OGC Opinion No. 08-04-22
The Office of General Counsel issued the following opinion on April 15, 2008 representing the position of the New York State Insurance Department.
Re: Gap waivers by national banks
1) Would a federally regulated national bank that offers gap waivers to its customers in connection with a direct auto loan be doing an insurance business pursuant to New York Insurance Law § 1101 (McKinney 2006)?
2) May the federally regulated national bank offer gap waivers to customers on motor vehicle instalment1 sales contracts purchased by the bank?
3) May a federally regulated national bank offer to waive an auto insurance deductible under a physical damage policy?
1) Yes. However, the Insurance Department will not regulate the sale of debt cancellation agreements, including gap waivers, because the Office of the Comptroller of Currency (OCC), a federal agency, regulates national banks.
2) Gap waivers are a form of debt cancellation agreements (DCAs) and, as noted above, the Department will not regulate the sale of DCAs by national banks. Therefore, we refer the inquirer to the OCC for an opinion on the issue.
3) The waiver of the deductible is a DCA and, as noted above, the Department will not regulate the sale of DCAs by national banks. Therefore, we refer the inquirer to the OCC for an opinion on the issue.
The inquirer reports that it represents a national bank that proposes to sell gap waivers in two ways: 1) to borrowers on the bank’s direct auto loans and 2) to borrowers after a loan closes in connection with motor vehicle instalment contracts purchased by, or assigned to, the national bank. In the latter instance, the bank would like to sell the gap waivers to borrowers for more than the amount it would cost the bank to obtain gap insurance coverage. Furthermore, on direct auto loans, the national bank intends to waive the cost of the primary auto insurance deductible to the borrowers. The bank also aims to provide incentives to loan officers and customer service representatives to encourage the sale of the gap waiver program.
Under a lease, a loan, or other credit transaction, a lessee or debtor is obligated to the lessor or creditor for the full outstanding amount under a lease or credit transaction, even if there is a total loss of the property that is subject to the transaction. For example, a consumer may purchase in 2003 a car valued at $25,000, and borrow $20,000 from a bank to be paid back over 5 years. In most instances, the bank would require the consumer to purchase insurance, wherein the bank would be an additional insured or loss payee, in the event there is physical damage to, or an unrecovered theft of, the car. These motor vehicle physical damage insurance policies provide coverage, typically, for the actual cash value only, which takes into account the car’s depreciation in value. In other words, the insurance policy would cover the car for $25,000 initially (in the event of a loss, the insurer would pay $5,000 to the consumer and $20,000 to the bank). As the car’s value depreciates over time, the benefits under the policy decline proportionately. For example, in 2006, the car may be worth $15,000, and the benefits would decline from $25,000 in 2003, to $15,000 in 2006.
Often, consumers owe more to the bank than the value of their car. Consider additional facts to the hypothetical above: in 2008, at the time the loan is due, the car’s value has significantly depreciated to $5,000, but the outstanding loan balance is $8,000. Thus, in the event of a total loss—with the total motor vehicle physical damage insurance policy in force—the consumer would owe the bank $3,000 out of pocket. If the loss was a result of an accident, the physical damage insurance policy would only pay the actual cash value of the car (less the deductible), and the consumer would owe the remaining balance to the bank. This scenario gave rise to “gap waivers,” which lenders began to sell. Gap waivers eliminate the debtor’s obligation to the creditor for the “gap,” or the difference between the actual value of the property and the amount owed to the bank, when the debtor suffers a loss in value.
Regulation of national banks that offer gap waivers
As a general matter, gap waivers constitute insurance because they squarely fit within the definition of an insurance contract set forth in Insurance Law § 1101(a)(1). See Office of General Counsel (OGC) Opinion dated April 2, 2002. Insurance Law § 1101(a)(1) states:
(1) "Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer [a] benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
In 1964, the Attorney General of New York concluded that a national bank entering into a debt cancellation contract in this state must comply with the licensing and other relevant provisions of the New York Insurance Law. See 1964 N.Y. Op. Atty. Gen. No. 30. To be sure, that opinion stated:
While national banks are necessarily subject to the paramount authority of the federal government, it is well settled that such banks are nonetheless amenable to state laws to the extent that such laws do not impair their efficiency as federal entities or conflict with the superior authority of the United States (citation omitted).
In 1994, the New York Legislature enacted sweeping banking reform legislation, which included the retail lease and credit business. See 1994 N.Y. Sess. Laws page 36 (McKinney). That legislation added a new paragraph (3) to subdivision (b) of Insurance Law § 1101, and created, in narrow circumstances with regard to personal property including motor vehicles, a gap waiver exception to the general definition set forth in Insurance Law § 1101(a)(1). Insurance Law § 1101(b)(3) reads as follows:
(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.
Therefore, a lessor or creditor is not doing an insurance business if: 1) the lessor or creditor waives the total gap amount; 2) the waiver applies only in the event of total loss of the personal property occasioned by its theft or physical damage; and 3) the charge to the lessee or debtor for the waiver does not exceed the cost of the lessor or creditor gap insurance coverage. The facts that the inquirer presents fall outside the scope of the exception set forth in Insurance Law § 1101(b)(3), because the bank wishes to charge the lessee or debtor more than the cost of the lessor or creditor gap insurance coverage.2 Therefore, the bank would be doing an insurance business.
Because the inquirer asks about national banks providing gap waivers, the federal regulations pertaining to DCAs or debt suspension agreements (DSAs) offered by a national bank are relevant to your inquiry. The federal government, which regulates national banks, refers to DCAs or DSAs in its regulations. See 12 C.F.R. 37.1. In principle, gap waivers waive the gap, and DCAs and DSAs waive or suspend the entire debt. However, the OGC considers gap waivers to be a type of DCA. See OGC Opinion dated June 17, 2004.
Nevertheless, given the OCC’s role, the Insurance Department has determined that it will not regulate the sale of DCAs and DSAs sold by a national bank in connection with an extension of credit to a customer of the bank that fall outside the scope of Insurance Law §1101(b)(3)(iii), and which therefore would constitute the doing of an insurance business in this state. Relying on the federal Gramm-Leach-Bliley Act (GLBA), 15 U.S.C. § 6711, an OGC Opinion dated April 2, 2002 concluded that a determination that the Insurance Law applies to a national bank that offers gap waivers needs to be made on a case-by-case basis.
Subsequent to the issuance of OGC’s April 2, 2002 opinion, the OCC, which charters, regulates, and supervises all national banks, issued a regulation governing DCAs and DSAs offered by national banks. See 12 C.F.R. § 37.1 (2007). Subpart (c) of that regulation, which sought to clarify that DCAs and DSAs would be subject to OCC’s regulation, and not regulation by the states, reads as follows:
(c) Scope. This part applies to debt cancellation contracts and debt suspension agreements entered into by national banks in connection with extensions of credit they make. National banks' debt cancellation contracts and debt suspension agreements are governed by this part and applicable Federal law and regulations, and not by part 14 of this chapter or by State law.
In view of the OCC’s regulation, the Department, in an April 4, 2003 OGC opinion, determined that it would not regulate the sale of DCAs and DSAs by a national bank in connection with an extension of credit to a customer of the bank. The instant opinion reaffirms the Department’s position, and refrains from opining about any incentives that a bank may provide to loan officers and borrowers in connection with its gap waiver programs. Therefore, we refer the inquirer to the OCC for an opinion regarding that question.
Gap waivers on motor vehicle instalment sales contracts that a national bank purchases
The second question asks whether the national bank may offer to customers gap waivers on motor vehicle instalment sales contracts that the bank purchases. The Motor Vehicle Retail Instalment Sales Act, see generally Personal Property Law §§ 301-316, governs motor vehicle instalment sales contracts entered into in New York. Personal Property Law § 301(5) defines a retail instalment contract. That provision states:
“Retail instalment contract” or “contract” means an agreement, entered into in this state, pursuant to which the title to, the property or a security interest in or a lien upon a motor vehicle, which is the subject matter of a retail instalment sale, is retained or taken by a retail seller from a retail buyer as security, in whole or in part, for the buyer's obligation. The term includes such an agreement wherever entered into if executed by the buyer in this state and if solicited in person by a salesman or other person acting on his own behalf or that of the seller. The term also includes a contract whereby a security interest in favor of the seller is created or retained and a contract for the bailment or leasing of a motor vehicle by which the bailee or lessee contracts to pay as compensation for its use a sum substantially equivalent to or in excess of its value and by which it is agreed that the bailee or lessee is bound to become, or for no other or for a nominal consideration has the option of becoming, the owner of the motor vehicle upon full compliance with the terms of the contract.
Therefore, under a retail instalment contract, a buyer and seller enter into an agreement whereby the seller retains either title to the property, or a security interest in, or a lien upon a motor vehicle as security for the buyer’s obligation to pay the full sales price. This sort of transaction is also known as a “conditional sales agreement,” because the buyer retains possession of the automobile, whereas the seller retains the title until the buyer makes a payment in full. See Yantzi v. Manzer, 30 Misc. 2d 770 (Sup. Ct. Lewis Co. 1961).
The holder of a retail instalment sales contract must offer to waive any gap amount only if gap insurance coverage from an authorized property/casualty insurer is available to the holder. Indeed, New York Personal Property Law § 302(A)(2), which governs total loss notice and waiver of the gap amount, states:
2. If the retail instalment contract provides that the buyer shall be responsible upon a total loss of the vehicle occasioned by its theft or physical damage for the gap amount, the holder, prior to the execution of the agreement, shall offer to waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage, only if motor vehicle creditor gap insurance coverage is available to the holder and such coverage is obtained from a property/casualty insurance company, which has been licensed by the superintendent of insurance of this state to write motor vehicle creditor gap insurance in this state. This offer may be made contingent upon the payment by the buyer of a separate charge that shall not exceed the cost of motor vehicle creditor gap insurance covering the retail instalment contract. Nothing contained in this section shall be construed to authorize a waiver, in connection with a transaction with respect to which motor vehicle creditor gap insurance has not been obtained, of a contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage.
The Department does not enforce the provisions of the Personal Property Law, but it is our understanding that if a bank or other financial institution originates a loan (a direct loan), and does not sell the property to a retail buyer, the bank would not be a retail seller pursuant to the Personal Property Law, and therefore would not be obligated to offer a gap waiver to a buyer. See OGC Opinions dated June 14, 2002 and March 11, 2008. However, a bank or other financial institution that purchases a loan as an assignee (an indirect loan) would be a holder3 under the plain language of the Personal Property Law. See OGC Opinions dated June 27, 1995 and March 11, 2008.
Gap waivers are a form of DCA and, as noted above, the Department will not regulate the sale of DCAs by national banks. Therefore, we refer the inquirer to the OCC for an opinion on the issue.
National bank waiving an auto insurance deductible under a physical damage policy
The inquirer’s final inquiry asks whether the gap waivers that a federally regulated national bank offers may waive an auto insurance deductible. As noted above, and as stated in an August 30, 2001 OGC opinion, if the lessor or creditor waived an obligation other than the gap amount—such as a deductible, which is included within the actual cash value of a motor vehicle or other property—the lessor or creditor would run afoul of Insurance Law § 1102, which prohibits doing an insurance business without a license. However, given the OCC’s role in the regulation of national banks, the Department will not regulate the sale of DCAs, including gap waivers, by a federally regulated national bank. If the inquirer has questions about that subject, we suggest that it contact OCC directly.
For further information you may contact Senior Attorney Sapna Maloor at the New York City Office.
1 “Instalment” is an alternative spelling of “installment.” For uniformity with New York’s statutory spelling, we use the term “instalment.”
2 The charge to the lessee in both motor vehicle and non-motor vehicle retail lease agreements, however, may exceed the cost of gap insurance by no more than ten dollars, which covers administrative costs. See Personal Property Law § 335(2) (covering motor vehicle retail lease agreements) and New York General Business Law 399-w(2) (covering non-motor vehicle retail lease agreements).
3 The “holder” of a retail installment contract is the retail seller of the motor vehicle under or subject to the contract or, if the contract is purchased by a financing agency or other assignee, the financing agency or other assignee. See Personal Property Law § 301(10).