Selling Auto Warranties by Phone? What Your Processor Will Check

Most people who own a car have had the call or the postcard: your vehicle warranty is about to expire, call now to keep your coverage. That pitch is why federal regulators talk about "auto warranty scam" robocalls, and it is the first thing an underwriter thinks of when a vehicle service contract company applies for a merchant account. Legitimate sellers carry that reputation into every application, whether or not they ever made a robocall.

This guide is for companies that sell vehicle service contracts, the product usually marketed as an extended auto warranty, by phone, by mail or online, and take payment by card. It covers how the card networks classify the business, what the FTC's Telemarketing Sales Rule requires before and at the point of payment, how state cancellation laws turn into chargebacks, and what an underwriter will ask. Federal rules are cited from 16 CFR Part 310 as published in the eCFR in October 2026, Visa rules from the Visa Core Rules and Visa Product and Service Rules of 18 April 2026 and Visa's Merchant Data Standards Manual of October 2026.

A service contract is not a warranty

The FTC's consumer guidance draws the line plainly. An extended warranty or service contract is different from the warranty that comes with a product: it costs extra, and it might cover different issues than the manufacturer's warranty. The same guidance tells consumers that the company offering it is not necessarily the manufacturer and might be one they do not know.

That distinction is where most of the enforcement in this industry starts. When the FCC fined the operation behind billions of auto warranty robocalls in August 2023, it described the scheme as selling vehicle service contracts "under the false and misleading claim of selling auto warranties." The FTC's 2023 orders against American Vehicle Protection Corporation and its operators followed complaints that its telemarketers falsely claimed to be affiliated with vehicle manufacturers and sold contracts costing thousands of dollars as "bumper to bumper" protection; five defendants accepted lifetime bans from the extended auto warranty business and from outbound telemarketing. In July 2024 CarShield and American Auto Shield agreed to pay $10 million to settle FTC charges that their advertising misrepresented what the contracts covered, with an order that also prohibits violations of the Telemarketing Sales Rule.

An underwriter reads your website, scripts and mailers looking for the same problems. Language that implies you are the manufacturer or the dealer, that coverage is about to lapse, or that a contract covers every repair is what regulators have already sued over.

How Visa classifies a service contract seller

Your merchant category code depends on how you sell, not only on what you sell. Visa's Merchant Data Standards Manual lists product warranties among the examples for MCC 6300, Insurance Sales, Underwriting, and Premiums, and gives a separate code, MCC 5960, Direct Marketing – Insurance Services, to merchants that sell insurance through direct mail, billing statement inserts, or magazine and television ads with a toll-free number or address to respond to.

The code that matters most for this industry is 5966, Direct Marketing – Outbound Telemarketing Merchant. Visa describes it as merchants that sell using outbound telemarketing, where the merchant initiates contact by telephone or by a mailing, other than a catalog, that instructs the cardholder to contact the merchant. A postcard telling a car owner to call about their coverage is that kind of mailing. Visa lists 5966 as a high-integrity risk MCC for card-absent transactions.

High-integrity risk status has real consequences for the account. Before submitting those transactions, the acquirer must itself be approved by Visa to acquire high-integrity risk merchants and must register each such merchant with Visa. It must then monitor the merchant's daily sales volume, average ticket, transaction count and disputes against a baseline built from the first month of processing, and produce the original underwriting file within seven days if Visa asks. Visa may also impose extra security or authentication requirements on a high-integrity risk merchant. All of that is work the acquirer takes on for your account, which is why the underwriting goes deeper than for an ordinary card-not-present merchant.

What the Telemarketing Sales Rule requires at the point of payment

The Telemarketing Sales Rule applies to a plan, program or campaign to sell goods or services by telephone that involves more than one interstate telephone call. Several of its requirements land directly on how you take payment.

• Before the customer agrees to pay, you must disclose truthfully and clearly the total cost, all material restrictions, limitations or conditions, and your refund and cancellation policy. If you do not give refunds, you must say so.
• You may not misrepresent an affiliation with, or endorsement or sponsorship by, any person or government entity. Claiming to call from the dealer or the manufacturer falls here.
• If you take payment by any method other than a credit card or a debit card covered by federal consumer protections, you must have the customer's express verifiable authorization. That means a signed written authorization, an audio-recorded oral authorization covering the specific details the rule lists, or a written confirmation mailed before you submit the charge.
• You may not create or cause the creation of a remotely created check or other remotely created payment order as payment in a telemarketing sale, and you may not accept a cash-to-cash money transfer or cash reload mechanism.
• You may not place outbound calls that deliver a prerecorded sales message unless the person has given the seller a signed written agreement to receive them.
• You may not run card transactions for a telemarketing sale through another merchant's account, or have another merchant run yours. The rule calls that credit card laundering, except where the card system expressly permits it.

Inbound calls are not a way around the rule's payment restrictions. A customer calling in response to a general-media advertisement is exempt from much of the rule, but the exemption does not cover the bans on remotely created payment orders and cash-to-cash transfers, or any upsell made on that call. Calls prompted by a mailer are exempt only if the mailer itself clearly and truthfully discloses the material information the rule requires, and the same payment bans and upsell exception still apply.

Keep the records the rule requires

Sellers and telemarketers must keep telemarketing records for five years. The FTC expanded those requirements in amendments published in April 2024. The list now includes a copy of each substantially different script and advertisement; a record of each telemarketing call, including the calling and called numbers, the date, time and duration, the script used, and the disposition of the call, with an exception for some manually dialed calls; the customer's name, contact details, what they bought, when, and how much they paid; and a complete record of every authorization or consent the rule requires, including a copy of the request in the form it was presented.

Those records are also your dispute file. When a cardholder says they were told something different on the phone, the recording, the script and the disclosures you sent are the only evidence you have.

State law decides how cancellations and refunds work

Service contracts are regulated by the states, and the rules vary. Texas is a useful example of how specific they get. Under Chapter 1304 of the Texas Occupations Code, a service contract provider or administrator may not operate in the state without registering with the Texas Department of Licensing and Regulation, and the contract must state the purchase price and the terms for cancellation.

• The contract must allow the holder to cancel at any time.
• If the holder cancels before the 31st day after purchase, the provider must refund the full purchase price, minus any claims paid, and may not charge a cancellation fee.
• After that, the refund is prorated for the remaining term, minus any claims paid, and the provider may charge a reasonable cancellation fee of no more than $50.
• A provider that does not refund before the 46th day after receiving the cancellation notice owes a penalty of 10 percent of the outstanding amount for each month it remains unpaid.

Other states set different periods and fees, so check the law in each state where your contract holders live, and write your cancellation terms to match it.

How cancellations and sales calls become chargebacks

Three Visa dispute conditions matter most to how this business sells.

Dispute Condition 13.7, Cancelled Merchandise/Services, applies when the cardholder cancelled a service, the merchant did not process a credit, and the merchant either did not properly disclose a limited cancellation policy at the time of the transaction or disclosed one and did not apply it. The dispute is limited to the value of the unused portion of the service. If a customer cancels inside a state's full-refund window and you have not refunded, you are exposed under both the statute and this condition.

Dispute Condition 13.5, Misrepresentation, covers a cardholder who claims the terms of sale were misrepresented. Visa lists the kinds of transaction it applies to, and "a transaction at an outbound telemarketing merchant" is on that list. A cardholder who says the sales call promised coverage the contract does not provide has a dispute right that most merchants never face. It can be raised within 120 days of the transaction processing date or of the date the services were received, and no later than 540 days from processing. As with 13.7, the amount is limited to the unused portion of the cancelled service.

Dispute Condition 13.2, Cancelled Recurring Transaction, applies when the cardholder withdrew permission to charge a recurring payment. Many service contracts are paid monthly, so a payment that runs after the customer cancelled is a dispute waiting to happen. Stop the schedule the day you receive the cancellation.

What an underwriter will ask a service contract seller

Expect the application to go well beyond a standard merchant file:

• Who the obligor is, who administers claims, and your registration in each state that requires one
• How you find customers: outbound calls, mailers, inbound calls from ads, online sales, or a mix, and who your lead and call-center vendors are
• Your sales scripts, mailers and website copy
• A sample contract, including coverage, exclusions, deductibles and the cancellation and refund terms
• How payment is taken: in full, or monthly, and whether you use a third-party payment plan
• Your Do Not Call and prerecorded-message compliance, and how long you keep call recordings
• Cancellation rates, refund turnaround times and complaint history
• Recent processing statements and your chargeback history, if you have processed before

Keeping disputes winnable

In this vertical the dispute is usually decided by what was said on the sales call and what happened after the customer asked to cancel. For each card-paid contract, keep:

• The call recording and the script version used, with the date and time of the call
• The disclosures given before payment, and the customer's agreement to the price and payment schedule
• The signed or accepted contract, including the cancellation and refund terms
• Every cancellation request with the date you received it, and the date and amount of the refund
• Every claim filed and how it was decided
• All correspondence with the customer

A service contract company that sells without implying a link to the manufacturer, discloses the price and refund terms before taking payment, honors cancellations on the state's schedule, and can produce the recording for any disputed sale is a very different file from the robocall operations regulators have shut down. If that describes your business, talk to a PayKings specialist with your contract, scripts and cancellation figures ready.