Service contracts: Hard-sell tactics plague dealers, customers

Service contracts: Hard-sell tactics plague dealers, customers
Paul Broome, a Cadillac dealer in Independence, Mo., hears from about 10 customers a month who complain about his dealership's high-pressure sales of service contracts. But Broome has nothing to do with the disputed contracts or their marketing.
Instead, some peddlers of third-party contracts tap vehicle registration data to reach customers of dealerships such as Broome's by telephone, e-mail and direct mail. Their sales pitch includes the claim often false that the customers' factory warranties have expired or are about to do so.
They assert or imply also falsely that they represent a dealership or automaker. And in some cases, vendors allegedly charged consumers' credit cards for thousands of dollars without authorization.
The boiler-room promotions are "giving the industry a black eye," says Broome, who chairs the Missouri Automobile Dealers Association.
State regulators are stepping in. Missouri Attorney General Jay Nixon is suing six independent service contract vendors, alleging deceptive sales tactics. He has settled similar charges with two other providers, who did not admit wrongdoing.
Nixon's office has gotten complaints from more than 200 consumers around the country, says a spokesman, who adds that the investigation has not uncovered any fake contracts. Several companies named in the lawsuit told Automotive News they are cooperating with Nixon to resolve the matter.
Hard sell The Missouri attorney general has cited other misleading marketing practices by some independent vendors of vehicle service contracts:
Promoting a service contract as an "extended warranty"
Contacting customers who are on federal or state "do not call" lists
Failing to honor money-back guarantees for canceled contracts
Source: Missouri Attorney General's Office
'Official' warnings
Dealers and regulators say rogue service contract vendors churn out "notices" to consumers that look and sound official. In an effort to make an immediate sale, they tell vehicle owners their warranty coverage is exhausted or soon will be. In many instances the customers have more than a year left on their manufacturer warranties.
"Customers say, 'I thought my warranty is still good,' " dealer Broome says. "Or, 'You already sold me a service contract, so why is someone telling me the warranty is about to expire?' "
Dave Robertson, executive director of the Association of Finance and Insurance Professionals, says such scare tactics have "long been the staple of the junk mail and recorded phone solicitation trades." The association trains and certifies dealership F&I managers in law and ethics.
Complaints have escalated with the rise of automated telemarketing and online commerce, dealers say.
Three of the vendors named in Nixon's lawsuit say they are cooperating with his investigation. They are Service Protection Direct, of St. Louis; Dealer Warranty Services, of St. Charles, Mo.; and Certified Auto Warranty Services Inc., of Lenexa, Kansas.
The vendors admit mislabeling service contracts as "warranties" and claiming factory warranties are about to expire when that is not always true.
"We target owners of vehicles that are 2 years and 3 months old," says Billy Bell, president of Certified Auto Warranty Services. "Depending on their driving habits, they could be out of warranty. We have no way of knowing the mileage on the vehicle."
Good behavior
Certified Auto Warranty Services and Dealer Warranty Services say some consumers who filed complaints with Nixon confused them with vendors that market service contracts with similar names. They say they typically honor money-back guarantees and government do-not-call lists. They deny claiming ties to dealers or automakers or improperly charging customers.
Ted Conrad, administrator for Dealer Warranty Services, says disreputable vendors have "ruined the industry."
"We try to do our utmost to satisfy customers, but others do not," he says.
John Hamill III, a lawyer for another defendant National Auto Warranty Services Inc., of Wentzville, Mo. says the company does not discuss pending litigation. Calls to the other defendants National Dealers Warranty Inc., of St. Peters, Mo.; and Direct Dealer Warranties, of St. Louis were not answered.
Dealers say hard-sell vendors of service contracts gravitated to Missouri because the state's regulation traditionally has been loose. The Missouri Automobile Dealers Association lobbied for tougher regulation that took effect in 2007, says Sam Barbee, the association's executive vice president.
Missouri now requires service contract vendors to register annually with the state's department of insurance. They must show that they have enough insurance to pay claims, place a reserve fund in trust with the department, document net worth of at least $100 million or prove that a parent company has agreed to cover claims.
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