Witness Panel 1
The Honorable Jim HoodAttorney GeneralState of Mississippi
Ms. Julie Benafield BowmanCommissionerArkansas Insurance Department
Witness Panel 2
Mr. David ReganVice President, Legislative AffairsNational Automobile Dealers AssociationGraphic (26.01 KB)Testimony ofDavid W. ReganOn Behalf of theNational Automobile Dealers AssociationBefore theSenate Commerce, Science, and Transportation CommitteeOn“Oversight of the Property and Casualty Insurance Industry”April 11, 2007SUMMARY OF THE TESTIMONY OF DAVID W. REGANThe problem – The confusing 51-jurisdiction state motor vehicle titling regime combined with the loss mitigation practices of automobile insurance companies invites fraud. Once a totaled vehicle is sold at salvage auction, any unscrupulous actor can repair or refurbish a wrecked or flood damaged car (typically a late model car “totaled” by an insurance company) and obtain a “clean” or “washed” title in a state with weak title disclosure rules. The new title will not reference the damage, leaving the unsuspecting buyer (consumer, dealer, or auction) to rely only on a vehicle inspection which many not expose the extent of the damage.The fraudulent actors enjoy substantial profit margins by selling these totaled cars at inflated values because: 1) state motor vehicle titling laws are confusing, contradictory and incomplete; 2) insurance companies have a short-term economic interest in under-reporting total loss vehicle data; and 3) vehicle title histories are based primarily on an outdated, paper-based system that does not allow prospective purchasers to access title brand information prior to purchasing the vehicle. In addition, the vehicle history products in the market today are helpful, but a clean vehicle history report is not conclusive evidence that a vehicle has never sustained significant damage. Unfortunately, Departments of Motor Vehicles (DMVs) and title history services may never get information about vehicles totaled by insurance companies, since not all total loss vehicles are retitled to reflect the severity of the damage.The solution – NADA supports S. 545 because it provides buyers with more complete, timely and reliable VIN-based vehicle histories before a used vehicle sale. The legislation is necessary for the following reasons:The public needs access to more complete total loss information. Insurance companies should provide VIN-based disclosure for all totaled vehicles, as required by S. 545. In addition to the VIN of a totaled car, S. 545 would require insurance companies to disclose the reason for the total loss (flood, collision, stolen, etc.), the date, the odometer reading, and whether or not the airbag deployed. This bill would significantly improve the current system by capturing severely damaged vehicles even if the insurance company did not sell the vehicle with a branded title. Importantly, the legislation would not preempt any state motor vehicle titling laws.The public needs more timely total loss information. The ability of consumers to access VIN-based vehicle data on a timely basis before the vehicle is resold is an essential part of this solution. S. 545 would require the insurance companies to disclose the VIN of a total loss vehicle at the time of payout thereby creating an electronic record that would red flag the vehicle as it proceeds through used car commerce. Providing the VINs to the private sector would significantly reduce the timeframe for fraud, since currently there can be a 30-60 day delay from the time a car is totaled until the time the brand is captured by the vehicle history provider.The public needs total loss information available in a searchable format prior to purchasing a vehicle. The auto industry needs access to the VINs of totaled vehicles in an electronic format to keep severely damaged vehicles out of the hands of consumers. The insurance companies are the first to be informed that a vehicle has been totaled, and they already track these cars in their own databases. The insurance companies should share this information with the public. S. 545 is critical to create more accountability for the insurance companies, since the public needs a better system to track these totaled vehicles and to keep these dangerous cars off the road.MORE COMPLETE AND TIMELY TOTAL LOSS DATA ARE NECESSARY TO COMBAT TITLE FRAUDMy name is David Regan. I am Vice President of Legislative Affairs for the National Automobile Dealers Association. NADA’s 20,000 franchised auto and truck dealerships sell, service and repair new and used car and trucks, all makes and models from the Mini Cooper to the Mack Truck. NADA’s membership penetration is 93% of all domestic and international nameplate dealerships. The majority of NADA’s members are small, family-owned and community-based businesses, and NADA’s members employ more than one million people nationwide.Overview of the Title Fraud ProblemAt NADA, we applaud the members of this committee and Senator Lott in particular for focusing on such an important national issue. According to news accounts, flooding caused by the Gulf Coast hurricanes in 2005 damaged more than 500,000 vehicles. Unfortunately, many of these severely damaged vehicles have been reconditioned and sold to unsuspecting buyers. In an effort to put consumers on notice of the nature of the problem, NADA’s website (www.nada.org) contains tips on how to spot a flood vehicle. However, increased public awareness is only a part of the solution.This problem is not limited to “Katrina cars.” Flooding in New England and North Carolina and other areas of the nation has led to countless other flood vehicles. Moreover, cars severely damaged in accidents are a major part of the title fraud problem as well. If an insurance company deems a car to be “totaled” as a result of collision, theft, or fire damage, the vehicle might be rebuilt and given a clean title that does not disclose damage. Last year, we believe that insurance companies totaled approximately five million vehicles.Each year thousands of totaled vehicles are fraudulently sold to unsuspecting buyers as undamaged vehicles. These vehicles may then surface in the classified section of your local newspaper, at a wholesale auto auction, in a consumer-to-consumer sale, or as a “trade in” on the lot of a franchised dealer. The fraudulent rebuilders and resellers enjoy substantial profit margins because: 1) state motor vehicle titling laws are confusing, contradictory and incomplete; 2) insurance companies have a short-term economic interest in under-reporting total loss vehicle data; and 3) the public and private sectors have failed to exploit existing technology to produce timely electronic transparency for motor vehicle title histories.Today, I will outline how confusing state title laws and insurance company practices benefit fraudulent rebuilders and resellers and how S. 545 could help remedy this problem.DISPARITIES IN STATE TITLING LAWS CREATE OPPORTUNITIES FOR FRAUDThe laws of fifty states and the District of Columbia govern the titling and registration of motor vehicles, creating a systemic lack of uniformity. A motor vehicle title documents ownership of a specific vehicle, whereas a motor vehicle registration provides permission to operate a specific vehicle. Although the trend in state titling laws has been toward more uniformity during the past several years, the 51 jurisdictions still conduct business 51 different ways. Each jurisdiction has created a distinct paper title, different computer programs to issue and track titles and registration, and a separate, extensive body of statutes and regulations to govern the titling and registration of motor vehicles within their respective borders. Additionally, these discrepancies can be complicated by the informal policies and procedures used by title clerks, which may vary even within jurisdictions.In common usage, a “title brand” is a notation on the face of a certificate of title that provides notice to all subsequent purchasers of the damage, condition, or prior use of a vehicle. A “brand” is a word, symbol or abbreviation printed on the title itself. The 51 titling jurisdictions use a wide variety of brands, such as reconstructed, salvage, rebuilt salvage, rebuilt, restored, reconditioned, junk, non-repairable, taxi, police, flood damage, fire damage, unsafe, and repaired. The complete list is extensive and confusing.Because 51 jurisdictions title vehicles 51 different ways, many opportunities for fraud exist. Under the current system, any unscrupulous rebuilder can repair or refurbish a wrecked or flood damaged car (typically a late model car “totaled” by an insurance company) and then obtain a “clean” or “washed” title in a state with weak title disclosure rules. The new title will contain no reference to the damage, leaving the buyer (consumer, wholesale auction or retail dealer) to rely on a physical inspection of the vehicle that may not expose the extent of the damage or rely on commercially available title history products, such as Auto Check and CARFAX.The vehicle history products in the market today are helpful, but a clean vehicle history report is not conclusive evidence that a vehicle has never sustained significant damage. Vehicle history services can only report information to which they have access. While title history products have improved in the past few years, the 2005 settlement between State Farm Insurance and the state Attorneys General demonstrates the extent to which the title data within a state department of motor vehicles is incomplete. Many state titling laws do not require insurance companies to obtain a salvage title for every totaled vehicle. Moreover, the insurance companies have a powerful economic incentive not to obtain a salvage title. Insurance companies receive higher sale prices for these totaled vehicles at salvage auctions if the titles are not branded. As a result, DMV title databases do not include all totaled vehicles.INSURANCE COMPANY PROCEDURES EXACERBATE THE PROBLEMEvery year millions of motor vehicles are “totaled” by insurance companies, and many of these vehicles routinely re-enter used car commerce. Typically, an insurance company “totals” a vehicle when the projected repair costs are too excessive in relation to the fair market value of the vehicle immediately prior to the flood or accident. Once the insurance company has totaled a car, the company usually sends a check to the insured, takes possession of the vehicle, and sells the damaged vehicle at a salvage auction to mitigate loss. Unfortunately, fraudulent rebuilders frequently buy totaled vehicles at salvage auction, repair them, and sell the cars as undamaged to an unsuspecting buyer, thereby reaping huge profits.The current loss mitigation model used by insurance companies increases the likelihood of subsequent fraudulent activity. The attached chart (“How Total Loss Vehicles Reenter the Market”) and explanatory material attempts to present the interrelationship between the state titling laws and the loss mitigation model of the insurance companies. While this process may vary from state to state and from insurance company to insurance company, the graphic depicts the lack of transparency that increases risk to subsequent buyers. The red flags indicate the points in the process where fraudulent activity may occur.If the insurance company fails to obtain a salvage title for the totaled vehicle, no public document may ever exist to put future purchasers on notice that the car was totaled. The insurance company may fail to report the status of the vehicle to the DMV because:a) The state titling law may not trigger an obligation by the insurance company or the original owner to report to the DMV; orb) State law may contain a reporting obligation, but the insurance company may fail to comply because of administrative oversight.The settlement between State Farm and 49 state attorneys confirms that this is not a hypothetical problem.Insurance companies have a powerful economic incentive to oppose more aggressive title laws or to underreport under existing laws. A total loss vehicle with a clean title is likely to sell at auction for substantially more than the same vehicle with a salvage or flood title. In other words, there is a market-based premium for a clean title and a market-based penalty for a salvage or flood title.Consumers have exactly the opposite economic interest – they want to know if a vehicle has been declared a total loss. The decision to total a vehicle is based on a variety of factors and may vary from company to company and from insured to insured, but one fact is abundantly clear – a declaration of total loss is one of the most material factors in determining the value of a vehicle. Every subsequent purchaser would want to know – prior to the sale – if a vehicle has been totaled.The solution MUST FOCUS ON PRE-TRANSACTION TRANSPARENCY: INSURANCE DATA ON TOTAL LOSS VEHICLES should BE RELEASED TO THE PUBLIC and dmv data should be eNhanced and released more quickly.The type of disclosure advocated in S. 545 is consistent with the Federal and state privacy laws that strictly limit the use of personal information obtained in the titling process. The Federal Driver Privacy Protection Act and similar state statutes limit the distribution of names and addresses included in title databases. The distribution of VIN-based title branding data or VIN-based total loss vehicle data would not include the personal identifiers protected by those statutes.More transparency, more timeliness, and more technology are necessary to provide buyers more complete and reliable VIN-specific data before a purchase. All buyers of a used vehicle (consumers, businesses, wholesale auctions, and even automobile dealers taking a vehicle in trade) have the same economic interest – determining fair market value prior to purchase. A more complete, near real-time title history would provide a more accurate picture of a vehicle’s prior condition/use. The insurance companies should be commended for providing some total loss vehicle data for many of the flood vehicles from the hurricanes. The VINs for some of these vehicles are now available on the website of the National Insurance Crime Bureau, but more should be done. One good example of this is PEMCO Insurance in Washington state, which voluntarily disclosed total losses due to heavy storms in November 2006. S. 545 would require the disclosure of the following total loss data: the VIN of a totaled car; the reason for the total loss (flood, collision, stolen, etc.); the date of total loss; the odometer reading on that date; and whether or not the airbag deployed. Armed with total-loss information, consumers, businesses, dealers, auto auctions – anyone buying used cars – should be able to easily identify one of these severely damaged vehicles, even if the title was washed.We understand that this legislation would NOT pre-empt state motor vehicle titling laws, but would create a separate data set that could be used to complement title data held by DMVs.Comments about the National Motor Vehicle Title Information System (NMVTIS)Congress has recognized that technology should play a critical role in this arena. The Anti-Car Theft Act of 1992 authorized the creation of NMVTIS. As envisioned, NMVTIS would become the single source for title history data from all 51 jurisdictions. The American Association of Motor Vehicle Administrators (AAMVA) has attempted to link all 51 databases in real-time using a combination of federal funds, state funds, and internal resources. The system envisioned would provide real-time, title clerk-to-title clerk linkage and then provide third party access to title histories. NMVTIS has not been completed because state resources are required to reconfigure state DMV systems to communicate with NMVTIS. AAMVA’s attempts to design and implement a system to provide public access to NMVTIS have not been successful.NMVTIS should be reconfigured to focus on providing consumers transparency prior to a transaction. The vast majority of the resources of NMVTIS have been used in an attempt to link DMVs so that title clerks can talk to title clerks electronically before issuing new titles. Unfortunately, most title fraud occurs before a title clerk ever sees an application for a new title. DMVs document motor vehicle ownership after a transaction has occurred. Moreover, DMVs do not have the statutory authority, expertise, or financial resources to package and market VIN history data to the public.NADA has also expressed concerns to the AAMVA leadership regarding the existing economic model for NMVTIS. First, additional Federal funding is not likely, so completion of the system is highly doubtful absent an additional source of funding. Second, even if additional public funding were forthcoming we have serious doubts the current model would be self-sustaining. Third, the private sector still does not have access to the title data in NMVTIS, despite the 1992 Anti Car Theft Act requirement granting such access. As a result, we have stated on numerous occasions publicly and privately, that NMVTIS must be redesigned to achieve its original purpose.NADA believes the best solution is a partnership between AAMVA and a private sector vendor that has the funding and technological expertise to build upon the existing NMVTIS system. Private sector information vendors are essential to the distribution of data to consumers. Any NMVTIS-based solution must rely on the private sector to package and market title histories to the general public. These vendors already buy title data from DMVs in bulk, usually every month. If the states simply provided daily electronic updates instead of monthly, the private sector could use technology to close the window for fraud. The end result would be an efficiently administered, up-to-date system that would provide consumers with more timely information. The very same technology could be used to provide title clerk to title clerk access as well.Congress should require the Department of Justice to implement the 1992 Anti-Car Theft Act to require insurance companies to disclose total loss data and salvage auctions to disclose sales data. DOJ has existing statutory authority to create more motor vehicle title transparency in a matter of months. 49 U.S.C. §§ 30501-30505. Congress should compel DOJ to initiate the rulemaking that was originally intended and enforce the penalties under existing law for failing to submit data to NMVTIS. The rule should: 1) recognize that NMVTIS has been created; 2) require insurance companies to submit to NMVTIS VIN-based information on total loss vehicles; 3) require salvage auctions and junk yards to submit to NMVTIS VIN-based information for vehicles sold at salvage auctions and junk yards; 4) require NMVTIS to engage a private sector joint venture partner to market the NMVTIS data to consumers no later than December 31, 2007; and 5) encourage state DMVs to submit VIN-based motor vehicle title and registration data to NMVTIS in electronic batch form every 24 hours. All data marketed to the public must comply with Federal and state privacy protection statutes.NADA believes S. 545 to require insurance companies to make total loss data available to perspective purchasers would complement a newly configured NMVTIS with AAMVA working with the private sector to more aggressively enhance consumer access to title history data.ConclusionAny solution to the title fraud problem must be viewed through the pre-transaction lens. The technological solution to the problem of flood vehicles – and all other title fraud – lies in creating near real-time, pre-transaction access to the vehicle history data that DMVs, insurance companies, and salvage yards currently collect. The enactment of S. 545 would provide a dramatic step in the drive to provide consumers more pre-transaction transparency.NADA and the franchised automobile and truck dealers throughout the country are prepared to assist with efforts to eliminate title fraud. Thank you for the opportunity to present our views, and I look forward to your questions.EXHIBIT A: HOW TOTAL LOSS VEHICLES REENTER THE MARKETBox 1. The process begins when an insurance company declares a total loss on a vehicle.Boxes 2a-2d. In step 2, the insurance company determines if the nature and extent of the damage requires the insurance company to obtain a salvage or flood title under state law. (The fact that the insurance company declares a total loss does not automatically trigger an obligation under state laws to obtain a salvage title. Each state has specific statutory and regulatory requirements that control this process.) Under 2a, the insurance company permits the consumer to retain the vehicle after receiving a total loss payment. This creates a red flag because the original owner could repair and resell without disclosure to the unsuspecting buyer in box 5b. In 2b, the company obtains a salvage title, so that title should accompany the vehicle throughout the process and surface in the title history search based on DMV records. However, when the insurance company does NOT obtain a salvage title, as in 2c, the red flag is noted because the vehicle will go to the salvage auction with a clean title, despite having been declared a total loss.Boxes 3a-3d. Step 3 captures the representative transactions at a salvage auction. Reputable buyers at salvage auctions, the recyclers in box 3b, purchase the totaled cars for scrap or parts. The potential for fraud still exists, however, as shown in box 3d. Unscrupulous resellers will purchase the wrecked vehicle solely to obtain a VIN with a clean title. They will then switch that VIN with a stolen vehicle of the same make and model. In some instances, criminals will walk a salvage yard just to collect VINs. If the VINs have “clean” vehicle history reports, the criminals will steal the same make, model, and year, and simply switch the VIN with a clean VIN plate. Box 3c depicts the rebuilders (legitimate and fraudulent) purchasing vehicles at salvage auction.Box 4. This step shows that legal and illegal activity may occur after the vehicle is rebuilt. In box 4a the legitimate rebuilder obtains the necessary title documents and fully discloses the nature of the damage when selling to the informed consumer in box 5a. However, in boxes 4a and 4b no such disclosure occurs so a red flag is noted. In 4b, even if the rebuilder received a salvage title at auction, the fraudulent rebuilder simply washes the salvage title by obtain a clean title in another state. Then the fraudulent reseller unloads the damaged car to the unsuspecting consumer in box 5b without disclosure. The consumer may obtain a title history report, but the data in the private sector database may not be current enough to assist the consumer before the purchase. Similarly, a licensed dealer may not have access to title data prior to a trade-in. In box 4c, the fraudulent reseller does not even have to wash the title, because the insurance company never notified the DMV of the total loss. Moreover, the unsuspecting consumer can find no protection at all in relying on a title history because the insurance company has never provided the DMV any information about the total loss.
Dr. Robert HunterDirector of InsuranceConsumer Federation of America