For many years, creditors have offered warranties and service contracts in connection with the sale of consumer products. Let’s spend a few minutes on warranties and service contracts—what they are, and how they can and cannot be marketed.

Since the passage of the Magnusun-Moss Warranty Act in 1975, consumer product warranties and service contracts have been regulated by federal law. Prior to this law’s passage, there was no well understood distinction between a warranty and a service contract. Also, there was no standard to distinguish a “full” warranty from a “limited” warranty. This law established certain guidelines or minimum standards before a seller could claim that its warranty of goods was a full warranty.

Also, the law provided limitations on how service contracts may be marketed and sold. A service contract differs from a warranty (whether full or limited) in that a warranty may be offered to the consumer by the dealer at no additional charge. That is, a warranty comes along as a part of the sale of the goods. 

Contrast a warranty to a service contract. A service contract is a contract to perform, over a fixed period of time or for a specified duration of time, services relating to the maintenance or repair, or both, of a consumer product. The sale of a service contract is often regulated by state law. While a warranty is only given by the seller or its manufacturer, a service contract may be offered by a seller, a finance company or a third party service provider. 

Because of the Holder-in-Due Course Rule (discussed here), the finance company is subject to all claims and defenses that the consumer has against the dealer or installment seller. So, in addition to having to be concerned with its own offering of a non-conforming service contract, a finance company should be concerned with a dealer’s service contract offering and its warranty offering. For example, is the dealer’s warranty designation of “full” or “limited” in compliance with federal law?

One of the substantive provisions of the Magnusun-Moss Act that is sometimes overlooked by creditors is the limitation on the disclaimer of the “implied warranties of merchantability and fitness for a particular purpose.” (Stay tuned until next week for a discussion of the meaning and import of these implied warranties.) So, a service contract or warranty that disclaims implied warranties can get the holder of the installment sales contract—the finance company—into trouble. 

When we think about the Magnusun-Moss Warranty Act, we should be thinking in terms of warranties and service contracts as well.

Practice Pointer: If you purchase installment sales contracts from dealers who offer warranties or sell service contracts, or if your finance company sells service contracts, be certain that they comply with any applicable state law, and the federal Magnusun-Moss Act as well.

Please Note: This is the forty-ninth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking Dentons - Consumer Finance Report.