Top News

GM: Dealers Must Disclose Non-GM Parts, Service Contracts

August 24, 2017

By Gregory Arroyo

DETROIT — In a pair of bulletins and a letter signed by its head of North American operations, General Motors (GM) issued a new set of dealer mandates that poses a serious threat to the aftermarket F&I product industry and has dealer trade groups scrambling for answers.

Dated Aug. 10, the letter states that GM dealers who sell non-GM-branded vehicle service contracts, parts and accessories must disclose that fact to their customers. In states like Mississippi and New York, similar disclosures are already required. The question is whether the penalties for noncompliance, including termination of a dealer’s franchise agreement, violate dealer-protection laws.

“If a non-Chevrolet, Buick, GMC or Cadillac vehicle service contract is sold to a customer, dealers must disclose to the customer that the service contract is not endorsed by GM. The disclosure requires an acknowledgment by the customer,” Alan Batey, GM’s executive vice president and president for North America, states in the letter obtained by F&I and Showroom magazine. “The failure to complete this required disclosure is a material breach of Article 5.1 of the Dealer Sales and Service Agreement (DSSA).”

Dealers on Hold

In addition to termination of their franchise agreement, GM dealers face a $500 penalty per vehicle, and could lose access to incentive programs such as GM’s Standards for Excellence and Essential Brand Elements. Noncompliance could also render a dealer ineligible for additional dealership opportunities.

The letter and bulletins don’t make clear whether the disclosure requirement applies to other F&I products. Also missing is the policy’s effective date and compliance deadline, which has been a source of dealer confusion.

General Motors officials did not respond to requests for comment.

The National Automobile Dealers Association reached out to GM within days of the new policy’s release, according to an Aug. 17 memo obtained by F&I and Showroom. Authored by Jim Moors, the association’s senior counsel, the memo questions whether GM’s disclosure form is consistent with the automaker’s DSSA and certain state laws that dictate disclosure content.

The memo also raises several questions, such as whether the disclosure is required in cases where a vehicle sold to a customer contains non-GM parts not installed by the selling dealer. It also points out that a number of states have enacted restrictions on manufacturers that attempt to influence which products its dealers sell.

“NADA believes that these requirements and the threatened sanctions may go beyond what appears to be required or authorized by the DSSA. It is also unclear exactly what products are subject to the disclosure requirements,” Moors’ memo states, in part. “While NADA cannot offer dealers legal advice, we strongly recommend you not take any action that indicates agreement with the new requirements without consulting with legal counsel.”

Preventive Measures

In 2014, dealer associations in Florida, Mississippi, New York, and Oklahoma successfully lobbied state lawmakers to pass measures prohibiting captives from pressuring dealers to sell only their F&I protections. But it wasn’t a complete victory for dealers in two of those states. The bills passed in Mississippi and New York include a requirement that F&I offices specifically disclose to customers whether or not they are purchasing F&I protections backed by their vehicle’s manufacturer.

In advance of the Mississippi bill’s effective date, the Mississippi Automobile Dealer Association (MADA) developed a one-sentence disclosure for its members. It requires that dealer have their customers initial the disclosure, signifying that they were advised — both verbally and in writing, as stipulated by the state’s updated Mississippi Motor Vehicle Commission Act — that the products they are purchasing are not provided or supported by a manufacturer or distributor.

“Disclosure to the buyer is already covered under the Mississippi franchise law,” Marty Milstead, president of the MADA, stated in an email to F&I and Showroom. “However, MADA is reviewing the bulletin over concerns of potential violations of the [law] with regard to the fines and penalties for not using the newly prescribed form.”

In New York, the disclosure isn’t mandated by the state, but a franchiser can require a dealer to make the disclosure in “a separate statement, acknowledged by the consumer.”

States like California and Ohio have statutes in place that prohibit manufacturers from discriminating against a franchisee for selling F&I products not approved, endorsed, sponsored or offered by the manufacturer. Brian Maas, president of the California New Car Dealers Association (CNCDA), said there is one exception: The statute does not prohibit a franchiser from requiring its dealers to disclose to customers whether or not a service contract is backed by the manufacturer. Maas, however, believes GM’s new disclosure form goes beyond what the statute allows, noting that this isn’t the first time GM has overstepped dealer franchise laws.

“This seems to be following a pattern from GM. I don’t know what’s going on in the Renaissance Center in Detroit,” Maas said, putting the association’s GM dealer count in the low hundreds. “Why they’re announcing all these policies that seem to make the relationship with their dealers more difficult boggles my mind.”

When automakers and their captive finance companies attempted to block the dealer-protection measures in Florida, Mississippi, New York and Oklahoma, they stood behind the Federal Trade Commission’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, also known as the Holder Rule. Published in May 1976, it says a finance source that accepts assignment of an installment sales contract from a dealer can be held responsible if a customer who purchased ancillary products takes legal action.

The rule, however, was noticeably absent in GM’s bulletins. Instead, Batey’s letter opens with the automaker’s new disclosure policy regarding the sale of non-GM equipment, parts and accessories, and reminds dealers about the National Traffic and Motor Vehicle Safety Act. It states that a person may not sell a motor vehicle or motor vehicle equipment unless the vehicle or equipment complies with applicable federal safety law.

“In addition to potential violations of federal law, there are other consequences that can result from the installation of unauthorized, non-GM equipment on a GM vehicle,” Batey states in his letter. “First, unauthorized modifications or alterations to the vehicle are not covered under GM’s ‘bumper-to-bumper’ new-vehicle limited warranty, and may void existing warranty coverage. Second, unauthorized vehicle modifications are not permitted on most retail vehicles leased through GM Financial.”

Profit Play

As for the disclosure form, GM requires that it be presented and signed by the customer during the sales or service process. Dealers must also keep a copy of the form in the customer’s sale or service file, along with copies of the purchase order and/or bill of sale.

At the top of the form is a box dealers need to check if a non-GM service contract is sold. Below that is a paragraph that reads: “Buyer/Lessee acknowledges that the dealer is selling her/him a Non-GM Service Contract (not specifically branded Chevrolet, Buick, GMC or Cadillac Protection).” It then states that the buyer understands that GM is not responsible for any claims under the non-GM product, has no obligation in connection with the sale or use of the non-GM service contract, and that it may not be accepted by other GM dealerships.

Dealers are then required to list the name of the provider and the contract number. The non-GM parts and accessories disclosure appears below that. At the bottom of the form, the dealer must list the 17-digit VIN and the name of the sales or service representative, and have the customer sign and date.

“It is little more than a document attempting to scare a consumer away from a non-GM accessory or service contract, which may run afoul of a number of state laws that prohibit an OEM from discriminating against a dealer’s use of non-OEM products,” said Randy Henrick, vice president and compliance counsel for Mosaic Compliance Services LLC. “I know a number of auto dealer attorneys are considering a declaratory judgment action against GM on the basis that the consumer consent is little more than a document attempting to cause the consumer to refrain from buying a non-GM service contract and therefore improper conduct on GM's part.”

The fear among F&I product providers, many of which are conducting their own legal analysis of the new policy, is that other automakers will follow GM’s lead. Carl Woodward, a partner with accounting firm Woodward Associates, said GM’s policy is all about profit.

In an April 2016 report, investment bank Colonnade estimated the F&I products market to be a $77 billion industry, with retail sales of vehicle service contracts estimated at $28 billion in 2014. And according to the NADA, 41.9% of new vehicles sold have a VSC attached to the deal.

Woodward, whose firm services a number of GM dealers, said there are many reasons why dealers would choose to sell an aftermarket VSC. Dealers who reinsure their service-contract plan with a third-party administrator can offer more coverage for less — a point he said dealers should stress to consumers when presenting GM’s disclosure to customers. Dealer fees for captive reinsurance programs are often higher as well.

“I talked to at least 10 dealers, and their blood is boiling. My perspective is GM is doing this for a profit motive,” Woodward said, adding that he spoke to several GM dealers who were unaware of the new policy. “All GM should be worried about is making good cars priced reasonably and staying out of its dealers’ pockets.”

Comments

  1. 1. Concerned customer [ August 24, 2017 @ 01:06PM ]

    It's interesting to read this dealer feedback. What is the fear in informing a customer that the product they choose to provide their customers isn't backed by the manufacturer? I believe most customers are making the assumption that anything purchased at the dealer is backed y the OEM. It's important to provide full transparency and not hide behind the big sign that sits in the front lot.

  2. 2. Bubba B [ August 24, 2017 @ 01:21PM ]

    I sure am glad we don't have any GM franchises.

  3. 3. Brian [ August 24, 2017 @ 07:36PM ]

    Good for GM. It's overdue. Unknowing customers have non OEM parts installed too often lowering the value of their cars while the dealers profit. This will also allow GM to distribute AC Delco service products to a broader base of service facilities.

  4. 4. Randal [ August 25, 2017 @ 08:58AM ]

    To my knowledge General Motors does not have an OEM warranty product. It is a third party endorsed product so unless GM owns the insurance company underwriting the risk they would seem to be doing nothing but blocking competition for their third party product versus other third-party products. It may be branded with their name through licensing but it is not their product. Just because it has their logo does not mean that they are in control of the claims payments process. So to infer that it is the manufacturer's product would be incorrect. It is third-party coverage just like any other coverage in the market. The Branding of the name does not guarantee better claim service or coverage which is what GM would like to infer to the customer. They simply want to channel the profits for the product line away from the dealers reinsurance programs and into their own pocket

  5. 5. Gary P [ August 28, 2017 @ 02:09AM ]

    GM uses WarranTech to admin their service contract, which makes their product 3rd party. All the F&I products with their GM logo are administered and underwritten by 3rd party companies. Flip over the service contract and you will see Bedford TX as the administrator address - which is WarranTech. Sounds like a monopoly to me.....

  6. 6. Tony [ August 31, 2017 @ 04:30PM ]

    How is it that GM uses a third party and they require a dealer to disclose that they are not a GM service agreement? Because this is a way for them to get around the legeslation that restricts them from forcing dealers to sell factory programs. This has nothing to do with helping a consumer, it's all about forcing dealers into a corner. Dealers need to step up and fight this, as do third party providers because if they prevail all will do it.

  7. 7. David [ September 02, 2017 @ 05:18PM ]

    I don't see the big deal in having to disclose, whether I am selling an OEM VSC, or a third party contract. It is what it is. If I am understanding correctly this form, or something very much like it has been in existence for a long time. GM is just bringing back to light. Further more, someone brought up whether GM uses a third party to admin their VSC, beside maybe Ford, I'm trying to find another OEM that doesn't use a third party. What am I missing?

 

Your Comment

Please note that comments may be moderated. 
Leave this field empty:
Your Name:  
Your Email:  

CLOSE [X]

READ NEXT

Finalists Announced for 2017 F&I Digital Media Awards

F&I and Showroom and F&I Express announced 13 finalists in five categories for the first-ever F&I Digital Media Awards.