Buying a car? Think twice about extended warranties and theft protection coverage, CU advises (March 2003).

Study asks Legislature to fix weak regulatory system that allows unscrupulous sales tactics

Texas regulators are largely ineffective in restraining auto dealers who use high-pressure sales tactics to push products such as extended warranties and theft protection products with huge markups but little value to the consumer, according to a Consumers Union study released March 21.

In a random survey of 404 complaints filed with the Texas Attorney General, CU found one-half of car buyers purchased extended warranties, paying an estimated $755 too much for them on average. Less than eight percent of complainants purchased theft protection, but that, too, came at a huge markup. Consumers generally paid from $299 to $799 for theft protection policies that cost the dealer less than $32 per covered car.

Consumers complained to the Attorney General about overcharges, deceptive practices and high-pressure tactics. Approximately one out of five complained specifically about their extended warranty. The study can be found at http://www.consumersunion.org/pdf/ExtWarr.pdf.

"Texas auto dealers are having a field day at closing at the expense of consumers, but you would never know it by listening to their sales pitches," said Rob Schneider, senior staff attorney with Consumers Union's Southwest Regional Office. "They're selling mostly unnecessary products at huge profit margins, and they'll go to any length to make sure consumers buy them."

The study noted that the agency charged with regulating these products -- the Texas Department of Licensing and Regulation (TDLR) -- "suffers both from the lack of power and the will to protect consumers." While extended warranties and theft protection are essentially insurance products and are frequently backed by an insurance policy, the products are not subject to insurance regulation in Texas.

Two bills filed in the Texas Legislature go in opposite directions. HB 3509 by Rep. Kino Flores, D-Mission, gives increased oversight authority to the Texas Department of Licensing and Regulation, requires contract prices to be preprinted and non-negotiable, and requires copies of the service contract to be provided to the consumer before it is purchased. But HB 1380, by Rep. Senfronia Thompson, D-Houston, makes matters worse by broadening the types of loans that can finance such add-on products and scaling back the little regulatory controls that exist.

Extended warranties provide a benefit to the automobile owner from mechanical breakdowns not covered by the manufacturer's original warranty. But they overlap the original manufacturer's warranty, extending it by just a few months or years. And, they are rife with numerous and important exclusions -- many leave out all maintenance and wear and tear items. Consumers report that dealers or the insurers backing the benefits sometimes fail to honor extended warranties and also make it hard for consumers to get a refund when they cancel their policies.

In fact, the benefits, the policies behind them, the exclusions, and the problems consumers face strongly resemble insurance market problems-except that these products are deemed not to be insurance, and therefore exempt from insurance regulation by statute.

"Extended warranties may quack and waddle like a duck, but under Texas law, they're a cow," Schneider said. "It makes no sense at all and it's hurting consumers all over the state."

Anti-theft policies duplicate coverage most consumers already have under their regular auto policy. Further: (1) some contracts require consumers to hold another insurance policy with theft coverage in order to receive benefits of the product; (2) theft policies may not pay a benefit for all kinds of theft, such as carjackings; (3) the advertised amount of anti-theft benefits may be contingent on the purchase of another vehicle from the same dealer; and (4) anti-theft policies also provide a much more limited payout if the vehicle is stolen and recovered, but damaged to the point of total loss.

In its study, Consumers Union found consumers paid anywhere from $99 to $1,500 for their anti-theft product. In contrast, insurance companies sold these policies to dealers for $9 - $17 for a three-year product, and $12 - $32 for a five-year product.

The State of Florida, for example, recognizes and regulates extended warranty products and anti-theft products as insurance. Auto dealers there are required to disclose the product cost, which cannot be marked up further at the dealership. Consumers also have legal recourse if the dealer does attempt to inflate the price.

Consumers Union is asking the Texas Legislature and state officials to:

• Increase the authority of the TDLR to oversee and regulate extended warranty providers, including authority to disapprove any service contract

• Require the purchase price to be preprinted on the contract and not subject to negotiation at the time of sale

• Direct sellers of extended warranties to provide a copy of the service contract to the consumer before the contract is purchased

• Make information about the number of extended warranty contracts sold available to the public

Earlier this month, Consumers Union issued a companion study in which it found that auto dealers are overcharging millions in selling overpriced and low value credit life and credit disability insurance policies.

"Taken together or separately, add-on products are a notoriously poor buy for Texas consumers," Schneider said. "Our advice is to buy a reliable vehicle and just say no to these costly last minute additions to the consumer bottom line."