CONSUMERS FOR AUTO RELIABILITY AND SAFETY

CONSUMERS FOR AUTO RELIABILITY AND SAFETY
VEHICLE BUYBACKS--COMMENT

FTC File No. 695-4402

Consumers for Auto Reliability and Safety appreciates this opportunity to comment concerning vehicle buybacks, and we look forward to reviewing the comments filed by other interested organizations and individuals.

In addition to these Comments, we also submit the "Preliminary Report: Resales of Vehicles Determined to Be Lemons," produced by the Consumers for Auto Reliability and Safety Foundation, based on data from 7 states that furnished Vehicle Identification Numbers (VINs) of vehicles that were determined to be lemons in state-administered arbitration programs. The study traces the title histories of 498 lemons. Should more complete data become available, the CARS Foundation will incorporate it for submission to the FTC at a later date.⁽¹⁾

1. How many vehicles are repurchased each year by manufacturers? How many vehicles are repurchased each year by dealers? What is the disposition of these vehicles? How many are resold to consumers? How many are resold within the same state? How many are transported to another state and resold? What happens to those not resold?

The total number of vehicles bought back due to quality or warranty performance problems is truly known only to the manufacturers. There is no central registry or census of buybacks available to the public. Data from the states is not complete, although there is enough available for commenters to make some extrapolations, as we do below.

 

The key issue: what buybacks to include in the census

It is critical that any census of the lemon laundering problem, it is to accurately reflect consumers' experience, include all vehicles with a history of defects, or known to the manufacturer to be seriously defective, and not just those that are adjudged "lemons" under state law. For reasons that we discuss in greater detail here and in response to Questions 3 and 4 below, any accounting of the number of buybacks must include so-called "goodwill" buybacks and "trade assists" completed with financial assistance from the manufacturer or its financial arm.

 

Previous public comments by manufacturers on the issue would have agencies exclude from the census the many vehicles bought back before arbitration decisions or court orders, and we expect that argument will be made again in this proceeding. There are two types of transactions included in this argument: 1) vehicles repurchased by the manufacturer before any final arbitration or court decision, and 2) vehicles traded in to the selling dealer after a consumer complaint where there is some financial participation by the manufacturer. The first has been described by manufacturers and dealers as "goodwill" or "customer satisfaction" buybacks, terms that do more to obscure than to explain their purpose. The second is known in the industry as "trade assists," meaning the manufacturer assists in making the deal financially acceptable to the customer and the dealer, but the actual repurchase is made by the dealer or the finance company.

 

"Goodwill buyback" has a broad, encompassing, and generally misleading meaning as it is used by manufacturers and dealers. The term itself connotes that the sole reason for buying back the vehicle is to promote a positive relationship between the buyer and manufacturer. In another context, "goodwill" connotes that intangible business asset consisting of the regard customers and the public hold for a firm's quality, reliability, and trustworthiness. Manufacturers have used the term in the lemon buyback context, however, to include any buyback made before a final arbitration decision, or before a court order has been issued, even where the company's own internal documents confirm that the vehicle has serious defects and clearly surpasses the presumption set forth in state lemon laws for buybacks. (See additional discussion of the issue below in our response to Questions 3 and 4.)

 

It would be a great disservice for the Commission to adopt this industry term and to ignore the many vehicles it covers. These vehicles are at least as likely as other buybacks (ones ordered by arbitrators or courts) to have serious defects. A better term for these vehicles is "early settlement" buybacks.

 

Early settlement buybacks are among most defective lemons

Cars that are repurchased or traded in shortly after a consumer voices a complaint are likely to be among the worst cases of unrepaired defects, and so are precisely the kinds of vehicles that second buyers should know about. Early settlements of disputes spare both buyer and manufacturer the expense of litigation, but this does not erase the fact that the vehicles have a history of defects and quality problems. Indeed, a rational buyback program from the manufacturers' viewpoint would have the worst vehicles--those that are most clearly unrepairable--repurchased quickly by settlement, and the more questionable cases moved into arbitration or litigation to resolve such questions as whether the facts support a finding that the car meets the statutory presumption for "lemon."

 

Arkansas, California, Connecticut, Indiana, and Utah already recognize this and require title branding and resale disclosure for early settlement buybacks. Indiana allows a narrow exception for advertised guaranteed repurchase programs, provided the vehicles were not found or alleged to have a nonconformity. We expect this trend will accelerate as the states focus on ways their lemon laws can be improved to better protect subsequent buyers.

 

We have reviewed an advance copy of the comment of Seattle attorney Peter Maier that bore directly on this issue. We find the study described in the comment persuasive. Maier looked at 22 cases in which he represented the consumer, and another set of 119 cases filed with the State of Washington Lemon Law Administration. The case analysis looked for any pattern of early settlement buybacks versus arbitration decisions for buybacks; it analyzed them based on the severity of the defects alleged, such as whether there was a safety defect as one allegation. The study reveals no pattern; Maier concludes that as a group, early settlement buybacks have the same type and severity of defects as ones that go through the arbitration proceeding.

 

Manufacturers have used the terms "goodwill" and "customer satisfaction" to describe buybacks that their own internal records admit qualify as "lemons" under state law

An example of how the terms "goodwill" and "customer satisfaction" buyback can be misapplied to obscure the issue of defects comes from the recent administrative action in California against Chrysler Corporation regarding the disposition of 119 manufacturer buybacks⁽²⁾. There Chrysler argued in its defense that all 119 vehicles were "customer satisfaction" buybacks, and thus not subject to California lemon law title branding, disclosure, and warranty requirements. But Chrysler's own statements clearly acknowledged that certain vehicles met the state law presumption for "lemons," and thus would ultimately be subject to a buyback order in arbitration or court. In one case, a sales tax refund request to the state submitted by Chrysler states that the vehicle in question was a "State Lemon Law Buyback...Vehicle in four times for four attempts and 32 days down for repairs to Transmission and Brakes."⁽³⁾

 

In fact, California's DMV alleged that 96% of the 119 vehicles had a "safety defect." Problems experienced by consumers included faulty brakes that repeatedly caused harrowing incidents, transmissions that intermittently failed to shift above low gear in freeway traffic, and vehicles that unpredictably stalled on the freeway, which the administrative law judge found to be "an obvious safety hazard." In addition, 48 of the 119 vehicles were repurchased following a decision rendered in Chrysler's own third party dispute process. Chrysler also had applied for a sales tax refund under the lemon law for 115 of the 119 vehicles. The administrative law judge found that "The only way for a manufacturer to obtain a sales tax refund is to prove to the [California] Board of Equalization that the vehicle is a 'lemon' within Civil Code section 1793.2."

 

Another example comes from California's action against General Motors.⁽⁴⁾ Typical statements in GM's internal documents regarding these buybacks allegedly made for "customer satisfaction" include these statements: "Vehicle qualifies as a Cal. Lemon under 2 criteria req'd for repair atts and loss of use time"; "Vehicle qualifies under lemon law for # of days in shop. Dealer has worked with TAN and cannot repair vehicle"; "Repurchase to facilitate trade: CA lemon law qualified." The corresponding disclosure forms for each vehicle indicated it was a "Mediated or Customer Satisfaction Repurchase."

 

Manufacturers and dealers use the misleading term "goodwill" to include vehicles with serious quality and safety defects not repaired under the warranty, precisely the vehicles covered by lemon laws. When first owners benefit from an early settlement, we see no reason to withhold the protection second buyers are accorded under these laws. The Commission should consider carefully the equities of protecting first and second buyers when crafting a remedy for the lemon laundering problem.

 

"Trade Assists" are an early settlement remedy; the term does not mean that the problems are insubstantial

The second category of buybacks that should figure in an accurate census is the "trade assist." This type of "early settlement" buyback means that the owner trades in a defective vehicle to the selling dealer for a replacement. As lemon owners may be desperate to get rid of a vehicle, they are sometimes induced to buy a more expensive model, instead of choosing a replacement or refund as the lemon laws provide. Presumably these trades should be made on terms more favorable to the consumer than a typical early trade-in, which can involve considerable depreciation; however, that is generally not the case.

 

As with the more general term "goodwill" buybacks, manufacturers have argued elsewhere that these vehicles are bought back not under the lemon laws or for any acknowledged defects, but in an effort to promote "customer satisfaction," and therefore should not count as lemon buybacks." We expect the manufacturers and dealers to submit comments that purport to quantify this category, and urge the Commission to regard them with skepticism, for the reasons cited above.

 

Caveats concerning California data

We know of no nationwide source of data to compile a census of buybacks. However, some very rough calculations can be made on the basis of some of the figures we have from the states. The difficulty with state data is that the states have varying laws, arbitration programs, and reporting requirements. Any accurate estimate will have to account for these disparate factors, and is beyond the scope of this comment.

 

We can offer some words of caution about making unwarranted assumptions based on figures from California, which comprises about 10% of the U.S. new vehicle market each year. The state's Arbitration Review Program recorded 4890 consumer requests for arbitration under the lemon law in 1995⁽⁵⁾. However, this figure represents only vehicles whose manufacturers offer a certified voluntary arbitration program, which represent approximately 66% of the California new vehicle market. We can extrapolate, then, that if 100% of the manufacturers offered programs, the figure would have been 1.5 times that (100% divided by 66%), or 7335.

 

Some California lemon owners remain unaware that the arbitration programs exist. Surveys indicate that only 3-5% of consumers who apply for arbitration found out about the program through the manufacturer. Notices in owners manuals are often overlooked. Unlike in other states, there is no requirement for a "lemon-aid kit" in the glovebox or when consumers experience problems. Consequently, in California the level of awareness about arbitration is lower than in states with high-visibility, user-friendly education and awareness campaigns.

 

Figures for cases found to be out of jurisdiction (1591) are not valid indicators for other states, because California's lemon law is one of a minority that does not include vehicles purchased for business use. This exclusion applies to individuals such as real and insurance estate agents and other self-employed persons, as well as small businesses. Therefore, an undetermined, but undoubtedly significant, number of consumers allege that their vehicles are lemons, but are excluded from arbitration because they use their vehicles to make a living. However, they would be granted access to arbitration in most other states, which include commercial use vehicles.

 

Figures for cases where consumers were awarded buybacks (564) are also not valid indicators for other states, since in California arbitrators only take the law "into account," which means it is often ignored. Consequently, only about 25% of Californians who seek relief are granted buybacks, compared to 48-64% in states where the law is applied.⁽⁶⁾

 

Any extrapolation based on solely on filings for arbitration would grossly underestimate the number of buybacks in California. One factor is the undetermined number of buybacks which result from early settlements when serious nonconformities are obvious, and cases are resolved before the consumer even files for arbitration. California does not record such settlements. Extrapolations based on awards in arbitration would fall even further from the mark. For example, in the DMV's administrative action against Chrysler, 58% of the 116 vehicles that the administrative law judge found to be lemons were repurchased through negotiated settlements or agreements, and not due to an arbitration decision.⁽⁷⁾

 

In addition, 10% of consumers who apply for arbitration in California subsequently file lawsuits, adding another 500 cases. Based on an informal survey conducted among the California plaintiff's attorneys who specialize in the field, we estimate that approximately another 1,500 cases are filed annually. An estimated 85-90% result in settlements, with the consumer receiving a refund and attorney's fees, and the vehicle's being repurchased. The California Motor Car Dealers Association recently indicated that an estimated 5,000 lemon law cases are filed annually in the state, but we believe that figure is too high⁽⁸⁾.

 

Given the complexities of the data, and the absence of specific figures for whole categories, such as the number of business-use vehicles, any extrapolations at this point would be merely speculative. However, perhaps now that a new title branding law has taken effect in California, in time a clearer picture will emerge.

 

2. How many of the repurchased vehicles are successfully repaired after they are bought back? Are there studies showing whether subsequent purchasers of these repurchased vehicles encounter a frequency of repair that is greater than, equal to, or less than that of purchasers of non-repurchased used cars of like models and model years?

The question of "successful" repairs makes unwarranted assumptions about the nature of persistent quality and safety problems with motor vehicles. Vehicles that have been repurchased by manufacturers and dealers typically have been returned and surrendered to the dealer numerous times during the warranty period for repairs. Most state laws set a standard of 4 repair attempts for substantial defects under the warranty, after which the vehicle is presumed to be a lemon. In many cases, there are repeated attempts to remedy a single component; in others, several repairs are made to related components that fail due to a single underlying design or assembly defect. (For example, a bent frame might cause suspension and drivetrain problems in several different components.) The repair may only be temporary, allowing the owner to drive the vehicle for a period until the problem resurfaces or manifests in another breakdown. Is a temporary repair "successful"? Only in that it gets the vehicle back on the road. But more importantly in this context, the underlying defect has not been cured, and the warranty has not been honored. Such intermittent nonconformities are common.

 

Furthermore, many state lemon laws mandate that consumers allow the manufacturers one more try to successfully repair nonconformities, after the dealer has repeatedly failed. The manufacturer's opportunity to "cure" comes before the matter can be heard in arbitration.

 

A new standard of "successful repair" would merely add yet another attempt to state lemon law presumptions

Each time a dealer returns a vehicle after warranty work has been performed, there is an implicit representation that the repair has remedied the nonconformity. Does it clarify the matter to introduce a new standard that yet another repair can be declared "successful"? We think not. It is simply another chance to "cure," adding one more to the state law presumption that is now working to protect consumers. A federal remedy to the lemon laundering problem should not introduce another, "one more chance" standard.

 

More fundamental than these practical objections is our position that the question itself ignores the policy that underlies the 38 state laws that now require disclosure to all second retail buyers. (Only Connecticut's law allows for vehicles to be declared "successfully" repaired.) State law disclosures to second buyers do not purport to advise them of existing defects, but instead that the vehicles have a history of problems. The issue, then, is not whether the nonconformities ultimately were remedied under the warranty; instead, the disclosure provisions are designed to alert prospective purchasers that the first owner experienced serious problems with the vehicle. And for good reason. Cars with repeated problems, or that are out of service for extended periods, may have underlying structural or design flaws, or they may be repaired with parts or components that have the same design flaw that caused the problem.

 

Buybacks are fundamentally different from other used cars

Consumers buying a used vehicle are entitled under state laws to notice of the history of problems the first buyer experienced, and any federal rule or remedy should continue this policy.

 

State laws classify a few types of used vehicles as worthy of special notice: salvage vehicles that are rebuilt from wrecks, flood damaged cars, and lemon buybacks. The policy underlying these designations is that they have traits that separate them from the general population of used vehicles. In particular, they are more likely to have latent defects. The purpose of the disclosures is to prevent fraud. We see no reason for any Commission action in this area to remove some of the vehicles from the operation of state law remedies.

 

Beyond these objections are the practical problems of introducing a "successful" repair standard. What entity will be designated to determine what is "successful"? We do not foresee a workable program to have an independent authority do this, and we would oppose any proposal to have the question resolved by the manufacturers or dealers, as they are disqualified by self-interest.

 

Consumers use the notice to avoid potential problems

The notion of "successful" repair, then, misses the point of the disclosure laws, which is to give the used vehicle buyer information about the vehicle history, and not its repair status on the day it is sold. Any disclosure to retail buyers about the vehicle's troubled repair history enables the buyer to inquire further, demand further assurances or warranties against recurring problems, bargain for a better price and assume the risk, or decline the risk altogether and refrain from making the purchase.

 

The very concept of "successful" repair is implicitly dismissed in a recently announced policy of one manufacturer. Ford Motor Co.'s new "Lincoln Assured" used car sales program, announced this April, is designed to bolster consumer confidence in purchasing recent model year, low-mileage used cars (2 years old, under 36,000 miles). Essentially, the manufacturer will certify certain used cars for resale through franchised dealers. The program includes a minimum 2 year/24,000 mile warranty from the manufacturer. According to a Wall Street Journal account of the program, eligible vehicles are limited to "previously leased Lincolns and Lincolns driven by a sole owner, which as a Ford Motor employee...[However,] cars previously used in rental fleets or cars with poor repair histories are being excluded."⁽⁹⁾

 

The reason for excluding daily rental cars should be obvious, as it is common knowledge that short-term renters drive cars harder than owners who have a stake in their car's durability and trade-in value. The reason for excluding cars with "poor repair histories" should be equally evident: the manufacturer believes that a poor history is an indicator of future problems. Cars with poor repair histories increase customer dissatisfaction and warranty costs, two outcomes Ford logically wants to avoid. We note with interest that Ford's announcement does not foresee taking cars with poor repair histories, giving them a final "successful" repair, and then selling them under the program.

 

Studies showing frequency-of-repair histories of manufacturer buybacks versus other used cars would of course be highly relevant to the issue at hand. We expect that the manufacturers have this data, and would be interested to see it entered into the record of this proceeding.

 

Manufacturers' claims about post-buyback repairs are unreliable

Related to this, and underscoring our points above about the idea of "successful" repair, we turn to the Proposed Decision in the recent California case against Chrysler. There the Administrative Law Judge's findings included the defect and repair histories of 19 cars as experienced by first, second, and (in a few cases) third owners. In at least 9 of those, or nearly 50%, problems with specific components recurred after the resale (Bonetti-Hanover, clutch slave cylinder, at 4-5; Soldano-Hogan, transmission, at 11-12; Lorraine-Kidroski, brakes, at 12-14; Stephens-Vigil, transmission, at 14-16; Smith-Estes, seat lock, at 18-20; Skogebo-Sodari, frame and tire wear, at 20-21; Dewitt-Jones, water leaks, 21-23; Sanford-Reid, brakes, 27-29; Puri-Pappangellan, transmission, at 29-30).

 

In a number of these instances Chrysler's disclosures to the second buyers claimed that problems experienced by first owners had been repaired. Typical of these is the notice to second buyer Vigil, which read:"A-604 TRANSMISSION FAILURE - VEHICLE REPAIRED 10-11-91" (at 16. See also disclosure to second buyer Jones, at 22.) However, Vigil continued to experience repeated transmission failures within 3 months of purchase.

 

Other examples from the Chrysler record show that manufacturer claims about repairs are not reliable. In at least one instance, Chrysler's partial disclosure to second buyers claimed that a problem had been repaired, while other Chrysler documents clearly contradicted that assertion.⁽¹⁰⁾

 

Warranties are no substitute for disclosures of defects

One issue which should not cloud this discussion of the second buyer's repair experience with buybacks is the issue of used car warranties. Consumers are entitled to vehicle history disclosure whether or not there is a warranty offered on the used vehicle, and for several reasons. First, used vehicle warranties are not equal, and many cover only part of the cost of repairs. Second, no warranty that promises repairs of defects can replace the lost time and the inconvenience of repeated repairs, including lost wages and rental car expenses. Furthermore, consumers are concerned about safety and reliability, not just whether their repair costs will be covered.

 

We believe it is self-evident that given a choice, informed consumers will pass over a vehicle with a bad history of repairs under warranty for one with an average history, even where both vehicles are offered with a comprehensive used car warranty. The 14 states' laws that prescribe warranties for the defects that gave rise to a buyback do not excuse disclosure in favor of the warranty coverage. The statute's provisions work together to protect consumers, and one is not intended to be a substitute for the other.

 

In summary, we strongly disagree that the problem of lemon laundering would be improved by introducing the notion of "successful repair." It ignores the clearly established policy of the states to require disclosure of the poor repair history of lemon buybacks; it introduces a "one more try" standard which dilutes the states' presumptions of how many repair attempts trigger the lemon remedies; and it has no realistic means of enforcement, as there is no practical way to test or certify repairs as "successful."

 

3. At what stage should a car be considered a buyback for the purposes of imposing a disclosure requirement? Should any car that is taken back by the manufacturer at any stage in a dispute over alleged defects be considered a buyback? If not, under what circumstances should a vehicle be considered a buyback? Should only those vehicles in which there has been an impairment of value be considered a buyback? If so, how should "impairment of value" or any similar limiting term be defined? Since manufacturer buybacks are only one segment of the buyback market, how can defective vehicles bought back by the dealer and/or traded in by consumers be identified?

As we have already commented extensively regarding this issue earlier, at Question 1, we will not repeat those comments here.

 

As a matter of public policy, any state or federal remedy should not allow manufacturers to evade title branding, disclosure, and warranty requirements merely by choosing to settle a matter at an early state with a repurchase.

 

Buyback status hinges upon the vehicle's nonconformities, not when it is repurchased

We concur with former Governor George Deukmejian of California, who vetoed a bill (SB 2568) that would have limited the disclosure law to only those vehicles reacquired pursuant to a court order or arbitration decision. In his veto message, the Governor stated:

"I am returning Senate Bill no. 2568 without my signature. This bill would limit the transactions on which a manufacturer would be required to disclose that a vehicle was the subject of restitution or replacement to those that were the subject of a court order or a decision rendered through a third-party dispute resolution process.

I am concerned that this bill would result in a disclosure requirement based on the level of the dispute rather than the reliability of the vehicle. Apparently, this bill would exempt from disclosure those vehicles that are clearly a 'lemon' because the manufacturer or seller did not dispute that the vehicle did not comply with the warranty.

 

Moreover, this bill would undermine the integrity of the records of the Department of Motor Vehicles by failing to identify all vehicles that were unable to be brought into conformity with warranty laws whether the manufacturer voluntarily complied or was forced to by a court or arbitrator."⁽¹¹⁾

In the same vein, the Administrative Law Judge in CA DMV v. Chrysler found that:

"There is no requirement that a third party determine that a vehicle is a 'lemon' before it can be repurchased as such. It is sufficient under the law that a new motor vehicle had a nonconformity which substantially impaired its use, value or safety, and the vehicle could not be repaired after a reasonable number of attempts, for it be eligible for repurchase. When the owners of new Chrysler vehicles represented to the manufacturer that the vehicles had nonconformities which could not be repaired after a reasonable number of attempts, those vehicles were 'lemons' and Chrysler agreed they were 'lemons' by honoring the customer's demands that the vehicles be repurchased and they receive restitution."⁽¹²⁾

If buyback provisions were triggered only when there is a formal determination in arbitration or court, it would ironically exempt vehicles when the manufacturer fully agrees that they are lemons, and there is no dispute.

 

The exception: advertised "satisfaction guaranteed" buybacks

We recognize that a legitimate exception to this general rule occurs when manufacturers advertise a guaranteed repurchase or satisfaction program for a defined period, provided that no nonconformity is alleged or found. We note that Indiana has adopted language that defines that narrow exception, and believe that Indiana's statute is an optimal approach that is fair to all parties.

 

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?

We do not believe that requiring disclosure of pre-settlement buybacks would cause a chilling effect on repurchases of truly defective vehicles. There are several reasons for our position. First, we understand from data in Connecticut and Florida that title branding and disclosure provisions have not lessened the incidence of early settlement buybacks in those states. Second, we note that all 50 states have enacted lemon law statutes. In all 50 states, the manufacturer's obligation to buy back seriously faulty vehicles is not discretionary, but is required when the legal standard or presumption is met. Third, most major auto markets in the nation, with the exception of California, offer a state-administered arbitration program were the law is applied. Altogether, 12 states, accounting for about 33% of the new vehicle market, offer such programs.

 

If early settlement buybacks decrease, arbitration buybacks would increase

Even assuming that manufacturers become reluctant to conduct early settlement buybacks prior to arbitration in those 12 states, that would mean that generally speaking, instead of repurchasing lemons before a hearing, companies would repurchase them shortly after a hearing--a difference of days. That would impose greater costs for administering arbitration programs, but would not forseeably lead to fewer repurchases.

 

In the other 38 states, most auto manufacturers offer voluntary dispute resolution programs under Federal Rule 703, which are supposed to hear cases within 40 days. The results are binding upon the manufacturer if the consumer accepts. Minnesota, Kentucky, and Arkansas require manufacturers to offer such programs. While manufacturer-sponsored programs are seriously flawed, they nonetheless represent an opportunity for manufacturers and consumers to resolve warranty disputes readily. They provide a degree of uniformity and access to relief.

 

While there indeed may be a lessening of buybacks where no defects exist, and a repurchase is not required by law, that would not represent a significant harm to consumers. Examples that have been mentioned by manufacturers in the past, such as purchasers who suddenly decide they prefer another color, or discover that the seats collect too much lint, are trivial, especially when compared with the compelling interest in identifying truly defective vehicles.

 

It is conceivably possible that manufacturers would cease to offer voluntary arbitration programs in the 38 states, and appeal more cases from state-administered programs in the other 12 states, undermining the arbitration process in those states. However, absent a wholesale practice of failing to comply with state lemon laws, we do not foresee a significant chilling effect on buybacks. Should a pattern of violations of state lemon laws emerge, that would be appropriate for state enforcement action.

 

5. How long should a vehicle be considered a buyback? Permanently? Until successfully repaired? Some other time period? How can it be determined whether a vehicle has been successfully repaired prior to reselling it?

The pitfalls of a "successful repair" standard are discussed above, in response to Question 2, so we will not repeat those points here

 

Permanent labeling would benefit consumers, auction companies, and dealers

This year, California became the first state to require a permanently affixed label on the driver door frame to identify buyback vehicles to prospective purchasers throughout the entire chain of ownership. There are several reasons for adopting a similar provision on a federal basis. Principally, it would provide a simple, cost-effective, uniform means for consumers, auction companies, and dealers to identify vehicles that had a history of defects. An on-vehicle label, placed so that it does not detract from other required disclosures, alerts consumers to inquire further about a car's repair record.

 

Given the mobility of lemon vehicles, and the fact that they may undergo several wholesale transactions before being resold to a retail consumer, a permanent label serves a useful purpose for auction companies and dealers: it indicates that additional paperwork and disclosures are required in connection with that vehicle, thereby making it easier to comply with state lemon disclosure laws. However, a permanent label is not a substitute for full disclosure of defects and warranty histories, but a device for facilitating compliance with the law and alerting downstream transferees.

 

We also understand that some dealers prefer to avoid purchasing and reselling lemons, to enhance their reputations for dealing solely in more desirable vehicles, and to reduce their liability. To the extent a label improves compliance, it also benefits those dealers, as well as individual consumers. Finally, as the vehicle is resold over the years, a label increases the likelihood that subsequent prospective retail purchasers will become aware that the vehicle should command a lower-than-normal price, and indeed may have latent defects that defy repair.

 

We would oppose removing the label after a number of years or miles, since consumers who buy older vehicles need protection at least as much as those who purchase newer vehicles. Most states lack a used car lemon law, and older vehicles are typically sold "AS IS." Therefore, repair costs must be borne by the consumer. Consumers need to know that a vehicle has a history of defects, and may be unsafe, unreliable or inordinately costly to operate.

 

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? What types of disclosures are given? Are these disclosure methods effective? Are consumers receiving the disclosures? Who is responsible for ensuring that disclosures are made to the consumer? Are the disclosures specific enough to identify or reveal the vehicle's previous history and the repairs performed? What are the costs/benefits of these disclosure methods to manufacturers? To auction companies? To dealers? To consumers? To other parties?

While 37 states require various forms of disclosure to consumers, noncompliance appears to be the norm. We note that in Florida, which has recently been investigating the practices of 20 manufacturers, failure to provide disclosures is apparently widespread, with over 88% of vehicles being resold without the required disclosures being provided to the agency. An inference can be drawn that they were also very likely not provided to the consumers. Even when individual state disclosure laws are well-designed, disclosure documents may be "lost" as vehicles move across state borders.

 

The CARS Foundation Report on Lemon Resale Practices reveals that only .6% of 498 lemons appear to have been branded on their titles as lemons. That indicates a likelihood that disclosure was also not provided in many cases, but it is not conclusive on that point. Further investigation is needed to determine whether disclosure was provided, and whether it was accurate.

 

Manufacturers' disclosures are sometimes misleading

Even when disclosures are given, as we discussed more fully in responses to Questions 1 and 2, they can be quite misleading. In some cases, they indicate that vehicles were repaired, when internal documents confirm vehicles were in fact not repaired. Sometimes they list only a minor flaw, and neglect to mention major defects.⁽¹³⁾ They are subject to misrepresentations by salespersons, who exploit ambiguities to minimize their import, such as claiming that a vehicle repurchased "in settlement of a legal matter" was merely a repossession from a consumer who could not make payments.

 

In some cases, the disclosures themselves are contradictory and confusing. For example, General Motors' disclosure form presented several categories, including "Mediated or Customer Satisfaction Repurchase," with the explanation that "General Motors voluntarily repurchased or reacquired the vehicle as a customer satisfaction measure, included in this category are vehicles repurchased or reacquired to settle (mediate) a dispute in the BBB program sponsored by General Motors. These disputes may include claims that could fall under a state 'lemon law.'"⁽¹⁴⁾ This blurs the line between "customer satisfaction" and "lemon," which are in fact two mutually exclusive categories.

 

Even when the forms themselves are not inherently misleading, they may be filled out in a way that may be misleading. For example, Karen Melvin of Minnesota purchased a used 1989 Dodge Caravan that had been the subject of a lawsuit in Virginia that reached Virginia's Supreme Court. In the course of litigation, Chrysler had stipulated that the vehicle was a lemon. It had a leaky seam which allowed rainwater to drip onto the steering wheel and into the driver's lap. Numerous attempts to fix the leak had failed.

 

On the disclosure form that accompanied the vehicle, there was a line for indicating that a vehicle was "repurchased by Chrysler Motors and/or [Dealership name] as a result of" the "State of lemon law ruling or settlement." But Chrysler did not check that line. Instead, Chrysler checked the line indicating it was bought back due to "The settlement of legal matter," an ambiguous phrase which could apply to a repossession or other type of legal transaction. Thereby, the implication was made that the vehicle was not a lemon. The company also wrote that the reported problem was "Water Leaks," and indicated under the heading "Date repaired or Other Comments" "Repair Order Dated 7-15-92," implying the leaks had been repaired. No mention was made of the earlier repeated futile repairs.⁽¹⁵⁾

 

When rainwater leaked in upon Ms. Melvin, she traced the vehicle's history and discovered it was indeed a lemon. In order to get a full refund, she had to file a lawsuit under Minnesota's lemon disclosure law. Soon afterward, Chrysler bought it back from Ms. Melvin to settle the lawsuit. However, the disclosure form that accompanied the vehicle still did not indicate that the vehicle was a lemon. Instead, the company again checked that the vehicle was bought back in "The settlement of a legal matter."⁽¹⁶⁾ Also, although the form indicated the vehicle was "to be sold for parts only," it was subsequently sold to a third retail purchaser, with a title that indicated it was "rebuilt." The third buyer moved to Illinois, where the vehicle continued to leak.

 

State laws typically charge manufacturers with providing disclosure. However, manufacturers have claimed in their defense that vehicles were subsequently resold by dealers franchised with another company, and that therefore they are not liable for the absence of a disclosure.⁽¹⁷⁾

 

Manufacturers must make the disclosures, but others must pass them on. Even where manufacturers comply, auction companies and dealers must transfer disclosures to the ultimate buyer. Laundering insures this does not happen. When the loopholes that allow laundering are closed, the disclosure laws will reach their potential to protect consumers. We are unmoved by manufacturers' protestations that they have no control over others who may fail to pass on disclosures. We invite them to assist the Federal Trade Commission in fashioning remedies that close the loopholes.

 

While the cost of providing effective disclosure would be minimal, the cost to manufacturers and dealers of having vehicles depreciate in value due to effective disclosure is undoubtedly quite significant. Currently those costs are being transferred to consumers, who stand to benefit from more effective disclosures and greater compliance with state laws.

 

7 and 8. (Because these questions are closely interrelated, we have combined them here.) What methods have been adopted by the various States to ensure that subsequent purchasers are advised that vehicles are buybacks? How effective have these methods been? What have been the costs and benefits of these State requirements to manufacturers? To auction companies? To dealers? To consumers? To the States? 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? Title branding? Disclosure documents to be given to consumers? Other methods? If disclosure laws are the most effective method, then what type of disclosure requirement should be imposed? What are the costs and/or benefits of these various methods?

 

States are moving to improve their laws to protect subsequent purchasers

Since 1988, 37 states and the District of Columbia have adopted statutes that require disclosure concerning the history of buybacks. These measures are in addition to Uniform Commercial Code statutes prohibiting types of fraud (e.g., concealment of material facts) in effect in all 50 states. Sixteen states and the District of Columbia require title branding on various buybacks. Nine states require a disclosure form to be attached to a vehicle.

 

In some respects, Utah's statute is exemplary.⁽¹⁸⁾ It requires a disclosure in the contract stating that "This is a used vehicle. It was previously returned to the manufacturer or its agent in exchange for a replacement motor vehicle or a refund because it was alleged or found have the following nonconformities," with lines for listing the nonconformities. The size of type is specified, and a line is included for the buyer to sign and date the document.

 

In addition, Utah requires a disclosure statement to be "affixed to the lower corner of the windshield furthest removed from the driver's side...clearly visible from the exterior of the vehicle." The window sticker shall state the identifying information for the vehicle, its odometer reading, and the following: "Warning: This motor vehicle was previously sold as new. It was subsequently alleged or found to have the following defect(s), malfunction(s), or conditions," with 5 lines for listing the nonconformities.

 

States have enacted title-branding statutes in an effort to track lemons.

In effort to curb illegal resales of lemons within their borders and facilitate tracking of lemons, 16 states and the District of Columbia require the titles on specified lemon vehicles to be branded with various notations. Those states are Alabama, California⁽¹⁹⁾ Connecticut, Florida, Indiana, Iowa, Louisiana, Maryland, New Jersey, New York, South Dakota, Utah, Vermont, Washington, and Wisconsin.

 

For example, Utah requires that "immediately upon receipt" manufacturers and dealers shall "clearly and conspicuously" brand the titles of buybacks with the notation "MANUFACTURER BUYBACK NONCONFORMING VEHICLE." Vermont requires the title to be branded "THIS VEHICLE WAS RETURNED PURSUANT TO LAW--DEFECT SUBSTANTIALLY IMPAIRS THE USE, MARKET VALUE, OR SAFETY. 9 V.S.A. CHAPTER 115."

 

Title branding is not a substitute for disclosure to the consumer, particularly since buyers in most states do not even see titles prior to purchase, or until after they have repaid a loan. However, title branding operates as a potential enforcement tool, enabling law enforcement agencies to track specific vehicles.

 

State title branding statutes alone are not sufficient.

Based on the 498 title reports provided to the CARS Foundation, it appears that steps are being taken to circumvent state branding requirements. For example, the brand on 12 of Vermont's lemons was apparently washed when the vehicles were transferred and retitled in neighboring states that lack reciprocal branding requirements.

 

Even when states require title branding on lemons shipped from other states and resold within their borders, their efforts may be frustrated. For example, Alabama requires that:

 

"If a motor vehicle has been returned to the manufacturer under the provisions of this chapter or a similar statute of another state, whether as a result of a legal action or as the result of an informal dispute settlement proceeding, it may not be resold in this state unless:

 

(1) The manufacturer discloses in writing to the subsequent purchaser the fact that the motor vehicle was returned under the provisions of this chapter and the nature of the nonconformity to the vehicle warranty.

 

(2) The manufacturer returns the title of the motor vehicle to the Alabama department of revenue advising of the return of the motor vehicle under provisions of this chapter with an application for title in the name of the manufacturer. The department of revenue shall brand the title issued to the manufacturer and all subsequent titles to the motor vehicle with the following statement: THIS VEHICLE WAS RETURNED TO THE MANUFACTURER BECAUSE IT DID NOT CONFORM TO ITS WARRANTY." (Acts 1990, No. 90-479, Sec.4.)

 

However, none of the 7 Georgia and Florida vehicles that were determined to be lemons, then subsequently retitled in Alabama, appear to have been branded, as required. This pattern is consistent among manufacturers.⁽²⁰⁾

 

Similarly, lemons retitled in California, Iowa, Indiana, Louisiana, Utah, and Washington also appear to be lacking any brand, but instead have apparently clean titles, with rare exceptions.

 

In fact, of 498 title histories, only 3, or .6%, reflect lemon brands. Those are:

 

1. A 1993 Ford that was determined to be a lemon in Hawaii, and was retitled on March 19, 1996 as a "Lemon Law Buyback" in California;

 

2. A 1993 Dodge that was determined to be a lemon in Washington state and was retitled in Connecticut on July 1, 1995 as a "Manufacturer Buyback," then placed in "auction";

 

3. A 1990 Volkswagen that was determined to be a lemon in Washington state, placed in "auction," and retitled in California on January 21, 1995, as a "Manufacturer Buyback."

 

The title on one vehicle, a Nissan determined to be a lemon in Washington, was branded on June 13, 1994 as "Comments" in Louisiana, which may indicate a lemon brand.

 

Another 10 vehicles bore other brands indicating that they had been retitled as "rebuilt," "salvage," "reconstructed," or "JUNK." However, this brand may appear as the consequence of a collision, rather than because the manufacturer submitted the vehicle's title to be branded under a state lemon law.

 

Permanent decals are a new supplement to title branding to reduce laundering.

This year, California became the first state to require a permanent decal to be placed upon the driver's door frame, indicating that a specific vehicle is a "Lemon Law Buyback."⁽²¹⁾ Both the language and the method are conducive to effective disclosure. While other states require window stickers that are more conspicuous, California is alone in requiring a lemon label that is intended to be permanent. The costs are minimal, and are one-time only. The label, like title branding, is not a substitute for full disclosure of defects.

 

Lack of compliance with state disclosure statutes remains a problem.

It appears that compliance with state laws varies. In a number of states where attorneys general or the state department of motor vehicles have investigated compliance with state disclosure statutes, they found widespread failures to comply. These investigations range from New York's action, filed against Chrysler in 1988, to Florida's ongoing investigation involving 20 manufacturers, and to recent actions in New York, California, and Texas.

 

Even states with the best laws have no assurance that buybacks will not be shipped into their state undetected, absent a federal system for identifying and tracking buybacks.

 

Consumers would benefit from greater compliance.

In states with the most effective statutes and high compliance rates, consumers benefit in numerous ways. They avoid significant economic damages, as well as the human and societal costs associated with unsafe vehicles. But unfortunately, the benefits are not realized, because lemons are shipped to other jurisdictions that offer less protection. This is why a Federal role, to supplement state efforts, is essential.

 

No single approach will resolve the buyback problem.

We suggest several components that, working together, would optimize the likelihood of effective, successful disclosures to consumers.

 

First is a "bright line" standard regarding which vehicles should be subject to disclosure. As discussed earlier, it is essential to provide well-defined parameters designed to preclude manufacturers from abusing discretion in this area, and to include all buybacks, with narrow exceptions for advertised programs where there are no allegations of a defect. We believe that Indiana's statute is a model in this regard.

 

Second is retitling in the manufacturer's name at the time the vehicle is repurchased from the original owner, in the state where the vehicle is bought back. This would assist law enforcement agencies in tracking vehicle histories. In the 14 states with branding provisions, retitling in the manufacturer's name would also increase the likelihood that the titles would be branded.

 

Third is title branding, which as a practical matter serves in most states as an enforcement tool, rather than as a disclosure to consumers. We would like to see branding provisions adopted by all the states.

 

Fourth is a permanent label on the vehicle, as discussed above in response to question 5, with penalties for removal. This would cover all vehicles, even those resold in states with no title branding.

 

Fifth is specific disclosure information on the vehicle itself, to be signed by the retail purchaser, confirming that full disclosure was provided. This could be incorporated into the existing FTC Used Car Buyer's Guide window sticker.

 

Sixth is easy access to complete and accurate information regarding the vehicle's warranty repair history. Prospective buyers have a right to know as much about a buyback vehicle's problems as the manufacturer and the sellers. Manufacturers already maintain computerized records of vehicle warranty repair histories. Printed versions of these should be made readily available to prospective buyers, perhaps for a nominal fee. This should significantly lessen the ability of manufacturers and dealers to misrepresent or conceal pertinent information.

Seventh is strong federal and state monitoring and enforcement.

 

Per-unit costs would be relatively small.

The cost of furnishing pre-printed disclosure forms is not great. Even vehicle repair history print-outs can be produced inexpensively from existing data. One-time labeling costs would be nominal. Retitling in the manufacturer's name will impose a one-time cost.

 

We expect that the costs of providing the disclosures should be no greater than for obtaining a credit report on an individual consumer. Considering the billions consumers invest in used vehicles and repairs, the relatively nominal amount required to provide accurate disclosure information on a small percentage of used vehicles would be well spent. We note that some firms are already offering similar services to consumers as a business venture. For example, Carfax, which purchases records from state agencies, provides a title report to subscribers for $3 and to consumers for $20. CCC Information Services will fax a report to consumers for $12. The growth of online services should also help to keep costs down.

 

Even when taken in the aggregate, requirements for retitling, branding, labeling, and disclosure are not burdensome. They do not require costly repairs, or mandate warranties. They do not even require that new information be generated, but merely that existing information be transmitted. In return, such requirements should bolster public confidence in the multi-billion dollar used vehicle market.

 

We expect that the per-unit costs would be nominal, considering the sizeable investment vehicles represent, particularly when compared to median household income. For individual consumers, who may avoid costly repairs or problems that may render a vehicle inoperable or even unsafe, the benefits are enormous.

 

Manufacturers and dealers also stand to benefit through decreased costs associated with liability and litigation, as well as a more positive public image. When there are violations, the governmental costs of enforcement may be recovered through the payment of fines and other penalties.

 

9. If disclosure or title branding laws are or would be most effective, how should any such disclosure or title branding rules be enforced? By FTC regulation? By model state law? By a national bank of VIN numbers? By other means?

As discussed above, we foresee that a combination of approaches will be most effective in enforcing disclosure and title branding rules. We have noted that a number of states have taken enforcement action concerning violations that occur within their borders. Clearly the states have indicated a strong desire to protect their citizens from violations of their state disclosure and branding statutes. The recent proposed decision in In re: Chrysler (CA DMV), which calls for Chrysler's license to be suspended for 60 days, and Florida's investigation into the practices of 20 manufacturers, are indicative of a strong state interest in this area.

 

Regarding the establishment of a data base of VINs, we note that Congress recently passed a bill (HR 2803--H Rept 104-618) to establish a national data base in the Justice Department for tracking stolen vehicles. The bill would also reauthorize grants to states to help them modify software systems related to the data base and remove a $300,000 grant cap established earlier. The bill's sponsors state that the system will eventually be supported by user fees--as are two national driver's license data bases.

 

While we suggest some approaches that we believe would work, we also look forward to reviewing comments submitted by other parties, to further define the problem areas and possible solutions. We are especially interested to see the comments of state officials regarding what they envision for a Federal role.

 

10. Uniformity in the disclosures 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 standard be an effective method to get buyback information to subsequent purchasers? What would be the costs and/or benefits of a national standard?

While a degree of uniformity is desirable to help resolve the problem of interstate shipment of vehicles to avoid state requirements, any remedy must be carefully crafted so that it does not undermine existing state protections. Among states, clearly the trend is toward more encompassing statutes, stronger enforcement, and increased coordination with other states, as awareness grows concerning auto industry practices.

 

We expect auto industry comments may favor a uniform approach that would preempt state laws. However, from a consumer perspective, the worst case scenario would be a uniformly weak, nationally preemptive law that allows manufacturers and dealers to disguise seriously defective vehicles as "goodwill" or "customer satisfaction" buybacks with impunity.

 

A weak uniform federal statute would have the economically perverse effect of rewarding manufacturers for producing defective products and dumping them back into the stream of commerce, as opposed to living up to their warranty obligations. It would allow them to merely shift the burden for their mistakes onto a more vulnerable segment of the market.

 

Any nationally uniform remedy, if it is to benefit consumers, must be designed to:

 

1. Include pre-decision buybacks;

 

2. Require the transfer of the title to the manufacturer, aiding in computer tracking of buybacks;

 

3. Make title laundering or knowingly selling a vehicle with a laundered title an unfair and deceptive trade practice under the Federal Trade Commission Act, Section 5, also making violations enforceable by consumers under state "Little FTC Acts."

 

4. Operate as a minimum standard to assist in tracking vehicles and spurring compliance, yet allowing states the flexibility to go further to protect their citizens and to enforce their own statutes.

Again, we appreciate this opportunity to comment, and look forward to reviewing the comments of others.

Respectfully submitted,

ROSEMARY SHAHAN, President
LAWRENCE KANTER, Counsel

Footnotes:

1. See Appendix A.

2. In re: Chrysler Motor Corp., CA Dept. of Motor Vehicles, Case No. M-605, Proposed Decision and Findings of Fact, May 30, 1996 (cited below as In re: Chrysler (CA DMV) See Appendix B.)

3. In re: Chrysler (CA DMV), at 15. See also disclosure notice at 17.

4. In re: General Motors (CA DMV), Case No. D-4833, Accusation, April 29, 1993. Documents obtained pursuant to Public Records Act request. See Appendix C.

5. CA State Dept. of Consumer Affairs Arbitration Review Program, "Total Disputes Processed by Certified Programs," Jan.1-Dec. 31, 1995."

6. Source: States of California, New York, Florida, and Washington Lemon Law Arbitration Programs, 1992-1994 Annual Reports.

7. "In 48 of the vehicles listed in Schedules A, B, and C, Chrysler repurchased the vehicles following a decision of its third party dispute resolution process..." In re: Chrysler (CA DMV), at 3. Another 68, or 58% of the 116 vehicles the Administrative Law Judge found to be lemons, were repurchased outside the scope of an arbitration decision.

8. "It is estimated that over 5,000 Lemon Law cases alone are brought each year by new car buyers." Letter of Peter K. Welch, Director of Government and Legal Affairs, to Assemblyman Larry Bowler, June 18, 1996.

9. Wall Street Journal, April 29, 1996, A4. Emphasis supplied.

10. In re: Chrysler (CA DMV), at 10.

11. Veto Message of Governor George Deukmejian, June 20, 1990. Emphasis supplied.

12. In re: Chrysler (CA DMV), at 3.

13. In re: Chrysler (CA DMV), at 16. Notice to second buyer Vigil mentions transmission, but fails to disclose defects in brakes and steering.

14. See "Disclosure of Vehicle Repurchase or Reacquisition Notice," Appendix C.

15. "Disclosure Notice" for VIN 2B4FK4536KR334036 dated 9-10-93.

16. "Disclosure Notice" for VIN 2B4FK4536KR334036, dated 6-1-94.

17. In re: Chrysler (CA DMV), Respondent Chrysler Corporation's Post-Hearing Brief, Filed August 17, 1995."The second owner, Ms. Weidemann, purchased the vehicle from a Cadillac dealer, not a Chrysler dealership. Not even the DMV can seriously contend that Chrysler has any control over or should be responsible for the actions of a Cadillac dealer." At 13.

18. Utah Sec. 41-3-408 and Sec. 41-3-409, Laws 1993, c. 163, Sec. 5.

19. In January of this year, California became the first state to require that lemons be branded with the term "Lemon Law Buyback."

20. This information is only as reliable as the data supplied to the CARS Foundation by the states and Carfax, and is subject to further confirmation.

21. CA Civil Code, 1795.8, adopted 1995.