WASHINGTON STATE ATTORNEY GENERAL'S OFFICE

July 29, 1996

Office of the Secretary
Room 159
Federal Trade Commission
Sixth Street and Pennsylvania Avenue NW
Washington, D.C. 20580

Subject: Vehicle Buybacks - - Comment FTC File No. P96 4402

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 accurate number of vehicles reacquired by manufacturers resulting from product quality and warranty service complaints is available only from the manufacturers themselves. There are a number of factors which make even an educated estimate of the number virtually impossible to achieve. Each manufacturer has unique customer service systems, policies and consumer dispute resolution programs. Manufacturers and their dispute resolution programs have not generally made reacquisition statistics available for review. The statistics of manufacturer resale disclosure programs for reacquired vehicles are also not available. Vehicles may be reacquired through a variety of mechanisms that may or may not be perceived as a direct reacquisition of the vehicle by the manufacturer: e.g. manufacturer and/or dealer incentives to 'trade in' a problem vehicle to obtain special prices, rebates, discounts, and/or coupons to apply to the next purchase or cash.
 
It has been the experience of the state of Washington's Lemon Law program that manufacturers' policies, justifications and classifications ('good will', 'lemon' or other) regarding reacquired vehicles appear to be applied inconsistently or, at least, under ever-changing rationales. Manufacturers may have certain company policies, which are unknown to us, that could explain this apparent lack of consistency. Such reacquisition policies could include dollar or volume limits for vehicle reacquisitions. However, until the manufacturers make this information available to us, we can only speculate about their policies and rationales.
 
Informal communications from industry contacts indicate that in Washington state, 10 vehicles are reacquired for each vehicle that becomes the subject of a formal Lemon Law dispute. If this unverified estimate is true, it means that 3,000 - 4,000 vehicles (at least 1.5 to 2 percent of all new vehicles registered each year in Washington state) are reacquired directly by manufacturers as a result of consumer complaints.
 
Reacquired vehicles are disposed of through a number of mechanisms. This office has observed that vehicles may be resold (wholesale or retail) by the dealer who assisted in the reacquisition, or vehicles may be physically retrieved by the manufacturer before being transferred by the manufacturer, its dealer or a remarketing service to an auction. Most vehicles are reintroduced into the public retail market, although a few vehicles have been donated to technical schools or charitable organizations, or in extreme situations, destroyed.
 
How, where, and under what conditions manufacturers dispose of reacquired vehicles are determined by policies established by each manufacturer. Whether reacquired vehicles are sold within the original state, or are transported to and sold in another state, appear to be influenced by a number of factors including state disclosure law, company policy governing auction access, location of regional/zone offices, and/or availability of repair centers and repair procedures. This office understands that some auctions may limit participants to only certain manufacturer franchises, with some systematically excluding bidding from franchises in 'disclosure states'.

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 answers to these questions are also in the hands of the automobile manufacturers. Warranty repair records and costs would identify the success of repairs and the subsequent history under continuing or supplemented warranty coverage. This would not reflect repairs made under service contracts or owner paid repairs where consumers are unaware of continuing manufacturer warranty obligations.

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?

The first issue to clarify is determining the purpose of a disclosure requirement. The goal should be to provide prospective buyers of used vehicles reasonable access to a vehicle's repair history (specifically warranty repairs), particularly where a vehicle has been "returned" by a prior owner because of substantial defects.
 
"Returned" is a term that is difficult to define with precision given the infinite scenarios that can and have been played out from a myriad of facts. Owners extricate themselves from dangerous vehicles or from nightmarish repair histories through a variety of mechanisms including Lemon Law remedies, other legal remedies, manufacturer-sponsored dispute resolution programs, manufacturer and/or dealer offered subsidies (e.g. cash, coupon and the like), or just simply 'cut their losses' and trade them in for other vehicles so that they can go on with their lives. Each of these scenarios poses different problems with any agency attempting to gather complete and accurate records. Not only are the fact patterns giving rise to the repurchases diverse, but a multitude of issues exist with respect to classifying and determining which facts should be disclosed, how they should be disclosed including what (if any) permanent title notations should be attached, and determining how to proceed with tracking, verification and enforcement for violations.
 
If, as the questions suggest, the focus is on impairment of the value of a vehicle based on the problems (or more likely the alleged problems), the difficulties of determining which vehicles require disclosure adds another layer of complexities to vehicles that are classed as "returned". Any standard used to evaluate and rate the repair problems must look more broadly to encompass safety problems and use or reliability problems. Washington's Lemon Law defines 'lemon' defects in a vehicle as warranty problems that substantially impairs the vehicle's use (reliability), value (below that of a similar vehicle), or safety (including life-threatening defects or those creating a risk of fire or explosion).
 
Manufacturer "buybacks" (i.e. those vehicles actually reacquired directly or indirectly by a manufacturer) should require mandatory disclosure and mandatory title notations for 'lemon' vehicles. 'Lemon' vehicles in the state of Washington are those which are formally determined or adjudicated as such, or which are returned pursuant to settlements of lemon law claims. Perhaps title notations should be required for other classes of "returned" vehicles if they can be accurately and consistently identified. It is questionable whether accurate or consistent identification can be made of dealer repurchases (or trade-ins) of defective vehicles which are not the subject of a lemon law inquiry or claim, yet the need for this information is just as critical for subsequent purchasers, as is the history of vehicles that were part of a 'lemon' settlement.
 
This returns us to the original issue behind these comments--what is the purpose for consumers and regulating agencies for manufacturer disclosures of warranty repair histories? For consumers, it is access to material information and for agencies, it is monitoring compliance and verifying violations.

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?

The simplistic and seemingly obvious answer is that broader disclosure requirements will provide a disincentive for manufacturers to provide the ultimate warranty repair of repurchasing or replacing defective vehicles voluntarily. The same apparent logic should also apply in the reverse: defining this vehicle "returned" for which disclosures are now required and calling the next a "goodwill buyback" which requires no disclosures would certainly encourage the latter practice.
 
The manufacturers are responding to substantial and ongoing problems on a relatively small percentage of their production. Any other industry has a quality control reject barrel for production failures at the end of the production line--it is a production expectation and anticipated cost. Manufacturers generally will acknowledge that product failures can and do occur on their production lines. They will also generally acknowledge (and sometimes blame) that the dealer providing warranty service failed or neglected to complete the corrective repairs effectively and timely. This office's experience is that manufacturers have made limited and inconsistent use of opportunities to resolve disputes informally merely because the next step will mandate disclosures and title notations. Some manufacturers make these informal resolution efforts, most do not. The largest incentive to resolve product problems seems to be corporate policies regarding customer satisfaction and the commitment to customer services programs including allocation of resources and standards of effectiveness. The role played in development of company policies by the impact of economic consequences caused by remarketing a 'branded' vehicle with disclosure requirements is unknown to this office. It is more likely that public access to compiled cumulative statistics that may encourage product quality comparisons and which would 'let the cat out of the bag' about a company's return policy is much more threatening than disclosures one vehicle at a time. Broad disclosure requirements equally applied to all manufacturers will have little or no effect on dispute resolution policies.

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?

How long a "buyback" returns to the original issue: what is the purpose for disclosure requirements? Would the disclosure of a vehicle's history of defects and ongoing warranty repair attempts be any less useful or critical to a third buyer than the second? Anything other than permanent notations will create a windfall at a future time for a dealer or consumer who receives the economic benefit of being the first owner of a 'declassified' lemon buyback.

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 previously 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?

Absent state law requiring disclosures in the remarketing of reacquired vehicles, manufacturer policy dictates how vehicles are reintroduced into the marketplace. The industry is the only source of answers to these questions.
 
This office has promulgated rules setting standards for manufacturer-created disclosure forms to substitute for the program's mandatory forms. Only one manufacturer in the past 4 years has submitted a form for approval. This office did not approve the proposed form because it did not provide for disclosure of all the information required by the rule on substitute forms and lacked directions to the intervening wholesalers (i.e. auctions, remarketing services, dealers) and retailing dealer regarding their obligations and potential liabilities.
 
The Washington Lemon Law was amended in 1995 to clarify and establish disclosure obligations for wholesale sellers and liabilities for restitution to subsequent wholesale and retail purchasers for failing to meet those obligations. A copy of the amended Lemon Law and administrative rules is appended to this Comment.

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?

Where the goal is to provide consumers with reasonable access to a vehicle's history of warranty repairs and status as a manufacturer 'buyback,' the manufacturer's warranty records must be available to consumers upon request from the franchise dealer's computer networks. Absent access to this manufacturer record there is no other source short of releasing information identifying the previous owners. Identifying previous owners to prospective buyers may be restricted and perhaps prohibited by federal or state law. Even where it has been available to consumers, it is an ineffective and inconsistent tool for disclosure. The next best alternative to previous owner identifications are permanent title notations which are readily disclosable by vehicle licensing agencies. Disclosures based on title notations must obviously be bare of detail and do not identify repair histories. At best, these title notations serve as red flags to consumers, warning them to search out further information before buying, particularly since most manufacturers or dealers refuse to voluntarily release substantive information about repair histories. At worst, title notations ("brands") are unseen by the vehicle's owner because the title went to the lienholder.
 
Washington's experience with tracking resale disclosures of Lemon vehicles, one by one, to monitor compliance is achievable because we are dealing with a relatively small number of vehicles (many of which are transported to other states for resale).
 
Intensive record keeping and tracking by any one agency of many tens of thousands of vehicles annually would be impractical to imagine without tremendous resources being devoted to the task. Perhaps the FTC, working with the states, could establish a centralized pool of shared computerized data to be used for enforcement purposes and perhaps for direct public access (through the Internet for example). This type of data pool also appears to be potentially cost effective. However it should not be mere title branding, for then it will not meet the goal of providing consumers with substantive information about a vehicle's repair history.

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?

Washington's Motor Vehicle Warranties Act, Chapter 19.118 RCW, generally know as the Lemon Law requires permanent title notations, written disclosure to intervening wholesale transferors and to the next retail consumer including disclosure of mandatory warranties for repairs to defects which the manufacturer represents as corrected. The statute covers vehicles reacquired by manufacturers through arbitration awards, arbitration settlements (as defined by rule, WAC 44-10-010), court order, or reacquired under a similar law of another state. There are no disclosure requirements or title notations regarding vehicles reacquired prior to acceptance of a dispute by the Arbitration Board.
 
This office requires 100% compliance with resale disclosure provisions of the Lemon Law. This policy includes tracking each vehicle to its next retail consumer in Washington or disposition in another state, and enforcement activities taken formally and informally against manufacturers and dealers. This office has made substantial efforts through the years to educate manufacturer representatives at corporate and regional levels to the obligations for reselling reacquired 'lemon' vehicles. We encourage manufacturers to consult with their legal departments to assure that every reacquired vehicle is returned to the market responsibly and in a manner that includes prevention of future liabilities.
 
When there are effective measures to inform consumers of buybacks, there are costs and benefits not only to the manufacturer but also to consumers and the regulatory agency(ies). The benefits to the manufacturer include: 1) an identifiable procedure to follow; 2) limiting potential liabilities by complying with the law and; 3) creating enhanced goodwill for a complying manufacturer. The costs to manufacturers include: 1) reduced resale value of vehicles and; 2) additional administrative costs.
 
The costs to dealers to adopt effective measures are only administrative. However, dealers' benefits include reduced future liability.
 
The costs to a regulatory agency are related to the volume of vehicles that must be tracked and monitored for compliance added to the costs of enforcement activities.
 
The costs to manufacturers, wholesalers and dealers will ultimately be passed on to consumers, but these are overwhelmingly outweighed by the benefits that are created for consumers. Effective disclosure gives consumers the means to accurately assess the actual value and price of a vehicle. Without this disclosure, consumers have no way to determine the actual value of a used car using such critical information as available warranty services when a vehicle is reintroduced into the market.

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?

Any FTC regulation should complement and assist the states in their efforts. FTC action must not preempt state law so as to limit a state's authority to establish more stringent requirements or employ their enforcement powers. Instead, the FTC and the states should establish comprehensive laws, rules and policies which support one another's unique role and perspectives. A databank of vin numbers nationwide can and should be accomplished. However, as noted above, this databank would only provide a limited part of a vehicle's history, although it could serve as an initial indicator of problems and provide directions to additional information. It is uncertain if this database could identify warranty coverage or specify other problems associated with the vehicle.
 
Washington participated in the development of a draft law (as opposed to a "model" law) under the sponsorship of the National Conference of State Legislators. This office would be pleased to participate in further efforts to develop a model statute. A critical element of such a model state law remains is one of reciprocity among the states for title notations and disclosure obligations.

10. Uniformity in the disclosure and labeling of repurchased vehicles might resolve the problems 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?

For the most part, resale motor vehicle requirements have been governed by state law and regulation. Although uniformity of disclosure is a desirable goal to work for, we must insure that any standard devised takes into account and not preempt those state whose laws provide a greater degree of protection for consumers than the national standard.
 
Any proposed FTC regulation for transportation of vehicles in interstate commerce should include a disclosure requirement when transporting targeted vehicles across state borders that recognizes and supports a receiving state's law, where that law is more restrictive. Even with such a recognition requirement, the ultimate result may be a continuation of current practice, i.e. that manufacturers will continue to direct repurchased vehicles to states with less stringent, or no, disclosure laws. If the national standard could establish minimum disclosure requirements for resales of targeted vehicles, it would alleviate to some degree, this "forum shopping" by manufacturers.
 
Computerized vehicle title and registration will present a new source of vehicle information in the future. The extent of future plans by the states' vehicle licensing agencies for exchanging this information should also be explored with those agencies.

Sincerely,

Paul N. Corning
Administrator
Lemon Law Administration

H. Regina Cullen
Assistant Attorney General