In a pair of bulletins and a letter dated Aug. 10 and signed by Alan Batey, head of General Motors’ North American operations, the automaker ordered its dealers to use a new disclosure form when non-GM service contracts, parts, and accessories are sold to customers. Despite the altruistic aims expressed in the memos, dealer trade groups believe that “safety and transparency” are not the reason for the automaker’s disclosure mandate and related sanctions.
“While your Aug. 10 letter states that it is very ‘important to make sure that customers are aware that their vehicle service contract is not a GM product,’ GM provides no evidence that this is a widespread problem in the industry justifying such a blunt force solution. ... Instead, the program appears to be an attempt to coerce dealerships into selling GM-branded products and service contracts ...”
On Aug. 24, the same day F&I and Showroom broke the story online, General Motors issued a second memo. Signed by Steve Hill, GM’s vice president of U.S. sales, service and marketing, the note contained a more streamlined form, as well as an explanation of the automaker’s new requirement. In states like Mississippi and New York, similar disclosures are already required. The question is whether the penalties for noncompliance violate dealer-protection laws.
“The purpose of this new process is to ensure that customers understand the source of the products they purchase at a GM dealer and to promote retail transactional integrity,” Hill wrote, in part, noting that its approach has been part of the automaker’s dealer sales and service agreement (DSSA) for many years. “The process is not intended to be punitive.”
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.
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.”
Hill’s follow-up email did provide answers to some of the NADA’s concerns, including that dealers aren’t required to disclose non-GM parts and accessories “installed prior to receipt by the dealer.” It also noted that the disclosure requirement does apply to fleet customers, body shop repairs, both warranty and customer pay repair parts, and used GM vehicles repaired or reconditioned with non-GM parts by the selling dealer.
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 Dealers Association (MADA) developed a one-sentence disclosure for its members. It requires dealers to 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, wrote 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, Ohio, and Washington 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 regarding the California statute: It 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.”
The Washington State Auto Dealers Association also responded to Batey’s memo and Hill’s follow-up note in a Sept. 1 letter obtained by F&I and Showroom magazine. Signed by WSADA’s Vicki Giles Fabré, it states that the new policy represents an attempt to make substantial changes to the “underlying franchise agreement,” threatens sanctions that violate the state’s franchise laws, and represents “an unfair attempt to prejudice the relationship between vendors who supply third-party service contracts and parts.”
“While your Aug. 10 letter states that it is very ‘important to make sure that customers are aware that their vehicle service contract is not a GM product,’ GM provides no evidence that this is a widespread problem in the industry justifying such a blunt force solution,” Fabré’s letter states, in part.
“Instead, the program appears to be an attempt to coerce dealerships into selling GM-branded products and service contracts, even in situations where a customer would be better served with a third-party option or where there is not GM equivalent,” the letter continues. “Indeed, using inflammatory language that implies that a part ‘may damage the vehicle, compromise its compliance with safety standards, or void the GM Warranty on the vehicle” only serves to highlight that appearance of impropriety.”
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.
“This seems to be following a pattern from GM. I don’t know what’s going on in the Renaissance Center in Detroit. Why they’re announcing all these policies that seem to make the relationship with their dealers more difficult boggles my mind.”
The rule, however, was noticeably absent in GM’s bulletins. Instead, Batey’s letter opens with the automaker’s 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 it operates in compliance 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 memo. “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.”
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 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.
Removed from the revised form attached to Hill’s follow-up memo were sections requiring a dealer to name the provider and the contract number of a non-GM service contract. The non-GM parts and accessories disclosure was also significantly paired down. Removed is a section requiring dealers to list non-GM parts and the part maker’s name. Dealers also don’t have to confirm the existence of any third-party warranty. All that’s required after that is the customer’s signature, printed name, 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.
“I talked to at least 10 dealers, and their blood is boiling. My perspective is GM is doing this for a profit motive. All GM should be worried about is making good cars priced reasonably and staying out of its dealers’ pockets.”
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 form 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. “All GM should be worried about is making good cars priced reasonably and staying out of its dealers’ pockets.”