Proper Product Terminology Reduces Risks
Proper Product Terminology Reduces Risks

The F&I industry has grown considerably over the last decade and the income generated for auto dealers from the sale of various products has become a significant source of income to offset the decline in income from the sale of the vehicles themselves.

As a result, regulation and scrutiny by lawmakers, consumer groups and the courts has increasingly been brought upon the industry. In response, the industry has gone to great lengths to educate all parties about F&I products and it has actively assisted in drafting the applicable laws and regulations in such a way that the F&I products are categorized and regulated properly.

In today’s business atmosphere it is important to minimize risks whenever possible. This is especially true in the automotive and F&I industry. Unfortunately, in spite of the efforts of the industry and regulatory groups, many areas in which risks could be reduced still exist. These problems can range from consumer confusion and dissatisfaction to negative media reports to regulatory enforcement actions to class-action lawsuits.

In my experience, I have found that may of these risks can be minimized or removed by simply knowing and understanding the product and using proper terminology. Below, I address several areas that commonly result in issues:

Retail Installment Sales Contract (RISC) vs. Loan

It is a common practice to use these terms interchangeably even by those who know better. Many times you hear that the dealer got the buyer a loan or loaned the buyer the money to purchase the vehicle. However, it is important to understand the difference between the two to prevent their misuse.

When a consumer purchases a vehicle from a dealer and finances the purchase through the dealer, they traditionally enter into an RISC. Under the RISC, the dealer is extending credit to the buyer for the vehicle purchase and the dealer is the initial “creditor.” Although the dealer/creditor could collect the agreed upon monthly payments from the buyer, in most situations the dealer subsequently assigns the RISC to a finance company.

In the loan scenario, the consumer, through a separate agreement with a third-party “lender” such as a bank or finance company, borrows money and uses the loan proceeds to pay the dealer for the vehicle. From the dealer’s point of view this should be considered a cash transaction because the dealer only received the proceeds of the loan and was not a party to the loan transaction.

Dealers do not “loan” money – they extended “credit.” Why is it important to know the difference? Most states have laws regulating RISCs and separate laws that regulate loans. These laws are two different animals. As a dealer, it is difficult enough to comply with the RISC laws let alone have to deal with the laws regulating loans.

GAP Waiver vs. GAP Insurance

Basically there are two kinds of guaranteed asset protection (GAP): waiver and insurance. Whether GAP is a waiver or insurance, the product is designed to do the same thing: in the event of a total loss, it takes care of any difference between the value of the vehicle and the amount owned under the RISC or loan. Most states permit the sale of the GAP waiver product.

GAP waiver is a contractual addendum to the finance contact, while GAP insurance is a separate contract that is just that – an insurance policy that pays in the event of a covered loss.

GAP waiver is most common in the RISC transaction discussed above. With GAP waiver, the parties to the RISC (buyer and dealer/creditor), through the use of an addendum to the RISC, contractually agree that if the buyer has a total loss and owes more on the vehicle that it’s worth, the creditor will WAIVE the balance. It is important to note that the GAP addendum can usually be purchased at the time the RISC is entered into between the buyer and dealer/creditor. GAP waiver is not an insurance product.

With GAP insurance, the buyer purchases an insurance policy that is designed to PAY the creditor the difference between the vehicle value and the amount owed. As an insurance product, the sale of GAP insurance is traditionally more highly regulated. GAP insurance is less common than GAP waiver, but is mischaracterized more often.

Warranty vs. Service Contract

A warranty is included in the price when a product is purchased and traditionally comes from the manufacturer or the seller of the product. A warranty cannot be sold separately from the product. A warranty can be either full or limited and is regulated by the federal Magnuson-Moss Warranty Act.

On the other hand, a service contract is purchased separately from the product itself and is usually administered by a third party. A service contract is in addition to any warranty on the product and only covers those items outlined in the contact. Most states regulate service contracts to varying degrees.

The confusion between the two terms is amplified when a service contract is referred to as an “extended warranty.” As a result, to prevent any confusion, the best practice is to not use the term extended warranty when referring to a service contact.

Insurance vs. Non-insurance Terms

A variety of insurance and non-insurance terms have been misused in the F&I industry. When discussing the terms and conditions of the products, pay close attention to the language used in the contracts themselves as it should give some guidance to the proper terminology to be used in discussing or describing the product. A few of these terms are briefly discussed below:

  • Coverage vs. Contract Terms The use of the term “coverage” traditionally is an insurance term. It is usually seen in insurance-type products and will be used when describing the product, its benefits and its terms and conditions. However, when describing non-insurance-type products, the contractual terms will most often be referred to as “contract terms,” “terms and conditions” or something similar.
  • Premium vs. Enrollment Charge/Purchase Price Premium is historically an insurance term and should not be used for non-insurance-type products. On the other hand, it is better to use terms such as enrollment charge or purchase price for describing the cost of non-insurance products.
  • Contract vs. Policy In those situations in which both insurance and non-insurance products are being sold together, it is easy to refer to the various products as “policies.” Unfortunately, policy is a term usually associated with insurance. The better practice is to refer to all of these products as contracts or agreements even if they are an insurance product.
About the author
Lewis Kuhl

Lewis Kuhl

Contributor

Lewis D. Kuhl is an attorney with Kurkin Brandes LLP, an Aventura, Fla.-based law firm. He has more than 20 years of experience with legal issues related to auto dealers and the automotive industry.

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