Warranty Scams and Consumer Rights

Building and selling cars isn't all that profitable. But writing loans and leases and selling expensive add-ons like extended warranties can be very lucrative -- and can add hundreds or even thousands of dollars to the price of a new vehicle.

With car sales starting to boom after years of desultory sales, the Consumer Financial Protection Bureau is taking a look at whether all these high-priced add-ons are being adequately disclosed to consumers, The Wall Street Journal reports today.

The newspaper says the bureau has issued subpoenas to several large auto lenders seeking information on sales practices, pricing and disclosure.

The add-on products are legal. The question is whether consumers are being properly informed of the cost of the products and the terms of the transaction.

Many consumers complain that they are promised their extended warranty will cost only a few dollars a month while covering nearly anything that could go wrong with their cars, only to learn otherwise when problems occur.

"I was pressured into buying a [AAA] Great Choice plan which they told me would cover everything I needed on my vehicle," said Ronnie of Baltimore in a ConsumerAffairs posting. "Well, after almost a year, I had a problem and nothing was covered. My mechanic told me the claims process in itself was the worst he had ever seen and that this was something called a product warranty which I don't know what that means but my mechanic made it sound like it wasn't a real warranty."

Discriminatory lending

The Justice Department, meanwhile,  is probiing auto dealerships that make their own loans to customers with poor credit, charging interest rates that may be much higher than a bank or auto lender would charge. The Journal said Jon Seward, deputy chief of the department's housing and civil enforcement section, made that disclosure at a panel discussion at George Mason University in Fairfax, Va., earlier this week.

In March, the CFPB warned auto lenders about jacking up interest rates for consumers with less-than-stellar credit ratings, a practice that can result in more expensive loans for minorities.

“Consumers should not have to pay more for a car loan simply based on their race,” said CFPB Director Richard Cordray. “[This] bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”

Consumers could be losing tens of millions of dollars a year because of  discriminatory lending, the agency said.

The problem involves what are called "indirect" auto lenders, which often allow the dealer to charge the consumer an interest rate that is higher than the rate the lender gave the dealer -- typically called “dealer markup.” 

As a result, markups generate compensation for dealers while frequently giving them the discretion to charge consumers different rates regardless of consumer creditworthiness. Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited bases.

Not so, dealers say

Car dealers are fighting back. The National Automobile Dealers Association (NADA) said it and other industry groups "strongly oppose any form of discrimination in auto lending, and the CFPB guidance appropriately explains that unlawful discrimination has no place in the marketplace.”

“However, it is relying on a theory of discrimination that is based on a statistical analysis of past transactions — not intentional conduct — and the CFPB has not provided any information about how it is conducting its analysis," NADA said in a statement.

Ally Financial, formerly GMAC, confirmed in a filing with the Securities and Exchange Commission (SEC) that it is one of the finance sources warned by the CFPB that it could face lawsuits.

“The CFPB has recently advised us that they are investigating certain [parts] of our retail financing practices,” read the filing. “It is possible that this could result in actions against us.”

The dealers group claims consumers often save money when they finance their cars through loans 

NADA said that data collected by the Federal Reserve Board and transaction data collected by J.D. Power and Associates demonstrate that  consumers who chose the indirect channel vs. direct saved, on average, $635.40 in 2008 and it said that in 2009, the average savings climbed to $779.40, then again to $1,162.20 in 2010. 

Rhonda, of Waterloo, Iowa, is angry with Staples. About six weeks ago, she says, she went to the office supply retailer and purchased the Model SPL TXC 15A paper shredder.

After using it twice, she said, it stopped working. What happened next, which resulted in her anger, was probably caused by miscommunication.

“I called Staples and was informed that it only had a two-week warranty!” she wrote in a ConsumerAffairs post. “Two weeks!! Are they kidding? I was assured by the salesman that it was the best shredder Staples carried. I am very upset and feel that I have been scammed out of $150. I have worked in retail for over twenty years and have never heard of such poor customer service. I know that you cannot return an item after two weeks, but this product should have a warranty longer than two weeks. I am very disappointed in Staples and will never shop there again.”

In fact, it does appear that Rhonda and the salesperson she spoke with are talking about apples and oranges. Most stores have a policy that they will accept a return of an item within a specified time period. Two weeks is not unreasonable and Rhonda acknowledges as much.

But Rhonda is under the impression that the warranty covering the product is only for two weeks, which is not the case. We were able to access the product information on the Staples website, where it clearly states the shredder has a one-year manufacturers' warranty.

Disconnect

When Rhonda called the store complaining that the shredder didn't work, she should have been told to contact the manufacturer. Maybe she was but just didn't understand. Or maybe the store personnel thought she just wanted to return it and explained that it was too late.

Consumers should understand that chain retailers especially don't get involved in warranty issues, unless they have issued the warranty, in the form of an extended service contract. Instead, when an item breaks in the first year of use, the consumer needs to contact the manufacturer directly.

That's why it is important for purchases like shredders to not only keep the store receipt, but to hang onto warranty information, and take the time and trouble to fill out the warranty card and send it in.

Some consumers may be in the market for a big-screen TV for this Sunday's Super Bowl between the Packers and Steelers. When making this type of purchase, consumers often have questions about warranties.

Federal law does NOT require manufactures to issue warranties on their products. However, if they do, the warranty must be easy to read and understand. There are different forms of warranties, including full, limited, extended, and implied.

Many consumers ask what the difference is between a “warranty” and a “guarantee.” While there is no difference between the terms, there can be a big difference between the warranties of two similar products manufactured by different firms.

There is a federal law covering warranties called the Magnuson-Moss Warranty Act.  The law doesn’t require manufacturers to issue warranties on their products, but if they do, the warranty must be easy to read and understand.  No “legalese,” just ordinary language is allowed. 

Every term and condition must be spelled out in writing.  Magnuson-Moss also creates two types of warranties:  FULL and LIMITED.

Full warranty

The label FULL on a warranty means:

• A defective product will be fixed (or replaced) free of charge, and within a reasonable time, including removal and reinstallation if necessary.
• You will not have to do anything unreasonable to get warranty service (such as shipping a piano to a factory).
• The warranty is good for anyone who owns the product during the warranty period.
• If a problem is reported and not dealt with during the warranty period, the company
• is still obligated to deal with the problem even if the warranty runs out.
• If the product can’t be fixed (or hasn’t been after a reasonable number of tries),
• you get your choice of a new one or money back.

Check what parts the warranty covers.  A full warranty may not cover the whole product.  It may cover only part, like the picture tube of a TV. 

Limited warranty

If a warranty gives you anything less than the full warranty, it’s LIMITED.  A limited warranty may:

• Cover only parts, not labor.
• Allow only a prorated refund or credit.
• Require you to return a heavy product to the store for service (the piano).
• Cover only the initial owner.
• Charge for handling.

A product can carry a full warranty on part of the product and a limited warranty on the rest.

Magnuson-Moss generally requires manufacturers to make a copy of their warranty available for you to look at before you buy -- so you can comparison shop for the best warranty coverage.

Implied warranty

Implied warranties are rights created by state law, not by the company.  The most common implied warranty is that the product you buy is fit for ordinary uses -- an electric mixer has to mix, an ice crusher has to crush. If it doesn’t, you have a legal right to get your money back.  Implied warranties come automatically with every product, even though they may not be written out.  However, watch out for “as is” or “no warranty” sales; they cancel out your implied warranty.

Protect yourself

Read warranties before you buy.  Make sure any verbal promises by the sales representative are included in the written warranty.  Keep your sales slip with your warranty.  You may need it to prove the date you bought the product or that you are the original purchaser.