ASSOCIATION OF INTERNATIONAL AUTOMOBILE MANUFACTURERS

COMMENTS OF THE ASSOCIATION OF INTERNATIONAL
AUTOMOBILE MANUFACTURERS

Vehicle Buybacks -- Comment, FTC File No. P96 4402,

61 Fed. Reg. 19067 (April 30, 1996)

The following represents the response of the Association of International Automobile Manufacturers, Inc. ("AIAM"), to the Commission's request for comments concerning disclosures in the resale of vehicles repurchased under state warranty laws (informally known as "Lemon Laws"), FTC File No. P96 4402, 61 Fed. Reg. 19067 (April 30, 1996). AIAM is the trade association that represents the U.S. subsidiaries of international automobile companies. AIAM member companies distribute passenger cars and light trucks that are either imported into or manufactured in the U.S.(1)

I. The Nature of the Issue.

Manufacturers repurchase vehicles from consumers for a variety of reasons and in a number of ways. Some repurchases are strictly to maintain consumer good will; some are an integral part of the marketing process, as in the 30 day unconditional guarantee programs of some companies. Other repurchases are required or ordered under state or federal warranty law. Sometimes the manufacturer purchases the car and takes title and possession, at other times the manufacturer assists the dealer in repurchasing the car. In the latter situation, the only action the manufacturer may take is to make an electronic transfer of money -- usually less than the repurchase price -- to a dealer who repurchases, repairs if necessary and resells the car as used.

Tracking repurchased vehicles is an interstate exercise. A manufacturer that repurchases a car usually sells it at auction. The auctions, which are run by independent companies, may not take place in the state where the vehicle was repurchased. Not all states have auctions, and the interval between auctions in the state of purchase may be such that it is more economical to ship the car to the closest next available auction. Moreover, those entities that purchase at auction may reside in a state other than the auction state and may in turn sell the vehicle in yet a third or fourth state. Cars are moved around to meet the needs of the used car market and consumer demand. The process can, and frequently does, involve a number of states. Indeed, the vehicles may travel across vast areas of the country after being repurchased and before being finally sold to a consumer. This movement is caused by bona fide business reasons -- such as the site of the next available convenient auction and the location of the purchaser -- and is not designed or intended to evade disclosure obligations.

Both the states and manufacturers have recognized the need to provide disclosure to consumers concerning vehicles that have been repurchased under state lemon laws. However, because of the interstate nature of the resale process and the number of different parties involved in the chain of transactions, the notice is not always received by the consumer.(2)

Most manufacturers have elaborate notice procedures. For some, auction purchasers receive forms making full disclosure of the reasons for the repurchase. These forms must be signed by purchasers who are, in turn, directed to give further notice to the next purchaser. Other manufacturers provide repurchased vehicles with an extended warranty that only begins when the ultimate consumer advises the manufacturer of purchase. The forms that accompany this warranty may include an acknowledgment of the vehicle's history.(3) However, because manufacturers do not resell the vehicles to consumers, they cannot guarantee that in all cases the notice will reach the consumer.

In recent years, a number of states have enacted laws requiring that notice be given. However, because the states cannot act beyond their own borders, such notice does not necessarily travel with the vehicle. Recognizing that notices could be removed from the vehicles, several states have passed legislation that would require the titles of vehicles to be branded if they have been repurchased by manufacturers. Only a few states have enacted such legislation, and because of the interstate character of the transactions, there have been times when vehicles have been moved from a state that has branding and retitled in a state that does not have branding. The "clean" title can then be used to avoid the brand when the vehicle is ultimately resold. AIAM's members do not approve of this situation, but it highlights the need for a uniform nationwide system in this area.

Title branding by its very nature is ineffective as a means of providing consumers with notice about vehicle history. Virtually in all instances, the consumer does not see the title until the purchase has been consummated. In many states, consumers do not see the title until they pay off the loan on their car. The lienholder (i.e., bank or finance company) retains the title in the interim. Thus, it could be months or years after the purchase before the consumer becomes aware of any information on the title.

Even if title branding did provide contemporary, meaningful information, the current patchwork of legislation cannot guarantee that the vehicle's history will travel with it. Despite the promotion of uniformity by the state attorneys general, the statutes are inconsistent from state to state. This lack of uniformity further reduces the value of the information to consumers. For instance, the requirement that triggers the notice or branding requirement varies substantially between states. In some states, any vehicle repurchased by a manufacturer for any reason may be subject to the notice or branding statute. Other states have limited the notice requirement to those vehicles subject to adjudicated repurchase under the state lemon law. This provides more certainty about a manufacturer's obligation and avoids chilling manufacturers' goodwill efforts.

As another example of the inconsistency, the wording on the brand or notice varies from state to state. Some states merely require the words, "manufacturer repurchase." There is no further explanation of what this means. Other states require the notice to indicate "defective vehicle." While this may put consumers on notice, it may also be misleading if a complete repair of the defect had been performed or if the vehicle was repurchased for goodwill reasons and was not in any way defective.

II. Disclosure of a Number of Aspects of Vehicle History is Important

There are a number of kinds of vehicle history that are important to consumers and should be disclosed. For instance, if a vehicle has been rebuilt from one totally destroyed in an accident and is properly classified as "salvage" or "rebuilt," a reasonable consumer would want to know. Similarly, notice should be given for vehicles that have suffered flood damage or have been subject to particularly rough handling as a taxi or emergency vehicle. All of these conditions are at least as material -- and therefore as deserving of notice -- as a warranty repurchase. AIAM would support disclosure in all these circumstances.

Appropriate disclosure of vehicle history should not provide irrelevant details. Rather, it should be confined to the condition or event that caused the need for disclosure. The full warranty history should not be part of the disclosure, only those events that were the cause of the repurchase. To expand disclosure to irrelevant repairs would be to needlessly expand the cost of disclosures and could confuse consumers, since many vehicles undergo warranty repairs during the ordinary term of applicable warranties.

III. A Single Clear, Uniform National Standard for Disclosure is Essential

Consumers will benefit if the current patchwork of state laws is replaced with a clear uniform national standard for disclosure. Some states do not require any form of notice. This, combined with the inconsistency of existing law, means that the consumer benefits (and administrative costs) of notice, including branding, vary considerably from state to state. More significantly, the current patchwork of provisions cannot prevent the so-called "washing" of titles when vehicles are moved from state to state. A uniform federal disclosure provision could ensure that all vehicles meeting a clearly defined standard will be sold with notice and that the notice will stay with the vehicle.(4) To be truly effective this standard must be the only standard applicable nationwide.

From the manufacturer's perspective, a clear, reasonable standard triggering disclosure or branding requirements is essential. If the standard is too sweeping -- for instance if all repurchases, even these which have no alleged defect must be branded or disclosed -- there will be disincentives to repurchase vehicles except when required by law. This would disadvantage consumers and manufacturers by hurting consumer satisfaction generally. Moreover, manufacturers should not be subject to liability if they provide notice to the next purchaser (or brand the title) if some other actor -- independent of and unknown to the manufacturer -- removes the disclosure or the brand. If the manufacturer can produce evidence that it applied the brand or provided the notice, that should be the end of its responsibility.

Clarity is also important. Vague standards such as a requirement based on whether a vehicle generally meets the "requirements" of a state's lemon law could create confusion, contention and, ultimately, litigation.(5) Inevitable differences of opinion will arise over whether such standards are met, and it would be inefficient to seek adjudication in every case.

AIAM would recommend a clear, specific standard such as that recently enacted in Florida. Under that statute a vehicle is subject to disclosure and branding if it "has been repurchased by a manufacturer pursuant to a settlement, determination or decision" under the lemon law and "'settlement' means an agreement entered into between a manufacturer and a consumer that occurs after a dispute is submitted to an informal dispute settlement procedure established by a manufacturer or is approved for arbitration before [the state's] New Motor Vehicle Arbitration Board..." Section 319.14 Florida Statutes (effective October 1, 1996). The standard would need only slight modification to have nationwide applicability.

A clear and consistent federal standard will facilitate better compliance. Having one requirement in this area rather than thirty (or fifty-one) will provide consistent procedure and cost savings. These benefits ultimately mean less consumer confusion -- i.e., enabling an apples to apples comparison -- and lower consumer costs for vehicles.

IV. Possible Solutions

A clear uniform national standard for disclosure that provides actual notice to consumers could be implemented in several ways. It is particularly important to find a way to provide consumers with information before they purchase, not after the fact. One means of ensuring that the vehicle's history stayed with the car would be for the Commission to amend the Used Car Buyers Guide to require a disclosure or a notice on the used car window sticker.

Another means of providing disclosure might be a national database of repurchased vehicles; however, such an approach also entails some serious problems which are described below. Under such a procedure, a consumer could call in with the Vehicle Identification Number of the vehicle he or she contemplates purchasing. All repurchased vehicles that qualify would be online and the consumer could be told whether the vehicle had been repurchased. This would put the consumer on notice to make further inquiry about the vehicle's history.

A number of problems arise with such a database, and it would have to be carefully crafted. To begin with there would still have to be some form of disclosure that traveled with the vehicle. Because there is a potential for abuse of the aggregated data, a number of safeguards would have to be included in design of the database. For example, consumers should be limited to one or two inquiries at a time and no more than a few inquiries over a six-month or one year period. Also, the response to inquiries should be a simple "yes" the vehicle has been repurchased under circumstances that meet the appropriate standard or "no" there is no record of that Vehicle Identification Number. There are also problems of how to ensure accuracy of the data and who has responsibility to ensure accuracy. A governmental entity or independent third party should probably operate such a system to ensure its credibility. Another problem would be funding such a project.(6)

AIAM could support uniform disclosures through the Used Car Guide or a database, if reasonably implemented.

A third, less preferable means of dealing with the disclosure issue would be a uniform, preemptive federal title branding law. As previously stated, this method does not provide advance notice to consumers. However, with nationwide uniformity and a clear trigger, title branding might merit further discussion.

V. Response to Questions Posed in the Federal Register Notice

The following responds to the 10 questions listed in the Notice. Many of the questions were previously discussed and a citation to the text indicates where AIAM's views may be found.

1. How many vehicles are repurchased each year by manufacturers?
AIAM does not have any information or statistics on number of vehicles repurchased.
 
2. How many of the repurchased vehicles are successfully repaired after they are brought back?
Although AIAM members believe that no repurchased car should be resold if it has not been successfully repaired, AIAM has no data in this area.
 
3. At what stage should a car be considered a buyback for the purposes of imposing a disclosure requirement?
AIAM believes that a clear triggering standard for disclosure and branding is essential. As previously discussed, the Florida statute provides one example of a reasonable and clear standard. Any less clear standard will either foment litigation or create disincentives to repurchase for goodwill reasons. See pp. 4 - 5 above.
 
4. If "buybacks" are defined to include those repurchased prior to the initiation of arbitration or litigation, would disclosure laws cause a chilling effect on manufacturers' willingness to make such "goodwill" repurchases?
If branding or notice requirements are too vague or sweep too broadly, they will chill a manufacturer's willingness to make repurchases in situations where there is no legal obligation to do so but the customer is unhappy. While there may be debate about the prevalence of such repurchases, they do happen and consumers benefit accordingly. The Commission should be wary of creating disincentives in this area. In recent years, manufacturers have been highly competitive in consumer satisfaction, and regulations that would reverse this trend would hurt consumers. As a result of these concerns, AIAM recommends a reasonable standard, such as that in Florida, tied to the state lemon law. See pp. 4 - 5 above.
 
5. How long should a vehicle be considered a "buyback"?
If a vehicle has not manifested a problem in several years, there is probably no reason to maintain it among those vehicles denoted as repurchased. However, drawing the line would be difficult and deleting the notation may not be cost-effective given the administrative burden involved.
 
6. What are the current practices of auto manufacturers, auction companies, and dealers regarding disclosure of the fact that a vehicle is a buyback to subsequent purchasers?
Individual manufacturers can describe their disclosure practices. For a generalized discussion, see pp. 1 - 3 above.
 
7. What methods are or would be most effective in getting information about a vehicle's history and prior repairs to consumers before they buy the vehicle?
AIAM strongly believes that providing information to consumers before they purchase is essential. Some possible solutions appear at pp. 5 - 6 above.
 
8. What methods have been adopted by the various States to ensure that subsequent purchasers are advised that vehicles are buybacks?
This question is discussed at pp. 1 - 3 above.
 
9. If disclosure or title branding laws are or would be most effective, how should any such disclosure or title branding rules be enforced?
If disclosure or branding is to be effective it must be implemented at a national level. As previously discussed, the lack of uniformity among states impedes the flow of information to consumers. Thus a model state law, which will inevitably be modified by each enacting state, will not be entirely effective. An FTC regulation, a national database or federal legislation would be preferable.
 
10. Uniformity in the disclosure and labeling of repurchased vehicles might resolve the problem of interstate shipment of vehicles to avoid individual state requirements. What are the costs and/or benefits of diverse State requirements versus those of uniformity? Would a uniform national standard be an effective method to get buyback information to subsequent purchasers? What would be the costs and/or benefits of a national standard?
As previously discussed AIAM strongly believes that procedures in this area must be uniform and national. See above generally.

AIAM appreciates the opportunity to express its views. Additionally, AIAM requests to participate in the Public Forum that the Commission will hold on these issues.

Footnotes:

1. Member companies include: American Honda Motor Co., Inc., American Suzuki Motor Corporation, BMW of North America, Inc., Fiat Auto U.S.A., Inc., Hyundai Motor America, Isuzu Motors America, Inc., Kia Motors America, Inc., Land Rover North America, Inc., Mazda Motor of America, Inc., Mercedes-Benz of North America, Inc., Mitsubishi Motor Sales of America, Inc., Nissan North America, Inc., Porsche Cars North America, Inc., Rolls-Royce Motor Cars Inc., Subaru of America, Inc., Toyota Motor Sales, U.S.A., Inc., Volkswagen of America, Inc. and Volvo North America Corporation.

2. Contrary to some assertions, manufacturers have no incentive to remove the notices from vehicles. In most situations notice is required by law and once the notice is given at the point of first sale, the manufacturer has suffered its whole loss of value. If the notice is subsequently lost, there is no benefit to the manufacturer.

3. A fuller description of particular practices may be found in individual company comments.

4. The same would be true with title branding -- i.e., a uniform clear standard would facilitate branding. Branding, for reasons previously discussed, is not a preferred solution because it usually fails to provide notice. Manufacturers have also found it administratively difficult to obtain branded titles in some states, thereby increasing significantly the costs of disclosure with no corresponding benefit to consumers. In the text, disclosure and branding are treated together. Even though AIAM does not advocate branding, if branding is to be done it should be subject to the same clear trigger provisions as disclosure.

5. This has been the case under Section 1793.23(c) of California's Civil Code where a manufacturer must provide disclosure any time that manufacturer "knew or should have known" that the vehicle met disclosure criteria.

6. Perhaps the 1992 Anti-Car Theft Act (Pub. Law 102-519) could be amended to provide funding. However, to date even the existing database on stolen cars has not been funded by Congress.