by Dave Robertson, MBA
As AFIP Certified Professionals know, F&I practices fall under the jurisdiction of both federal and state regulators. The question of whether it’s permissible to make a vehicle sale contingent on the purchase of a vehicle service contract (VSC) is an excellent example of why it’s essential for F&I managers to have a working knowledge of statutes and regulations at both levels.

If certain requirements are met, such as full disclosure and requiring the purchase by both cash and credit customers, the practice may not violate federal law. However, it’s a different story at the state level.

Making a vehicle sale contingent on a VSC purchase is prohibited in some states. Other states may allow the practice, but require that the retail price of the service contract be computed as part of the cost of credit – impacting the APR. The rest of the states may consider it a non-issue and defer to federal requirements. Due to the variation in state laws, the practice of making a vehicle sale contingent on a VSC purchase should not be employed without the advice of competent counsel.  

I personally find the practice counterproductive, but it’s the dealer’s prerogative to market vehicles as he or she sees fit. Accordingly, the following dealership practices should clear the regulatory hurdles at the federal level.

If a dealer imposes a VSC purchase contingency, the requirement to purchase a VSC must be clear to consumers visiting the lot and to prospective buyers during the vehicle selection process. The following disclosure should be displayed on wall signs and notices posted on the vehicles –and printed on the Buyer’s Order:

All vehicle sales require the purchase of a vehicle service contract.

Which is not to say that the notice can’t inform the consumer of the benefits of the coverage.  

The requisite must apply regardless of how the customer pays for the vehicle – cash or credit, whether dealer-arranged or buyer-acquired. In addition, the dealer must provide tangible evidence that the requirement is enforced – it’s not just a sales gimmick. If a buyer isn’t willing to purchase a VSC, the sale doesn’t happen. 

While the process is simple, the jerrymandering machinations for wringing out a few extra VSC sale dollars at the cost of reduced vehicle gross – or lost sales – is anything but simple. I’d assume a limited coverage VSC is offered on every vehicle, with the F&I person attempting to up-sell the customer to more extensive levels of coverage.  

Based on industry penetration numbers, if a dealer provides a full array of VSC coverages and benefits offered at reasonable markups – and maintains a properly trained and compensated F&I cadre to convey this information – a significant number of car buyers will voluntarily opt for the coverage. More important, offering a VSC – rather than requiring it – shows that the dealer respects the right of consumers to make unencumbered vehicle purchase decisions.  

In my view, the VSC purchase requirement is a relic sales practice long out of fashion. For the market savvy, “We like to weigh our options and make our own decisions,” Gen Xers, Xennials and Millennials, it’s a deal killer.

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This article was reviewed by a qualified attorney.

From AFIP News, February 2020