NATIONAL ASSOCIATION OF CONSUMER ADVOCATES

BEFORE THE
FEDERAL TRADE COMMISSION

IN RE:

VEHICLE BUYBACKS - COMMENT

FTC File No. P96-4402

COMMENTS OF THE NATIONAL ASSOCIATION OF CONSUMER ADVOCATES

Steven A. Taterka
P.O. Box 368
Kingston Springs, TN 37082
615 952-3661

Patricia Sturdevant
General Counsel
National Association of Consumer Advocates
225 Bush Street, Suite 758 San Francisco, CA 94104
415 397-7057

I. Introduction

The National Association of Consumer Advocates ("NACA") submits these comments in response to the Commission's Request for Comments Concerning Disclosures in the Resale of Vehicles Repurchased Due to Warranty Defects, Federal Register, Vol. 61, No. 84, p. 19067 et seq., (April 30, 1996).

NACA is a non-profit corporation whose members are private and public sector attorneys, legal services attorneys, and law professors and students whose primary practice involves the protection and representation of consumers. Its mission is to promote justice for all consumers by maintaining a forum for information sharing among consumer advocates across the country and to serve as a voice for its members as well as consumers in the ongoing struggle to curb unfair and abusive business practices. From its inception, NACA has focused its efforts in the area of abusive practices involving automobiles, including odometer rollbacks and wrecked car fraud, sale of "lemon" vehicles, force-placed insurance and deceptive practices in the sale and leasing of vehicles.

For the reasons detailed below, NACA supports the petition filed with the Commission by Consumers for Auto Reliability and Safety together with other consumer groups. NACA believes there is a need to adopt a trade regulation rule to address "lemon laundering" nationally since the current checkered regulation by a handful of states cannot successfully remedy the problem. Indeed, the current state of local regulation actually contributes to substantial consumer injury, as purchasers in states without adequate statutory protection become a natural market for the resale of laundered vehicles from states which regulate or restrict lemon laundering. The trade regulation rule should be applicable both to motor vehicle manufacturers and to dealers, since both will appear in the ownership trail before a buyback vehicle is ultimately resold to the next retail purchaser; accordingly, both must be included so as to ensure that the chain of disclosure is not broken. In addition, title branding, a warning label and conspicuous contract disclosure are all important and vital elements that should be included in any regulation to offer consumers a meaningful, up-front disclosure, allowing them to make informed decisions regarding the largest purchase most consumers will make.

II. Necessity for a Rule

The benefits of ensuring that potential purchasers of buyback vehicles know what they are purchasing are manifest. Consumers have a right to adequate information to protect themselves in the marketplace. In particular, consumers are entitled to sufficient information to completely avoid a buyback vehicle and instead opt for a vehicle without a troubled history. A consumer is also entitled to knowingly choose to purchase a buyback vehicle but at a price which reflects its diminished value. In those states that require manufacturers to offer a minimum express warranty upon resale of a buyback vehicle, a consumer can avoid wasting money on a manufacturer-offered or third-party extended warranty which would merely duplicate state-mandated coverage.

The National Association of Attorneys General ("NAAG") recognized the problem at its winter meeting in 1991. At that time NAAG passed a resolution entitled "Mandatory Disclosures in the Resale of Lemon Vehicles", in which it acknowledged the huge potential monetary loss to consumers attributable to the purchase of "lemon" buyback vehicles and recognized that many states do not have adequate legal protection for unwitting consumer purchasers of lemon law buybacks. NAAG recommended the adoption of legislation or regulations which would provide for buyback status disclosure, title branding, reporting to and recording by state motor vehicle departments of the identification of buyback vehicles, as well as recovery of actual damages, exemplary damages, and attorneys' fees for aggrieved consumers. NAAG also recommended the creation of a multistate database network to allow interstate tracing of vehicles with branded titles.

The states currently take a wide variety of approaches to the problem. Many states require manufacturers to provide a disclosure statement to only the first transferee after repurchase by the manufacturer; several require the buyer's signature to substantiate that the disclosure has been made. Some states provide for title branding to alert subsequent purchasers of the vehicle's buyback status; among the states that do brand, the branding phrases are not uniform. Further, some states carry over title brands from other states while others do not. One state, California, requires placement of a sticker in the driver's door frame to reflect the vehicle is a buyback. In a few states, violation of a disclosure requirement relating to buyback vehicles is actionable by an aggrieved consumer. Other states simply have not addressed the issue. Because the approaches are so varied and because many states have not enacted meaningful legislation to address the problem, promulgation of a national trade regulation rule will eliminate any incentive or opportunity for manufacturers to retitle and/or sell buyback vehicles in "soft" states. The proposed trade regulation rule would provide a measure of protection for consumers in those states as well as in other states to which the vehicles may ultimately be resold. Of course, any rule promulgated by the Commission should operate as a minimum standard and not preempt more protective legislation that any state has enacted.

Finally, although case law makes clear that there is no private right of action under the Federal Trade Commission Act, promulgation of a trade regulation rule that defines lemon laundering as an unfair or deceptive act or practice will be of great assistance to individual purchasers. Many states have enacted "mini-FTC" acts that allow aggrieved consumers to bring suit for unfair or deceptive conduct and define Commission rules as criterion by which the practice is deemed a violation of state law. Furthermore, the proposed trade regulation rule will maximize the ability of aggrieved consumers to enforce their rights under state common law.

III. Scope of Rule

The threshold issue that needs to be determined is which vehicles should be covered by the trade regulation rule. Vehicles repurchased by motor vehicle manufacturers may be repurchased at one of several steps in the process of invoking a state lemon law. A vehicle may be repurchased before or after a consumer (or the consumer's attorney) has given the manufacturer notice of the vehicle's failure to conform to an express warranty, after notice but prior to a request for arbitration, after an arbitration request but prior to the hearing, after the hearing but before a decision is rendered, or after the decision but prior to the filing of suit. In a state such as Florida, which provides for both state-run and manufacturer-sponsored arbitration, the points at which a vehicle can be repurchased are yet greater. After arbitration, a repurchase can take place while litigation is pending, after a trial court decision, or while a case is on appeal. Accordingly, any attempt to classify a buyback vehicle based on the point at which it was repurchased creates an artificial distinction unrelated to the basis for the buyback.

Manufacturers argue that they often repurchase vehicles to retain customer goodwill rather than because the vehicles are defective. According to the manufacturers, only vehicles which have been formally adjudicated by a court or arbitrator as lemons should be tagged as buybacks. The argument, however, misses the mark for several reasons. First, a vehicle which exhibits substantial and uncorrectable nonconformities is more likely to be repurchased early in the process and thus prior to an arbitration decision or adjudication by a court. Thus, under the manufacturers' argument, the more defective the vehicle, the more likely it is that it would escape buyback regulation. Second, lemon laws typically cannot be invoked unless the vehicle has been out of service four times for the same unrepaired defect or at least thirty days cumulatively. Indeed, in some states manufacturers may be given yet additional attempts at repair. See, e,g, Tenn. Code Ann. s.55-24-205(c), allowing a manufacturer ten additional days after notification to attempt a fifth repair before the consumer may proceed to litigation. Again, an early buyback is most likely an indicator of a more egregious defect. Finally, an actual determination by a court that a vehicle is nonconforming occurs only a small percentage of the time, since the vast majority of such litigation is resolved informally prior to final determination, and may depend more on the manufacturer's litigation philosophy than on the defective nature of the vehicle.

Any definition of "buyback vehicle" should therefore include all vehicles repurchased by a motor vehicle manufacturer or by a dealer with the assistance of the manufacturer following notification by the purchaser of a defect. Among the most comprehensive definitions is that contained in Indiana's statute governing buyback vehicle disclosure. It defines a "buyback vehicle" as:

"...a motor vehicle that has been replaced or repurchased by a manufacturer or a nonresident manufacturer's agent or an authorized dealer, either under this chapter or...by judgment, decree, arbitration award, settlement agreement, or voluntary agreement in Indiana or another state..."

Indiana Code 24-5-13.5-3.

This definition includes all repurchases, however denominated, with a limited exception for any motor vehicle repurchased pursuant to an advertised guaranteed repurchase program where the vehicle is not alleged or found to have a nonconformity as defined by Indiana's lemon law.

NACA supports this definition of buyback vehicle. No single point in the buyback process is a better indicator than another in determining that a vehicle is nonconforming. Absent an impartial arbiter to review all buybacks (an impossible task), the mere fact of buyback is the best indicator that the vehicle is defective. The manufacturers' arguments that many of their buybacks are made for goodwill reasons represent nothing more than a continuation of their outlandish denials that they do, in fact, produce defective vehicles.

IV. Recommendations

Five years ago a NAAG working group developed model legislation to address lemon laundering. The model legislation included three core facets: title branding, a window sticker, and conspicuous contract disclosure. Each of these recommendations, as well as several others, deserve comment.

A. Title Branding

Title branding is desirable for a number of reasons. First, where consumers take possession of the title certificate, they can take appropriate action if disclosure was not received at the time of purchase. While in most states lienholders retain possession of the title until the loan is paid, in several states, such as Wisconsin, the owner acquires possession of the newly issued title immediately. Second, title branding allows a buyer to establish knowledge of the seller that a vehicle is a buyback; thus, the buyer can take action for any nondisclosure prior to sale. Third, title branding enables law enforcement to trace buyback vehicles to determine if particular manufacturers or dealers are engaging in a pattern of nondisclosure. Fourth, title branding allows a dealer to protect itself and the consumer from unwittingly trading in buyback vehicles.

Unfortunately, there is not now uniformity among the states in the branding phrases used to designate buybacks. For instance, Connecticut brands titles with the phrase "MANUFACTURER BUYBACK". See, Conn. Gen. Stat. s.42-179(g)(1). Indiana similarly requires "Manufacturer Buyback - Disclosure on File". See, Indiana Code 9-17-3-3.5(b)(1). Alabama brands titles with the statement, "THIS VEHICLE WAS RETURNED TO THE MANUFACTURER BECAUSE IT DID NOT CONFORM TO ITS WARRANTY". See, Code of Ala. s.8-20A-4(2). New Jersey requires that titles indicate "that the motor vehicle was returned to the manufacturer because it did not conform to the manufacturer's warranty and the nonconformity was not corrected within a reasonable time as provided by law." See, T. 39, Ch. 10, New Jersey Rev. Stats. Vermont stamps the following phrase on titles: "THIS VEHICLE WAS RETURNED PURSUANT TO LAW: DEFECT SUBSTANTIALLY IMPAIRS THE USE, MARKET VALUE, OR SAFETY.". See, Vermont Stats. Ann., Title 9, Sec. 4181. A uniform national brand is clearly the most desirable solution.

B. Window Stickers

The second facet of the NAAG model legislation would require the placing of a separate window sticker on buyback vehicles available for retail sale. Just as the Commission's Buyer's Guide rule serves to inform potential used car purchasers of the inclusion, availability or lack of warranty for a subject vehicle, likewise a sticker would apprise consumers of a vehicle's buyback status.

C. Contract Disclosure

The third facet of the model legislation requires prominent disclosure of a vehicle's buyback status in any contract for the sale of a used vehicle. NACA proposes a requirement of a specific, clear, and conspicuous disclosure that the vehicle was previously repurchased by its manufacturer due to a substantial defect which impaired its safety, use, or market value. To ensure that the consumer is made aware of the disclosure, there should be a separate, written statement signed by the consumer acknowledging that disclosure has been made. There is already precedent for a Commission mandated contract provision in consumer contracts; the Commission's Holder in Due Course Rule has long required language in consumer credit contracts to the effect that assignees of such contracts are subject to claims and defenses of the consumer. See, 16 C.F.R. s.433.

D. Other Types of Disclosures

In addition to the proposals contained in the NAAG working group's model legislation, the Commission should also follow California's lead to require manufacturers to place a conspicuous sticker on the vehicle disclosing its buyback status. Such a requirement should be patterned after the federal Odometer Act's requirements for odometers replaced due to malfunction; that Act requires placement of a sticker in the driver's door frame disclosing the mileage on the original odometer if the new odometer was not reset to the original odometer's reading. See, 49 U.S.C. s.32701 et seq.

Finally, the Commission should require manufacturers to title all buybacks in the manufacturer's name upon repurchase. This requirement would enable dealers who subscribe to computer databases, such as Carfax, to more easily identify buybacks and thus avoid them if they so choose. The significance of these databases should not be underestimated; several manufacturers already use them to identify salvage vehicles in order to deny warranty claims on vehicles that have been deemed total losses by insurance companies. This requirement would also assist law enforcement personnel in identifying buybacks and aid consumers who obtain a title history if they purchase a vehicle which exhibits substantial defects.

V. Conclusion

For the reasons stated, NACA supports the adoption of a trade regulation rule which establishes a broad definition of covered vehicles and provides for comprehensive procedures to ensure full disclosure to consumers.

Respectfully Submitted,

Steven A. Taterka
P.O. Box 368
Kingston Springs, TN 37082
615 952-3661

Patricia Sturdevant
General Counsel
National Association of Consumer Advocates
225 Bush Street, Suite 758
San Francisco, CA 94104
415 397-7057