Mythbusters: FTC Used Car Rule

For more than a decade, the FTC considered revisions to the Used Car Rule. On November 18, 2016, it published the final revisions that went into effect on January 27, 2017. The revised rule provided for a new buyer’s guide that was optional for a year and mandatory effective January 27, 2018.

We write frequently about myths in the car business – things dealer employees wrongly believe are true. Let’s bust some myths about the FTC Used Car Rule.

Myth #1  The new form gives us a choice to disclose the vehicle as is or with a dealer warranty. When we sell a used vehicle with the remainder of the OEM warranty or with a factory program car warranty as the only coverage, we are not selling it as is. We should mark the buyer’s guide that we are selling the vehicle with a dealer warranty.

Fact #1 That is incorrect. In filling out the former buyer’s guide form under the original rule, the choice was between a sale as is or with a warranty. That permitted disclosure that the vehicle was sold with a warranty even if the dealer did not provide one. The buyer’s guide form under the revised rule defines “as is” as not having a dealer warranty, with the check box for a warranty applying only if a dealer warranty is offered.

If a vehicle is sold only with a manufacturer’s warranty – whether it is the original OEM warranty or a program warranty – or with a third party backed warranty, that is not a dealer warranty. If there is no other dealer warranty applicable, the buyer’s guide must disclose the sale “as is – no dealer warranty”.

According to the FTC, if there is only a non-dealer warranty applicable to the vehicle, such as the remainder of the OEM coverage, the dealer can disclose the terms under the “systems covered / duration” section of the buyer’s guide. But that description must be clear about the warrantor. If the warrantor is not the dealer, and no other dealer warranty is given with the sale of the vehicle, then the vehicle must be disclosed on the buyer’s guide as being sold as is, even if a clear description of the non-dealer warrantor and terms is made in the “systems covered/duration” section.

Myth #2  We only must display the buyer’s guide on vehicles available for retail sale. If FTC investigators walk our lots, we can explain to them that vehicles without stickers are not for retail sale.

Fact #2  If a vehicle is on your lot, or in your parking area as is the case for a demonstrator, FTC investigators assume it is for sale. An FTC investigator who may walk your lot will not listen to explanations, believing that a consumer will see a vehicle for sale on your lot or a demonstrator as available for retail sale. If a vehicle is wholesale only, and you post no buyer’s guide, clearly disclose its status. Soap the windows “not for retail sale” or some other clear designator that the vehicle is not available for retail sale.

Myth #3   The back of the buyer’s guide has a space to identify the contact for a complaint. Because we have turnover, we can just list the job title of the contact and the phone number, for example “contact used car manager at 555-555-5555”.

Fact #3  The FTC has said it wants the name of a person listed. You can also list the title in the event of turnover and you must list a contact method for the job position.  But the FTC has been clear that it wants the name of a person.

Myth #4  In describing a dealer warranty, we simply disclose that the powertrain is covered.

Fact #4  The revised rule changed that. In the revised rule, the FTC clarified it is no longer acceptable to use the shorthand term “powertrain”. The buyer’s guide must disclose individual components of the powertrain system covered by the warranty like the engine, transmission, and differential.

Myth #5 When a dealership sells a used car with the dealer’s warranty, the FTC buyer’s guide serves as the warranty document that the customer must receive.

Fact #5  A customer who buys a used car with the dealer’s warranty must also receive a separate warranty document.

When the dealer is offering its own express warranty, such as ninety day engine, transmission, and differential coverage or thirty day 50/50 protection, the buyer’s guide is not the only document the buyer must receive. The seller must provide a separate warranty document.

The federal Magnuson Moss Warranty Act requires that a warranty must be a written description of a consumer’s rights in a clearly worded, single document. There is a simple answer why the buyer’s guide cannot be the warranty document – the buyer’s guide itself says that it is not.  The form buyer’s guide states:

“Ask the dealer for a copy of the warranty document and an explanation of warranty coverage, exclusions, and repair obligations.”

There is a more complicated answer – the buyer’s guide cannot function as the warranty document because, while it does or may contain some descriptions of coverage required by the MMWA, it does not have all the mandated terms. This list of items that must be disclosed in an MMWA compliant warranty may also be on the buyer’s guide.

(1) A statement whether the dealer’s warranty offered is “full” or “limited.”  If you wonder which of these you should offer with the used cars you will warrant, we will make this easy.  Never offer a “full” warranty.  The obligations that accompany that description under federal law are more than any car dealer should accept.  Always describe a used car warranty as “limited”

(2) A statement of the percentage of the repair costs you will pay.

(3) A list of the specific systems covered by the warranty.

(4) A description of the duration of warranty coverage for each of the covered systems.

(5) An explanation of how a customer gets warranty service. You must include your company’s name, address, telephone number and the name of the person to call about warranty service.  On the back of the buyer’s guide, you must describe who to see about complaints.  If that is the same person to see for warranty service, that arguably would suffice under MMWA.  But it is better to state who to see for warranty service in your warranty document.

(6) A list any of parts or systems excluded from coverage under the warranty, if it is necessary for clarification. If the battery, for example, is not covered the same as other elements of the electrical system, that must be disclosed in the warranty document.  That may be disclosed on the buyer’s guide, for example, by describing that the warranty covers the “Electrical System (except battery)”.

(7) A disclosure of all obligations that the consumer has as a condition to obtaining warranty service.  The buyer’s guide may meet the MMWA requirement, for example, by stating a deductible a customer must pay to get service.

So far, so good.  Unfortunately, the remaining terms of a warranty mandated by the Magnusson-Moss Warranty Act are not included on the buyer’s guide.

(8) Any warranty under the Magnusson-Moss Warranty Act must have this specific disclosure that does not appear on the buyer’s guide: “This warranty gives you specific legal rights, and you may also have other rights which vary from state to state.”

(9) While a buyer’s guide does not contain the following mandated disclosure when implied warranties are limited, a warranty must: “Some states do not allow limitations on how long an implied warranty lasts, so the above limitation may not apply to you.”

(10) Most warrantors wish to exclude or limit consequential or incidental damages in their warranties, but this is not even addressed on the buyer’s guide.  A warranty document must include this language: “Some states do not allow the exclusion or limitation of incidental or consequential damages, so the above limitation may not apply to you.”

(11) Limitations on coverage must be disclosed in a warranty.  For example, you will probably want to limit a used car warranty to your customer, not someone who may buy the car from the customer.  You may also want to exclude commercial use.  Those limitations are not disclosed on a buyer’s guide.

Protect your dealership against claims you breached your obligations when you sold a used vehicle with an express dealer’s warranty that did not comply with the MMWA.  Use a separate written warranty with the terms required by federal law to protect your dealership.