January 27, 2003

FTC Allows 50/50 Warranties on Used Cars

Decision Supports Industry Group
and Contradicts Consumer Advocates

by Eric Arnum, Editor

See Also:

  1. The FTC Explains Its Decision
  2. Consumer Advocates Object
  3. Dealers Defend Use of 50/50 Warranties
  4. How NIADA Did It
  5. Advice Columns Warn Against 50/50

The Federal Trade Commission, seemingly reversing itself and contradicting a growing amount of casework at the state level, has told the attorney for a used auto dealer association that split-cost warranties are permissible, even when they require the buyer to bring their car back to the dealer that originally sold it to them.

At issue is the so-called tie-in prohibition of the Magnuson-Moss Warranty Act, which makes it illegal for a warrantor to require the buyer to make an additional purchase in order for the warranty to remain effective. But also at issue is the nature of split-cost warranties themselves, which consumer advocates say are subject to potential abuse because the warrantor gets to decide the cost, and therefore the amount to be split.

Exchange of Letters

In April 2002, a letter written by Keith Whann, counsel for the National Independent Automobile Dealers Association, asked the FTC to clarify its position on split-cost warranties that require all warranted service to be performed by the dealer.

The FTC's answer came in the form of a letter of opinion drafted on Dec. 31, 2002, and announced in the Jan. 3, 2003 weekly wrap-up (File No. P864207). It's not a prohibited tie-in of a service to a warranty because the repair is the very service promised by the warranty, the FTC reasons.

See also: The FTC's Explanation in Detail

Lemuel W. Dowdy, staff attorney at the FTC's Bureau of Consumer Protection, told Warranty Week that it would be allowable for a used car dealer to provide a 100% warranty, but to make it conditional on all the warranty service and repair work being done exclusively at his shop. It also would be allowable to make it a 25/75 split-cost warranty, or an 80/20 split, for that matter. In other words, the FTC has no problem with the percentages. There's also no problems with a deductible, if it's used instead of or in addition to a percentage split.

Opportunity for Fraud

The FTC is well aware that as the sole provider of warranty service, the dealer has an opportunity to inflate total costs so as to increase the amount paid by the consumer. In Footnote 8 of the FTC's letter to Whann, "The Commission recognizes that there is some concern that dealers may inflate the costs of warranted repairs and in this way impose all or most of the repair cost on the purchaser. If such practices occur, they would likely constitute deceptive practices and could also constitute breaches of warranty (as failing to provide the benefit promised in the warranty)."

The FTC has in the past issued comments that led some to believe that split-cost warranties were permissible, and others to believe they were prohibited. In 1998, an FTC guide book stated that dealers must always disclose the percentage of parts and labor that will be covered under a limited warranty. Those on the dealer's side of the argument took that as an endorsement of the practice.

The FTC's own publication, "A Dealer's Guide: The Used Car Rule," Whann wrote, "states that dealers may disclose the percentage of parts and labor that will be covered under a limited warranty, and even discusses dealers offering 50% coverage for parts and labor. On the same form, the dealer is required, by statute, to: (i) identify the name and address of the dealership and the name of the contact person for warranty related questions; and (ii) instruct the consumer to see the contact person for warranty related complaints. For over twenty-five years, this requirement has been interpreted to mean that the dealer may require the consumer to pay a portion of the repair charge and the dealer is the entity that the consumer should look to for performance of the warranty services."

See also: Whann Makes His Case

Then in 1999, the FTC told Congress that split-cost warranties "likely violate" the Warranty Act. The key word, which the FTC's own letter mentions in its letter, is "likely". Upon further review, the FTC has now changed its previously-tentative mind.

Consumer Advocates Disappointed

Carolyn Carter, an attorney with the National Consumer Law Center Inc. in Boston, said the non-profit group believes the opinion stated in the FTC's latest letter is not in keeping with past precedent.

"We urged the FTC to stick with the view that it had published in 1999, that 50/50 warranties 'likely violate' the prohibition against tie-ins," she said. "I certainly think that the 1999 opinion was correct and that this one is incorrect."

Leslie Grey, a deputy attorney general in Pennsylvania who brought a 50/50 warranty case against a used car dealer in 2001, said she thinks that while her case agreed with state and federal precedents, this letter does not.

"We're disappointed in this new interpretation," Grey told Warranty Week. "Our contention was that these [50/50 warranties] are subject to potential abuse by the dealer, that repair costs are inflated, leaving the consumer to pay what they thought was half the stated price but which in reality reflects the entire cost of the repair."

See also: Consumer Advocates Object

Used vehicle dealers reached by Warranty Week said the problem with 50/50 warranties isn't so much with the warranties themselves as it is with dealer fraud. The cost of any repair job can be inflated -- even those where the customer is paying 100 percent of the cost. And it's no easier to double the repair bill when the customer is paying half than it is when the customer is paying for the whole thing.

"There's a clearly published price list," noted Jeff Thurston Sr., president of Thurston's Marina in Weir's Beach NH. "Our work order lists the part number and the cost of that part." That goes for out-of-warranty repairs as well. "Were it done six months after the warranty expired, he'd still expect me not to double the price. I think the concerns being voiced by consumer advocates have more to do with business practices that are fraudulent."

See also: Dealers Don't See the Problem

Weldon Sisson, owner of Century Auto Sales in Irving TX, said the basic 50/50 warranty he provides with each used car sold is more for peace of mind than anything. Before he sells a car, he knows if it will survive for at least 30 days. The promise of a 50/50 split in repair costs is his assurance to the customer that he thinks it will.

Sheri Edgecomb, general manager at Edgecomb's Imported Auto Sales and Service in Charlottesville VA, said that if she tried to falsely inflate repair costs, her customers could instead hand her back the keys. The Volvo dealership features an unconditional 30-day money back guarantee, which allows the customer to get all their money back (minus 20 cents for each mile driven).

"We are not like any other used car lot that you'll ever see," Edgecomb said. "Our customers know that if we say it's a $50 repair, it's a $50 repair." These are her neighbors -- lifelong customers. And they're buying Volvos, not Yugos. They expect reliability, safety, and longevity.

Don't Be a Fool

Banks and customers who have lived through encounters with 50/50 warranties nearly unanimously advised against them. The Motley Fool, normally an investment advice magazine, once carried a 13-part column called Buying a Used Car. In the last part of that comprehensive piece, author Paul Maghielse pulls no punches in his damnation of 50/50 warranties:

"Used car lots are notorious for enticing buyers with an extended mileage "50/50" warranty, or some such beast. This warranty makes them a lot of money. How? Well, they pay half the parts and half the labor on the work performed, but, here's the clincher, they perform the work and set the rates. It's dealer shysterism at its worst, so don't fall into this money pit even if they are giving it to you for free."

See also: Credit Unions Warn Against 50/50

Whann tackles that argument head-on in his letter. "One of the primary concerns being expressed by plaintiffs� attorneys, consumer advocates and some regulators is that if limited warranties with less than 100% coverage continue to be offered, motor vehicle dealers have an incentive to artificially inflate the cost of repairs," he wrote. "For example, if the total cost of a repair would normally cost $200, the dealer and the consumer would each pay $100 under a 50/50 limited warranty.

fake $200 billHowever, if the dealer inflates the cost of the repairs and charges the consumer $400 for the same repair, the consumer would pay $200, thus covering the cost of the entire repair and the dealer theoretically would not incur any financial obligation. This argument is without merit, however, because the average dealership markup is estimated to be 15% on parts and 30% on labor and because both Federal and State Laws afford consumers protection from these types of practices."

See Also:

  1. The FTC Explains Its Decision
  2. Consumer Advocates Object
  3. Dealers Defend Use of 50/50 Warranties
  4. How NIADA Did It
  5. Advice Columns Warn Against 50/50

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