Is your Service Contract program posing a compliance risk to your dealership?
At a recent trade show I overheard a dealer and provider of vehicle service contracts discuss the rise in providers that allow dealers to payoff the service contract over a period of time in interest free monthly payments. On its face that seems acceptable, but I wondered whether an issue is created if the dealer includes the cost of the service contract in the amount financed section in the retail installment contract, which results in the charging of a finance charge to their customer. The bottom line is that the dealer is collecting interest on the cost of the service contract from the customer while the service contract itself hasn’t been fully paid for.
To make things more complicated, in some programs the customer purchases the service contract directly from the service provider while others allow the dealer to act as a middle-man. Throw in the various state laws that impact the sale and financing of service contracts, and there is certainly the opportunity for the dealer to unknowingly walk into a situation filled with risk. Off the top of my head, I would think that a plaintiff’s lawyer would be very curious as to the contractual rights and obligations of the dealer and service contract provider. I bet various state regulators would want to look at the terms of the service contract as well as whether both the dealer and service provider have jumped through whatever hoops are relevant in that state.
Next, every state has some form of a Deceptive Trade Practices Act, and those are broadly written so that a creative lawyer can usually make a wide range of behavior sound like an actionable offense and pass judicial scrutiny. One of those pesky plaintiffs’ lawyers might be real curious about their client being charged interest under such a scenario. These cases are dangerous for dealers because the statutes usually allow for recovery of both attorneys’ fees and triple damages if the conduct of the defendant rises to a certain level.
Finally, it occurs to me that somewhere along the line one of these dealers is going to default on payments owed to the service contract provider, either because they hit a rough patch or because of issues related to coverage. What happens in the event the dealer stops paying for the contract? Will the service contract provider honor the contract with regards to claims made by the customer? I sure hope so, because both lawyers and regulators would be “all ears” if they didn’t and I’m sure the BCFP would be interested in the facts if a customer posted a complaint on its database.
The bottom line is that dealers need to do their homework on any new service provider or program. Don’t just assume that the provider has received a legal opinion that the program is compliant. Ask questions, conduct due diligence, ask to see any opinions and judge for yourself. Only then should the dealer take the next step. It’s’ just good vendor management, and that’s an important part in a dealer’s ability to manage their overall risk.
Steve Levine is Chief Legal and Compliance Officer of Ignite Consulting Partners, which provides compliance, technology and best practices consulting to BHPH and independent dealers, finance companies and other industry participants. Follow him on Twitter @LawyerLevine for frequent insight into compliance issues in our industry, or contact him at Steve.Levine@IgniteCP.com.