Julie A. Cardosi
SALE OF AFTERMARKET VOLUNTARY PROTECTION PRODUCTS SUBJECT TO INCREASED REGULATORY SCRUTINY
In the auto industry, the sale of aftermarket or voluntary protection products (“voluntary products”) is an important source of profit to a dealership. NADA has reported that dealer finance departments’ sales of voluntary products continue to drive dealership revenue. Sources of revenue from the sale of these products include vehicle extended service contracts, guaranteed asset protection (GAP), and credit life and disability insurance. Other voluntary products include dent repair, window etching and products related to financing of the vehicle, among others.
The sale of these voluntary products, however, can be a regulatory “slippery slope” for dealerships finding themselves at the end of enforcement challenges by federal regulators, like the Federal Trade Commission, the Consumer Financial Protection Bureau, and Department of Justice, and state regulators, such as the Illinois Attorney’s General Office. In recent years, we have assisted dealers in connection with regulatory challenges by some of these agencies over the sale of voluntary products.
So, what are the regulatory concerns? Regulators often focus on the proper disclosure of these products and various claims that rise to the level of misrepresentations concerning the products.
In Illinois, the Attorney General’s Office is charged with enforcing Illinois laws intended to protect Illinois consumers against unfair and deceptive practices. The Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.) generally prohibits such unfair methods of competition and unfair or deceptive acts or practices which include:
“any deception, fraud, false pretense, false promise, misrepresentation, or
any concealment, suppression or omission of any material fact, or
any practice described in the "Uniform Deceptive Trade Practices Act”.
This law applies to advertising and to business practices and transactions.
As to the disclosure of these products, one area of scrutiny is whether the dealership has disclosed the optional or voluntary nature of the products. That is, the dealership must disclose (and be able to substantiate such disclosure) that the customer is not required to purchase these products when purchasing or leasing a vehicle, nor is the customer required to procure any product or service offered by the dealership. This extends to service contracts, financing and the other aftermarket protection products. The model NADA policy contains useful disclosure information, but it is up to each dealership to ensure their employees make certain that customers know that purchase of these products is voluntary and not required. Also, in the sale of these products, the dealership must disclose the products separately from the vehicle.
Dealerships should also ensure against any misrepresentations concerning the price or the value of the products. Aside, some products, such as service contracts, for example, may be subject to specific insurance law requirements promulgated by the state’s insurance regulators. For this reason, dealers should consult with their lawyers and accountants about the structure of any service contracts they offer. In general, dealerships typically utilize a menu-based pricing system in the offer of these optional products to disclose the product costs. Again, it’s imperative to ensure the customer understands the costs, along with the voluntary nature of the purchase. An important aspect is to disclose the price and monthly payment for each of the products if purchased separately. Also, failure to systematically offer and charge the same price to each customer for the same product can subject the dealership to claims of unlawful price discrimination.
In marketing the sale of these voluntary products, dealerships can be held responsible for any claims made as to the nature or value of the products, notwithstanding the use of product vendor marketing materials. Dealers should consider requiring product vendors to indemnify the dealership from and against any and all claims, including marketing or advertising claims, and requiring vendors to procure insurance coverage (naming the dealership as an additional insured) to back up that indemnification.
Additional best practices to consider include ensuring customers are informed about submission of a claim and if the product can be cancelled, along with the cancellation process and eligibility for refunds in the event the product is cancelled. Also, it is important to ensure the dealership is consistent in the way it offers and sells these products.
Finally, as the fate of new government regulations hang in the balance with the ushering in of a new US presidential administration and likely shifts in the balance of Congressional power, dealers would be wise to keep informed of all new legal and regulatory changes at the federal and state levels as those can and will undoubtedly impact their business practices.
 In 2018, NADA released its model policy, the “Voluntary Protection Products: A Model Dealership Policy” to assist its members with compliance considerations. See NADA website at https://www.nada.org/ .