ATTORNEY GENERAL'S OFFICE
July 29, 1996
Office of the Secretary
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
- 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
- "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'
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
- 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
- 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
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
- 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
- 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.
Paul N. Corning
Lemon Law Administration
H. Regina Cullen
Assistant Attorney General