Holes in Monitoring System Let Lemons Get Resold
Thousands of vehicles that sat in the murky waters left by hurricanes Katrina and Rita are starting to show up on the used-car market.
Most states require that flooded cars be labeled as such on the title. But scam artists have found loopholes in the system. They re-register cars in states with looser title laws -- sometimes two or three states -- until the warning that the car was flooded is gone. This fraudulent practice is known as "title washing."
In 1992, Congress passed a law designed to stop the practice of title washing, but it was never fully implemented. The National Motor Vehicle Title Information System (NMVTIS) was designed to offer car history reports, as well as other information not available from commercial companies -- such as valuable data derived from insurance claims. Advocates say the program would save both consumers and the government money -- money that might otherwise be spent investigating title fraud.
But NMVTIS has been crippled. Consumer advocates say one big reason is opposition from commercial interests that profit from title washing. That opposition showed up in the form of bills introduced in Congress that would have made NMVTIS much less effective. One allowed states to opt out of the program. If just a few states pulled out of NMVTIS, that would have given scam artists a place to wash titles.
Insurers with Incentives to Hide Lemons?
Bill Brauch of the Iowa attorney general's office says those legislative efforts were led by the largest auto insurer in the country: State Farm. "They were very, very active back in the mid- and late-'90s in proposing federal legislation that would cap what the states could do and, in our view, weaken the laws that are out there," he says.
Those bills were not successful. Nevertheless, NMVTIS never got the money it needed to be effective. Some consumer advocates suspect State Farm was working behind the scenes to undercut the program. They don't have hard evidence, but Bernard Brown, a fraud attorney in Kansas City, believes State Farm did have a motive for keeping the practice of title washing alive: money.
"They've had a very lucrative business, selling their totaled cars," Brown says. "But a big part of why it's been lucrative is that they've sold them -- a lot of them -- with clean titles."
Brown says damaged cars with clean titles can fetch up to $2,000 or more. And just last year, State Farm admitted it had sold 30,000 totaled cars with clean titles over a five-year period.
State Farm's Side of the Story
State Farm wouldn't talk on tape for this story. But in an e-mail, a company spokesman said State Farm has always supported NMVTIS -- it even contributed $100,000 last year toward completing the program. When asked whether State Farm ever lobbied to reduce funding, the spokesman said, "To our knowledge, State Farm has not lobbied to cut off funding for NMVTIS."
Don Hall heads the Virginia Automobile Dealers Association. He says all insurance companies profit from selling totaled cars with clean titles. "It is my professional opinion, after 27 years, that what State Farm did is the norm in the industry, not the exception to the rule," he says. "What happened to State Farm is they got their hands caught… in the cookie jar."
But David Snyder, a lawyer with the American Insurance Association, is offended by that claim. "That kind of thinking has just never occurred to the insurance industry and strikes me as absolutely unfounded allegations," Snyder says. "People are trying to, apparently, make a political point with regard to the insurance industry in terms of what amounts to character assassination."
Competing with CARFax
NMVTIS supporters say another company that had a commercial interest in stopping the program was CARFax, which sells car history reports. NMVTIS would be a publicly funded competitor to CARFax. In 1999, when CARFax was based in Missouri, company representatives met with their senator, John Ashcroft. CARFax Spokesman Larry Gamache says Ashcroft wanted advice on whether NMVTIS was a good investment for taxpayers.
"We were asked about our thoughts on NMVTIS," Gamache says. "As a private business, we ask this of ourselves: 'Does it make sense financially? Is the ultimate benefit worth the investment of costs?'"
Later, Sen. Ashcroft publicly blasted NMVTIS as a "Washington boondoggle" and called for a cost-benefit analysis.
In 2001, the Department of Justice -- where Ashcroft had since become attorney general -- completed that analysis and found NMVTIS was a bargain. For a $22-million federal investment, NMVTIS would save car buyers as much as $11 billion a year.
Lost Momentum for Change
But it took two years to complete that analysis. And that long wait caused problems, according to Linda Lewis-Pickett. She's with the American Association of Motor Vehicle Administrators, which is in charge of developing NMVTIS.
"We had very strong momentum going at the time the Department of Justice commissioned the cost-benefit analysis," she says. "It certainly slowed down the process, there's no doubt about that."
Lewis-Pickett says 27 states are participating in NMVTIS right now. But without money to bring in the rest of the states, loopholes still exist. David Regan with the National Automobile Dealers Association says scam artists continue to wash titles. He says every day that information goes uncollected "is a day in which fraudulent resellers and fraudulent re-conditioners and re-builders of vehicles can perpetuate fraud."
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