GAP Coverage: Toyota Collects Unearned Millions Each Year by Charging Early Contract Payoff Fees, Lawsuit Says

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Toyota Motor Credit Corporation (TMCC) and Toyota Motor Insurance Services (TMIS) have collected unearned fees for guaranteed automobile protection (GAP) waivers in instances in which a customer has paid off a retail installment sales contract early, a proposed class action alleges. 

The 38-page complaint out of California claims Toyota is aware these fees “have not and will never be earned” yet collects them anyway and then refuses to refund the money to customers despite being contractually and legally obligated to do so as the creditor and assignee of a driver’s finance agreement and GAP waiver. 

“As a result of this unlawful and fraudulent practice, Toyota knowingly collects and keeps tens of millions of dollars in unearned fees from its customers each year,” the case alleges. 

According to the suit, members of the proposed class financed the purchase of their vehicles by entering into retail installment sales contracts with authorized Toyota dealers. Under these agreements, the consumers agreed to pay the price of the cars in monthly installments over a fixed period of years, with interest, the case explains, with the contracts immediately sold and assigned by a dealer to Toyota, to whom all future payments are made directly. 

Although similar, a retail installment sales contract is different from an auto loan in that a loan is a transaction between a consumer and a bank or other lender for money that’s to be used to by a vehicle and repaid with interest, while the former is a transaction between a consumer and auto dealer, according to the case. In a retail installment sales contract, a consumer agrees to repay the dealer over time for the value of a vehicle plus interest, the suit specifies, citing a definition from the U.S. Consumer Financial Protection Bureau.

Each retail installment contract at issue in the lawsuit included a GAP waiver—an addendum, or supplement, to the contract that amends its terms and becomes part of the overall agreement, the complaint continues. According to the suit, a GAP waiver is a debt cancellation agreement that provides, in the event a customer suffers a total loss of their vehicle and the actual cash value of the car is worth less than the balance owed to the creditor, that the dealer will agree to waive the difference. Per the case, this difference is known as the “GAP”:

“For example, assume a customer’s car is stolen and the customer still owes $10,000 in payments on their retail installment sales contract. Also, assume the customer’s liability insurer only agrees to pay $8,000 for the ‘total loss’ of the vehicle. Without a GAP Waiver, the customer would still owe the $2,000 difference to Toyota as the creditor on the contract, even though the customer no longer possesses the vehicle. However, if the retail installment sales contract has a GAP Waiver, then Toyota is required to ‘waive’ the $2,000 difference.” 

From there, the lawsuit relays customers pay for GAP coverage in monthly installments over the life of a finance agreement. Per the case, the total cost of GAP coverage—i.e. GAP fees—for the full term of the contract is listed separately in the retail installment sales contract as part of the total amount financed. The contract also lists the total amount of interest a customer will pay—i.e. the finance charge—over the full length of the deal, the suit says. 

A wrinkle, according to the complaint, is that while a customer is told upfront the total cost of GAP coverage and finance charges for the full term of their contract, the consumer, in truth, pays these amounts incrementally over time to Toyota on a month-to-month basis as part of the monthly payment for their car. 

When a customer pays off a finance agreement early, or before the original maturity date, this triggers what Toyota and the rest of the auto finance industry call “unearned GAP fees” and “unearned finance charges,” the lawsuit says. As an example, the suit provides that if a customer had four years of GAP protection at a cost of $800 yet paid off their finance agreement in only two years, $400 in “unearned GAP fees” would exist for the unused half of the contract term. According to the lawsuit, these GAP fees are considered unearned in that the early conclusion of a finance agreement means “there is no possibility of a GAP and the customer is no longer receiving anything of value” by paying for future GAP coverage. 

Where the defendants come in, the lawsuit alleges, is that in the event a customer wants to pay off their finance agreement early, Toyota will typically not include the unearned finance charge in the total quoted payoff amount but will include unearned GAP fees. In other words, the case says, Toyota, at the time of early payoff, “fraudulently represents to its customers … that they owe Toyota the unearned GAP fees for the remaining term of the contract” when the company is aware these fees are not earned, and can never be earned, because the finance agreement is ending early.

Toyota then allegedly collects and pockets the unearned GAP fees unless a customer affirmatively asks for a refund, which the suit says “rarely happens.” The money knowingly reaped by Toyota each year through this practice amounts to millions of dollars that “rightfully belongs to its customers,” the suit claims:

“Toyota always knows when there has been an early payoff of the finance agreement because Toyota, as the creditor, is the entity receiving the early payoff. Likewise, Toyota always knows it [sic] customers are entitled to a credit or refund of the unearned GAP fees after an early payoff, because Toyota knows that once the retail installment sales contract is terminated early, there is no basis for continuing to charge customers for future GAP coverage. Consequently, there is no legitimate basis for Toyota to include the unearned GAP fees in the early payoff amount quoted to customers, nor is there is any legitimate basis to collect such unearned money from its customers and then refuse to give it back unless the customers affirmatively requests [sic] a refund.”

The suit argues Toyota’s GAP waiver forms fail to clearly and unambiguously provide that customers will forfeit their unearned GAP fees unless they affirmatively request a refund. Further, the case alleges Toyota’s early payoff letters sent to customers are “misleading and fraudulently conceal” the automaker’s obligation to refund unearned GAP fees. 

The plaintiffs ask the court for an order requiring Toyota to refund to all customers nationwide all unearned GAP fees collected after the early payoff of finance agreements, an order requiring the defendants to pay the interest that accrued on those delinquent funds and an order requiring Toyota to, on a future basis, issue a credit for unearned early-payoff GAP fees or direct, prompt refunds. 

The lawsuit looks to represent consumers nationwide who entered into finance agreements with a Toyota GAP waiver addendum that were assigned to Toyota, who paid off their finance agreements before the end of the contract term, and who did not receive a credit or refund of the unearned GAP fees and/or accrued interest on those amounts. The case also looks to cover California- and Colorado-only subclasses fitting the same criteria 

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