The Office of General Counsel issued the following opinion on September 24, 2002, representing the position of the New York State Insurance Department.

Re: Gap Waivers and "Direct Loans".

Question Presented:

1. When a credit union or bank sells a gap waiver to a member or customer in connection with a "direct" motor vehicle loan, and the financial institution has purchased gap insurance, may the financial institution "up-charge" an administrative fee, that is, charge a fee for the gap waiver that is in excess of the cost of the gap insurance attributable to the loan?

2. If a credit union or bank can offer a gap waiver but does not do so, would it be liable for the gap amount in the event of a loss?

Conclusion:

1. When a credit union or bank sells a gap waiver to a member or customer in connection with a "direct" motor vehicle loan, and the financial institution has purchased gap insurance, the financial institution may not charge a fee for the gap waiver that is in excess of the cost of the gap insurance attributable to the loan.

2. A credit union or a bank in a direct loan situation is not obligated to offer a gap waiver, and the liability for the gap amount will depend upon the terms of the loan agreement. In other words, if the debtor is obligated under the loan agreement for the full amount of the loan, including the gap amount, then the fact that the lender does not offer to waive the gap amount will not discharge the debtor’s obligation.

Facts:

No specific facts are provided. The inquirer wished clarification of certain points that were addressed in our previous opinion letter dated June 18, 2002. For the purposes of this discussion, the inquirer stated that loans made by a seller are called "indirect" loans, while loans made by a financial institution are known as "direct" loans.

Analysis:

As we noted in the previous letter, the making of a gap waiver constitutes the doing of an insurance business in New York, within the meaning of N.Y. Ins. Law § 1101 (McKinney 2000) for which licensing is required pursuant to N.Y. Ins. Law § 1102 (McKinney 2000), except as provided in § 1101(b)(3), which states: 

(3) Notwithstanding the foregoing, the making of an agreement pursuant to which a lessor of personal property, a creditor making a loan or other credit transaction on personal property or, in the absence of a waiver by the lessor or creditor, the lessor's or creditor's assignee waives the obligation of the lessee or debtor for the gap amount, as such term is defined in paragraph fifty-two of subsection (a) of section one hundred seven of this chapter, shall not constitute, or be deemed to constitute, the doing of an insurance business if:

(i) the lessor or creditor or, in the absence of a waiver by the lessor or creditor, the assignee waives any and all obligations of the lessee or debtor for the gap amount and the lessee or debtor is discharged from any and all further obligation to pay the gap amount;

(ii) the waiver applies only in the event of a total loss of the personal property occasioned by its theft or physical damage;

(iii) in the event the lessor, creditor or assignee purchases lessor or creditor gap insurance, the charge to the lessee or debtor for the waiver does not exceed the cost of the lessor or creditor gap insurance coverage; provided, however, that nothing contained herein shall be construed to prohibit the lessor from including the charge for the waiver in the capitalized cost as that term is defined in subdivision eleven of section three hundred thirty-one of the personal property law.

The above exemption applies to any lessor or creditor, or assignee thereof, and hence would apply to both "direct" and "indirect" loan transactions. Consequently, any waiver of the gap amount by a "direct" lender that does not come within the exemption would constitute the doing of an insurance business by the lender. For the purposes of the inquirer’s question, the relevant condition is item (iii) above, which prohibits any charge to the lessee or debtor for the gap waiver that exceeds the cost of the gap insurance obtained by the lessor or creditor. The two exceptions to that rule will be discussed below.

In addition to the Insurance Law provisions, there are requirements in the New York Personal Property Law (PPL) and New York General Business Law (GBL) that apply in regard to certain gap waivers. N. Y. Pers. Prop. Article 9 (§§ 301 et seq.) (McKinney 1992 & Supp. 2002) applies to motor vehicle retail instalment contracts; N. Y. Pers. Prop. 10 (§§ 401 et seq.) (McKinney 1992 & Supp. 2002) applies to non-motor vehicle retail instalment contracts; Pers. Prop. Article 9-A (§§ 330 et seq.) (McKinney Supp. 2001) applies to motor vehicle retail lease agreements; and N. Y. Gen. Bus. §339-w (1996) applies to non-motor vehicle retail lease agreements.

Under the PPL and the GBL, a lessor or creditor may not offer a gap waiver unless it has purchased lessor or creditor gap insurance. This is not a requirement under the Insurance Law and hence only applies to those gap waivers specifically covered by the PPL and the GBL.

In regard to retail instalment contracts, the PPL provides that the gap waiver may only be made contingent upon the payment by the buyer of a separate charge that may not exceed the cost of the creditor gap insurance. N. Y. Pers. Prop. § 302A (McKinney Supp. 2002) and N. Y. Pers. Prop. § 402A (McKinney Supp. 2002). This provision is consistent with the requirement in Insurance Law § 1101(b)(3)(iii), quoted above, which limits the charge for the gap waiver to the cost of the gap insurance.

Unlike the case for retail instalment contracts, Pers. Prop. § 335 McKinney 1992 & Supp. 2001) (which governs motor vehicle retail lease agreements) and N. Y. Gen. Bus. §339-w (1996 & Supp. 2001) (which governs non-motor vehicle retail lease agreements) specifically provide that the gap waiver offer may be made contingent upon the payment by the lessee or assignee of a separate charge that shall not exceed the cost of lessor gap insurance covering the retail lease transaction plus an administrative fee not to exceed ten dollars. Inasmuch as these provisions were enacted at the same time as Insurance Law 1101(b)(3), the Department construes the ten-dollar fee provisions for retail lease transactions as an implicit exception from the Insurance Law provision. Accordingly, in those limited circumstances regarding retail lease transactions, a lessor or its assignee may charge an amount that exceeds the cost of its lessor gap insurance, but limited to ten dollars, without doing an insurance business.

It should be emphasized that the provisions of the PPL and the GBL do not apply to all gap waivers, but only those specifically addressed therein. A motor vehicle or non-motor vehicle retail instalment contract is one in which the retail seller who sells the property is one of the parties. It is our understanding that a direct loan initiated by the financial institution would not be a retail instalment contract but Article 9 and 10 would apply if the financial institution purchased a retail instalment contract from the retail seller.

With that as background, we will address the inquirer’s specific questions.

1. When a credit union or bank sells a gap waiver to a member or customer in connection with a "direct" motor vehicle loan, and the financial institution has purchased gap insurance, the financial institution may not charge a fee for the gap waiver that exceeds the cost of the gap insurance attributable to the loan because of the Insurance Law requirements. Should the financial institution charge a fee, it would be doing an insurance business, and would have to become licensed as an insurer. If the financial institution does not have gap insurance in place, it is not limited as to how much it may charge for the gap waiver. However, if the financial institution were an assignee under the loan from the retail seller, then it would be subject to the requirements of the PPL and may not offer the waiver absent gap insurance, subject to the fee limitation therein, which permits a $10 administrative fee to be charged.

2. A credit union or a bank in a direct loan situation is not obligated to offer a gap waiver. The liability for the gap amount will depend upon the terms of the loan agreement. In other words, if the debtor is obligated under the loan agreement for the full amount of the loan, including the gap amount, then the fact that the lender does not offer to waive the gap amount will not discharge the debtor’s obligation. The debtor may purchase debtor gap insurance in such a case.

As we stated in the prior letter, the Insurance Department does not enforce the provisions of the PPL or the GBL. The inquirer was directed to contact the appropriate banking regulatory agency concerning the applicability of these laws, or any other law or regulation, to financial institutions.

For further information, you may contact Principal Attorney Paul A. Zuckerman at the New York City office.

1"Gap amount" is defined in N.Y. Ins. Law § 107(a)(52) (McKinney 2000) as follows:

(52) "Gap amount" means:

(A) in the case of a lease of personal property, the difference, if any, between:

(i) the amount owed by the lessee, under the early termination provision of the lease, as of the date of a total loss of the leased property caused by its theft or physical damage, or the amount which would have been owed by the lessee had the lessor not waived such obligations; and

(ii) the sum of: (I) any unpaid rental payments and other unpaid charges, arising from the failure of the lessee to fulfill the lessee's obligations under the lease, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the lessee is required under the lease agreement to maintain a physical damage insurance policy on the personal property which is the subject of the lease agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy.

(B) In the case of a loan or other credit transaction on the purchase of personal property, the difference, if any, between:

(i) the amount owed by the debtor under the loan or other credit transaction as of the date of a total loss of the personal property which is the subject of the loan or other credit transaction agreement caused by its theft or physical damage, or the amount that would have been owed by the debtor had the creditor not waived such obligation; and

(ii) the sum of: (I) any unpaid payments and other unpaid charges, arising from the failure of the debtor to fulfill the obligations under the loan or other credit transaction agreement, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the debtor is required under the loan or other credit transaction agreement to maintain a physical damage insurance policy on the personal property which is the subject of the loan or other credit transaction agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy.

2 Please note that the Personal Property Law uses the spelling "instalment" rather than the preferred spelling "installment" in the articles that regulate both motor vehicle and non-motor vehicle retail instalment contracts (N.Y. Pers. Prop. Law Articles 9 & 10 (McKinney 1992 & Supp. 2001). Hence we follow suit in this letter.

3 Note that, since the gap waiver may not be sold except where there is gap insurance in place, the charge for the gap waiver in a retail instalment contract may never exceed the cost of the gap insurance.