Auto salvage and S. 431, S. 485, and S. 1232 : hearing before the Committee on Commerce, Science, and Transportation, United States Senate, One Hundred Third Congress, first session, August 3, 1993 online

age the subcommittee to consider requiring cars that have been
salvaged and then rebuilt to undergo a tou^ safety inspection be-
fore they are reissued a title for the road. Before showing the video,
I would like to take the time to commend the Chair, the ranking
member, and the sponsors of these three important bills for their
attention to this problem, and I thank you for the opportunity to
testify here today. Of course, I would be happy to entertain ques-
tions from the members of the subcommittee at any time.

Thank you very much.

[The prepared statement of Mr. Gray follows:]

Prepared Statement of Clyde Gray

Good afternoon, Mr. Chairman and Members of the Subcommittee. My name is
Clyde Gray, and I am a reporter with the investigative unit of WCPO-TV in Cin-
cinnati, Ohio. I am accompanied today by James 2iarchin, News Director of WCPO-
TV, and Matthew Weber of Baker &. Hostetler, WCPO's General Counsel. After my
statement, I will show you a short video containing highlights of the I-Team's series
on rebuilt wrecks. We very much appreciate the invitation to testify today about fed-
eral legislation which could combat the life-threatening risks that we documented
in our series.

Imagine paying more than $13,000 for a car that the salesman tells you is a low-
mileage, one owner car with a shiny paint job only to discover vou can not steer
the car over 50 miles per hour. But that is not all you discover. The car the sales-
man assured you was almost new, is not new after all. In fact, it is not even one
car. Incredibly, your $13,000 car has actually been spliced together in a backyard
body shop from the bodies of two different cars — cars that are from two different
model years. Almost unbelievably, you find your car was totaled in a wreck only a
few weeks before you bought it. The car was smashed in both the front and rear.
An insurance company sold the car for salvage, and then it was pieced back together
with parts from other wrecked cars before being sold to your car dealer at an auto
auction in another state. You paid $13,000 for a piece of junk — a car that experts
now tell you is unsafe to drive.

Mr. Chairman, horror stories like this are all too real and, in most cases, the con-
sumers who are victimized have no adequate recourse under state or federal law.
During our six month investigation of this growing problem, the WCPO-TV inves-
tigative unit found hundreds of cases where consumers had paid thousands of dol-
lars for what they thought were almost new cars but in reality were rebuilt wrecks.

And this is not an isolated problem. It crosses the borders of almost every state.
The I-Team uncovered a huge national industry that is cheating millions of car con-
sumers every year. One car auction company estimates the cost to consumers from
this car fraud to be in the billions of dollars.

In most cases, buyers of rebuilt wrecks never know they are purchasing cars that
were wrapped around telephone poles or had rolled over embankments. That is be-
cause in many states there is no indication on a car's title to tell the consumer that
the car was totaled and then reconstructed. In these states, a car that is salvaged
after a wreck gets a salvage title, but once it is reconstructed the car gets a brand
new title — known as a clean title — that has no mention of its previous condition. To
the next buyer of the car, it is as if the accident never happened. The buyer seldom
knows the car was totaled and he ends up paying thousands more than the car is
worth. Often, the cars now are structurally unsound and sometimes are not even
road worthy.

Because of these loopholes in the title process, the buyer of a rebuilt wreck does
not know why the car is having mechanical problems. Car dealers who buy these
cars at auto auctions say they also are the victims of rebuilt wrecks. In Ohio and
Kentucky alone, we found more than 150,000 rebuilt wrecks were sold in just the
last few years.

While the economic cost to individual consumers who get stuck with rebuilt
wrecks might be devastating, the solution to the problem is simple.

Just as passing the National Truth in Mileage Act was necessary to correct the
rolling back of car odometers, the problem of rebuilt wrecks calls for a national law
to require that these cars carry titles designating them as "rebuilt." Once a car is
salvaged by an insurance company, the title should always reflect the car's salvage
history. Like cattle, the title should be branded for life. This would require uniform



wording and a uniform salvage designation from state to state, but this would not
be any different or any more difficult than what was done for odometers. And many
experts will testify that rebuilt wreck fraud poses an even greater safety risk than
odometer rollbacks.

In addition to branding a car's title as "rebuilt," we would encourage the Sub-
committee to consider requiring cars that have been salvaged and then rebuilt to
undergo a tough safety inspection before they are re-issued a title for the road.

Before showing the video, I would like to commend the Chairman, the Ranking
Member, and the sponsors of these three important bills for their attention to this
problem, and I thank you for the opportunity to testify here today. Of course, I
would be happy to entertain questions from tne Members of the Subcommittee at
any time.

Senator Mathews. Mr. Gray, thank you. Let me suggest that in-
stead of showing the video at this time, let us go to the next wit-
ness and wait until our associates come back, because I am sure
they would like to see this video.

Mr. Gray. Very well, sir.

Senator Mathews. Mr. Blumenthal, welcome to the committee.
May we hear your statement?

STATEMENT OF HON. RICHARD BLUMENTHAL, ATTORNEY
GENERAL, STATE OF CONNECTICUT, TESTIFYING ON BE-
HALF OF THE NATIONAL ASSOCIATION OF ATTORNEYS GEN-
ERAL

Mr. Blumenthal. Thank you. Senator. In testifying here today —
and I very much appreciate this opportunity to do so — I represent
not only my office, the Attorney General's Office of the State of
Connecticut, but also the National Association of Attorneys Gen-
eral, which passed a resolution just a couple of years ago that I in-
troduced and proposed that would in essence support the proposals
contained in Senate bill 1232.

In introducing that bill. Senator Gorton described the problem of
fraudulent lemon buyback sales as menacing and deceptive. Cer-
tainly that characterization of the problem rings very true to those
of us who are responsible for law enforcement at the State level.

To understand the dimensions of the problem, the subcommittee
should understand that approximately 50,000 cars nationwide are
repurchased or replaced every year as a result of court orders or
arbitration. That figure does not include the thousands upon thou-
sands of vehicles that are repurchased and replaced as a result of
out-of-court settlements, and very often those vehicles are among
the most egregious, the most defective, the worst of the lot, because
the dealers and the manufacturers do not even resort to the man-
datory process, but voluntarily repurchase or replace vehicles.

For most of us, buying an automobile is among the most impor-
tant purchases we make, second only to our home, and unfortu-
nately fraud on car consumers is rampant. It is a fact of life in this
country today, and one that must be addressed and will be ad-
dressed if the Senate and the House of Representatives do adopt
these very potentially effective proposals.

In 1982, my State, the State of Connecticut, became the first in
the Nation to pass a lemon law establishing specific rights for con-
sumers who purchase new motor vehicles. In 1984, our State estab-
lished a State-run arbitration system. Since its inception, the Con-
necticut lemon law arbitration system has resulted in the settle-
ment of about 2,450 disputes.



10

Over the past 10 years, the Connecticut lemon law has provided
our citizens with an effective remedy for redressing problems with
their cars, and yet as successful as the lemon law program has
been in Connecticut, we have found countless used car buyers who
have been victims of fraudulent sales of cars previously bought
back by manufacturers because of defects.

It is for that reason that I proposed in 1992 and advocated before
our general assembly to require that the title of each lemon law
buyback vehicle be branded with the words "manufacturer's
buyback." The branding will serve as a permanent notice to future
car owners of its history, and the provision will also require that
the department of motor vehicles include that designation on any
subsequently issued title for that car.

Connecticut thus became one of six or seven — only a handful of
States — that currently have those kinds of title stamping or brand-
ing. And yet, this is a problem that really cries out for a national
solution. Connecticut bears the burden of enforcing that law, while
at the same time, its consumers are victims of cars from other
States that do not have that kind of title-stamping requirement.
This problem really demands uniform standards such as those that
are contained in the proposals before you — uniform sticker stand-
ards, uniform title certificates, uniform stamping or branding
standards, uniform requirements that State motor vehicle depart-
ments carry forward on all titles the stamp and brand standards
and uniform disclosure statements contained in S. 1232.

Just briefly a couple of key points:

Notification on the car title ensures that second and third subse-
quent purchasers are aware that the car was a manufacturer's
buyback.

Second, title branding does not discourage settlement of lemon
law cases. We did a comparison of four States, two with title brand-
ing, two without, which demonstrated that there is absolutely no
correlation between title branding and settlement rates.

Third, title branding does not increase the number of vehicles
that are described as lemons. Rather, it is merely a disclosure stat-
ute, as a number of the Senators emphasized in their opening
statements.

We urge that two provisions of the law be clarified. First of all,
that State officials have the ability to enforce this law much as
they do in regard to the odometer-tampering provisions that were
adopted and were referred to earlier — that is. Title 15, United
States Code, Section 1990A, which allows for State attorneys gen-
eral to enforce odometer-tampering prohibitions.

Second, we urge that the term "inconsistent" be specifically lim-
ited to those instances where compliance with State law would not
be possible without directly violating the Federal law. Such a provi-
sion would allow for States to provide greater protection, enhanced
protection to consumers, even above and beyond the Federal provi-
sions. Clearly, a Federal solution establishing minimal standards
for all States is absolutely necessary, and that is why we, as attor-
neys general, so strongly support S. 1232.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Blumenthal follows:]



11

Prepared Statement of Richard Blumenthal

I appreciate the opportunity to speak in support of S. 1232, which would establish
federal requirements regarding the disclosure and reporting of salvage vehicles and
manufacturer buyback vehicles.

For most of us, buying an automobile is among the most important purchases we
make, second only to our home. Unfortunately, fraud on car consumers is rampant.

In 1982, Connecticut became the first state in the nation to pass a Lemon Law,
establishing specific rights for consumers who purchase new motor vehicles. In
1984, our state established a state-run arbitration system, a low cost administrative
hearing process to mediate and settle disputes between consumers and motor vehi-
cle dealers and manufacturers.

Since its inception, the Connecticut Lemon Law arbitration system has settled
2450 disputes, 68 percent resulting in refunds or replacement vehicles through arbi-
tration awards or predecision settlements in favor oi the consumer.

Over the past ten years, the Connecticut Lemon Law has provided our citizens
with an effective remedy for redressing problems with new cars.

MA^fUFACTURERS BUYBACKS: CONNECTICUT'S EXPERIENCE

As successful as the Lemon Law program has been in Connecticut, we've found
that many used car buyers have been victims of fraudulent sales of cars previously
bought back by manufacturers because of defects.

Nationally, over 50,000 vehicles are repurchased annually as a result of lemon
law arbitration or litigation decisions. Many buybacks are sold in Connecticut with-
out the knowledge of the consumer.

In order to be fully protected, Connecticut consumers need passage of a federal
law requiring title branding, a law similar to S. 1232.

S. 1232: UNIFORM PROTECTION FOR ALL CONSUMERS

In 1991, I sponsored a resolution, adopted by the National Association of Attor-
neys General, regarding mandatory disclosures in the resale of Lemon vehicles. The
resolution notes that a vehicle's "buyback" history is material in anv subsequent
sale, that many of these vehicles are sold at auctions and recycled back into the
maricetplace and that many states do not have adequate legal protection for the un-
witting consumer buvers of these vehicles. Accordingly, the unanimous resolution
calls for legislation which:

• requires that a vehicle's buyback history be clearly and conspicuously disclosed
on the title, in the contract and on the vehicles; and

• requires that state motor vehicle departments carry forward all such buyback
brands on all new titles issued.

I am pleased to see that all of these points are included in S. 1232.

Also very important is the proposed bill's definition of "Manufacturers Buyback
Vehicles" specifically including vehicles which are repurchased or replaced, not only
pursuant to a court order or an arbitration proceeding but also pursuant to pre-trial
settlement agreements. The latter is particularly significant since in our experience,
this includes the majority of the vehicles which are returned under our Lemon Law.

Statistics from Connecticut's State-operated Lemon Law Arbitration Program
show that on average, over a 2 year period (1990-91 the most recent period for
which complete figures are available), approximately 200 vehicles were repurchased
or replaced by manufacturers annually, through the program. This figure includes
not only those cases in which an arbitration decision was issued, but also settle-
ments reached after the arbitration process has been initiated by the consumer.

Connecticut also requires that manufacturers report all defective vehicles which
are repurchased or replaced, to the department of^ motor vehicles. Over the same
2 year period, an average of approximately 700 vehicles were repurchased or re-
placed according to the DMV records. Thus, substantially more are repurchased
through voluntary agreements, thereby avoiding lemon law arbitration.

These repurchased cars are sent to the resale market. They are sold by the dealer
or manufacturer at wholesale auction houses — usually in other states — where any
evidence that the car was a lemon law buyback is eliminated. The cars are then
purchased by dealers who sell them to unsuspecting consumers. Many of these cars
still have defects which cause problems for the new owners. If the consumer had
knowledge of the vehicle's history, the new owner would not have purchased the
lemon law buyback vehicle at the price which he/she paid.

Armed with this information, my office worked in conjunction with the Depart-
ment of Motor Vehicles and tried to trace some of the cars which the Department
of Consumer Protection's Lemon Law Arbitration Program had ordered to be bought



12

back. Only 1 car out of 50 was traceable in Connecticut. The rest were probably sold
out of state without proper and full documentation of the car's history.

Connecticut's law at the time only required that dealers place a disclosure notice
on the car. This notice is easily removable especially if a car is sold out of state.

In 1992, I successfully proposed and advocated a Connecticut statute to require
that the title of each lemon law buyback vehicle be branded with the words "manu-
facturer's buyback". The branding will serve as a permanent notice to future car
owners of its history. The provision would also require that the Department of
Motor Vehicles include such designation on any subsequently issued title for that
car.

I suggest some key points:

1. Notification on the car title ensures that second and third subsequent pur-
chasers are aware that the car was a manufacturer's buyback.

2. Title branding does not discourage settlement of lemon law cases. A compari-
son of four states (two with title branding and two without) demonstrated that there
is no correlation between title branding and settlement rates.

3. Title branding does not increase the number of vehicles which are described
as lemons; rather it is merely a disclosure statute.

Connecticut's law is a significant victory for consumers. Very importantly, how-
ever, so many of these buybacks are immediately sold in other states that Connecti-
cut's consumers are probably purchasing lemons bought back in other states without
title branding. As long as some states lack title branding, and currently there are
many, there will undoubtedly be lemon law vehicles are repurchased or replaced
outside of our formal arbitration programs approximately 500 vehicles per year.

Our experience has been that the vehicles which are the most seriously defec-
tive — the vehicles which most clearly fall into the "Lemon" category are the vehicles
which the manufacturers are most likely to buy back voluntarily rather than submit
to arbitration or legal proceedings. For these reasons, S. 1232 should be clarified so
that there is no doubt that vehicles repurchased or replaced through voluntary set-
tlements even those settlements which occur prior to a filing of a lemon law com-
plaint must be included within the scope of this legislation. At the same time, since
it is limited to vehicles reacquired due to a defect or nonconformity, it does not
apply to so-called goodwill buybacks or vehicles returned after extended test drive
programs.

Our experience demonstrates a need for federal legislation. Yet, the states have —
and should continue to have a pivotal role in lemon law enforcement. Therefore, I
urge a further clarification of section 704 of the proposed bill limiting the preemp-
tive effect of the law to those provisions of state aisclosure law which are inconsist-
ent with the federal law and regulations. I recommend that the term "inconsistent"
be specifically limited to those instances where compliance with state law would not
be possible without directly violating the federal law. Such a provision would allow
states to provide greater protection for consumers.

Finally, I would urge the committee's consideration of a provision allowing for
state attorney general enforcement of violations of this act. This provision would be
similar to 15 IJSC 1990a, which allows for state attorney general enforcement of the
odometer tampering provisions of the Motor Vehicle Information and Cost Savings
Act.

Clearly, a federal solution, establishing minimum standards for all states is abso-
lutely necessary. That is why I strongly support S. 1232.



BACKGROUND STATEMENT

In a recent letter to state Attorneys General, the Center for Auto Safety reported
that 50,000 vehicles are repurchased annually as a result of lemon law arbitration
or litigation. These figures do not include the vehicles which are returned to the
automobile manufacturers through voluntary settlements in order to avoid potential
arbitration or litigation. There have been numerous reported instances where these
vehicles are then resold without disclosure to consumers.

Not all states have specific requirements regarding disclosure of a vehicle's lemon
history and even fewer require that the vehicle's title be stamped or branded to indi-
cate that it is a lemon law buyback. In those states where disclosures are required
on the vehicle or the title, lemon vehicles can easily be transported to another state
which has no such requirements and a new title can be obtained without the lemon
disclosure. Even in the states where disclosure is required, there is currently no
tracking system which could be used to determine if vehicles coming in from other
states are lemon law buybacks.



13

For these reasons, it is believed that legislation which would establish uniform

{)rocedures among the states regarding disclosures, title branding and reporting of
emon Law buybacks would be the most efTective way to address this problem. The
attached resolution supports mandatory disclosures m the resale of lemon vehicles
in order that consumers will become more fully informed about the history of the
used cars they purchase.



PROPOSED RESOLUTION— MANDATORY DISCLOSURES IN THE RESALE OF LEMON

VEHICLES

Whereas, at least 50,000 vehicles with serious safety defects or non-conformities
are repurchased by manufacturers or dealers annually through arbitration, litiga-
tion or through settlements as a result of the various state lemon laws; and

Whereas, with an average purchase price of $15,000 per automobile, lemon law
buvbacks represent a potential $750 million loss; and

Whereas, many of those vehicles are subsequently resold at auction or by used car
dealers and thus recycled back into the marketplace, back onto the streets, and back
into repair shops; and

Whereas, many states do not have adequate legal protection for the unwitting
consumer purchasers of lemon law "buyback" vehicles; and

Whereas, the fact that the vehicle is a manufacturer or dealer "buyback" vehicle
is material to any subsequent sale of the vehicle;

Now, therefore, be it resolved that the National Association of Attorneys General:

1. Encourages the adoption of legislation or regulations in each state that:

a) provides for disclosure oi the fact that a vehicle has been repurchased by
a manufacturer or dealer for the protection of consumers;

b) contains a disclosure provision which requires that notice be placed clearly
and conspicuously on the vehicle, on the contract and on the title;

c) requires that pertinent information on buyback vehicles be reported to and
recorded by state motor vehicle departments;

d) requires state motor vehicle departments to carry forward all previous
lemon law title brands or stamps on all new titles issued; and

e) provides for recovery of actual damages, exemplary damages and attor-
neys' fees, where appropriate, by consumers injured by violation of the statute.

2) Supports participation in a multistate database network which would allow the
interstate tracing of vehicles with branded titles.

3) Authorizes its Executive Director and General Counsel to make these views
known to all interested parties.

Senator Mathews. Thank you, Mr. Blumenthal. I believe our
next witness is Mr. Gene Van Winkle. Mr. Van Winkle, welcome.

STATEMENT OF GENE VAN WINKLE, GENERAL MANAGER,
OMAHA AUTO AUCTION, ON BEHALF OF ANGLO AMERICAN
AUTO AUCTIONS

Mr. Van Winkle. Mr. Chairman, members of the committee, my
name is Gene Van Winkle. I am general manager of Omaha Auto
Auction, Omaha, NE.

I came to Washington to testify in favor of S. 431, the Vehicle
Damage Disclosure Act. The legislation would fight salvage fraud,
a scam that hurts the automobile industry and endangers every-
body on the highways.

When consumers get hurt financially or physically, it damages
our company's reputation. That hurts our 200 employees in
Omaha. More than 7,000 new and used car dealers regularly buy
vehicles at our company. We are the victims. I speak not only for
Omaha Auto Auction but for 29 sister auctions that make up Anglo
American Auto Auctions, Inc.

We serve every region of the United States. Our trade group, the
National Auto Auction Association, also supports S. 431. Together,
we include over 265 auctions in every State in the Union and sell
more than 14 million vehicles each year.



71-121 0-94-2



14

Mr. Chairman, this problem exists because the State titling laws
make it easy to buy a wrecked vehicle, fix it up, and hide the vehi-
cle's history fi-om a prospective buyer. The process is a little com-
plicated, but I will try to explain briefly why we have the problem
and why S. 431 will cure it.

First, the States have 51 different systems for dealing with
wrecked cars. Depending on where the car gets wrecked. State