NATIONAL ASSOCIATION OF ATTORNEYS GENERAL

BEFORE THE FEDERAL TRADE COMMISSION

VEHICLE BUYBACKS - COMMENT JULY 29, 1996

FTC FILE NO. P96 4402

COMMENTS OF THE STATES OF CONNECTICUT, HAWAII, LOUISIANA, MARYLAND, OREGON AND WASHINGTON

TO:

Donald S. Clark, Secretary
Room 159
Federal Trade Commission
Sixth Street and Pennsylvania Avenue, N.W.
Washington, DC 20580

On November 8, 1995, Consumers for Auto Reliability and Safety, (CARS), joined by a number of other consumer groups, filed a petition requesting that the Federal Trade Commission initiate enforcement action or a rulemaking proceeding to address concerns relating to the resale of "lemon" vehicles which had been previously repurchased from their original owners due to alleged defects and then sold to subsequent purchasers without disclosure of the vehicles' lemon history. On April 30, 1996, the Federal Trade Commission requested public comment and announced that it would be conducting a public forum on the issues raised by this petition.

The attorneys general of the states of Connecticut, Hawaii, Louisiana, Maryland, Oregon and Washington submit these comments in response to the Co1mmission's request. The attorneys general are concerned about the issues relating to the resale of lemon vehicles because of our responsibility as the primary enforcers of our states' consumer protection laws, including state lemon laws and state laws against deceptive trade practices. Vehicles "repurchased" under state lemon laws or "buyback" vehicles as those terms are used in these comments refer to defective vehicles which were returned to the manufacturer or its franchised dealer, in exchange for a refund, a replacement vehicle, or other credit or compensation. The recent administrative action by the state of California against Chrysler Corporation is one example of the enforcement initiatives undertaken by a number of states concerning the alleged resale of lemon law buyback vehicles without full disclosure to subsequent consumer purchasers.

The attorneys general believe that the repurchase of a vehicle by a manufacturer or a dealer due to alleged defects, is a material fact. The consumer purchaser's awareness of the existence or the potential existence of a serious vehicle defect directly affects the price the consumer is willing to pay or even the ultimate decision of whether to buy the vehicle at all. Depending on the nature of an existing vehicle defect, even the safety of the consumer purchaser may be at risk.

For these reasons, the attorneys general support increased legislative, regulatory and enforcement initiatives designed to ensure that complete and accurate information regarding any vehicle's lemon history is disclosed to subsequent consumer purchasers.

COMMENTS

Issue No. 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?

It is estimated that as many as 25,000 vehicles are repurchased annually by manufacturers or dealers. In Connecticut alone, during the five year period from 1991 through 1995, manufacturers reported 2,604 vehicles that were bought back or replaced. There can be no doubt that the number of these vehicles is substantial. These figures do not differentiate between those vehicles repurchased or replaced by manufacturers or by dealers and we do not believe there is a justifiable basis for such a distinction. From the perspective of the subsequent consumer purchaser, the fact that a defective vehicle was repurchased or replaced is just as material whether it was taken back by a manufacturer or dealer.

In many instances, manufacturers have arranged for local franchise dealers to accept the return of defective vehicles in satisfaction of the manufacturers' lemon law obligations. The dealers may receive credit or some other form of compensation from the manufacturers for performing this service. While there may be a number of legitimate, logistical reasons for this procedure, it may have the undesirable side affect of avoiding the resale disclosure provisions of some state lemon laws, which are triggered only by the return of a vehicle to the manufacturer. Therefore, the attorneys general believe that any disclosure standard for the resale of lemon law buyback vehicles should be broad enough to encompass dealer as well as manufacturer buybacks.

Since the states do not automatically track the subsequent sales transactions involving buyback vehicles, it may be difficult to provide exact figures regarding the disposition of these vehicles. We believe that the vast majority of the repurchased vehicles are ultimately sold to consumers. Only the manufacturers could provide information regarding the disposition of vehicles which are not sold for ultimate retail purchase. We also believe that a substantial number of these vehicles ultimately are transported to other states for resale. For example, Connecticut estimates that, based on a survey of over 200 vehicles bought back during 1994 and 1995, approximately 75% of the buybacks were sold to out of state purchasers.

Issue No. 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 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?

We believe that any vehicle which is returned to a manufacturer or dealer due to a dispute involving a defect, should be subject to buyback vehicle disclosure requirements. This rationale should apply whether the vehicle is returned as a result of an administrative or judicial determination, an arbitration proceeding or a voluntary settlement, even if no action is pending. If the defect which is the subject of the dispute is serious enough to warrant the repurchase or replacement of the vehicle, any subsequent purchaser of the vehicle should know the circumstances surrounding the return of the vehicle.

Some members of the automobile industry have argued that such a requirement is too broad in that it would trigger disclosures for those vehicles designated as "goodwill" buybacks, for which the alleged defect is either insignificant or not substantiated. We remain unconvinced that the number of non-defective vehicles repurchased by the manufacturers is significant, particularly when compared to the number of defective or lemon vehicles which are returned. We would welcome statistics from the industry which show the numbers of these vehicles, apart from any advertised "test drive" program buybacks. Additionally, we believe that full disclosure allows subsequent potential consumer purchasers to determine for themselves whether a defect exists or whether it would substantially impair the use, safety or value of a vehicle.

We are particularly concerned that any definition of "buyback vehicles" not exclude those vehicles returned pursuant to voluntary settlements. A significant number of defective vehicles are taken back by auto manufacturers, in exchange for refunds or replacement vehicles, prior to the issuance of administrative, arbitral or judicial decisions, both before and after the actions are initiated.

In Connecticut, for example, for the five year period from 1991 through 1995, the state operated lemon law arbitration program reported that while 308 vehicles were ordered repurchased or replaced through arbitration decisions, 403 vehicles (approximately 46% of all eligible cases) were returned to manufacturers in exchange for refunds or replacement vehicles pursuant to predecision settlements. Manufacturers reported that an additional 1,893 vehicles were repurchased or replaced (approximately 73% of all lemon law buybacks for this 5 year period) prior to the filing of a complaint with the state operated lemon law program.

It should also be noted that many of the vehicles which are the subject of these settlements have experienced serious defects and have extensive repair histories. The following are just a few examples of some of the problems experienced during the first 2 years or 18,000 miles of operation, in vehicles repurchased or replaced through voluntary settlements:

Any definition of buyback vehicle that excludes voluntary settlements is likely to exclude a substantial number, perhaps even the majority, of the vehicles currently repurchased or replaced by automobile manufacturers. Moreover, such an exclusion would allow manufacturers to take back and resell vehicles with serious problems, some of which may seriously impair the safety of these vehicles, without any warning or notice to subsequent consumer purchasers.

Issue No. 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? 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?

We believe that the application of disclosure requirements to voluntary, prefiling buybacks has not had, and will not have, a significant chilling effect on the willingness of manufacturers to reach these settlements. We believe that manufacturers are motivated to repurchase or replace substantial numbers of defective vehicles due to a combination of strong state lemon laws and a desire to maintain greater long term customer loyalty. If the consumer purchaser of a defective vehicle can only force the manufacturer to "stand behind its product" after numerous, unsuccessful repair attempts followed by a hard fought arbitration or court proceeding, the consumer is likely to be angry, frustrated and extremely dissatisfied with the manufacturer by the end of the process.

On the other hand, if the manufacturer sees that a vehicle has a substantial defect and that a lemon law proceeding and an adverse decision are likely, it may be able to mitigate the consumer's dissatisfaction considerably by settling the matter at a much earlier stage. If the manufacturer voluntarily accepts the return of a vehicle before the consumer reaches a point of anger and frustration, instead of providing the same relief after a contested lemon law proceeding, there is an increased likelihood that the consumer will be retained as a customer. This seems to be supported by figures which show that a much greater percentage of consumers in pre-decision settlements are willing to stay with the same product by accepting replacement vehicles instead of refunds, than consumers with adjudicated decisions.(1)

There are other economic factors which create pressure on manufacturers to take back defective vehicles at an early stage in consumer disputes. The cost to a manufacturer of providing the consumer with a replacement vehicle is likely to be considerably less than the cost of paying the consumer a refund of the retail purchase price or buying the consumer out of a lease. An early settlement also allows the manufacturer to save the costs associated with conducting a contested hearing or extended litigation.

We believe that these marketing and financial concerns outweigh any so-called "chilling" effect that would result from requiring the disclosure of the buyback history of those vehicles which are bought back prior to the initiation or the adjudication of lemon law claims.

Connecticut, for example, requires the disclosure of the buyback history of vehicles which are returned through voluntary settlements as well as adjudicatory proceedings. For the five year period from 1991 through 1995, manufacturers reported a total of 2,604 returned vehicles. Only 711 of these vehicles were returned through the state operated lemon law arbitration program, as a result of either arbitrated decisions or predecision settlements. The remaining 1,893 vehicles or approximately 73% of the buybacks over this 5 year period, were returned prior to the initiation of lemon law arbitration proceedings.

Since a substantial number of vehicles are already repurchased or replaced by manufacturers prior to the filing or initiation of lemon law actions, it is difficult to speculate that even more vehicles would be voluntarily taken back by manufacturers if disclosure requirements were applied only to those which were the subject or formal adjudicatory proceedings. Certainly, the adverse consequences of exempting these prefiling buybacks from resale disclosure requirements cannot be ignored; thousands of unsuspecting consumers would be burdened with the unexpected expense, inconvenience and potential risk to personal safety which accompany the unknowing purchase of such recycled buyback vehicles.

Issue No. 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 like models and model years?

Issue No. 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?

We are not aware of any state studies or statistics which show the numbers or percentages of buyback vehicles which are repaired prior to resale. Connecticut does have a procedure by which a manufacturer can apply to the Department of Motor Vehicles for permission to remove the buyback disclosure statement upon submission of an engineering report certifying that repairs have been successfully performed on the vehicle and that any defects have been corrected. However, only one such application has been received by the Department (it was granted) over the past several years. Informal reports from local auctions where buyback vehicles are resold suggest that along with disclosures of alleged defects, manufacturers sometimes report repairs which have been performed to correct the defects. We would be interested in reviewing any statistics recorded by the industry which show the number or percentage of buyback vehicles which are repaired as well as the frequency of repairs by subsequent purchasers of these vehicles.

Determining whether repairs performed by manufacturers prior to resale are successful, is not always possible. Often, the defects are of an intermittent nature and only occur under certain conditions. The manufacturer or dealer may not be able to duplicate a problem in order to repair it. A broken part may be a symptom of a more serious underlying problem, rather than the cause. A manufacturer may believe in good faith that replacement of the part has corrected the problem, but the problem recurs once the vehicle has been purchased by a consumer. Most of these vehicles have already been subjected to multiple repair attempts by authorized dealers, who probably believed that the vehicles had been successfully repaired after each attempt.

For these reasons, we believe that the best approach is to disclose full and accurate information regarding a vehicle's buyback history, even if the manufacturer believes that the vehicle is no longer defective. Manufacturers may choose to disclose any repairs performed after the buyback of the vehicle. In this way, subsequent consumer purchasers would be in a better position to evaluate the condition and the value of the vehicle or to determine whether an inspection by an independent technician would be useful or necessary.

We also believe that the disclosure requirements should not be limited to the first purchaser or to a set time period. The buyback history of a vehicle and the potential existence of serious defects are just as important for each subsequent purchaser of the vehicle to know, as for the first. Manufacturers and dealers should not be able to avoid the disclosure requirements through multiple "paper" sales transactions.

Issue No. 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? 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?

We believe that the two most effective methods of disclosing a vehicle's buyback history prior to sale, are a prominently displayed window sticker on the vehicle itself, and a clear and conspicuous disclosure statement in the contract. A prominently displayed window sticker puts the consumer on notice that the vehicle is a buyback from the first moment the consumer examines the vehicle. The benefit of such an early disclosure is that it minimizes the opportunity or the likelihood for deception regarding the vehicle's true history, during the sales presentation. The costs of such a window sticker disclosure are minimal, particularly when compared to the potential costs to the unsuspecting consumer who purchases a resold lemon. Costs could also be minimized if such a disclosure were combined with existing window sticker requirements, e.g., the FTC Buyer's Guide for used vehicles.

The contract disclosure statement provides a second notice to the consumer when the contact is being completed. This serves to remind the consumer of the vehicle's buyback history at a critical stage in the buying process. As an additional precaution, the contract disclosure may be made in a segregated disclosure box, which contains a separate line for the consumer's initials or signature. Such a written acknowledgment requirement draws the consumer's attention directly to the buyback history disclosure and makes deception much more difficult.

Title branding is not really a means of communicating buyback information to consumers since consumers rarely see title documents prior to the purchase of a vehicle. However, it is an important enforcement tool which makes subsequent tracing of buyback vehicles easier. In addition, it is a permanent record of a vehicle's buyback history and provides notice to subsequent dealer purchasers. Therefore, while title branding does not provide direct notice to consumer purchasers, it does create disincentives for dealers contemplating the nondisclosure of a vehicle's buyback history and ultimately makes consumer notice more likely.

Issue No. 8

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?

More than 20 states have some form of disclosure requirements specifically addressing the resale of buyback vehicles. These requirements include various methods of disclosure such as window stickers, separate notice forms and contract clauses, many of which also mandate the signature of the subsequent consumer purchaser as acknowledgment of receipt of the buyback information. The required information usually includes the year, make, model and identification number of the vehicle, as well as a listing of the defects alleged and, in some cases, a statement of the current status of the defects.

Some states require a combination of disclosure methods for more effective communication of the information to prospective consumer purchasers. Connecticut and Utah, for example, require both a window sticker on the vehicle and a clause in the contract, disclosing the vehicle's buyback history and listing the defects alleged.

It is difficult to measure the effectiveness of these methods. Even those states with specific buyback disclosure statutes have found compliance to be problem at times. Over the years, states such as California, Connecticut and New York have initiated enforcement actions against dealers or manufacturers in which violations of state buyback disclosure laws were alleged. Oregon recently conducted a limited survey of consumer purchasers of buyback vehicles and estimates conservatively that in 14% of these transactions, there had been a failure to provide consumers with the written buyback disclosures required by law.

There are a number of factors that hamper the effectiveness of existing state disclosure legislation. The sale of used vehicles occurs extensively on an interstate level. Typically, large dealer auctions are attended by dealers from a number of other states. It is not unusual for a single used vehicle to be wholesaled from dealer to dealer through several states before being sold to the next consumer purchaser.

Many states still do not have buyback vehicle disclosure laws. Others require disclosure only on the vehicle but do not brand the title or carry brands forward from other states' titles. If a vehicle is bought back in a state which requires disclosure of the buyback history on a window sticker, it may well be wholesaled to a dealer in a state which does not require such a disclosure. If the original state did not brand the title or if the title brand is not carried forward by the second state, removal of the window sticker may hide the buyback history from subsequent purchasers.

Once the vehicle's title and documentation have been effectively "laundered" in the nondisclosure state, the vehicle may be sold to a dealer in yet another state. Even if this third state does have stringent disclosure requirements, they will be of little use in protecting subsequent purchasers of a vehicle where all traces of its buyback history already have been removed.

Issue No. 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 databank of VIN numbers? By other means?

In 1991, a working group of the National Association of Attorneys General proposed and circulated model legislation addressing the subject of buyback vehicle disclosures. It called for notice of a vehicle's buyback history and defects to be displayed on a window sticker and included in the sales contract. In addition, it would have required that titles be branded, that these brands be carried forward from titles in other states and that the identification numbers of these vehicles be recorded by state motor vehicle departments.

For whatever reasons, only a few additional states have incorporated these provisions into statutes or regulations since that time. Currently, there are still states that have no legislation or regulations which specifically address buyback vehicle disclosures. Some states have comprehensive disclosure and title branding requirements but exempt a substantial number of buyback vehicles from their applicability by the exclusion of voluntary buybacks. Other states have some disclosure provisions but no title branding or reporting requirements.

In light of the difficulties resulting from the extensive interstate trafficking in buyback vehicles, and since the ultimate goal of buyback vehicle disclosures is to protect consumers from deception in the purchase of used motor vehicles, we believe that consideration should be given to the promulgation of a regulation by the Federal Trade Commission which incorporates the concepts set forth in the model legislation. We believe that effective enforcement would be enhanced by requiring that titles of buyback vehicles be branded. Unlike a window sticker which is easily removed, branding a title provides a more permanent record of a vehicle's buyback history and increases the likelihood that this information will be passed on to subsequent purchasers. In addition, it would provide for easier tracking of these vehicles by federal and state enforcement authorities, especially if combined with reporting requirements and the utilization of a national database.

Issue No. 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?

We do not believe that there is a demonstrated need for uniformity for its own sake. Companies which engage in business on a regional or national level have traditionally been subject to diverse state regulations. Instead, the focus should be on providing a minimum level of consumer protection from potential deception in the used motor vehicle marketplace. A weak national standard which excludes voluntary buybacks from its coverage, would provide uniformity, but would fail to provide comprehensive protection to consumers. A strong national standard may be the most effective way to ensure that consumers in each state receive complete and accurate information regarding the buyback history of used motor vehicles. At the same time, states should not be preempted from experimenting with different methods of disclosure and supplementing a national standard in order to provide additional consumer protections.

CONCLUSION

We thank the Commission for this opportunity to submit comments and we urge your consideration of the regulatory and enforcement issues we have addressed.

_______________________________
Richard Blumenthal
Attorney General of Connecticut

Richard Kehoe
Special Counsel

Garry Desjardins
Assistant Attorney General

Office of the Attorney General
110 Sherman Street
Hartford, CT 06105

On behalf of:

Margery S. Bronster
Attorney General of Hawaii

Richard P. Ieyoub
Attorney General of Louisiana

J. Joseph Curran, Jr.
Attorney General of Maryland

Theodore R. Kulongoski
Attorney General of Oregon

Christine O. Gregoire
Attorney General of Washington

Footnote:

1. For example, in Connecticut, statistics from the state operated lemon law arbitration program show that for the 5 year period from 1991 through 1995, an average of 28% of the arbitration decisions requiring the manufacturer to accept the return of a defective vehicle, awarded consumers replacement vehicles as opposed to refunds. For the same period however, in predecision settlements in which manufacturers agreed to accept the return of the vehicle, 58% of the settlements involved replacement vehicles.