NATIONAL AUTO AUCTION ASSOCIATION
NATIONAL AUTO AUCTION ASSOCIATION'S COMMENTS
FEDERAL TRADE COMMISSION REQUEST FOR PUBLIC COMMENTS REGARDING THE PRACTICES OF THE MOTOR VEHICLE INDUSTRY IN THE RESALE OF ALLEGEDLY DEFECTIVE VEHICLES PREVIOUSLY PURCHASED FROM CONSUMERS BECAUSE OF WARRANTY DEFECTS, FEDERAL REGISTER, APRIL 30, 1996 (VOLUME 61, NUMBER 84), PAGES 19067-19072
SUBMITTED TO
OFFICE OF THE SECRETARY
Room 159
Federal Trade Commission
Sixth Street and Pennsylvania Avenue N.W.
Washington, D. C. 20580
June ____, 1996
The National Auto Auction Association ("NAAA") is pleased to respond to the request of the Federal Trade Commission ("FTC") for public comments concerning the practices of the motor vehicle industry in the resale of allegedly defective vehicles previously repurchased from consumers because of warranty defects.
The FTC's request for comments focuses on the allegation that despite various state laws requiring disclosure of "buyback vehicles", purchasers of buyback vehicles do not always receive these disclosures. NAAA member auctions have always been dedicated proponents of complete and accurate disclosure of the condition and history of motor vehicles being sold through their auctions, and will be the strong link in any effective disclosure system that is created.
HISTORY OF NAAA AND THE WHOLESALE MOTOR VEHICLE AUCTION INDUSTRY
NAAA is an international trade association of wholesale motor vehicle auctions located throughout the United States, Canada, Australia, New Zealand, Europe and Asia.
NAAA member auctions allow only licensed motor vehicle dealers to purchase through their auctions. Although sellers include new and used car dealers, manufacturers, rental and leasing companies, fleet owners, financial institutions and other lenders, government agencies and others, only licensed motor vehicle dealers are allowed to purchase, except in unusual circumstances where required by law. Auctions that allow retail transactions as part of their principal business cannot be NAAA members.
The motor vehicle auction industry was established 56 years ago in South Carolina and the National Auto Auction Association was organized 43 years ago in 1953. Wholesale motor vehicle auctions have become the primary means of used motor vehicle redistribution in the United States. In 1995, the 252 NAAA member auctions provided auction services in more than 15,000,000 wholesale transactions with total sales prices exceeding $60,000,000,000.00.
The motor vehicle industry, particularly the wholesale motor vehicle auction industry, has become as interstate as any industry in the United States. Most wholesale auctions have sellers and buyers from many states attending each auction. Some have nearly all 50 states represented, as well as many foreign countries and other jurisdictions.
In order to balance dealership inventories and to maintain business cash flow by selling off slow-moving inventory and/or buying fresh inventory, both new and used vehicle dealers attend wholesale auctions throughout the country. Based upon demand, what might sell for $5,000.00 in Maine might sell for $6,000.00 in Mississippi or vice versa. Wholesale auctions send out weekly auction reports. Sellers study these reports to determine where a particular vehicle can bring the best price, and buyers study them to determine where needed inventory is likely to be offered for sale. This enables sellers and buyers to choose the best markets for particular vehicles.
As early as the late 1950s, wholesale motor vehicle auctions throughout the United States had developed clear and concise printed trading policies setting forth requirements for disclosure of equipment deficiencies and visual and mechanical defects of motor vehicles being auctioned. Throughout the years, these requirements have been expanded to include prior use and, very importantly, odometer readings. NAAA was at the forefront of motor vehicle industry efforts that led to today's successful odometer disclosure requirements.
The growth and success of the wholesale motor vehicle industry has in large part resulted from an atmosphere of trust between wholesale buyers and sellers of motor vehicles. Auctions require the sellers to accurately describe the motor vehicles being sold, resulting in significant protection for the buyers. This same protection is enjoyed by sellers when they buy. Dealers buy at wholesale motor vehicle auctions because they consider such auctions to be the safest place to buy a motor vehicle with complete knowledge of its condition and history.
HOW WHOLESALE MOTOR VEHICLE AUCTIONS OPERATE
Wholesale motor vehicle auctions provide the facilities, expertise and personnel to allow the marketing at wholesale of large volumes of motor vehicles in commercial transactions in a very short period of time.
As discussed, the wholesale motor vehicle auction industry continues to grow because its customers trust it. In addition to requiring numerous disclosures by sellers, wholesale auctions guarantee payment to the seller upon presentation of good title. They also guarantee unencumbered title to the buyer. Thus, the wholesale auction assumes the two primary risks in the transaction.
Although wholesale auctions are not in the chain of title or vehicle ownership, and simply provide auction services to the seller and buyer, the seller knows the seller will be paid with the wholesale auction's funds upon presentation of good title and the buyer knows the wholesale auction will resolve the title problems the buyer would ordinarily have to resolve.
Most wholesale auctions consist of parallel auction lanes through which the motor vehicles are driven. Some auctions have as few as 2 lanes; some have as many as 20. As the motor vehicles are driven through these lanes, they stop in front of an auction block, and are auctioned off, one at a time, by an auctioneer for the consignor (owner) to the successful bidder. Typically, the seller stands with the auctioneer to represent the vehicle. Sellers treat buyers fairly because to do otherwise would reduce the number of bidders available at subsequent sales.
Probably the best way to illustrate the basic flow of information through a wholesale auction is to follow the documents.
The process starts with the registration of a motor vehicle at the auction. The auction prepares an invoice, which includes the name of the consignor (owner), a description of the motor vehicle including the vehicle identification number (VIN), the equipment, the odometer mileage and a run number. Motor vehicles are run through the auction in the numerical order of the run numbers. After a motor vehicle is registered, it is parked on a prenumbered space, sometimes with descriptive information on its windshield for inspection by potential bidders, and the auction invoice is sent to the auction block.
NAAA member auctions employ off-duty law enforcement officers to inspect motor vehicles, including reviews of confidential VINs, for theft and other irregularities as part of the auction registration process.
Although procedures at all wholesale auctions are not indentical, almost all NAAA member auctions have written disclosure requirements and motor vehicles are sold under a system of lights and announcements. The typical auction invoice has a variety of blocks to indicate certain disclosures and a separate section for a narrative disclosure of announced conditions. In the typical light system, a green light indicates a motor vehicle has no problems, a yellow light indicates that there are defects disclosed that are announced at the time of auction, and red lights indicate more serious problems.
Under the yellow light, a consignor would typically announce a miss in the engine, a malfunctioning transmission or other mechanical problems. The red light is used to disclose over 100,000 miles, frame damage, flood, prior taxi use, salvage, rebuilt and other more serious problems.
Although the specific disclosures are made on the actual auction invoice and are also made by the auctioneer at the time of auction, the light system alerts the buyer at the time of sale to carefully review the disclosures and the motor vehicle before fully consummating a transaction.
The motor vehicles are run through the auction lanes in sequential order, and when the time comes for a motor vehicle to run, it is driven by an auction employee through the auction lane, stops in front of the auctioneer, the auctioneer auctions the motor vehicle, announces any conditions or defects shown on the invoice and reminds bidders of the light that is on. If the consignor accepts the highest bid, the auction clerk on the block fills in the purchase price and has the buyer sign the invoice.
The buyer then has an opportunity to examine the motor vehicle to be sure it is as represented. Usually buyers have an hour to test drive a vehicle to be sure it is as represented before consummating the transaction by tendering payment at the auction office. The buyer is given possession of the motor vehicle and a copy of the auction invoice, containing the disclosures made by the seller.
Later the seller goes to the auction office and turns in his title documents to a trained title clerk for review, which includes checking the title for the correct VIN, unsatisfied liens, proper disclosures, proper signatures, and proper chain of title. Assuming the title documents are in order, they are passed on for processing.
NAAA member auctions process an extremely large number of title transactions. Although more title applications are submitted to motor vehicle administrators than title transactions that occur through NAAA member auctions, motor vehicle administrators are unable to carefully examine all of the title applications; whereas NAAA member auctions carefully scrutinize each and every title transaction in order to protect their buyers and to avoid claims involving breaches of warranty of title or failure to make required disclosures.
Most wholesale auctions allow the seller a short period of time to produce the proper title documents, which are frequently in the possession of a lienholder, and the auctions may hold the buyer's payment until proper title documents are produced. The seller is paid with the auction's check. Most buyers pay with checks or documentary drafts. If the buyer pays with a check, the check is deposited to the auction's bank account and the title documents are forwarded to the buyer. The same thing happens if the buyer pays with cash. If the buyer pays with a documentary draft, the title documents are deposited inside the documentary draft envelope and forwarded to the buyer's bank for payment.
NAAA INVOLVEMENT IN COMBATING ODOMETER FRAUD AND IN SUPPORT OF THE TRUTH AND MILEAGE ACT AND ITS IMPLEMENTING REGULATIONS
NAAA has been at the forefront of efforts to combat odometer fraud since the mid 1970s, and although the disclosure system for odometer mileage (new disclosure in each transaction) is different from buyback disclosures (single disclosure made at time of buyback and passed on to subsequent buyers), NAAA efforts to eradicate odometer fraud through effective disclosure demonstrate NAAA's knowledge, experience and interest in an effective system of vehicle history disclosure.
In 1975, NAAA established a committee for the purpose of promoting the concept of a universal title among all states, including odometer mileage. NAAA argued that if the odometer mileage was consistently disclosed and recorded each time a motor vehicle was transferred and/or retitled, a paper trail would be created that would disclose any irregularity in the odometer reading by an auction, dealer, consumer or any other person or entity. Unfortunately, a universal title has never been adopted, although strong similarities currently exist.
As discussed in detail in the following section, NAAA is a primary sponsor of a bill pending in Congress to make uniform among the states disclosure of motor vehicles as having been previously salvaged, flood, or rebuilt. The passage of this bill will be a giant step toward uniformity.
NAAA was among the most active participants in the National Highway Traffic Safety Administration's (NHTSA's) rulemaking proceedings to implement the Truth In Mileage Act of 1986, which finally required odometer disclosure on title documents printed on secure paper. NAAA has been recognized by NHTSA as representing the segment of the motor vehicle industry that has done the most to make TIMA and its implementing regulations effective. Once the rules were in final form, NAAA conducted a wide variety of educational programs, not only for the wholesale motor vehicle auction industry, but for all segments of the motor vehicle industry.
Although TIMA and its implementing rules are not perfect, they represent an important step toward uniformity, and at the same time point out a potential danger in these buyback disclosure proceedings. Although TIMA made uniform the odometer disclosure that must be made and set forth the documents upon which the disclosure must be made, TIMA superimposed uniform requirements on top of inconsistent state requirements, leaving, in NAAA's opinion, many loopholes and defects that could have been resolved by more complete uniformity.
NAAA feels strongly the FTC must seriously consider the danger of superimposing uniform buyback disclosure requirements on top of existing inconsistent documents and procedures.
NAAA INVOLVEMENT IN THE ANTI-CAR THEFT ACT OF 1992 AND EFFORTS TO REQUIRE UNIFORM DISCLOSURE OF THE PRIOR HISTORY OF MOTOR VEHICLES AS SALVAGE, REBUILT, AND FLOOD DAMAGED
Recognizing the serious problem of lack of required disclosure that motor vehicles were previously salvage, rebuilt or flood damaged and the further problem that existing disclosure requirements were inconsistent and ineffective, Congress passed the Anti-Car Theft Act of 1992, and created the Motor Vehicle Titling, Registration and Salvage Advisory Committee to make recommendations to implement certain of its goals. NAAA was a primary advocate of this important law and an active participant on this Committee. The primary proponent of the need to deal effectively with inconsistent state disclosure requirements.
The Advisory Committee recommended federal legislation for uniform definitions of salvage and non-repairable vehicles, salvaged and rebuilt salvaged titles, non-repairable vehicle certificates and flood vehicles, as well as uniformity of titling and control methods, duplicate title issuance, and inspections of rebuilt salvage vehicles before they are returned to the road.
As a result, NAAA and other motor vehicle industry representatives formed the Coalition for National Motor Vehicle Titling Reform, and a Bill prepared by the Coalition is currently pending in the U. S. House of Representatives as HR-2900.
The Bill has 58 sponsors and strong bi-partisan support. A Senate version is being drafted at the time of this submittal. These bills are still in the Committee stage and could provide the FTC an opportunity to propose an effective buyback disclosure through title branding.
NAAA is aware the FTC has a copy of the report of the Advisory Committee and a copy of HR 2900, and will not take unnecessary time elaborating on them in this Position Paper, however, NAAA cannot urge strongly enough that uniform procedures are even more important than uniform documents. If the procedures are fully consistent, they may be able to work even with different documents. Obviously, complete uniformity is preferable, but uniform procedures are more important than uniform documents.
For example, if the FTC mandates some type of uniform buyback disclosure document and requires all states to use it, but does not require uniform buyback disclosure procedures, the disclosure system will not work. If State A requires title branding of buybacks, but State B allows that brand to be washed off the title or refuses to carry forward the brand of State A, then unscrupulous persons can simply buy a vehicle in State A, take the State A title to State B, retitle it in State B with a clean unbranded title in complete compliance with State B's law and take the vehicle to State C and sell it to an unsuspecting purchaser with no disclosure.
NATIONAL AUTO AUCTION ASSOCIATION'S RECOMMENDATION ON BUYBACK DISCLOSURE
NAAA supports full disclosure of all material defects and prior motor vehicle history, particularly safety defects, including any defects that detract from the value of a motor vehicle, so long as the disclosure requirements are equally fair to all involved, including manufacturers, dealers and those in the business of selling motor vehicles, as well as those purchasing motor vehicles both commercially and as consumers.
NAAA feels very strongly that full disclosure will be effective only if it is carried forward either on the title document or the motor vehicle, or both, and NAAA would strongly recommend title branding because it is easier to implement and more effective. Titles are already branded for a variety of reasons, and title branding is more difficult to circumvent than branding a motor vehicle. Law enforcement advises NAAA that the skill of criminals in removing and replacing brands on motor vehicles is currently difficult to combat. Counterfeit replacements are extremely difficult for even trained law enforcement officers to detect, and would be impossible for a consumer to detect.
While vehicle branding might be an effective deterrent at an NAAA member auction because of the availability of trained law enforcement officers to physically inspect the motor vehicles before they are offered for sale, vehicle branding would be weak protection for the consumer.
All current and contemplated disclosure requirements that are effective are centered on the title documents. After years of problems with odometer disclosures being manipulated because they were made on separate pieces of paper that were no more secure than a grade school student's notebook paper and easily destroyed, thrown away or altered, Congress and NHTSA moved to disclosure on title documents issued by states on secure paper that is as tamper resistant as modern technology will allow.
HR 2900, which will implement the recommendations of the Advisory Committee created pursuant to the Anti-Car Theft Act of 1992, focuses on title branding. This is the only available system that can be uniformly and effectively administered by all state motor vehicle departments.
Title branding, rather than repeated disclosure on the title or otherwise, is the most effective method of buyback disclosure. Odometer disclosure is made each time a motor vehicle is transferred so each succeeding disclosure is most effectively made on the title documents. The buyback disclosure is a single disclosure made at the time of the initial sale after buyback, and this disclosure must be carried forward since it is not remade at each transfer. An effective title branding system is the most efficient means of accomplishing meaningful buyback disclosure.
NATIONAL AUTO AUCTION ASSOCIATION'S ANSWERS TO SPECIFIC QUESTIONS SET FORTH IN THE REQUEST FOR PUBLIC COMMENTS
In its request for public comments, the FTC asks numerous questions, and while NAAA cannot provide answers for all of the questions, NAAA does want to respond to all.
ISSUES FOR COMMENT
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?
1. 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?
2. 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 in 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?
3. 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? On the other hand, would disclosure laws that only cover cars that were the subject of a formal arbitration or litigation proceeding lead manufacturers to buy back more vehicles under the heading of "goodwill" in order to avoid the disclosure requirement?
4. 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?
5. 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 and/or benefits of these disclosure methods to manufacturers? To auction companies? To dealers? To consumers? To other parties?
6. 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?
7. 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?
8. 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 databank of VIN numbers? By other means?
9. 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? Should 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?
SUMMARY
NAAA appreciates the opportunity to provide these public comments, and looks forward to the opportunity to participate in the public forum. Although NAAA member auctions will not be involved in the consumer transaction at which the buyback disclosure system will be primarily directed, as the primary means of motor vehicle redistribution in the United States NAAA member auctions will collectively participate in a very significant number of the transactions in which the buyback disclosure will be carried forward.
NAAA and its member auctions have a history of fighting for uniformity and full disclosure, and they can be the strong link in any effective disclosure system the FTC adopts.
The FTC should be careful not to try to superimpose some uniform procedures or documents on top of inconsistent state procedures and documents; otherwise, the attempt at uniformity will fail, and may even result in a worse system than currently exists.
The ability to "wash" a title is essential to those who want to avoid disclosure to their buyers, whether it be odometer mileage, prior use, or buyback. If there is even one state in which titles can be washed, that state will render ineffective any disclosure system the FTC adopts.
Thank you again for allowing NAAA to submit these public comments.
Respectfully submitted,
____________________________________
L. L. "Lin" Musick, President
National Auto Auction Association
5320-D Spectrum Drive
Frederick, MD 21701
Phone: (301) 831-4977
Fax: (301) 831-1359
____________________________________
Warren V. Young, Chairman
Special Lemon Law Buyback Committee
of the National Auto Auction Association
5320-D Spectrum Drive
Frederick, MD 21701
Phone: (301) 831-4977
Fax: (301) 831-1359