Warranty in the Biden Administration:
A new president from a different party brings with him not only a radically new set of policies, but also a completely new batch of policymakers. Though barely a week old, the new administration has already filled many of those job openings, and has already signaled some of its top priorities.
While there is no U.S. Department of Warranty Management in Washington DC, the federal government has a profound effect on the warranty industry through several agencies and bureaus. On the occasion of the change in presidential administrations that occurred earlier this month, we thought it time to review the structure and changing leadership of all of those warranty-regulating federal offices.
Rather than reporting to one massive federal bureau of guarantees and protection plans, the industry is regulated more or less on the basis of the product or service that accompanies the pledges they issue to customers. And so, one agency concerned with transportation oversees auto safety, while another concerned with the environment oversees auto emissions. An entirely separate agency looks after air safety. And then at least two agencies protect consumers -- one oversees consumer products, and the other oversees financial services. And yet another agency protects investors.
This is not meant to be a political statement. Rather, it is meant to be a recognition of the facts that Joseph Biden was elected as President on November 3, 2020 and was sworn into office on January 20, 2021, triggering the wholesale turnover of thousands of jobs in Washington D.C., and sending regulatory policies in a totally different direction. Here are some of the changes most relevant to the warranty management industry.
The pandemic currently causing tens of millions of infections and hundreds of thousands of deaths, and the resulting economic downturn induced by travel bans and lockdowns are the top near-term priorities for this new White House, as are the racial and economic inequalities that boiled over this past summer, and the warming of our planet caused by greenhouse gas emissions. Warranty policies are way down the list of priorities from those, but as we saw in the automobile industry in 2009, they can be central to the success of an economic turnaround.
The U.S. Department of Transportation, created in 1967, is the home of several agencies that have a direct impact on warranties. Pete Buttigieg, the former mayor of South Bend, Indiana, and a former presidential candidate himself, has been nominated by President Biden to be his Secretary of Transportation, taking over, if confirmed, from Lana Hurdle, who is serving as the acting secretary on an interim basis since Inauguration Day. Steven Bradbury was the acting secretary for the eight days before that, filling in after Elaine Chao resigned on January 11.
The two agencies within the DOT that have the most direct impact on warranties are the Federal Aviation Administration (FAA) and the National Highway Traffic Safety Administration (NHTSA). Stephen Dickson, a former Delta Air Lines executive, is the holdover administrator of the FAA, while Jack Danielson is the holdover executive director of NHTSA. The Biden Administration has yet to name their replacements, or to fill other vacancies that have accumulated in the ranks over the last few years.
The FAA's impact on warranties comes through its power to issue airworthiness directives to aircraft operators -- basically the flying equivalent of a safety recall. For example, in 2013 the FAA issued an emergency airworthiness directive that grounded the Boeing 787 Dreamliner after some lithium-ion batteries were found to be defective, and in 2019 it grounded the Boeing 737 MAX after crashes in Indonesia and Ethiopia revealed a design defect in the plane's automated flight control system. These directives are thought to have cost Boeing tens of billions of dollars in increased expenses and lost revenue.
The TREAD Act
NHTSA's longstanding impact on warranties has been its power to collect safety complaints, launch defect investigations, and issue vehicle safety recalls. In late 2000, former President Clinton signed into law the Transportation Recall Enhancement, Accountability and Documentation Act, better-known by its acronym, the TREAD Act. The new law forced vehicle manufacturers to submit quarterly tabulations of defects, reports of injuries or deaths, and other metrics to NHTSA's Office of Defects Investigation in so-called Early Warning Reports.
The goal was to enable NHTSA to find patterns and anomalies in the data that would enable it to initiate investigations and launch safety recalls based on a much smaller number of incidents than was the case previously. The hope was that the manufacturers themselves would detect some of those patterns earlier, and perhaps correct them sooner, thus reducing the number of future defects and the amount of warranty expense they cause.
It's unclear if the TREAD Act ever did raise safety levels or reduce warranty expenses, but it sure did increase the number of recalls. According to NHTSA's own data, in the 20 years from 2000 to 2019, it issued 14,791 recalls covering 679.4 million vehicles. The annual count of recalls peaked at 1,033 in 2018, and the annual count of vehicles affected by those recalls peaked at 86.3 million in 2015. In 2019, 19 automakers were affected by a recall of 56 million Takata air bags in an estimated 41.6 million vehicles. In contrast, back in 1999, right before the TREAD Act became law, there were 395 recalls affecting 19.4 million vehicles.
What the TREAD Act definitely did do is force the manufacturers to modernize and automate their internal warranty claims management and defect reporting systems, so they could create accurate Early Warning Reports for NHTSA every quarter. And so, today they run some of the best-managed warranty departments in the world.The TREAD Act also made intentional violations of its reporting requirements a criminal act subject to prison terms of up to 15 years. However, most of the Early Warning prosecutions so far have resulted in just fines, such as the $70 million paid by Honda in early 2015 or the $70 million paid by FCA later that year.
In recent years, NHTSA has also more frequently teamed up with other agencies, such as the U.S. Environmental Protection Agency, on such matters as fuel standards and emissions warranties. This level of teamwork is likely to increase in the Biden Administration, as climate change guides policies on cross-agency issues such as diesel trucks, honest emissions tests, and defect reporting.
The EPA was created in 1970 as an independent agency of the federal government. It is headed by an administrator who is appointed by the President and confirmed by the Senate. Although the EPA administrator is technically not considered to be a core member of the President's Cabinet, it is nevertheless usually treated as a Cabinet-level position. Famous past administrators include Scott Pruitt, William Ruckelshaus, and Christine Todd Whitman.
The current acting EPA administrator is Jane Nishida, who took over on January 20 from acting administrator Charlotte Bertrand, and before that, acting administrator Andrew Wheeler. Michael Stanley Regan, who is currently the secretary of the North Carolina Department of Environmental Quality and previously worked at EPA, is the Biden Administration's nominee for the permanent position.
Other key members of the EPA's leadership team that do not require confirmation by the Senate were sworn in on January 20. These include Dan Utech, the incoming Chief of Staff, and Alison Cassady, the Deputy Chief of Staff for Policy. Victoria Arroyo is the Associate Administrator for Policy, and Philip Fine is the Principal Deputy Associate Administrator for Policy.
Volkswagen Diesel Testing
The EPA's Office of Transportation and Air Quality oversees mobile sources of pollution. Sarah Dunham, who was the most recent director of the Office of Transportation and Air Quality, has now become the acting chief of the EPA's Office of Air and Radiation. The reason we mention it is because the Office of Transportation and Air Quality runs the National Vehicle and Fuel Emissions Laboratory (NVFEL) in Ann Arbor MI, which has the task of testing vehicles and engines to certify that they meet all emissions and fuel economy standards. It was closed for much of last year over concerns about the pandemic.
The emissions lab is perhaps most famous for what it didn't do, which was to detect a so-called "defeat device" used by Volkswagen and others to cheat on emissions tests, until they were exposed by some college students doing research projects. In 2014, West Virginia University's Center for Alternative Fuels Engines and Emissions, or CAFEE, created a Portable Emissions Measurement Systems for diesel engines, which could be mounted inside a small car such as the VW Passat and could do its job while the vehicle was actually being driven. And for the two-liter Volkswagen diesel engines, it measured results that were up to 40 times dirtier than the EPA's own test detected.
In 2015, CAFEE notified the EPA that their research had detected a "defeat device" installed within the VW diesel engines, which cut emissions drastically when the car's computer determined that its engine was undergoing a test (it could be loaded to be on the lookout for the profiles of up to 10 government tests). And then, when the car was actually being driven by an actual driver, the engine resumed its dirty mode, emitting 40 times more Nitrous Oxide, for instance.
Two weeks ago, the EPA settled a lawsuit against Toyota Motor Corp. with a $180 million fine, alleging decade-long violations of emissions-related defect reporting requirements.
According to the EPA, Clean Air Act regulations require manufacturers to notify the agency by filing an Emissions Defect Information Report (EDIR) when 25 or more vehicles or engines in a given model year have the same defect in an emission control part. The regulations also require vehicle manufacturers to file a Voluntary Emissions Recall Report (VERR) with the EPA when they perform a recall to correct defects in emission-related parts, and to file quarterly reports to update the agency on the progress of such recalls.
Fuel Efficiency Standards
EPA and NHTSA also oversee the Corporate Average Fuel Economy (CAFE) standards for passenger cars. In 2018, NHTSA and EPA proposed the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021–2026 Passenger Cars and Light Trucks, which would reduce the required annual improvement rate in average fuel efficiency from 5% to 1.5% per year. And in April 2020, the agencies said that from now on, those new rules would pre-empt more stringent state and local rules in locations such as California.
Many manufacturers at first supported the federal government's policy over the states', but then some started cutting side deals with individual states such as California and Colorado, agreeing to follow their more stringent standards. And then some of those states sued the federal government over the pre-emptions. And then the manufacturers and their trade groups began advocating a return to a single national standard -- but California's, not Washington's. And then they worried about meeting fuel efficiency standards in Europe and China that were different yet again from the different U.S. standards.
So as they used to say in the Marine Corps, it's a Situation Normal, All Fouled Up (SNAFU) that will have to be straightened out by EPA and NHTSA as soon as possible. We have no idea what they'll decide under new management, but we'd put our money on an end to SAFE and a return of CAFE.
Diesel Truck Warranties
The EPA's primary effect on truck warranties comes through its heavy-duty vehicle emissions standards. In August 2011, EPA and NHTSA issued Phase I standards for greenhouse gas emissions and fuel economy standards in medium and heavy-duty trucks. Five years later, the Phase 2 standards were finalized.
According to the EPA, the truck emission standards are expected to lower carbon dioxide emissions by about 1.1 billion metric tons, save vehicle owners about $170 billion in fuel, and reduce oil consumption by up to 2 billion barrels over the lifetime of the vehicles covered by the rules.
The Diesel Emissions Reduction Act is an effort to use loans, grants, and rebates to spur the operators of older diesel engines in trucks, buses, and off-road equipment to retrofit or replace those engines with cleaner, newer units. In a 2019 report to Congress, EPA said it had replaced 67,300 engines under the program, reducing nitrous emissions by 474,700 tons, particulates by 15,490 tons, and hydrocarbons by 17,700 tons over the lifetime of the affected engines.
Under the Biden Administration, EPA is going further, pursuing even stricter standards under the heading of the Cleaner Trucks Initiative (CTI). On January 6, EPA issued an Advance Notice of Proposed Rule, which is a step ahead of even the usual Notice of Proposed Rulemaking. It was published a week ago in the Federal Register, which makes it official.
Among the proposals in this advance notice are measures that would lengthen the emissions warranties of diesel engines, would use various catalysts and exhaust aftertreatment technologies to reduce carbon and nitrous oxide emissions, and would test an engine's emissions levels while the trucks they're in are actually being driven, rather than in labs. EPA is also soliciting comments on the use of alternative fuels such as natural gas, liquefied petroleum gas, and dimethyl ether.
Section 207(a) of the Clean Air Act authorizes EPA to require emissions warranties on vehicles and engines. However, in recent years, the durations and specs of EPA's emissions warranties have been surpassed by the standards set by state regulators, such as the California Air Resources Board.
EPA's brand new advance notice mentions that beginning with the 2022 model year, California requires light heavy-duty diesel engines to carry emissions warranties for at least 110,000 miles, for medium heavy-duty engines to have at least 150,000-mile emissions warranties, and for the emissions of heavy heavy-duty engines to be warranted for at least 350,000 miles. It states that the comments it seeks about this matter are not so much about the wisdom of whether California should implement these new standards as it is whether they should be adopted nationally.
Other Consumer Products
The Federal Trade Commission's impact on the warranty industry comes primarily from two tasks: 1) enforcement of the Magnuson-Moss Warranty Act, enacted in 1975, and its 2015 enhancement, the E-Warranty Act, both of which govern product warranties, and 2) enforcement of the National Do Not Call Registry, which impacts the telemarketing sale of extended warranties.
The FTC is currently run by five Commissioners: Rohit Chopra, Noah Joshua Phillips, Joseph Simons, Rebecca Slaughter, and Christine Wilson. Last week, after Joe Biden's inauguration, Slaughter took over as chairperson from Joseph Simons, who was appointed in 2018. Simons is now expected to step down as a Commissioner, clearing the way for a new Biden nominee.
The tenures of FTC Commissioners are ordinarily not tied to Presidential terms, but there is a tradition that three of the five Commissioners will be from the same political party as the President, thus giving them a tie-breaking vote. Chopra and Slaughter are Democratic, and Simons, Phillips, and Wilson are Republican. Chopra, however, has been nominated by President Biden to head the Consumer Financial Protection Bureau (see below). So there will soon be two vacancies at the FTC.
The Warranty Act is named after Senator Warren Magnuson (D-WA) and Representative John Moss (D-CA). It applies to both manufacturers and retailers who offer written warranties on consumer products. It doesn't actually require warranties -- rather, it outlines the minimum disclosure standards for written warranties, if they are offered. And it defines the differences between a limited warranty, a full warranty, an express warranty, and an implied warranty.
Basically, the Warranty Act requires the seller of a consumer product to provide pre-sale access to the terms and conditions of said written warranty, in simple and readily-understood language. The E-Warranty Act allowed that disclosure to happen in the form of a webpage. And it outlines how warranties cannot be tied to certain brands of consumables, the use of branded parts, or the use of certain repair shops, unless such "tie-ins" are specifically required.
Unlike European or Australian warranty laws, the U.S. law does not specify any minimum duration for a written warranty on a consumer product. It also does not specify any disclosure requirements for commercial product warranties, or any warranty requirements for second-hand consumer products or typically non-warranted consumer products such as food, apparel, books, bags, boxes, drugs, fuel, or chemicals.
Those products are nevertheless covered by implied warranties, which though not governed by any federal agencies, have frequently led to federal lawsuits. One is the implied warranty of fitness for a particular purpose, and the other is the implied warranty of merchantability.
A good way to picture the difference between them is that the fitness warranty says these shoes are good for jogging, while the merchantability warranty says they will fit on your feet. But the shoes themselves may not carry any express warranty at all, and they could very well fall apart a month after purchase, in which case they may or may not be exchangeable under the merchant's return and exchange policy, if there is one. Injuries or consequential damages caused by defective shoes would be addressed under product liability lawsuits, which are another matter altogether.
Do Not Call List
According to the FTC, the National Do Not Call Registry is a list of the phone numbers of consumers who want to reduce the number of telemarketing calls they receive. It is managed by the FTC, and its rules are allegedly enforced by the FTC, the Federal Communications Commission (FCC), and various state officials.
Throughout recent years, the reports of police, media, and consumer protection advocates have steadily heralded the reappearance of "expiring warranty scams," in which high-pressure telemarketers and robocallers warn consumers that they must buy vehicle service contracts as soon as possible, because their factory warranties are about to end. Back in its heyday in 2009-2010, warranty scam calls like these went out by the millions from telemarketing boiler rooms in and around the St. Louis area, and were received by everyone from children on the playground to U.S. Senators about to speak on the Senate floor.
That scam has once again become a big problem. A company called YouMail Inc., which markets an app that can block unwanted telemarketing calls, said in a January 6 press release that scams comprised 1.7 billion or 44% of all robocalls in the month of December 2020. Warranty scams were the top category within that 44%, accounting for 265 million calls, followed by health-related scams, at 212 million calls.
One can only wonder how bad it would be if the FTC, FCC, and various state officials were not working on the problem. Personal experience of this reporter can attest to the utter disregard that warranty scam callers have for phone numbers in the National Do Not Call Registry. In fact, our company's mobile numbers seem to get more scam calls than our landline numbers. If enforcement efforts are under way, they are not making a meaningful difference in the frequency or severity of this inundation. Someone is not doing their job.
Public Company Disclosures
Like the FTC, the U.S. Securities and Exchange Commission is run by five Commissioners who are appointed by the President. President Biden has nominated Gary Gensler to be the chair of the SEC, subject to approval by the U.S. Senate. The other currently-serving Commissioners are Allison Lee, Caroline Crenshaw, Hester Peirce, and Elad Roisman.
Like the FTC, tradition holds that three of the five Commissioners be from the same political party as the sitting President. Lee and Crenshaw are members of the Democratic Party, as is Gensler. Since December 2020, Lee has been the acting chair of the SEC, bridging the gap between the departure of former chair Jay Clayton, and the expected arrival of Gensler.
The SEC is the repository of the Form 10-K annual reports and Form 10-Q quarterly financial statements filed by companies whose stock trades publicly in New York. And since those filings contain the warranty expense report data that details the claims paid, accruals made, and reserves held by these companies, the SEC operates the world's largest database of record when it comes to product warranty metrics.
However, the actual rules for disclosure of those product warranty metrics were set by the Financial Accounting Standards Board (FASB), a non-profit group the SEC has designated to be responsible for setting accounting standards for the U.S. There are seven board members, led since July 2020 by chairman Richard R. Jones.
In late 2002, the accounting standards-makers issued a document called FASB Inquiry Number 45, or FIN 45 for short, which had the long title of "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Nestled within that document was a single paragraph that mandated how public companies that offer product warranties must begin including in their financial statements the beginning and ending balances in their warranty reserve funds, along with the net amounts for all additions and subtractions from that fund, including claims, accruals, acquisitions, divestments, changes of estimate, and foreign exchange adjustments.
In 2009, FASB released a new unified set of rules called the Accounting Standards Codification, or ASC. All the sections are numbered, as are the subsections and paragraphs. Section ASC 460, Guarantees, is the new home for the product warranty disclosure rules first enumerated in FIN 45. And then ASC 606, Revenue from Contracts with Customers, is the home of the disclosure rules for extended warranties and service contract sales, primarily the treatment of deferred revenue. The International Financial Reporting Standards Foundation has adopted a similar accounting rule, called IFRS 15, Revenue from Contracts with Customers, which went into effect in 2018 in other countries.
The SEC was created in 1934, in the wake of the Great Depression, to protect investors and to maintain orderly and efficient stock markets. It enforces the provisions of the Sarbanes-Oxley Act of 2002, which like FIN 45, was written to curb the financial abuses and fraud that led to the Enron and WorldCom accounting scandals that crested in that year.
However, it most famously failed to detect the Ponzi scheme operated for decades by stock broker Bernie Madoff, until the culprit confessed the scheme to his sons, who called the FBI in December 2008, months after the collapse of Lehman Brothers, AIG, and other financial firms. Again, somebody's not doing their job.
Consumer Financial Protection
The Consumer Financial Protection Bureau was launched in 2011, after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, meant to cure some of the financial abuses uncovered during the Great Recession that followed the collapse of Lehman Brothers. Controversial from the get-go, the creation of the CFPB was originally proposed in 2007 by Elizabeth Warren, who would go on to win election to the U.S. Senate in November 2012.
In 2010, former President Obama appointed Warren as Assistant to the President and Special Advisor to the Secretary of the Treasury, and gave her the task of setting up the CFPB. But his ultimate choice as the CFPB's first official director was Richard Cordray, who served until 2017.
When Cordray resigned in November 2017, he designated his deputy director Leandra English as his successor. However, this was opposed by President Trump, who installed Mick Mulvaney, who was also at the time his director of the Office of Management and Budget, as the acting director of the CFPB.
In early 2018, Mulvaney famously requested a $0 budget for the bureau, and later that year he renamed it the Bureau of Consumer Financial Protection, or BCFP -- rearranging the letters on the sign in the lobby himself. Kathy Kraninger, who worked under Mulvaney at the OMB, succeeded him as the bureau's director in August 2018, and soon she changed the name back to CFPB.
Kraninger resigned on Inauguration Day earlier this month, at the request of the incoming administration. For the moment, the CFPB's Chief Strategy Officer David Uejio has temporarily stepped up to serve as acting CFPB director, until the nomination of current FTC Commissioner Rohit Chopra as CFPB director is confirmed by the Senate and he is sworn in.
The CFPB regulates banks, lenders, and other financial companies. Insurance is regulated at the state level in the U.S., as are insurance-like products such as extended warranties and service contracts. The involvement of the CFPB in the extended warranty industry is therefore slight and indirect. Primarily, the sale of service contracts becomes a CFPB issue when their premiums are wrapped into a car loan, and the terms and conditions of that loan are found to be excessively unfair to the consumer, or when a seller's refund policies are deemed to be unfair to the borrower.
For instance, in 2016 the CFPB reviewed the financing practices of used auto dealer Y King S Corp., also known as Herbies Auto Sales, and found that while it required customers applying for a loan to also purchase a $1,650 vehicle service contract, it did not detail this requirement in its disclosures. But that was just one of several lending abuses outlined in a 30-page consent order. The bottom line is the CFPB went after the lending abuses, of which service contracts formed a small part.
The CFPB also went after Wells Fargo & Company in 2018 for auto insurance and mortgage lending abuses, including its refund policies for Guaranteed Asset Protection (GAP) and other auto insurance policies. The bank paid a $1 billion fine to settle the wire-ranging matter and discontinued the practices that led to the review, though it ultimately did not make any admissions of guilt. But again, the headline charge was lending abuses, not extended warranties or GAP policies.
The CFPB also operates a Consumer Advisory Board, an Academic Research Council, a Community Bank Advisory Council, and a Credit Union Advisory Council. In June 2018, Mulvaney fired all 25 members of the Consumer Advisory Board after some of its members criticized his leadership of the CFPB.
Other Recent White House Moves
On Monday, January 25, President Biden signed an executive order ensuring that when the federal government spends taxpayer dollars, they are spent on American-made goods, produced by American workers, with American-made component parts. The White House said this executive order fulfills President Biden's campaign promise to make Buy American real, and to close loopholes that allow companies to move production and jobs offshore while still qualifying for domestic preferences.
A statement posted on the White House website said that contracting alone accounts for nearly $600 billion in federal spending. It also said that President Biden will appoint a new Director of Made-in-America within the Office of Management and Budget.
Former President Donald Trump also signed multiple executive actions as part of his "Buy American and Hire American" agenda, beginning in early 2017. The Trump Administration also created the Office of Trade and Manufacturing Policy, which was headed by Peter Navarro. The Biden Administration has not announced a replacement for Navarro nor a plan to continue the office.
The Office of the U.S. Trade Representative is a different post. Robert Lighthizer was the U.S. Trade Representative until January 20th, when he was temporarily succeeded by acting U.S. Trade Representative Maria Pagan. Katherine Tai, who is currently a House committee staff member, is the Biden-designated nominee for the permanent position.
Elsewhere around the White House, Rep. Deb Haaland (D-NM) has been nominated to head the Interior Department. Jennifer Granholm, the former governor of Michigan, has been nominated to be Secretary of Energy. While she was in office as governor from 2003 to 2011, she was known for working with the auto industry to develop electric vehicles, and in 2017, she joined the board of directors of Proterra Inc., a manufacturer of electric transit buses.
Gina McCarthy, who was Obama's EPA administrator, is becoming an Assistant to the President and chief of the new White House Office of Climate Policy. Maggie Thomas is the Chief of Staff for the Office of Domestic Climate Policy, and Ali Zaidi is to be the Deputy National Climate Advisor. None of these posts require Senate confirmation, so they are already on the job.
John Kerry, who was Obama's Secretary of State, is Biden's Special Presidential Envoy for Climate, a new post within the National Security Council (NSC). Earlier this week, he spoke on behalf of the Administration via Zoom at the World Economic Forum, normally held in Davos, Switzerland. Environmental attorney Brenda Mallory will chair the Council on Environmental Quality. Brian Deese was appointed as Assistant to the President and Director of the National Economic Council.
And finally, in the U.S. Capitol, Rep. Chellie Pingree (D-ME) has been elected as the new chair of the House Appropriations Subcommittee for Interior, Environment and Related Agencies, a post from which she will oversee the EPA, among other agencies. Rep. David Price (D-NC) continues as chair of the House Appropriations Subcommittee for Transportation, and Housing and Urban Development, and Related Agencies, which oversees NHTSA and the FAA, and Rep. Mike Quigley (D-IL) continues to chair the House Appropriations Subcommittee for Financial Services and General Government, which oversees the FTC and SEC.