Abraham Lincoln, after an evening at the White House, was asked, “How does it feel to be President of the United States?” “You have heard,” said Lincoln, “about the man tarred and feathered and ridden out of town on a rail? A man in the crowd asked him how he liked it, and his reply was, ‘If it wasn’t for the honor of the thing, I would rather walk.'”
Our country has some really big problems right now — the COVID-19 pandemic, resulting unemployment and business closures, a volatile stock market, and an upcoming presidential election already mired in controversy — but, amid these troubles, it seems like there is no dealership issue too small for the federal government to attack.
We have written about recent cases brought against dealerships by the Federal Trade Commission and the U.S. Department of Justice alleging discrimination in setting interest rates on car financing. And we are not talking about big dealership groups here; sometimes the enforcement target has had only one rooftop or sometimes two. Last month, I offered advice on how to protect your dealership from claims of illegal discrimination. I promised that, this month, I’d discuss the second big area of governmental scrutiny: selling voluntary protection products.
Voluntary protection products (sometimes called ancillary products) include optional products that protect the vehicle, such as extended service plans or dent repair, and products that protect the buyer specifically related to the vehicle’s financing, such as credit insurance, debt cancellation, or guaranteed asset protection/GAP.
Most consumer advocates — and, if they are being honest, many government enforcement lawyers — hate these products. They think they are overpriced, which leads them to suspect that dealers must be deceiving customers about VPPs or else no one would buy them. And that kind of thinking can put a big fat target on a dealership that fails to take care in how it markets these VPPs.
To be sure, these products are not for everyone. A consumer who buys or leases a new car with a great manufacturer warranty may not get as much benefit from an extended service plan as a consumer buying a high-mileage used car. A consumer making a big down payment may never be underwater on financing and thus may not need GAP. Or perhaps the consumer can afford to self-insure against the risk that the financed car will become a total loss early in the contract when the amount owed often exceeds the insurance payoff.
But, as we know, not every consumer is that fortunate. Pity the driver, often a young driver, who wraps his car around a tree and discovers that, despite property insurance, he owes thousands of dollars for a car that is now in a junkyard. Or a consumer who can afford her monthly payment but not the shock of a big repair bill not covered by a warranty. Well-paid government lawyers may not understand these concerns, but every dealer has seen customers in these difficult situations.
And while I am focusing mostly on federal enforcement, beware of the states! See, for instance, the article by my delightful partner, Catharine Andricos, “State Legislators and Regulators Are Working to Fill the GAP,” in the August 2019 issue of Spot Delivery.
When the regulators attack a dealership, they generally use one or more of three claims:
- The dealership claimed the VPP was required;
- The dealership mispresented the cost of the VPP; or
- The dealership misrepresented the value of the VPP.
Let’s look at each of these liability theories in turn.
Representations About Whether Product Is Optional
This is one of the easiest concerns to avoid but perhaps ironically one of the most frequent charges levied against dealerships. The National Automobile Dealers Association and other trade groups have published a very helpful guide that includes a model dealership policy on VPPs. It is available at NADA.org.
It is useful not only for the claim regarding voluntariness but also for the next two claims, as well.
The very nature of VPPs is that they are voluntary! If a dealership can implement only one rule on VPPs, it should be to ensure that customers know the purchase of VPPs is not required to buy or lease a vehicle or to obtain warranty coverage, financing or financing on particular terms, or any other product or service offered by the dealership.
It might be useful to post a sign to this effect. The NADA policy contains a template of a good sign. But if your employees state or imply otherwise to your customers, a sign may not do much good. But a sign certainly won’t hurt.
Representations About Cost
This is one of the oldest types of claims against sellers of VPPs and also an easy one to avoid. A few VPPs have a cost set by state law, such as VPPs defined as insurance products that must be offered at rates established by the state insurance commission. But often VPPs have a price set at the dealership’s discretion.
For those products with discretionary pricing, a couple of concerns exist. One is whether consumers understand the cost. The other is whether, if the dealer sometimes discounts the price, the discounts are given fairly. Let’s look at both of these concerns.
“Menu pricing” has long been acknowledged as the best way to inform a customer of the cost of optional products. See the article in the August 2020 issue of Spot Delivery by my wonderful partner and fellow Oklahoman, Eric Johnson, “Menu? We Don’t Need No Stinkin’ Menu. Yes, You Do!”
The key feature of menu pricing is showing the customer the price of, and monthly payment for, each VPP if purchased separately or, if relevant, as part of a bundle. In the best case, the dealer has nailed down financing and is able to present the cost like this:
Simple spreadsheet software (such as MS Excel) makes this disclosure easy for any dealership.
When a dealership does not quote every customer the same price for the same VPP, the compliance issue is trickier. The dealership might be cited for illegal discrimination if it charges members of protected groups more, on average, than members of non-protected groups for the same VPP. An agency also could claim that differences in pricing are inherently unfair, even if not discriminatory on a prohibited basis. The NADA policy contains excellent guidance for how to set up your program to manage this risk.
Representations About Value
This concern requires a dealership to consider many issues, which makes it harder to ensure compliance. But remember, if you sell it, you are responsible for the claims, even if you use a brochure or other marketing material provided by someone else. Here are questions to ask yourself (and the vendor of the product):
- What are the claimed benefits of this product? Are you sure they are true?
- Are there important exclusions from the benefits that are not prominent in the marketing material and in the contract provided before the consumer chooses the product?
- Are the benefits reasonable under the terms of this deal?
There are lots of pitfalls under this topic. Here is an example from one of my most painful compliance reviews. The product offered protection against damage in what is often called an appearance trait. The brochure featured a photograph of the chrome parts of an expensive vehicle with a lot of chrome. The fine print excluded the chrome parts in this photograph. Get my concern?
Related to this example, the brochure did not mention the exclusions for damage to certain chrome parts. These exclusions were relegated to the fine print of a long contract, which was not part of the brochure. No one looking at the brochure, and all the chrome in the photos, would have a clue that this product did not cover damage to these chrome parts.
But there are many other examples. Perhaps the product relates to theft prevention — does window etching come to mind? What is the evidence that any theft prevention product actually reduces theft? In one product I reviewed, the “product” that was supposed to reduce theft was virtually invisible to both vehicle owners and thieves.
The brochure suggested that perhaps law enforcement agencies knew something about the product (but that would be too late to prevent theft and relevant only to recovery), but, in fact, few law enforcement agencies had the equipment to detect the code. That meant the product not only did not deter theft, but it also did not aid in the recovery of a stolen vehicle. If a government agency had claimed deception regarding this product, how in the world would we have defended it?
So, here’s a tip: If a seller of a voluntary protection product invites you to market its product, ask to see its substantiation for all claims. Don’t be shy. Understand that you will be on the hook for any claim that cannot be substantiated in advance. It doesn’t matter that the claim was in a brochure provided by someone else. The only exception is if the product seller offers you indemnification for all claims. That means, if you are sued for deception, the marketer will cover all your costs, including legal fees and damages. But in all my years of practicing law (don’t ask how many), I have never seen such an indemnification. (Even if the product seller agrees to indemnify you, that agreement is worthless if the product provider isn’t solvent enough to stand behind it.) This means you are liable for everything in the brochure. Just sayin’.
A Few Final Points
I never promised compliance regarding VPPs would be a walk in the park, but following these tips will get you most of the way there. Here are a few additional points for your checklist, which you will quickly understand but which can sometimes get lost in the shuffle:
- Be sure the customer knows how to file a claim and whether a deductible applies;
- Be sure the customer knows whether the VPP can be cancelled and, if so, how to do it; and
- Should you take the initiative to cancel a VPP if you know it no longer benefits a customer, such as when a customer trades in a car she purchased from you with GAP or another VPP eligible for a refund? Many considerations apply to this decision, including state laws that require the holder of the financing contract to automatically provide a refund of GAP. A good dealership will remind a consumer to cancel any VPPs eligible for refunds (and to check her original paperwork if she doesn’t recall) and, if the dealer sold the product, to cancel the coverage on the trade-in if the holder does not do this automatically.
If I were Queen for a Day, I would reserve the full force of federal government enforcement powers for significant harm that affects more than a modest number of consumers. But since I am not expecting a coronation, let’s focus on the benefit of studying these enforcement actions. First, if federal agencies pursued these claims in one case, it’s a safe bet they will be willing to do so again. Second, it is also safe to anticipate that states and class action counsel will follow their leads. Finally, if you are a dealership that prides itself on adhering to best practices and maintaining a strong reputation in your community, a thorough compliance program regarding VPPs is vital.
A word to the wise dealership that wants to avoid the honor of having its name on an enforcement action regarding voluntary protection products: You are never too small or inconsequential to fly beneath the federal government’s compliance radar. Doesn’t that make you feel special?
*L. Jean Noonan is a partner in the Washington, D.C., office of Hudson Cook, LLP. Jean can be reached at 202.327.9700 or by email at [email protected].