Most every sale of a motor vehicle by a dealer (or, for that matter, any other consumer product) has warranty implications that must be considered and addressed by the either or both the product manufacturer or seller. Therefore, it is important for dealers, warranty administrators and others to have a basic understanding of warranties and the regulatory scheme that applies to them.

In one way or another, warranties are regulated by one or more of the following:

• The Magnuson-Moss Warranty Act (MMWA)
• Federal Trade Commission (FTC) Act and Regulations
• State Warranty and Vehicle Service Contract Acts and Regulations
• State Insurance Regulations
• State Unfair and Deceptive Acts and Practices (UDAP) Acts
• State Lemon Laws
• State Uniform Commercial Codes (UCC)

Addressing the various state laws and regulations that govern warranties is beyond the scope of this discussion. As such, the discussion below will focus mainly on the regulations and requirements imposed by federal law.

Warranty vs. Service Contract

First, it is important to understand the distinction between a warranty and a service contract.

A warranty is included in the price when you purchase a product and traditionally comes from the manufacturer or the seller of the product. A warranty can not be sold separately from the product. A warranty can be either full or limited and is regulated by the MMWA.

On the other hand, a service contract is purchased separately from the product itself and is usually administered by a third party. A service contract is in addition to any warranty on the product and only covers those items outlined in the contact. Most states regulate service contracts to varying degrees.

Warranties can either be “express” or “implied.”

Express warranties are promises, representations and statements (including a product description or sample) made about the product that forms the basis of the bargain and is relied upon by buyer. Express warranties can be either written or oral.

On the other hand, implied warranties are unwritten or unspoken promises that are created by state statute and automatically apply to the goods when they are sold. The two types of implied warranties are the warranty of merchantability and the warranty of fitness for a particular purpose. The implied warranty of merchantability is the promise that the goods will do what they are supposed to do. The warranty of fitness for a particular purpose is a promise that the product is suited for purpose or proposed use the buyer has identified to seller. If the seller does not offer a written warranty, in most instances, the seller can disclaim these implied warranties so long as the buyer is informed in a conspicuous and specific manner.

Magnuson-Moss Warranty Act

On the federal level, warranties are governed by the MMWA that was enacted by Congress in 1975 and regulated by the FTC. Under the MMWA, manufacturers and sellers are required to provide consumers with detailed information about the warranty coverage provided on the product purchased and the rights and obligations of the consumer and the warrantor.

The MMWA does not require a business to provide a written warranty and does not apply to oral warranties, however, if the warranty offered is in writing it must comply with MMWA. MMWA only applies to consumer goods (not products sold for resale or commercial purposes) and not to services a business may provide. Lastly, where there is a conflict between federal and state warranty law, MMWA will preempt the state law and prevail.

Warranty Requirements under MMWA

The MMWA and related regulations specify three requirements that a warranty must meet:

• The warranty must indicate that the warranty is either “Full” or “Limited”
• The required coverage terms of the warranty must be in a single, easy to read document
• The warranty must be available so that the consumer can read the warranty before buying and where goods are sold

For a warranty to be considered a full warranty under the MMWA, it must meet the minimum standards for warranties. Full warranties must meet all of the following five requirements; otherwise, it is a limited warranty:

• No limit on the duration of implied warranties
• Warranty coverage is not limited to original purchaser
• Warranty service is provided without charge
• Warranty provides, at consumer’s choice, replacement or full refund if unable to repair product after a reasonable number of attempts
• No unreasonable duties are required to receive service

Under applicable regulations, written warranties must describe the coverage under the warranty by addressing the following items:

• What does the warranty cover and/or not cover
• Coverage period of the warranty
• What will and/or will not be done by the warrantor to correct or remedy the problem
• How the consumer goes about getting warranty service
• How state law affects rights under warranty by including the standard disclosure language

Prohibited Warranty Provisions under MMWA

Under the MMWA there are restrictions on implied warranties, “tie-in sales” provisions and deceptive or misleading warranty terms:

• The MMWA prevents the warrantor from eliminating or limiting implied warranties
• Tie-in sales provisions that require the consumer to buy an item or service from a particular company in order to keep the warranty in force are prohibited unless the product or service is required to make product work, the FTC has given prior approval or the required item or service is provided free of charge
• Warranties that contain deceptive and misleading terms are prohibited

MMWA and FTC Used Car Rule

Most dealers who sell used vehicles must also comply with the FTC’s Used Car Rule regarding the Buyers Guide requirements. As a result, the requirements of the MMWA and the Used Car Rule are interrelated in that they both address important warranty disclosure requirements. Under the Used Car Rule, the Buyers Guide must contain the following warranty disclosures:

• Whether the vehicle is being sold “AS IS” or with a warranty
• If a warranty is offered, what percentage of the repair costs the dealer will pay under warranty
• If the manufacturer’s warranty has not expired this must be disclosed along with the required safe harbor language regarding the remainder of the manufacturer warranty
• An outline of the warranty coverage must be listed on the Buyers Guide and the dealer must also provide a written warranty that complies with MMWA

The F&I industry has grown considerably over the last decade and the income generated for auto dealers from the sale of various products has become a significant source of income to offset the decline in income from the sale of the vehicles themselves.

As a result, regulation and scrutiny by lawmakers, consumer groups and the courts has increasingly been brought upon the industry. In response, the industry has gone to great lengths to educate all parties about F&I products and it has actively assisted in drafting the applicable laws and regulations in such a way that the F&I products are categorized and regulated properly.

In today’s business atmosphere it is important to minimize risks whenever possible. This is especially true in the automotive and F&I industry. Unfortunately, in spite of the efforts of the industry and regulatory groups, many areas in which risks could be reduced still exist. These problems can range from consumer confusion and dissatisfaction to negative media reports to regulatory enforcement actions to class-action lawsuits.

In my experience, I have found that may of these risks can be minimized or removed by simply knowing and understanding the product and using proper terminology. Below, I address several areas that commonly result in issues:

Retail Installment Sales Contract (RISC) vs. Loan

It is a common practice to use these terms interchangeably even by those who know better. Many times you hear that the dealer got the buyer a loan or loaned the buyer the money to purchase the vehicle. However, it is important to understand the difference between the two to prevent their misuse.

When a consumer purchases a vehicle from a dealer and finances the purchase through the dealer, they traditionally enter into an RISC. Under the RISC, the dealer is extending credit to the buyer for the vehicle purchase and the dealer is the initial “creditor.” Although the dealer/creditor could collect the agreed upon monthly payments from the buyer, in most situations the dealer subsequently assigns the RISC to a finance company.

In the loan scenario, the consumer, through a separate agreement with a third-party “lender” such as a bank or finance company, borrows money and uses the loan proceeds to pay the dealer for the vehicle. From the dealer’s point of view this should be considered a cash transaction because the dealer only received the proceeds of the loan and was not a party to the loan transaction.

Dealers do not “loan” money – they extended “credit.” Why is it important to know the difference? Most states have laws regulating RISCs and separate laws that regulate loans. These laws are two different animals. As a dealer, it is difficult enough to comply with the RISC laws let alone have to deal with the laws regulating loans.

GAP Waiver vs. GAP Insurance

Basically there are two kinds of guaranteed asset protection (GAP): waiver and insurance. Whether GAP is a waiver or insurance, the product is designed to do the same thing: in the event of a total loss, it takes care of any difference between the value of the vehicle and the amount owned under the RISC or loan. Most states permit the sale of the GAP waiver product.

GAP waiver is a contractual addendum to the finance contact, while GAP insurance is a separate contract that is just that – an insurance policy that pays in the event of a covered loss.

GAP waiver is most common in the RISC transaction discussed above. With GAP waiver, the parties to the RISC (buyer and dealer/creditor), through the use of an addendum to the RISC, contractually agree that if the buyer has a total loss and owes more on the vehicle that it’s worth, the creditor will WAIVE the balance. It is important to note that the GAP addendum can usually be purchased at the time the RISC is entered into between the buyer and dealer/creditor. GAP waiver is not an insurance product.

With GAP insurance, the buyer purchases an insurance policy that is designed to PAY the creditor the difference between the vehicle value and the amount owed. As an insurance product, the sale of GAP insurance is traditionally more highly regulated. GAP insurance is less common than GAP waiver, but is mischaracterized more often.

Warranty vs. Service Contract

A warranty is included in the price when a product is purchased and traditionally comes from the manufacturer or the seller of the product. A warranty cannot be sold separately from the product. A warranty can be either full or limited and is regulated by the federal Magnuson-Moss Warranty Act.

On the other hand, a service contract is purchased separately from the product itself and is usually administered by a third party. A service contract is in addition to any warranty on the product and only covers those items outlined in the contact. Most states regulate service contracts to varying degrees.

The confusion between the two terms is amplified when a service contract is referred to as an “extended warranty.” As a result, to prevent any confusion, the best practice is to not use the term extended warranty when referring to a service contact.

Insurance vs. Non-insurance Terms

A variety of insurance and non-insurance terms have been misused in the F&I industry. When discussing the terms and conditions of the products, pay close attention to the language used in the contracts themselves as it should give some guidance to the proper terminology to be used in discussing or describing the product. A few of these terms are briefly discussed below:

• Coverage vs. Contract Terms
  The use of the term “coverage” traditionally is an insurance term. It is usually seen in insurance-type products and will be used when describing the product, its benefits and its terms and conditions. However, when describing non-insurance-type products, the contractual terms will most often be referred to as “contract terms,” “terms and conditions” or something similar.
• Premium vs. Enrollment Charge/Purchase Price
  Premium is historically an insurance term and should not be used for non-insurance-type products. On the other hand, it is better to use terms such as enrollment charge or purchase price for describing the cost of non-insurance products.
• Contract vs. Policy
  In those situations in which both insurance and non-insurance products are being sold together, it is easy to refer to the various products as “policies.” Unfortunately, policy is a term usually associated with insurance. The better practice is to refer to all of these products as contracts or agreements even if they are an insurance product.