A battle is brewing among consumer groups, car dealers and the government over the use of contingency agreements in the Cash for Clunkers program.

At issue is who is left holding the bag if a transaction goes awry.

Under the Car Allowance Rebate System, a consumer turns in a qualified clunker and gets $3,500 or $4,500 off the price of a new car. The dealer must make sure the clunker and the new car meet program requirements and get the proper documentation – including proof of insurance and registration – from the owner.

After the buyer drives off, the dealer must electronically submit the paperwork and wait to be reimbursed. Dealers say that transactions are being rejected at a high rate – often for data errors, which can be corrected – and that reimbursements are coming slowly or not at all.

Some dealers are requiring or asking buyers to sign an agreement stating that if the dealer is not reimbursed, they will repay the dealer the $3,500 or $4,500 or return the car and get all or most of their money back. They can’t get their old car back because it is destroyed.

If buyers don’t comply, some dealers say they will repossess the new car, which could hurt the customer’s credit rating, or report it as stolen, says Rosemary Shahan, president of Consumers for Auto Reliability and Safety.

Dealers “told Congress and the press they needed Cash for Clunkers to be renewed because dealers were on the hook, they had taken risk, entered into these contracts. They didn’t tell Congress ‘We are shifting this risk onto consumers,’ ” she said.

The National Highway Traffic Safety Administration, which is running the CARS program, has told dealers they cannot force people to sign these agreements. It posted an advisory on www.cars.gov this week saying, “Consumers are not required to sign contingency agreements to pay back the dealers should the CARS credit be rejected.”

In response to reports that some dealers are refusing to turn over the keys to the new car until they are reimbursed, NHTSA added this notice to the Web site: “If the dealer has the new car in stock, the dealer must allow you to take possession of the new car before the dealer may submit the credit application to the government.”

The National Automobile Dealers Association questioned NHTSA’s legal authority to issue that kind of guidance. Charles Cyrill, a spokesman for the association, said it will “report any clarifications to its members as they are received.”

Some state auto dealers associations are recommending that their members get buyers to sign the contingency agreements. A sample agreement on the Minnesota Auto Dealers Association Web site says, “The dealership believes in good faith that your trade-in vehicle qualifies for the CARS incentive and that funds will be available. However, the risk of the federal government not paying the incentive is yours – not the dealerships.”

The California Motor Car Dealers Association is not advising its members to use such agreements, said Peter Welch, the group’s president. But “dealers are very, very frustrated. Some have seven-figure receivables outstanding. It’s starting to impact their cash flow. Many dealers I know have already decided to cease the program until they get paid.”

Dealers are also afraid they could lose if they make a transaction but are not reimbursed before the $3 billion allocated by Congress runs out. No one is sure how much money remains. A “fuel gauge” showing how much is left has been removed from the program’s Web site.

NHTSA spokeswoman Patricia Oladeinde said that if money runs out before a dealer is reimbursed, the dealer will be on the hook. “This is a voluntary program,” she said. “It does to some extent pose some risk.”

She said dealers have “a real-time ticker” that tells them how much money is left, but refused to tell me. “The public doesn’t need to know how much money is left,” she said.

Welch checked with two California dealers who said they have no access to a “real-time ticker.”

NHTSA has been sending out periodic updates through e-mail alerts.

The Wall Street Journal reported that as of early Tuesday, dealers had requested reimbursement for 292,447 vouchers totaling about $1.23 billion.

This article appeared on pageC – 1of the San Francisco Chronicle

After “cash for clunkers” proved so popular that it threatened to run out of cash within its first week, the House pushed aside the other items on its agenda today to save it, passing a bill that allots another $2 billion to keep the program running.

The passage of the bill, by a vote of 316 to 109, helps stave off a temporary shutdown of the Consumer Assistance to Recycle and Save (CARS) program. The program allows a consumer to trade in a gas-guzzling vehicle for a $3,500 to $4,500 rebate to help buy a more efficient model. Seen as a boon to the struggling auto industry and as a benefit for the environment, the original bill was passed last month with $1 billion in funding. The program was meant to last until November 1 or the cash ran out.

The latter came first. Dealers reported that their showrooms were crammed with consumers eager for a trade-in. Thursday, less than four days after the program was up and running, it was nearly out of money. According to reports, the White House warned lawmakers that the program would have to be halted at midnight. It wasn’t, but uncertainty about the CARS’s future was rife until today.

The House bill has to pass the Senate next week, but that seems more than likely. And government officials say that the program will continue regardless through the weekend. “If you were planning on going to buy a car this weekend using this program, the program continues to run,” White House spokesman Robert Gibbs said this morning.

The program’s popularity seems to have taken many lawmakers aback. “It has succeeded well beyond our expectations and all expectations,” President Barack Obama said in remarks today. “It’s working so well that there are legitimate concerns that the funds in this program might soon be exhausted.” As of late Wednesday, 22,782 cars had been purchased through CARS. In their debate over whether to add another $2 billion to the fund, lawmakers spoke about dealerships in their districts being packed with customers for the first time in months. Consumers were clearly exhilarated, they said. So were struggling American auto companies. “This is one thing that we have done in this Congress that is absolutely working,” Republican Rep. John Campbell of California said in debate today.

But Campbell and others pointed out that the administration of CARS hasn’t been as successful. While the program “accomplished what we wanted it to accomplish,” said Rep. Pete Hoekstra of Michigan, not a single one of the dealers in his district has yet received approval from the Department of Transportation for the rebates they issued. That could leave them holding the bag for thousands of dollars.

There also have been concerns about the environmental impact of the bill. Right now, a consumer can get $3,500 for trading in an 18 mpg car for a 22 mpg one—not exactly revolutionary. And environmentalists point out that it takes cars off of the road even though they’re still functional, adding to the pollution that occurs each time a new car is manufactured.

Even so, the program gives the auto industry, and the economy, a needed boost. And even environmentalists agree that, at the very least, it sets the idea of fuel efficiency more firmly in consumers’ minds.

WASHINGTON/DETROIT (Reuters) – The U.S. “Cash for Clunkers” plan to jump start car sales by offering up to $4,500 (2,695 pounds) for older cars swapped out for new ones is so successful that the White House and Congress were scrambling on Friday to find $2 billion (1.2 billion pounds) more for the program.

Ford Motor shares rose nearly 8 percent in early trading as the rapid success of the $1 billion program lifted prospects for an industry beset by abysmal sales, bankruptcies and uncertainty.

“The downward spiral has been broken. We saw a stabilization in sales in the second quarter, and there will be a recovery in automotive sales,” Mike Jackson, chief executive of the leading U.S. dealership group, AutoNation, said in an interview. “There’s no question about it.”

Automakers are due to report U.S. sales next week.

The “Cash for Clunkers” program was modelled after similar government incentives in Europe, and offers consumers up to $4,500 to trade in older and less fuel-efficient vehicles to be scrapped.

A preliminary analysis by the Transportation Department shows that dealers sold 250,000 vehicles with the government benefit since July 1. Officials said brisk sales exhausted the $1 billion allotted by Congress earlier in the year.

CAN PLAN DRIVE ECONOMY?

The effect that the plan will have on the economy is unclear. Analysts have said they expect it to give the economy a bit of a lift in the current quarter.

Obama administration officials considered suspending the program on Friday but opted to keep it going through the weekend while options are considered.

Leaders in the U.S. House of Representatives and Senate worked quickly with White House support to craft legislation that could be approved before Congress left for its month-long summer vacation. The House was due to recess later on Friday, the Senate on August 7.

“We feel confident that we’ll have a solution that people can agree on moving forward and that the program continues,” White House spokesman Robert Gibbs said.

A bill offered by House Appropriations Chairman David Obey would extend $2 billion through September 30, 2010. The funds would come from an unused Energy Department loan guarantee initiative that was part of the government’s economic stimulus package enacted in February.

The amount of the proposal could change as it moved closer to a vote.

House Republicans said they would not block the measure in the Democratic-led Congress.

In addition to stimulating sales, the “Cash for Clunkers” program was aimed at boosting sales of General Motors Corp and Chrysler Group, both of which restructured under bankruptcy protection this year.

Fuel efficiency terms of the program were narrow enough to help domestic manufacturers qualify. But Senators Dianne Feinstein and Susan Collins have said any extension must include stricter efficiency and environmental requirements.

They were asking the Transportation Department on Friday for details on sales data such as makes and models sold with program rebates.

Very early indications showed that cars were selling better than pickups or sport utilities. But it was unclear how the program had affected Toyota Motor (7203.T) and Honda Motor (7267.T), which make the most fuel efficient passenger cars.

Analysts expected the program, if utilized fully, to push U.S. sales above 10 million units for 2009, higher than the annual rate so far this year.

(Reporting by John Crawley; Additional reporting by Rick Cowan and Steve Holland in Washington and David Bailey and Soyoung Kim in Detroit; Editing by Toni Reinhold)

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