Cash for Clunkers Scams Update and Warning

The U.S. Department of Transportation is advising consumers taking advantage of the “Cash for Clunkers ” program not to sign contingency agreements promising to pay back up to $4,500 if dealers don’t receive payment from the government.

No contingency agreement is required to participate, the Transportation Department, which administers the $3 billion Car Allowance Rebate System, said on its Web site. The Minnesota Automobile Dealers Association has a form on its Web site that members can use as part of a new-car closing.By signing the form, the buyer agrees to reimburse the dealership the incentive amount if the dealer is unable to obtain the credit from the government “for any reason.” The consumer can also return the car to the dealership and pay “areasonable charge ” for use of the new vehicle, according tothe form.

Consumers signing the agreement also acknowledge their trade-in vehicle may have been destroyed and can’t be returned. Dealers may be acting improperly by asking consumers to keep their old cars until credits for their vehicles are approved by the National Highway Traffic Safety Administration, the Transportation Department said on its Web site. If the new car is in stock, the dealer must allow the buyer to take possession before the paperwork for the credit can be submitted, the department said.

Cash Demands

In some cases, dealers are demanding $4,500 in cash to avoid reporting the car as stolen when the government credit doesn’t arrive, said Rosemary Shahan, president of Sacramento, California-based [Consumers] for Auto Reliability and Safety. Gloria Sharp of Woodbury, Minnesota, traded in her Jeep Grand Cherokee for a new Honda Accord and said she was called a few days after the deal closed and asked for more money. Thegovernment rejected the credit, but the problem turned out to be on the dealer’s end — they had mistakenly applied for $4,500 instead of $3,500, she said. “They said if we didn’t give them the money, they wouldn’t submit the paperwork, ” Sharp said. San Francisco-based Consumer Action joined Shahan’s group at a news conference to ask the Department of Transportation, which administers the program, to prohibit dealers from forcing consumers to sign agreements that promise payments if the reimbursements don’t show up.

‘Bait and Switch’

“These practices are a form of ‘bait and switch,'” the groups wrote in a letter to Transportation Secretary Ray LaHood today. “Car buyers are particularly vulnerable to the dealers’ pressure because they have surrendered their traded-in vehicle and lack access to reliable information about whether or not the deal was approved by the government.”

Minnesota Automobile Dealers Association Executive Vice President Scott Lambert said the group would continue using the contingency form. The government hasn’t said the form can’t be used, and dealers have to protect their interests with so muchuncertainty about the program, he said.

“I don’t think it’s NHTSA’s job to get between the customer and the dealer,” Lambert said. “If the consumer doesn’t want to sign the agreement, they can walk away. ” The state’s 250 participating auto dealers have submitted about $42 million in unprocessed credits, Lambert said. Deals are getting rejected by the government on technicalities and about 10 percent of Minnesota’s dealer claims have been accepted, he said. For the entire country, it’s about 2 percent, he said.

A Mess

“This program is administratively a mess,” Lambert said. “The dealerships are having a terrible time.” “Getting approval for dealer reimbursement requests is still facing significant hurdles,” said John Lyboldt, vice president for dealer operations for the National Automobile Dealers Association in McLean, Virginia, in an e-mail statement. “NADA is currently working with NHTSA to streamline the process and help dealers get paid in a timely manner.”

LaHood, in a statement today, told consumers they are eligible to buy cars under the program that haven’t been delivered yet to dealer lots. Earlier this week, two Michigan lawmakers asked the Transportation Department to offer buyers under the program vouchers toward future purchases given declining dealer inventories.

The program is intended to spur new car sales and help revive the ailing auto industry. The program’s initial $1 billion was exhausted about a week after it formally began andPresident Barack Obama signed a bill approving an additional $2 billion on Aug. 7.

Yo-Yo Financing

Lawmakers had expected the program to generate about 250,000 vehicle sales with enough money to last until Nov. 1. Consumers can receive up to a $4,500 credit for trading in an older car for one with better gas mileage, when certain conditions are met.

The government has received 338,659 applications for credits as of today, according to the Transportation Department. The total value of the submitted applications is $1.4 billion.

Congress intended that consumers get a good deal in return for trading up to more efficient vehicles, Shahan said. Dealers are using the program to reel consumers back into the showrooms to pay extra cash, a practice sometimes referred to as “yo-yo” financing, she said.

“This is yo-yo financing on steroids,” Shahan said.