Failed clunker deals may cost consumers

In some cases, the groups said, dealerships are requiring buyers to sign agreements that oblige the consumer to repay the dealer for the program's $3,500 or $4,500 rebate if the government denies the claim -- despite a government advisory that consumers are not required to sign such agreements. Dealer associations in some states are providing the agreements on their Web sites for members to use in clunker transactions.

The dealers apparently are using such agreements to guarantee that they receive the rebates promised by the program. Cash for clunkers has been plagued by uncertainty concerning its funding and late payments to dealers, who are required to give consumers the rebate up front and then wait for reimbursement by the government.

Some clunker deals are being rejected by the government because they don't meet all of the program's specifications. For example, the trade-in must have been continuously insured for the 12 months prior to the clunkers transaction.

The Department of Transportation is overseeing the clunkers program, which provides rebates to consumers who trade in an older car for a new vehicle that gets better gas mileage. The official Web site, www.cars.gov, states that "consumers are not required to sign contingency agreements to pay back the dealer should the CARS (Car Allowance Rebate System) credit be rejected."

"Despite the fact that the cash for clunkers program has provided a financial lifeline to car dealerships, some dealers are trying to bend the program's rules and take advantage of car buyers," said Joe Ridout, a spokesman for Consumer Action, in San Francisco.

The Department of Transportation "should prohibit dealers from using contracts that impose liability on car buyers in the event that a dealer mishandles the voucher transactions. They have reaped the benefits of this program and should be required without exception to play by its rules."

A spokeswoman for the Department of Transportation did not return calls seeking comment.

Rosemary Shahan, head of Consumers for Auto Reliability and Safety, in Sacramento, Calif., said the consumer groups weren't certain how widespread the problem was. Ridout said the groups had received 20 to 30 complaints, out of about 300,000 clunkers transactions since the program kicked off July 24.

Consumers who spoke at a news conference today related tales that showed potential for abuse.

One South Carolina woman said she was asked to sign a "rebate reimbursement agreement" when she was credited with a $3,500 rebate while purchasing a new Dodge pickup truck under the clunkers program. When it later turned out that her trade-in didn't qualify, the dealer said she had to pay an additional $2,500 or be sued for breach of contract.

The consumers complained that they had little luck getting answers from the government. They said they left messages at the official clunkers hot line but received no response.

Auto dealers, for their part, complain that the reimbursement agreements are an outgrowth of the government's slowness in reimbursing dealers who have sold cars under the clunkers programs. Some dealers are on the hook for hundreds of thousands of dollars in rebates.

"While problems with application submissions have been significantly reduced, getting approval for dealer reimbursement requests is still facing significant hurdles," said John Lyboldt, the National Automobile Dealers Association's vice president for dealer operations. "NADA is currently working with Transportation Department officials to streamline the process and help dealers get paid in a timely fashion."

Under the current rules, if the program runs out of money, dealers will not be reimbursed for any pending clunkers deals. The program ran through its initial $1 billion allocation in less than a week. The additional $2 billion appropriated by Congress last week is expected to last through Labor Day.

The dealers and consumer groups are calling on DOT to develop rules to ensure an orderly wind-down to the program that leaves neither dealers nor consumers holding the bag for rebates after the money runs out.