August 14, 2008

"Expiring" Warranty Scams:

Existing laws are not much of a deterrent and the lawsuits are merely a cost of doing business. But a group of auto warranty finance companies think they have a better way to stop the pre-recorded phone calls and misleading postcards: banding together and refusing to do business with the scammers.

By now, virtually every daily newspaper and every TV news program has run at least one story in the past year about the so-called "auto warranty scam" where pre-recorded voice messages or mass-mailed postcards carry the dire warning that "your warranty is about to expire."

The pre-recorded messages, also known as "robocalls" or "voice blasting," have worried thousands of people who pay thousands of dollars each to make sure their vehicle's extended warranty coverage remains current. But thousands of others who had placed their phone numbers onto a federal Do Not Call list are angry because they can't get the companies to stop calling them. And they're complaining.

Some of the worst offenders buy blocks of numbers that spoof Caller ID services into misidentifying the source of their unwelcome auto warranty solicitations. And when consumers taken in by the urgency of the pitch try to cancel the policies they bought under pressure, refunds are usually slow, partial, or are not delivered at all.

The postcards usually carry in bold letters a heading such as "Ford Notification" or "Volkswagen Notification," and the message that "your warranty is about to expire," leading some recipients to believe the sender is somehow linked to the dealer that sold them the vehicle or to the manufacturer that made it. They call their auto dealer to complain, who tell them to call their local consumer affairs agency.

Source of the Problem?

Some say the culprits are located in Florida, New Jersey, New York, or California, while others point to St. Louis, Missouri, as the hub for telemarketing companies selling vehicle service contracts via postcard or phone calls. At least 41 state attorneys general have launched investigations or filed lawsuits, and several states are considering legislation to outlaw the abusive practices.

Years ago, many of the principals of the current industry used to work at one St. Louis-based telemarketing company called Consumer Automotive Consultants LLC. Then they left the company to start their own telemarketing operations, so there are now several call centers in the area specializing in vehicle service contract sales. Is it them making the calls? At least two have denied it categorically, and nobody has been able to prove otherwise.

The problem is that the good companies are being swept up with the bad, and because the good companies are identifying themselves accurately and allowing consumers to opt out of receiving their messages, frankly they're easier to catch. In addition, when the fines are levied, they won't always stop with the sales agents. They may come after the administrators, finance companies, and insurance companies as well.

The trouble with the thought of new laws is, most of these abusive practices are technically already outlawed. Under terms of the Telephone Consumer Protection Act, Direct marketers must identify themselves, and must give consumers an opportunity to opt out. The Federal Trade Commission operates a National Do Not Call Registry where consumers can put their phone numbers on a list that telemarketers must observe.

Do Not Call Do Not Work

The problem is, if you'll forgive the bad grammar, is the Web site do not work, and even if it did, the list would only be meaningful if there was more vigorous federal enforcement. And because there's not, it's fallen to the state attorneys general and their consumer protection agencies to do what they can to stop the abuses.

In March, Missouri Attorney General Jay Nixon launched "Operation Taken for a Ride," taking legal action against several of the businesses that allegedly used misrepresentation and deception to sell motor vehicle extended service contracts to consumers. AG Nixon filed suit against Vehicle Services Inc.; TXEN Partners, doing business as Service Protection Direct; United Warranty Solutions LLC; Dealer Warranty Services; Certified Auto Warranty Services Inc.; National Dealers Warranty Inc.; National Auto Warranty Services Inc.; and Smart Choice Protection LLC, doing business as Direct Dealer Warranties. He also announced settlements with Carhill Enterprises Inc., doing business as Consumer Protection Services; and Warranty Activation Headquarters; each of which gave the AG their assurances of voluntary compliance with the law.

"It�s rather insidious how these companies prey upon consumers� fears, sending misleading letters informing them that their current motor vehicle warranties were about to expire, when in fact many of the consumers possessed factory warranties that wouldn�t expire for several months," the attorney general said in a press statement. "That was the hook to sell these consumers unneeded motor vehicle extended service contracts for hundreds or thousands of dollars. When consumers canceled the contracts, many received only a partial refund or no refund at all."

New Sheriff in Town

Last week, the Renaissance Hotel near the St. Louis Airport was the scene of a meeting where the finance companies that administer the extended warranties told their sales agent partners that they'll soon have another worry in addition to new laws and lawsuits. Beginning in just a few weeks, any direct marketers that have not agreed to follow a newly-drafted code of conduct will be cut off from their source of financing. By September 15, all telemarketing companies who work with the finance companies will need to have signed an affidavit that they will not operate illegal voice blasting operations.

The meeting was also the official public kickoff of the Automotive Warranty Services Association, which will publish the new code of conduct, get the direct marketers to sign it, and turn in those who break their promises. While it's highly unlikely that the worst offenders would join the group, most of the finance companies they work with already have, and they've set their deadline.

Joe DiMartini

Some of the direct marketing companies who attended the August 6 meeting immediately pledged their full support. Joe DiMartini, owner of Service Protection Direct and co-chair of the AWSA's enforcement and certification committee, said he was very much in favor of the industry self-regulation plans outlined in St. Louis. He said that ever since the aggressive and misleading outbound calling started about a year ago, he's been warning people that it will turn out to be a "very, very, bad thing for our industry," he told Warranty Week. "Every day is a ticking time bomb," he added, so any move to make it stop as soon as possible has his backing.

"I thought it was very positive that as a group we were all pushing for self-regulation in order to give a better impression to the market about our industry," DiMartini said. "And I thought it was very good that most of the companies involved were on board with making changes in the industry." He said what struck him the most was the way that natural competitors could set aside their differences in order to clean up their industry before the government does.

Crime Does Pay?

The sad truth is that the bad actors that are drawing all the unwanted attention to the industry in the first place are probably two or three times more profitable than those that follow the law, DiMartini estimated. And he said he thinks some of them have already figured the inevitable fines into their business plans, calculating that they'll still be ahead of their law-abiding competitors. But what scares both the scammers and the good guys is the prospect that they might now be legislated completely out of existence because it's gone too far.

"The reality is that a lot of those guys are just not educated enough to understand what the rules are," DiMartini said. He estimated that if there were 40 or so telemarketers in the room last week, roughly a third of them were not making outbound phone calls to begin with, including his company. And of those that were, perhaps only four or five of them were in flagrant violation of the law. "But they have to be weeded out," he added. "They are either going to have to comply with the rules of the group, or they'll have to go. And, quite frankly, the association is going to turn them in for not complying."

Helen MacMurray, a partner in the law firm of MacMurray, Cook, Petersen & Shuster, is going to be the public face of the AWSA's industry cleanup effort. She's been appointed as legal advisor for the AWSA, and has already spent most of the summer putting together the plans that are now unfolding.

During her presentation at last week's meeting, MacMurray delivered a tough message to the attendees: either self-regulate or be put out of business by 41 very angry state AGs who are now logging thousands of complaints.

Helen MacMurray

"What we did at the meeting was outline for them all the illegal activities that the industry was engaging in, and then I outlined all of the current investigations and lawsuits, and then I provided to them several examples of how different industries did not clean up themselves, and were put out of business -- the industry as a whole," she said.

For instance, she told attendees how the Ohio legislature recently passed laws that made it very difficult for payday loan companies to remain in business in the state. "Wiped them out," MacMurray said. And they did so after a rising chorus of complaints made it difficult for the legislators to ignore the problem. Unable or unwilling to fix their own problems, the industry was basically run out of town. So it's not just lawsuits and fines the warranty telemarketers need to be concerned about, she said. They could find themselves legislated out of business.

MacMurray said she's seen "blatant violation of all the federal and state telemarketing laws" by some of the call centers selling vehicle service contracts. They're calling people on the Do Not Call list, and they're "voice blasting" a pre-recorded message to them, without first seeking their express advanced permission to receive such messages, as is now required under Title 47 Section 227 United States Code. They have no prior business relationship with the prospect, and in some cases they're using bogus Caller ID codes to disguise their true location. Some even claim to be working for the dealer or the manufacturer.

Canning the Spammers

On the Internet it's the spammers that caused all the problems, and there's been no solution, despite laws and lawsuits aplenty. The amount of spam has become so great that it practically crowds out all the legitimate messaging. And not only aren't the laws not working, but also the technical means such as content filtering are blocking some of the legitimate email and not all of the spam. So what makes MacMurray think the voice blasters and postcard mailers are going to stop, just because the AWSA says so?

"If they're truly selling a product, then they have to be financed," she said. "I have all of the finance companies joining the association. So now the deal is you either comply with the laws, or none of the finance companies will finance you." If any voice blasters have a problem with that new policy, well, maybe they can complain to one of the attorneys general.

Over the past 15 years or so, MacMurray has been on both sides of consumer protection. So she knows how the system works. In the 1990s, she served as the chief of the consumer protection section under Ohio Attorney General Betty Montgomery (who was in office from 1995 to 2003), and chaired the national committee of state AG's consumer protection agencies. Some of the cases she prosecuted in the 1990s were extended warranty related.

In 2000, MacMurray left government to enter private practice, handling defense work in some class action auto extended warranty marketing cases, among other things. Her three other named partners also worked for AG Montgomery: Brian Cook, Shaun Petersen, and Michele Shuster. And then after Montgomery herself left office in 2003, she joined the firm as well.

MacMurray has been on the "Super Lawyers" list in Ohio for the last five years, and she's one of only five on the state's list that specialize in consumer law. She was a founding member of the Teleservices Ethics Committee at the Direct Marketing Association. And she's been on all the major TV news shows to offer her take on regulatory issues that affect consumers.

MacMurray also counts as clients several of the vehicle service contract finance companies that administer the policies the telemarketing companies sell. These are the finance companies that want to clean up the industry before the states legislate or fine them out of business for the actions of their independent sales agents. Their big fear is that when it comes time to pay the fines, they'll be the easiest to find.

Code of Conduct Expected

The AWSA proposes to create a standard code of conduct and a list of best practices that, with the finance companies' backing, will be adhered to by all the vehicle service contract sales agents and telemarketers that they deal with.

"They asked me to put that together," MacMurray said, "so I drafted some bylaws for an association, and some best practices, and I pitched that to them." They liked it, and the AWSA was born.

The AWSA's initial board of directors consists of Rebecca Howard from Warranty Finance LLC as the board president; Scott McMillan from Mepco Finance Corp. as the vice president; Carter Patterson from Forte Data Systems Inc. as the secretary and treasurer; as well as Marcy Johnson from Summit Finance Inc. and Matthew Weil from American Guardian Warranty Services Inc. as additional board members.

First-year dues will be $5,000 per companies and $1,000 for consultants and independent reps. The AWSA is officially a 501(c)(6) trade organization, a not for profit allowed to form to pursue a common business interest. This type of group is exempt from most federal income taxes, and membership dues paid by those companies that join are tax deductible as business expenses. They don't need to reveal the names of member or donor companies, but the group is not allowed to engage in political activity on behalf of a candidate or a cause. That's the domain of a 501(c)(4) organization.

Were the AWSA to engage in lobbying activities, those expenses would not be deductible and the group would have to tell members what percentage of their dues was tax deductible. Most chambers of commerce and trade associations are 501(c)(6) organizations, as is, surprisingly, the National Football League, which initially came together in 1920 as the American Professional Football Conference to draft rules regarding when college players could go pro and how the pros could change teams.

The AWSA's Mission Statement

The AWSA's mission statement is "to promote regulatory education, compliance and stability for marketing and servicing of extended automotive warranties. It promotes self regulation as a superior alternative to government imposed requirements."

Its stated purpose is "to promote regulatory education and compliance for the marketing and servicing of extended automotive warranties. This organization is dedicated to helping the members provide the best service to their clients and consumers. The organization will stand as a centralized location for consistency within the industry. Along with education and training, the goal is for the members to take what they learn and implement the practices into their own companies."

Within a matter of months, the AWSA's programs will include:

  • Industry Best Practices,
  • Compliance Manual,
  • Certification of Companies, and a
  • Consumer Advisory Board.

The AWSA also has formed two committees: an enforcement and certification committee, and a best practices committee. For the enforcement and certification committee, the three co-chairs are Joe DiMartini of Service Protection Direct; Andrew Hillin from Summit Financial; and Chris Shoemaker from Warranty Activation Headquarters. Matthew Weil from American Guardian Warranty is the board liaison. For the best practices committee, Marcy Johnson from Summit Finance and Ralph Carrillo from MEPCO are the co-chairs.

The enforcement and certification committee, as its name implies, will have the power to investigate alleged offenders, to certify current members as compliant, and to direct the finance companies to cut off those who are not. The best practices committee will edit the draft document that MacMurray has created, with a goal of finishing it by October 1 and presenting it to the membership. The certification committee plans to begin certifying members as compliant as early as December 1.

Time Is of the Essence

"We're running out of time. If we don't move quickly, the industry's going to be shut down. So that's why we're on such a quick timetable," MacMurray said.

MacMurray said once the finance companies get the direct marketers to stop voice blasting and misrepresenting themselves, the AWSA will make a package of state and federal regulations and compliance data that will become a perk of membership. "That could cost a fortune" if members had to hire their own researcher to do it, she said, "tens of thousands of dollars. I'm going to do this for the association, and then the association will share all of this information with its members."

Besides a good lawyer, any good association also needs a good executive director, and it just so happened that MacMurray knew a guy who helped launch an auto repair trade association under similar circumstances 15 years ago, who was looking for a new opportunity. Larry Hecker helped form the Automotive Maintenance and Repair Association, a group that came together in 1992 to self-police that industry before the government did. So they reached out to him and he became the AWSA's executive director on July 1.

Hecker said one of the things the AMRA did in its early years was put together the Motorists Assurance Program as a way to curb allegedly aggressive selling by repair shops. Sound familiar? At the time, attorneys general were sending investigators into repair shops with cars that had identical problems, but they were coming out with wildly different diagnoses and cost estimates. So the AMRA created a code of ethics and a Uniform Inspection & Communications Standard that outlined procedures repair shops had to follow before making a repair recommendation to customers.

Then the AMRA began an accreditation process that was supported by the big chains, the small independents, the carmakers, and the parts manufacturers. Hecker estimates that at its peak in 2004 or 2005, at least 8,000 repair outlets were MAP certified. More importantly, by then the relative number of complaints regarding auto repairs had begun to drop.

The attorneys general turned their attention elsewhere, to other problems. Self-regulation worked.

Do the Right Thing

Hecker said he thinks it might also work in this case. "Most of the members of the industry are trying to do the right thing, and they're offended by the small minority who are not," he said. "And they're getting swept up in the actions by the attorneys general and the consumer protection folks around the country."

There are of course other industry associations with a stake in the automotive warranty space. But there doesn't seem to be a good match for what the AWSA wants to do in any of them. Hecker said the Service Contract Industry Council was not focusing on activities such as member certification or best practices, and the Institute of Warranty Chain Management was not focusing on the automotive extended warranty telemarketing business. The Vehicle Service Contract Administrators Conference is a trade show, not an association. And the Automotive Industry Action Group is more focused on manufacturing than on marketing. So there wasn't really an existing group that the warranty finance companies could join to achieve their goal.

"If an organization wants to set some kind of standard and best practices for the direct marketing side and the finance side, then there needs to be a new group, considering that none of the existing groups encompass that membership," Hecker said. Plus, he suggested, "organizations generally don't like to take on new roles that are peripheral to their main focus." But he added that he anticipates conversations between the AWSA and each of these warranty-related groups, as well as many others.

Future Plans?

"Specialty groups like this definitely serve a need," Hecker said. "They get a group or an industry together. They solve a problem. Then they either go on, like the Automotive Maintenance and Repair Association, or they go dormant," he said, like a group he once helped form that worked for a year and a half on safety standards for automotive air conditioning repairs. Or, the group could achieve its goal and then stick around to monitor compliance and maintain their standards.

"The issue is that there a lot of attorneys general and other consumer protection folks who are going after the industry," Hecker said. And both laws and lawsuits are likely before year's end if there's no solution to the problem. "Helen's job and my job will be to ask them to hold off until the industry gets its act together and comes up with a self-regulating, self-enforcing, self-policing type of program. And assuming they're satisfied with it, then hopefully they'll back off."

Readers who wish to contact the AWSA should email Larry Hecker at or call +1 (302) 524-1150.

See You In September

Is it almost the end of summer already? Warranty Week will be closed for summer holidays until the end of this month. Our next newsletter will be published on September 3. For anyone else traveling to a shady spot for a bit of vacation in the weeks ahead, have a safe trip!

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