CONSUMER FEDERATION OF AMERICA

CONSUMER FEDERATION OF AMERICA
COMMENTS TO THE FEDERAL TRADE COMMISSION

ON

LEMON BUYBACK PRACTICES

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

August 14, 1996

The Consumer Federation of America (hereinafter CFA) is a non-profit association of some 240 pro-consumer groups, with a combined membership of 50 million, that was founded in 1968 to advance the consumer interest through advocacy and education.

CFA is a co-petitioner in requesting that the Federal Trade Commission take steps to curb "lemon laundering" of seriously defective vehicles. CFA remains deeply concerned about continuing problems consumers encounter in connection with used car sales and repairs. For the past four years, in conjunction with the National Association of Consumer Agency Administrators, CFA has conducted surveys of consumer protection agencies concerning their consumer complaints. Each year, automobiles -- new and used car sales and repairs -- are the product about which consumers complain the most.

Last year, in response to the question about the top five most frequent categories o f complaints received, autos comprised three of the four most frequent responses, with "used car sales" topping the list.

CFA understands that member organizations, other consumer groups, state Attorneys General, and individual plaintiffs attorneys have submitted lengthy and detailed documents in response to the questions posed by the Commission. These comments seek to supplement those submissions, and to briefly summarize our position.

Question 1.

The exact number of buybacks is not known, except to individual auto manufacturers. However, a recently published report about lemon laundering in California indicates that about 100 titles a week are submitted to California's Department of Motor Vehicles to be branded "Lemon Law Buyback" under a new law that took effect in January.⁽¹⁾ If that rate is sustained, it would lead to a projected 5,200 vehicles annually that are expected to be branded in that state. Since California accounts for approximately 10% of the U.S. vehicle market, an extrapolation based on the most recent data from California indicates that at least 52,000 vehicles nationwide are lemon buybacks.

Question 2.

Auto manufacturers' claims that vehicles are repaired before being marketed to used car buyers should be viewed with skepticism. Often, maladies are intermittent, and may be apparent only under specific conditions that are not duplicated when the vehicle is tested on the road or in the laboratory environment. Common examples are failure to start in certain climatic conditions, or stalling when there are changes in temperature or altitude.

Further, manufacturers' service bulletins frequently document troubles that affect thousands of vehicles due to flaws in the manufacturing process, such as faulty parts from a single supplier. When this occurs, sometimes no fix exists unless a part is retooled or remanufactured, which can be an extremely lengthy and costly undertaking. Meanwhile, if vehicles with a common flaw have been repurchased and resold to subsequent buyers who lack warranty protection, the vehicles may remain unfixed indefinitely.

A problem that requires special engineering can mean that an effective repair is delayed for months. For example, owners of certain Ford F150 trucks experienced stalling when they shifted the vehicles into reverse. A Special Services Message from the manufacturer stated on November 21, 1994, "Engineering is currently working on a service PCM to address the harsh reverse engagement concerns on 1993-94 4.9L E4OD transmissions. The revised PCM's should be released early in the second quarter of 1995. Until that time, if a customer complaint of harsh reverse engagement is encountered, please perform normal diagnostics as outlined in the E4OD reference manual. If no faults are detected, do not replace any parts or assemblies. Please wait for the revised PCM."⁽²⁾

Question 3.

CFA policy calls for disclosure, title branding, and public registry of all vehicles repurchased by auto manufacturers and their agents or dealers. The determination whether a vehicle is subject to branding and disclosure should not rest upon the stage at which it is repurchased, rather upon its safety and reliability. It would be ironic indeed, and contrary to sound public policy, to exempt vehicles when their producers fully agree that they are lemons, simply because no dispute exists.

Question 4.

Abuses of the terms "goodwill" "customer satisfaction buyback" are well-documented by the States, and are obviously little more than euphemistic attempts to conceal the histories of vehicles which are truly "lemons." From the consumer's perspective, on balance, if including buybacks repurchased prior to the initiation or arbitration or litigation were to result in fewer consumers being able to return vehicles for trivial reasons--not due to a defect--that would be a small price to pay in return for identifying vehicles with serious nonconformities that substantially impair their use, value, or safety.

Question 5.

With the average transaction price of a new vehicle now exceeding $20,000, more and more consumers are turning to used vehicles to fill their transportation needs. In order to make an informed choice, they should be fully informed whether the vehicle they are considering has a history of known defects, and may in fact be unrepairable.

As with flooded, rebuilt, or salvaged vehicles, the fact that a vehicle was a buyback remains material to subsequent buyers and should continue to be fully disclosed prior to resale. While several states mandate that vehicles be repaired prior to resale, they generally also require disclosure as well. Some states take the additional step of barring the resales of vehicles with a history of safety defects. States' interest in protecting their citizens and reducing the costs incurred by unsafe vehicles should not be undercut upon the unsubstantiated pretext that the defects, which typically repeatedly defied repair, have suddenly been repaired.

Questions 6, 7, and 8.

Thirty-seven states and the District of Columbia require disclosure to subsequent purchasers that a vehicle is a buyback. However, it is clear from law enforcement actions in states including New York, Florida, California, and Washington that manufacturers have commonly failed to provide disclosure. This occurred even in states with state-administered arbitration programs, where vehicles were determined to be lemons; therefore, it is also clear that noncompliance was not the result of a misinterpretation concerning how to define a lemon.

While state disclosure statutes vary in their effectiveness, the main problem is noncompliance. Since New York announced its settlement with Chrysler in 1988, states have taken action to enforce their disclosure statutes. However, without a federal data base for identifying buyback vehicles, their efforts may be frustrated simply by shipping buybacks across state borders.

The major benefit of title branding is that it encourages compliance with disclosure statutes by providing a valuable, cost-effective tool for law enforcement.

Questions 9 and 10.

CFA supports federal action provided it does not preempt stronger state statutes. Any federal action should complement states' ongoing efforts to alleviate continued problems arising from sales of buyback vehicles. The optimum approach for maximizing full and effective disclosure is a coordinated effort among state and federal governments, to provide a framework for identifying and tracking lemon buybacks and providing meaningful deterrence against noncompliance.