants). That’s misleading. So was Chris Arnold’s entire story. 3 9
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