Lawsuit Claims Hyundai Capital America Retains Unused GAP Waiver Fees When Borrowers Pay Off Loans Early

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Hyundai Capital America faces a proposed class action over its alleged practice of retaining unearned fees from unused guaranteed asset protection (GAP) waiver addendums when consumers pay off their auto finance agreements early.

Per the lawsuit, when a borrower who purchased GAP coverage—i.e., a form of insurance to cover the difference between what’s still owed on a car loan and what insurance will pay in the event the vehicle is “totaled”—pays off the full amount of a loan before it’s due, they’ve also paid for unused GAP coverage for the full amount of their loan term. The case argues the consumer is thus entitled to a refund for GAP fees paid for coverage that went unused.

The suit alleges, however, that it is Hyundai Capital’s practice to deny refunds for GAP fees despite being contractually obligated to return the “unearned” money to policyholders.

“Hyundai Capital knows consumers are entitled to a refund of unearned GAP fees when they pay off their finance agreement early, but it collects the unearned GAP fees anyway,” the complaint charges. “This has enabled Hyundai Capital to collect and keep millions of dollars in unearned GAP fees that rightfully belong to their consumers.”

The lawsuit explains that GAP products are a form of insurance designed to protect a consumer in the event that their vehicle is deemed a “total loss” or stolen while they owe more on their car loan than their insurer is willing to pay for the loss. A GAP waiver is a “debt cancellation agreement” whereby the creditor—in this case Hyundai Capital—agrees to write off the “gap,” i.e., the amount left on the loan after applying the insurance proceeds, if the financed car is deemed a total loss or stolen, the case says.

Per the suit, GAP waiver fees are added as a separate line item in a vehicle purchase finance agreement and paid in monthly installments over the life of a loan. Hyundai Capital’s GAP waiver addendum expressly states that if the finance agreement is paid off early, the GAP waiver addendum will terminate, and the borrower is entitled to a refund of the unused portion of the GAP fees, according to the complaint. These fees are considered unearned, the suit says, because when a borrower pays off a finance agreement, there is no possibility that the creditor will need to write off a “gap,” and the consumer thus does not obtain “anything of value” by paying for GAP protection.

According to the filing, Hyundai Capital’s GAP fee refund provision “makes sense” in that “consumers should not have to pay for a service they no longer need and derive no benefit from.”

The lawsuit alleges, however, that despite Hyundai Capital’s contractual obligations, it is the creditor’s policy to refuse to refund consumers for the unused portion of their GAP protection when they pay off their loans early. Thus, the defendant has breached its contracts with consumers and “wrongfully retained” millions of dollars per year in unearned GAP fees, the case contests.

The lawsuit, which was removed from Los Angeles County Superior Court to California’s Central District Court on November 12, looks to represent anyone who, during the applicable statute of limitations period, entered into a finance agreement with a GAP waiver addendum that was assigned to Hyundai Capital America and who paid off their agreement before the end of the loan term but did not receive a refund of the unearned GAP fees. Also proposed in the case is coverage for a state-specific subclass of consumers who entered into their finance agreement with Hyundai Capital America in California.

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