Katrina-Damaged Cars Pour into Used Market

Thousands of vehicles flooded and damaged by hurricanes Katrina and Rita are showing up on the U.S. used car market. Most states require that flooded cars be identified on the title, but scam artists have found loopholes in the system.

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Thousands of vehicles flooded by hurricanes Katrina and Rita are showing up on the used car market. Most states require that flooded cars be labeled such on the title. But scam artists have found loopholes in the system. They re- register cars in states with looser title laws. This fraudulent practice is known as title washing. NPR's Jeff Brady has the story.

JEFF BRADY reporting:

Underneath the I-10 freeway, right near downtown New Orleans, there is a one-mile stretch of land that has become home to hundreds of flooded cars. Right now, I'm looking at a Nissan Altima--the steering wheel is caked in mud. Just a few months ago this is a car that would have fetched a lot of money on the used car market, but now it's pretty much worthless.

Mr. BERNARD BROWN (Attorney, Kansas City): Hundreds of thousands of these cars, they're not all going away.

BRADY: Kansas City lawyer Bernard Brown specializes in automobile fraud cases.

Mr. BROWN: They'll be cleaned up and sold to people across the country without any disclosure whatsoever.

BRADY: This is a problem because water gets into the electrical system and corrodes the wiring. One consumer advocate says the car essentially rots from the inside out. Luke Smith is a mechanic at Ritchie's Automotive in Tampa, Florida. One of his customers recently brought in a Chevy Cavalier that he just purchased. The check engine light was on, and it had a musty odor inside.

Mr. LUKE SMITH (Mechanic, Ritchie's Automotive): One of the first things I did was pulled a couple of vents out of the dash and noticed that there was some debris, some old wet leaves.

BRADY: Then Smith pulled up the carpet and found dried mud. He broke the bad news to his customer, this is a Katrina car--there's a chance the car may never run right. The insurance industry set up a database of flooded cars after the hurricanes but not every affected vehicle is in it. And there are commercial companies that offer car history reports, but their databases aren't complete either. They don't include insurance claim data.

In 1992, Congress created a system that would have been much more comprehensive. It's called the National Motor Vehicle Title Information System, in government acronyms speak NMVTIS. But NMVTIS has been crippled and consumer advocate say one big reason is opposition from commercial interests that wanted it to fail.

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.

Bill Brock from the Iowa AG's office says those legislative efforts were led by the largest auto insurer in the country, State Farm.

Mr. BILL BROCK (Iowa Attorney General's Office): They were very, very active back in the mid and late 1990s in proposing the federal legislation that would cap what the states could do and, in our view, weaken the laws that are out there.

BRADY: Those bills did not pass, but NMVITAS never got the money it needed to be effective. Some consumer advocates suspect State Farm was working behind the scenes to undercut the program, but they don't have hard evidence. But Kansas City attorney Bernard Brown believes State Farm did have a motive for opposing a system that would reveal every car's history.

Mr. BROWN: They've had a very lucrative business selling their totaled cars. But a big part of why it's been lucrative is that they've sold them, a lot of them, with clean titles.

BRADY: Brown says damaged cars with clean titles can fetch up to $2,000 more. A year ago, State Farm admitted it sold up to 30,000 totaled cars over a five-year period that didn't have the histories properly noted on the title. The company settled the case with 49 state attorneys general. It agreed to pay $40 million to car buyers who unwittingly bought the damaged vehicles.

State Farm wouldn't talk on tape for this story. But in an email a company spokesman says 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, quote, "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.

Mr. DON HALL (Head, Virginia Automobile Dealers Association): 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. What happened to State Farm was they got their hands caught, if you will, in the cookie jar, so to speak.

BRADY: But David Snyder is offended by that claim. He is a lawyer with the American Insurance Association.

Mr. DAVID SNYDER (Assistant General Counsel, American Insurance Association): That kind of thinking just has never occurred to the insurance industry and is absolutely unfounded allegations of people that are trying to, apparently, make a political point with regard to the insurance industry in terms of what amounts to character assassination.

BRADY: NMVTIS supporters say another company also had a commercial interest in stopping the program. You may have heard one of that company's ads.

Unidentified Man: The problem is Doug is about to buy a used car.

DOUG: Yep, and I'm going to get ripped off!

Unidentified Man: And Doug doesn't know about CARFAX, which lets you check a used car's history to see if it's been in an accident, has accurate mileage, stuff like that. So you know...

BRADY: 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. Ashcroft wanted advice on whether NMVTIS was a good investment for taxpayers. Later, Senator Ashcroft publicly blasted NMVTIS as a Washington boondoggle and called for a cost-benefit analysis. In 2001, the Department of Justice, where Ashcroft was now attorney general, completed that analysis and found NMVTIS was a bargain.

The DOJ report said that for a $22 million federal investment, NMVTIS would save car buyers as much as $11 billion a year. 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.

Ms. LINDA LEWIS-PICKETT (President and CEO, American Association of Motor Vehicle Administrators): We had a very strong momentum going at the time that the Department of Justice commissioned the cost-benefit analysis. It certainly slowed down the process. There's no doubt about that.

BRADY: 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.

Mr. DAVID REGAN (National Automobile Dealers Association): Every day that goes by that information is either not collected, or if it is collected, it is not conveyed into the public domain, that is a day in which fraudulent resellers and fraudulent reconditioners and rebuilders of vehicles can perpetuate fraud.

BRADY: As flooded vehicles from the hurricane zone start showing up on the used car market, there appears to be renewed interest in finishing NMVTIS. Several members of Congress are looking into the issue. And the Department of Justice, which oversees NMVTIS, says it started a review of the program this fall.

Jeff Brady, NPR News.

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