We have some colorful language in our industry. Printing a contract is also known as spinning a deal. We have green peas and old dogs.
Our industry also uses technically incorrect language, some of which is perpetuated by the banks and credit unions — “loan” is one such example. Dealers do not make loans; dealers execute installment sales contracts which are assigned to willing finance sources. This leads to another misnomer, that dealers work with finance sources, not lenders.
“Warranty” is probably the most widespread misuse of a term. Dealership managers, some finance source contracts, and an occasional agent love to refer to a vehicle service contract as a warranty. The underlying issue is that a warranty is provided by the manufacturer or seller at no additional cost to the consumer, while a service contract is an optional voluntary protection product that carries a cost to the consumer.
Why is the Difference Important?
The Federal Trade Commission (FTC) is the primary regulator of many of the federal laws franchised auto dealers are required to be compliant with. The Magnuson-Moss Warranty Act is the defining federal statute when it comes to warranties, and its promulgating rule is the FTC Disclosure Rule.
The FTC’s website contains useful information to help dealers navigate through the myriad issues its regulations can require. One such article from its website addresses the differences between warranties and service contracts:
“An auto warranty is a contract to fix certain defects or malfunctions for specific amount of time after you buy a car. A manufacturer’s warranty typically is included in the purchase price when you buy a new car, but used cars might come with some type of warranty coverage, too.
An auto service contract is a contract to perform (or pay for) certain repairs or services. Service contracts are sometimes called an “extended warranty,” but they’re not a warranty as defined by federal law.”
Another Dark Side Attack
Last year, the FTC announced a $1.5 million settlement with Bronx Honda and its general manager. The primary thrust of the settlement was for alleged discriminatory actions. The FTC also pointed out that Bronx Honda offered certified pre-owned (CPO) Hondas and told customers they must pay an additional "certification" fee to receive the advertised price and warranty, a practice prohibited by the manufacturer.
The dealership also assessed "prep, shop, or reconditioning" fees for some CPO Hondas.
Manufacturer CPO Programs
Another data point to consider is the manufacturer’s CPO programs themselves. The ones I’ve read stay silent on the question of charging the consumer for the cost of the CPO warranty, but are clear that they expect the vehicle to be certified before it is offered for sale. This means that the cost of the CPO is to be included in the sale price.
Mag-Moss Warranty Act
The Magnuson-Moss Warranty Act passed in 1985, predating any manufacturer CPO programs. As such, the act does not directly address a CPO warranty. We are striving to obtain an FTC opinion on the subject, but you know how slowly government requests work.
Until the FTC responds to our query, we are left with looking at the original statute, opinions expressed on the FTC website, regulatory actions from the regulating agency, and the manufacturer CPO programs for direction. All four of our currently available data points suggest that a dealer cannot charge a consumer for a CPO warranty at the point of sale. It must be included in the advertised price of the vehicle.
Quite frankly, this is good news for agents. Dealers should have an available vehicle service contract which mirrors the coverages available under the manufacturer CPO warranty. The price of the vehicle service contract should be comparable to the CPO cost. This gives the dealer an opportunity to sell a service contract to the consumer and avoid potential regulatory actions.
Stay safe, good luck, and good selling.
Gil Van Over is the executive director of Automotive Compliance Education (ACE). He is also the founder and president of gvo3 & Associates.