The Government’s Auto Warranty Plan
Two weeks ago the Treasury Department announced that it would back warranties of new General Motors and Chrysler vehicles. The purpose is clearly to reassure potential buyers who are worried about buying domestic vehicles. It does not, however cover consumers who already own a General Motors or Chrysler vehicle and also does not cover safety recalls which may occur in future years.
Basically, under the "warranty commitment program" special warranty accounts would be set up which will be used only if the manufacturer lacks the financial resources to back up its warranties. If that were to occur the government would appoint a program administrator who in turn would select an auto service provider to provide warranty services. The special warranty accounts would be funded with 125% of the anticipated warranty costs, with 110% coming from the government and 15% from the manufacturer. The federal portion would come from the Troubled Asset Relief Program. The magnitude of the program has not been defined but in 2007 General Motors paid $4.5 billion worldwide on warranties and during the first nine months of 2008 spent $3.9 billion on warranties according to its SEC filing.
Although the program does not include safety recalls, even if a manufacturer were to be in Chapter 11 bankruptcy the warranty program would cover all its vehicles, including those sold overseas.
Both General Motors and Chrysler have promised to stand behind their warranties and to service their customers.
While many questions remain as to how such program would be implemented, the government believes that such backing will reassure consumers.
