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Full text of "Auto repair fraud : hearing before the Subcommittee on Consumer of the Committee on Commerce, Science, and Transportation, United States Senate, One Hundred Third Congress, first session, March 4, 1993"

^^ S. Hrg. 103-27 

S^ AUTO REPAIR FRAUD 



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HEARING 

BEFORE THE 

SUBCOMMITTEE ON CONSUMER 

OF THE 

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 
UNITED STATES SENATE 

ONE HUNDRED THIRD CONGRESS 

FIRST SESSION 



MARCH 4, 1993 



Printed for the use of the Committee on Commerce, Science, and Transp^jrtation 



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U.S. GOVERNMENT PRINTING OFFICE 
G5-488CC WASHINGTON : 1993 

For sale by the U.S. Government Printing Office 
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-040655-2 



65-488 -93-1 



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^ S. Hrg. 103-27 



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V^ AUTO REPAIR FRAUD 

Y 4. C 73/7: S. HRG. 103-27 

Auto Repair Fraud, S.Hrg. 103-27* 1... 

HEARING 

BEFORE THE 

SUBCOMMITTEE ON CONSUMER 

OF THE 

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED THIRD CONGRESS 

FIRST SESSION 



MARCH 4, 1993 



Printed for the use of the Committee on Commerce, Science, and Transp^jrtation 



^^wimw(|(^ 



JUNf.l693 



WMHiBpr hAr^nn t ftr ^rojiD^lR; 




U.S. GOVERNMENT PRINTING OFFICE 
65-488CC WASHINGTON : 1993 

For sale by the U.S. Government Printing Office 
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-040655-2 



65-488 -93-1 



COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ERNEST F. HOLLINGS, South Carolina, Chairman 
DANIEL K. INOUYE, Hawaii JOHN C. DANFORTH, Missouri 

WENDELL H. FORD, Kentucky BOB PACKWOOD, Oregon 

J. JAMES EXON, Nebraska LARRY PRESSLER, South Dakota 

JOHN D. ROCKEFELLER IV, West Virginia TED STEVENS, Alaska 
JOHN F. KERRY, Massachusetts JOHN McCAIN, Arizona 

JOHN B. BREAUX, Louisiana CONRAD BURNS, Montana 

RICHARD H. BRYAN, Nevada SLADE GORTON, Washington 

CHARLES S. ROBB, Virginia TRENT LOTT, Mississippi 

BYRON L. DORGAN, North Dakota JUDD GREGG, New Hampshire 

BOB KRUEGER, Texas 

Kevin G. CURTIN, Chief Counsel and Staff Director 
Jonathan Chambers, Republican Staff Director 



Subcommittee on Consumer 

RICHARD H. BRYAN, Nevada, Chairman 
WENDELL H. FORD, Kentucky SLADE GORTON, Washington 

BYRON L. DORGAN, North Dakota JOHN McCAlN, Arizona 

BOB KRUEGER, TExas CONRAD BURNS, Montana 






(II) 






CONTENTS 



Page 

Opening statement of Senator Bryan 1 

Opening statement of Senator Gorton 7 

Opening statement of Senator Hollings 6 

Prepared statement of Senator Exon 29 

List of Witnesses 

Abrams, Robert, Attorney General, State of New York 17 

Azcuenaga, Mary L., Commissioner, Federal Trade Commission 8 

Prepared statement 10 

Del Tufo, Robert J., Attorney General, State of New Jersey 13 

Prepared statement 16 

Johnson, Evan, Auto Unit Administrator, Montgomery County, MD, Office 

of Consumer Affairs 30 

Prepared statement 32 

McCarthy, Alyson, Consumer Investigative Reporting Unit, KTNV-TV, Las 

Vegas, NV 38 

Prepared statement 40 

Appendix 

Hecker, Lawrence S., Chairman, Maintenance Awareness Program, prepared 

statement of 49 

Snyder, David F., Senior Counsel, American Insurance Association, prepared 

statement of 50 

(III) 



AUTO REPAIR FRAUD 



THURSDAY, MARCH 4, 1993 

U.S. Senate 
Subcommittee on Consumer of the 
Committee on Commerce, Science, and Transportation, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 9:35 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Richard H. Bryan 
(chairman of the subcommittee) presiding. 

Staff members assigned to this hearing: Claudia A, Simons, staff 
counsel, and Moses Boyd, senior counsel; and Sherman Joyce, mi- 
nority staff counsel. 

OPENING STATEMENT OF SENATOR BRYAN 

Senator Bryan. As chairman of the Commerce Committee's 
Consumer Subcommittee, I take this opportunity to welcome each 
of you here for this morning's testimony and hearing. The commit- 
tee today will continue its examination of automobile repair fraud 
by reviewing the progress that has been made to improve the situa- 
tion. 

Last summer, the charges brought against Sears highlighted 
many of the problems that consumers confront in taking their cars 
in for automotive repairs. Serious questions were raised regarding 
the pervasiveness of automobile repair fraud in America. 

In July of last year, I chaired a hearing to explore the nature and 
extent of such fraud, and to discuss possible solutions. Some of the 
testimony was quite disturbing, as we learned the apparently wide- 
spread nature of auto repair fraud, be it unnecessary repairs, defec- 
tive repairs, overcharges, deceptive and misleading advertising, or 
the use of accelerated maintenance schedules that more subtly de- 
fraud consumers. Particularly troublesome are the service writer 
compensation programs. 

At the conclusion of that hearing, the ranking member of this 
subcommittee, Senator Gorton, and I requested that the Federal 
Trade Commission commence an investigation into the auto repair 
industry. 

The problems of automobile repair fraud are national in scope. 
The Sears case alone resulted in actions by 43 different States. I 
look forward to hearing from the Federal Trade Commission this 
morning to learn of the information that they have developed dur- 
ing the course of their renewed activity in this field. 

Also following the committee's hearing of last year, the National 
Associations of Attorneys General established an automotive repair 
task force to examine the issue from the State perspective and to 

(1) 



coordinate enforcement efforts. As part of the settlement with 
Sears, the National Association of Attorneys General received 
$200,000 to create an automotive repair industry reform fund. 

The task force will be disbursing the funds, which will be used 
in part to fund individual State undercover sting operations, and 
we look forward to hearing the testimony this morning of two of 
America's most distinguished attorneys general who join us. 

Given the sophisticated equipment in most automobiles today, it 
is no wonder that consumers find themselves at the mercy of auto 
repair shops, and are often left wondering whether the $500 they 
just spent for repairs was necessary, or was it just money that was 
wasted? 

Even if a given repair was necessary, questions often linger over 
whether the repair was properly performed, and whether, indeed, 
the repair will last for a period of time. 

Because of this situation, undercover sting operations are one of 
the most effective methods for discovering abusive practices and 
are extremely useful for their deterrent effect. 

While it is clear that the routine trip to the auto repair shop is 
every consumer's nightmare, it is less clear how to remedy the situ- 
ation. Fortunately, it appears that progress has been made and 
continues to be made since our hearing last year. 

I must note that, despite an invitation to Sears to participate in 
these hearings so that we might have a follow-on with the dialog 
that we engaged them with last July, they failed to appear in re- 
sponse to our question, and I would hope that that does not indi- 
cate a lack of cooperation on their part, as they were specifically 
invited to appear and to respond to some of the questions that we 
had in a colloquy with a couple of their witnesses last July. 

I look forward to our hearing this morning, and to hear from our 
very distinguished panel. I think it may be appropriate, however, 
to lead this segment off by introducing some television tape that 
was done by a television station in Las Vegas, an ABC affiliate, 
KTNV. 

Why do not we crank that up, because although this occurred in 
Las Vegas, it could have occurred in any city in America. I think 
this will set the stage for our discussion, and then we will intro- 
duce our witnesses and invite them to testify. 

[A videotape was shown.] 

Ms. McCarthy. It is the single most common complaint on our Contact 13 hot- 
line. With few laws to protect the consumer, car owners are bilked out of thousands 
of dollars for unnecessary repairs, shoddy work, and sky-high prices. Tonight, Con- 
tact 13 goes undercover to expose the auto repair nightmare in our special report, 
"Tune-up Terror." 

Voice. You get ripped off every time. 

Voice. I am frustrated because I have been taken for my time, I have been taken 
for my money 

Voice. It is thievery, I mean, to a degree. 

Voice. Once again they thought that, being a woman, and probably because I was 
blonde, I did not know anything. 

Voice. Well, $550 labor, I would say that is a gross overcharge. 

Ms. McCarthy. Hundreds of hood horror stories. Different victims, but the same 
scenario. 

Voice. After the third repair 

Ms. McCarthy. For Jean Philips, it was a tune-up master disaster. 



Ms. PfflLIPS. They advertised a $49.99 tune-up, and as soon as you take it in for 
a tune-up, something else is wrong with your car, something else is wrong with your 
car, and rny car was running fine. 

Ms. McCarthy. $114 for the first repair, $151 for the second repair, $121 for a 
third repair, and after all that, the car's engine blew up on the ride home from the 
repair shop. 

Ms. Philips. The smoke was billowing out, and all of the oil ran out all over the 
place. 

Voice. You take your car in, you expect them to do a decent job, and you pay 
them for it. 

Ms. McCarthy. Bill Sheehy took his car in for an oil change. How is this for an 
oil change? They forgot the oil. The car's engine froze up 4 miles down the road. 
He had to pay another shop to rebuild it. 

Voice. $2,418.15. 

Mr. Sheehy. See, right there — no oil in the engine. 

Voice. What is a poor girl supposed to do? 

Ms. McCarthy. Ann Porter is the victim of yet another auto repair nightmare. 
She paid for a new part and repair she never got. 

Voice. If you ask them for a part, how can you be sure that the part they are 
giving you is the part that came out of your car? 

Ms. McCarthy. Contact 13 received hundreds of letters from angry and frus- 
trated car owners, each one detailing their own auto repair nightmare, so to get to 
the bottom of this problem. Contact 13 hits the streets. We go undercover and under 
the hood to expose some of the most common auto repair pitfalls. We begin tonight 
with reporter Steve Crupi, who focuses on the infamous overcharge. 

Mr. CRUPI. We took a 1988 Chevy Beretta and had a team of GM mechanics make 
sure the car was in tip-top condition. Then, we intentionally ripped a hole in the 
vacuum hose that attacnes to an engine sensor. 

What kind of a repair job is that? 

Voice. The total job should not take any more than an hour. It could be done 
within 20 to 30 minutes. 

Mr. Crupi. Cost factor. 

Voice. $50 to $100. 

Mr. Crupi . Cost. 

Voice. More like $20 to $50 would be a better idea. 

Mr. Crupi. So to fix the problem, all they have to do is replace that hose. 

Voice. Replace this hose. 

Mr. Crupi. A $3 part. 

Voice. Yes, absolutely. 

Mr. Crupi. So to see if we could find a fair deal, we had a News 13 producer take 
the car to a variety of repair shops around time. 

Voice. Yes, I am having car problems. I would like an estimate. 

Mr. Crlti. At the very first shop we visited, they did not even open the hood be- 
fore telling us that just getting an estimate would cost a car-load of money. 

Voice. The test runs about 4 hours. 

Voice. The test runs about 4 hours, and how much is it? 

Voice. $130. 

Voice. That is $130, and that is before any work is done on it. 

Voice. Right. 

Mr. Crupi. So before we had any repairs made at all, we have driven ourselves 
into a $130 hole. Now, for the average car owner, it is just plain hard to tell. Are 
you getting a good deal, or are you getting the shaft? After our $130 test, the me- 
chanic recommended nearly another $200 in repairs. He replaced the vacuum hose, 
plus a perfectly good computer sensor, leaving us with a total bill of $315, a figure 
our mechanic just could not believe. So we just spent $315 to put this on. 

Voice. For a 5-minute repair. Yes, absolutely, or a 10-minute repair. 

Mr. Crupi. Was it worth this much? 

Voice. Absolutely not. 

Mr. Crupi. So we confronted the shop owner for an explanation. Almost all this 
$200 extra iust to replace that part that did not need to be replaced. 

Voice, well, that is a matter of opinion. My opinion is that it did need replace- 
ment. 

Mr. Crupi. And despite a sign that said, all parts sold at list price, we were 
charged two-and-a-half times the going rate. 

Voice. This is a fair deal and a fair price for what we did. We did this work. 

Mr. Crupi. But we checked around and could not find a single mechanic who 
thought we got a fair deal. 

Voice. Overcharging you there, too. 



Mr. Crupi. What you are saying is, there is really no way to be sure. 

VoiCK. No, there is not. 

Mr. Crupi. You are at the mercy of the mechanic. 

Voice. Yes. Pretty much, yes. 

Ms. McCarthy, n is pretty amazing out there. 

Mr. Crupi. It really is, Alyson, ana you are at the mercy of the mechanic unless 
you arm yourself with some knowledge, and later this week we will have some tips 
on how you can afTord your own tune-up nightmare. 

As for the repair shop in the piece you just saw, they did do a good job in fixing 
our car, but they probably did a lot more than we really needed. The owner says 
we should be thankful for that, but I am not so sure, when you consider we took 
that same car and that same problem to a number of other shops, and at one place 
getting it fixed cost us only $29. 

Ms. McCarthy. It would be nice if it were the car-owner's option. This is some- 
thing coming up. Tomorrow night. Contact 13 goes back undercover with trans- 
mission trouoles. Car owners are at the mercy of their mechanic, and it can be a 
frightening fate if there is a dishonest or incompetent mechanic under your hood. 

To show you what we mean. Contact 13 goes back undercover tonight with trans- 
mission problems in part 2 of our special report, 'Tune-up Terror." 

Voice. It would be very tempting for a mechanic to try to blow it out of propor- 
tion. 

Ms. McCarthy. We wanted to see just how tempting it would be to turn a minor 
repair into major bucks, so we had our team of GM mechanics take a 1989 Toyota 
Camry with a perfectly good transmission, and we purposely disconnected a set of 
wires that would leave the car stuck in third gear. 

Voice. It is an obvious connection. It is at the transmission. It should not take 
you very long to find it and only a minute to plug it in. 

Ms. McCarthy. So, top time. 

Voice. I think 20 minutes. Test drive 10, and 20 to find. 

Ms. McCarthy. So that would be 

Voice. $25. 

Ms. McCarthy. No part required. 

Voice. No part at all. 

Ms. McCarthy. Once again. News 13 hit the streets in search of estimates. 

Voice. Is there any way I can get an estimate? 

Ms. McCarthy. Even before lifting the hood or test-driving the car, this shop is 
certain the transmission will have to oe replaced or rebuilt. 

Voice. That is probably $1,600. 

Voice. And this is pretty much — that is 

Voice. I would say, count on it. 

Voice. Count on it. 

Voice. Yep, about $1,600. 

Voice. I was hoping it would be something real simple. 

Voice. No, they have had a problem with these here, and that is where it is. 

Ms. McCarthy. Three more transmission shops turn up three more inflated esti- 
mates. 

Voice, you are going to get stuck anywhere you go. It does not make any dif- 
ference. You are in a situation on this car. 

Ms. McCarthy. So thinking that we would be stuck, we authorized the $175 
transmission inspection and we left the car at the shop. 

Much to our surprise, the shop owner called us 10 minutes later. He had discov- 
ered the loose wire and reconnected it. The repair was free, along with this warning. 

Voice. You have got to be real, real careful in this town, to where you go. Some- 
body could have zapped you real fast, you know. 

Ms. McCarthy. And that somebody was to be found at our next stop. 

Voice. The worst it could run is around $700 to $800. 

Ms. McCarthy. Another sky-high estimate, so we left the car with the assurance 
of the shop manager that it would be ready the next day. 3V2 days later, the repairs 
were finally finished, and we had a sneaky feeling we would been hosed. 

Voice. Now, what exactly did you have to do? 

Voice. We had to rebuilt it. We will pull the car out front for you. 

Voice. Okay, thank you. 

Ms. McCarthy. And keeping to the high end of their estimate, we drove away 
$790 later, our mechanic standing by to let us know what we got for that money. 

Voice. I would say that is a gross overcharge. 

Ms. McCarthy. So in other words, we are looking at a transmission that has in 
fact been overhauled. 

Voice. Yes. 



Ms. McCarthy. But did not need to be. 

Voice. It did not need to be. 

Ms. McCarthy. So we went back to the transmission shop for an explanation 
from the manager. 

It is an obvious disconnection if you have to pull the transmission. 

Voice. That is ririit. 

Ms. McCarthy. That is why we find it hard to believe that a mechanic would not 
notice that it is disconnected. 

Voice. Well, if it was disconnected, I had two different people work on it, it was 
just honest — we missed it. We just plain missed it. 

Ms. McCarthy. $800 for a mechanic to overlook this is way expensive for the car 
owner. What if we had not been here to catch it? She woula be paying $800 for a 
transmission that was perfectly good. This is what the investigation is all about. 

Voice. All I can do is apologize for that situation. 

Ms. McCarthy. We got an apology and something most customers would not 
get — their money back. 

Voice. The consumer could have been down the road for no money or very little 
money, and which would you prefer? I would prefer the $20 or $40 bill and take 
my chances, considering that this transmission was absolutely fine. 

Ms. McCarthy. And what you have seen here these last couple of nights is just 
a fraction of the tune-up terrors Steve Crupi and I have discovered during our inves- 
tigation. 

Mr. Crupi. That is right, Alyson. Surely Las Vegas does have honest mechanics 
who do good work, but take a look at our statistics. During our whole experience 
we randomly selected ten repair shops, big and small, dealers and independents, 
and only two out of our ten encounters did we come away feeling like we got a fair 
deal. To me, that is an 80 percent rip-off rate. Is there any hope for the average 
car owner? 

Well, Alyson, tomorrow that is the question we will try to answer. It is been quite 
an education. 

Ms. McCarthy. A very expensive one, has not it, Steve? 

Mr. Crupi. Absolutely. 

Ms. McCarthy. Thank you very much. John, in this week's special report, 'Tune- 
up Terror," Contact 13 has gone undercover to capture on camera and microphone 
many of the pitfalls facing consumers needing car repairs. Tonight, we take a look 
at how car owners can protect themselves from the dishonest or incompetent me- 
chanics out there. We begin by listening in on some of their high pressure sales and 
scare tactics. 

Voice. It is just costing you money every day. You could be blowing hundreds of 
dollars every time you start your car. 

Voice. And there is no chance that it is going to be something little. 

Voice. You have got a real problem when it comes to the transmission. 

Voice. $375. How about $1,800? 

Voice. Do not let yourself get suckered. 

Voice. I could not understand this ripping off of people. Why are not people hon- 
est anymore? 

Ms. McCarthy. When Jean Philip's car engine blew up after a tune-up, she took 
her case to small claims court and won, but that is about the only recourse a car 
owner has against a bad mechanic. 

Voice. Knowledge, I think, is the best weapon against something like this. 

Ms. McCarthy. And that is why Deborah Richards learned how to do her own 
tune-ups and brake jobs. 

Voice. I am baffled and somewhat ashamed when I come cross women who do 
not even know how to change a tire. This is the nineties. This is supposed to be 
the year of the woman. Let us do it. 

Ms. McCarthy. Armed with the basics about car repair, Deborah knows enough 
to spot a rip-ofl in the making. She warns car-owners to avoid a coupon offering a 
low or no-cost service, because most mechanics work on commissions. Mechanics 
themselves admit there is a problem within the industry. 

Voice. What they will do is try to up-sell things that you do not need and they 
know you do not need to try to get their sales up and keep their business up. 

Voice. You can get caught up in the amount of work that you are doing, and you 
do not catch the details. 

Ms. McCarthy. So how can the consumer protect themselves? Start by spending 
the time up front to shop around and save big bucks down the road. 

Voice. One good defense against overcharging would be to get second opinions. 
A lot of people do it with doctors, they do not seem to want to do it witn auto- 
mobiles. 



Ms. McCarthy. Once your problems have been diagnosed, most of your work can 
be done over the telephone. Our estimates to repair this vacuum hose alone ranged 
from $29 to $315. 

Voice. In hard times, greed is a powerful weapon. 

Ms. McCarthy. But even armed with knowledge, one thing we have learned is 
there is no guaranteed way to avoid a rip-off, especially if you do not have a hidden 
camera with you, but there are some rules to keep in mind. 

Now, Steve Crupi is standing by live at a nearby repair shop with a checklist of 
the basics that every car owner should know. Steve. 

Mr. Crupi. Alyson, we are at Perfect Auto on South Decatur. It is one of only two 
shops we went to where we felt we did not get ripped off, but whether you come 
here or whether you go somewhere else, it is almost impossible to know what you 
are getting into or how much it is going to cost. 

So straight away, right off the top, make sure you understand everything you are 
being told. Get an estimate, and get it in writing. Before you authorize anything 
beyond that estimate, make sure the mechanic gets your direct approval. 

Before you have the work done, check arouno. At the very least, call around. Find 
out what other mechanics think of that estimate. Is it a rip-off, or isn't it? Other 
mechanics might have an opinion that is a little bit better than your own. 

Also, before you go ahead and have that work done, talk to the mechanic. Tell 
him you want your old parts back. It may not guarantee that you will not be ripped 
off, but it will put the mechanic on the defensive. It will tell him that you are no 
idiot. 

At one shop we went to, the repair man simply said he could not provide us with 
our old parts. That is a tip-off right away that something unusual is going on. 

Also, a couple of the shops we went to, we got an estimate before the mechamic 
even looked under the hood. That should be another tip-off that something sneaky 
may be going. 

Also, another important question to ask is, how much are they going to charge 
for those new parts? Some shops will charge you only list price. However, at a num- 
ber of other shops we got stung for as much as two-and-a-half times list price. 

So, Alyson, obviously, it is Setter to be armed with knowledge and a checklist of 
how to approach a car repair, rather than being an obvious victim. 

Ms. McCarthy. We now know you are absolutely right. Thank you very much, 
Steve Crupi, reporting live for Contact 13. 

[The video tape ended.] 

Senator Bryan. I think that piece pretty much puts it in perspec- 
tive, in terms of the nature and diversity of the problem, although 
some of it appears a bit humorous, if that was your car that had 
iust blown up and your only means of transportation, and you are 
left with the alternative of getting another vehicle or bringing ac- 
tion against the repair garage that creates a major problem for you. 

For the record. Senator Krueger has indicated that he will at- 
tempt to join us later, but he has some questions that he wants to 
submit for the record, and that will be done, and we will keep the 
record of this proceeding open for other members of the subcommit- 
tee who would like to submit written questions at a later point. Mr. 
Chairman, your comments, please. 

OPENING STATEMENT OF SENATOR ROLLINGS 

The Chairman. I am pleased that the committee is holding this 
important hearing today, and I commend Senator Bryan for his ef- 
forts to keep the issue of automobile repair fraud under scrutiny. 
This issue continues to be one of the most common consumer com- 
plaints received by State and local consumer protection offices, the 
seriousness of which we all can appreciate. 

Since the Consumer Subcommittee's hearing last Julv, I am 
pleased to learn of the actions that have been taken at both the 
Federal and State levels to address further automobile repair 
fraud. Specifically, I understand that the National Association of 
Attorneys General has formed an automotive repair task force to 



examine the problem, and is being joined in that effort by the Fed- 
eral Trade Commission and the American Automobile Association. 
I also understand that Sears, as part of its settlement with New 
Jersey last summer, has contributed $200,000 to that task force, 
and has taken other steps to resolve the claims that were made 
against it. 

These actions are important to send a strong message that busi- 
ness as usual in this area is no longer acceptable. I look forward 
to the testimony of the witnesses this morning, as the committee 
continues its examination of the issue of automobile repair fraud. 

Thank you, Mr. Chairman. 

Senator Bryan. Thank you, Mr. Chairman. Senator Gorton. 

OPENING STATEMENT OF SENATOR GORTON 

Senator Gorton. Mr. Chairman, I would like to thank you for 
calling this hearing on automobile repair fraud today. The publicity 
last year surrounding allegations of impropriety by Sears Auto 
Centers in California focused attention on this issue. As former at- 
torneys general, we both know that auto repair fraud is a serious 
problem, and it presents major problems to law enforcement offi- 
cials. 

Whether it is for family matters or to commute to work, most of 
us depend on a car every day. And, while new cars, domestic and 
foreign, have become more reliable and require less maintenance 
than older models, the fact is that cars break down and must be 
repaired. An individual who needs his car repaired promptly is sus- 
ceptible to being charged for unnecessary repairs. Moreover, most 
consumers are not sufficiently knowledgeable to know when what 
a mechanic is recommending to them is an unnecessary repair. 

Even if a consumer thinks he has been defrauded, it is virtually 
impossible to prove that a repair facility did anything improper 
once a repair has been made. State law enforcement efforts, using 
stings and inside informants, can identify wrongdoers, but these ef- 
forts are unlikely to lead to redress for consumers who have been 
defrauded. 

Following last year's Consumer Subcommittee hearing on this 
issue, Mr. Chairman, you and I wrote to Federal Trade Commis- 
sion Chairman Janet Steiger to ask the Commission to investigate 
what the appropriate role is for the Federal Government in this 
area. Today's witnesses will outline the scope of this problem, and 
what law enforcement officials can and should do about it. 

Thank you. 

Senator Bryan. Thank you, Senator Gorton. I am pleased to wel- 
come our first distinguished panel here to share with us their own 
point of view on this problem. We are joined by the Honorable 
Mary L. Azcuenaga, who is the Commissioner of the Federal Trade 
Commission; the Honorable Robert J. Del Tufo, who is the Attorney 
General for the State of New Jersey; and the Honorable Robert 
Abrams, the Attorney General for the State of New York. 

Let us begin with the hearing from a national perspective, and 
let us hear from you, Ms. Azcuenaga. Welcome, and good morning 
to our hearing. 



8 

STATEMENT OF MARY L. AZCUENAGA, COMMISSIONER, 
FEDERAL TRADE COMMISSION 

Ms. AzcuENAGA. Thank you, Mr. Chairman, and good morning. 

I am Mary Azcuenaga, Commissioner of the Federal Trade Com- 
mission, and I appreciate the opportunity to appear before the sub- 
committee today to discuss the work of tne Federal Trade Commis- 
sion in combating fraud in the automobile repair industry. 

The written statement that I offer for the record represents the 
views of the Commission. Any other observations or answers to 
questions I might make are my own views, and do not necessarily 
reflect the views of the Commission, or any other Commissioner. 

And, having given those disclosures and caveats, I would also 
like to say that I am especially pleased this morning to be appear- 
ing on the same panel with General Del Tufo of New Jersey, who 
is the National Association of Attorneys General Auto Repair Task 
Force Chairman; and with General Abrams of New York, with 
whom we have had a long, productive relationship. 

With your permission, I will give a somewhat shorter version of 
the written statement. 

Senator Bryan. That would be fine, and your full text will be 
made a part of the record. 

Ms. Azcuenaga. Thank you, Mr. Chairman. 

Last July, as you indicated, your subcommittee directed the Com- 
mission to investigate the practices of the automotive repair indus- 
try, and to report our findings to the subcommittee. You expressed 
a particular interest in how the FTC, and the Federal Government 
as a whole, might assist the State attorneys general in combating 
automobile repair fraud. We are engaged in a number of activities 
in this area, including law enforcement efforts, as well as coordina- 
tion and liaison with the States. And I am pleased to provide you 
with a preliminary report on the Commission's activities. 

Traditionally, the automotive repair industry has been licensed 
and regulated at the State and local level. Some States, for exam- 
ple, require auto repair facilities to give consumers a written state- 
ment estimating the cost of repairs, and also require the repair fa- 
cilities to obtain further authorization fi*om the consumer before 
proceeding with work not listed on the estimate or if the cost of the 
repair will exceed the estimate by a specified amount. Other States 
impose licensing or certification requirements on auto repair facili- 
ties and on auto repair mechanics. 

While recent cases have drawn much attention to national auto 
repair chains, these chains constitute a limited portion of the in- 
dustry. For example, in 1990, mass merchandisers accounted for 
only 4 percent of the automotive after-market service outlet market 
share. The three greatest market share segments, together ac- 
counting for 62 percent of the market, were service stations, with 
25 percent, new car dealers, with 22 percent, and general repair 
shops, with 15 percent. 

Most auto repair problems continue to be local in character. Nev- 
ertheless, this is an important consumer issue, and the Commis- 
sion is committed to assisting State and local law enforcement ef- 
forts whenever it is feasible, and to identifying cases that can more 
appropriately be addressed by the Commission, rather than by 
State and local agencies. 



The staff of the Commission has conferred with the subcommit- 
tee staff about three areas that may be appropriate for further 
Commission exploration. 

First, the widespread use of flat rate manuals, which list the av- 
erage length of time needed to make specific repairs. Repair shops 
may charge consumers labor costs based on those averages, even 
though the actual repair times may be substantially less. 

A second area of interest involved incentive compensation sys- 
tems in the auto repair industry. These systems, which include the 
use of quotas, commissions, or similar compensation may provide 
incentives for sales personnel to sell unnecessary auto repair serv- 
ices in order to meet quotas or receive larger commissions. 

The final concern is low-balling, a practice where repair shops 
advertise deceptively low prices to lure consumers into the repair 
shop, even though only a few vehicles will be eligible for the adver- 
tised price. The staff of the Commission is in the process of examin- 
ing these factual, legal, and economic issues. 

Another possible law enforcement approach that we have identi- 
fied is to focus on national franchised auto repair outlets, such as 
tune-up, transmission, and brake repair shops. These types of spe- 
cialty repair shops held about 13 percent of the automotive after- 
market service outlet market share in 1990. 

As you know, the Commission enforces a trade regulation rule 
concerning franchising and business opportunities. We are con- 
cerned that some auto repair franchisors may misrepresent the 
availability of training and assistance that will be provided to 
franchisees, or the degree of technical expertise required to operate 
a franchise. This, in turn, may cause injury to consumers, for ex- 
ample, by the delivery of inadequate or incompetent auto repair 
service by franchisees, who are improperly trained, because train- 
ing is not provided as promised. 

By focusing the Commission's enforcement efforts on the large 
franchise chains, we may help address repair problems that are of 
nationwide scale. 

For example, the Commission just last month obtained a tem- 
porary restraining order and an asset freeze from the District 
Court in New Jersey against Car Checkers of America, which sells 
franchises for a mobile car inspection service. 

The Commission shares the subcommittee's views on the impor- 
tance of Federal-State cooperation in addressing consumer protec- 
tion issues. Our staff has been participating in several of the activi- 
ties undertaken by the Auto Repair Task Force created by the Na- 
tional Association of Attorneys General. 

Similar joint efforts in the 900 numbers, telemarketing fraud, 
and environmental advertising and marketing have been extremely 
successful in the past, and we hope to continue that success. 

One way we can work together to combat auto repair fraud is 
through education. One of the principal activities of the NAAG task 
force, in which the FTC staff participates, is the development of an 
auto repair fraud consumer education campaign in cooperation 
with the American Automobile Association. This campaign will use 
a variety of media to disseminate information to consumers and 
will tailor the information to the market in each State. 



10 

The NAAG Auto Repair Task Force also plans to conduct a forum 
for discussing the issues raised in the auto repair industry, and our 
staff is working with them on that forum. 

We also plan to participate with the task force in summarizing 
the State laws in the auto repair area in order to obtain a more 
accurate picture of the extent and types of regulations currently in 
force. Such a summary also will assist in providing helpful infor- 
mation to consumers with auto repair problems. 

In conclusion, the Federal Trade Commission shares the concerns 
of this subcommittee about the fraudulent practices occurring in 
the auto repair industry and the economic injury suffered by con- 
sumers as a result of those practices. The FTC is actively pursuing 
a range of activities to consider the specific problems in that indus- 
try, and possible solutions to those problems, as well as to clarify 
the Federal role in this area. 

Thank you for the opportunity to appear today and report on 
Commission activities in combating auto repair fraud. And I, of 
course, am pleased to respond to any questions. 

[The prepared statement of Ms. Azcuenaga follows:] 

Prepared Statement of Commissioner Mary L. Azcuenaga 

I am Mary L. Azcuenaga, Commissioner of the Federal Trade Commission. I ap- 
preciate the opportunity to appear before the Subcommittee today to discuss the 
world of the Federal Trade Commission in combating fraud in the automobile repair 
industn^. This written statement represents the views of the Federal Trade Commis- 
sion. My oral presentation and responses to questions are my own, and do not nec- 
essarily reflect the views of the Conunission or any individual Commissioner. 

In a July 22, 1992, letter, your Subcommittee directed the Commission to inves- 
tigate the practices of the automotive repair industry, and to report its findings to 
the Subcommittee. You expressed a particular interest in the Commission's rec- 
ommendations regarding how the FTC and the federal government as a whole might 
assist the State Attorneys General in combating automobile repair fraud. The Com- 
mission's staff is engaged in a number of activities to address auto repair fraud. 
These include law enforcement efforts, as well as coordination and liaison with the 
states. I am pleased to provide you with a preliminary report on the Commission's 
activities. 

LAW ENFORCEMENT EFFORTS 

Traditionally, the automotive repair industry has been licensed and regulated at 
the state and local level. Some states, for example, require auto repair facilities to 
give consumers a written statement estimating the cost of repairs and also require 
the repair facilities to obtain further authorization from the consumer before pro- 
ceeding with work not listed on the estimate, or if the cost of the repair will exceed 
the estimate by a specified amount.^ Other states impose licensing or certification 
requirements on auto repair facilities and on auto repair mechanics.^ While recent 
cases ^ have drawn much attention to national auto repair chains, these chains con- 



^ According to the most current figures we have available, in 1980, 23 states and the District 
of Columbia had such disclosure laws: Alaska, California, Colorado, Connecticut, Florida, Ha- 
waii, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nevada, New 
Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Virginia, Washington, and 
Wisconsin. As noted later in this testimony, one of the projecte of the NAAG Auto Repair Task 
Force is to survey and summarize the current level of state regulation. 

^According to the most recent figures available to us, in 1980, six states and the District of 
Columbia used facility registration as a method to regulate auto repair practices: California, 
Connecticut, Hawaii, Michigan, New York and Rhode Island; two states (Michigan and Hawaii) 
and the District of Columbia required mechanic certification or licensing through testing. 

3 Three recent state actions charged Sears, Roebuck and Company with selling unnecessary 
auto repairs. In September, 1992, Sears agreed to pay $8 million to settle a civil action brought 
by the California Attorney General that charged Sears with improper practices at its 72 Califor- 
nia auto repair centers. The $8 million settlement included $3 million in restitution to consum- 
ers, $1.5 milhon to community colleges with auto repair facihties for the purchase of auto repair 
equipment and supplies, and the remaining $3.5 million to be used by state and local law en- 
forcement offices to cover investigative and monitoring costs. The consent decree also prohibits 



11 

stitute a limited portion of the industry. For example, in 1990, mass merchandisers 
accounted for only four percent (4 percent) of the automotive aflermarket ser/ice 
outlet market share. Discount and department stores accounted for another four 
percent (4 percent) of the market share. The three greatest market share segments, 
together accounting for 62 percent of the market, were service stations with 25 per- 
cent, new car dealers with 22 percent, and general repair shops with 15 percent.* 

Most auto repair problems continue to be local in character.^ Nevertheless, the 
Commission is committed to assisting state and local law enforcement efibrts, when- 
ever it is feasible, and to identifying cases that can more appropriately be addressed 
by Commission action, rather than by state or local agencies. We have little doubt 
that auto repair fraud and related deceptive practices are extremely serious and re- 
sult in substantial consumer injury. 

The staff of the Commission has conferred with the Subcommittee's staff about 
three areas that may be appropriate for further Commission exploration. First, the 
Subconmiittee staff has expressed concern about the widespread use of flat-rate 
manuals, which list the average length of time needed to make specific repairs. Ac- 
cording to the Subcommittee staff, repair shops often charge consumers labor costs 
based on those averages, even though the actual repair times may be substantially 
less.® A second area of interest to the Subcommittee staff involves incentive com- 
pensation systems in the auto repair industry. The Subcommittee staff has sug- 
gested that these systems, which include the use of quotas, commissions or similar 
compensation, may provide incentives for sales personnel to sell unnecessary auto 
repair services in order to meet quotas or receive larger commissions. The final con- 
cern raised by the Subcommittee's staff is "lowballing," a practice where repair 
shops advertise deceptively low prices (for example $9.95 oil and lube specials) to 
lure consumers into the repair shop, even though only a few vehicles will be eligible 
for the advertised price. Such practices may be akin to the types of "bait and switch" 
schemes the Commission has seen in other areas. 

These types of auto repair practices and potential remedies for these practices 
raise a number of factual and legal issues, including some that may require detailed 
economic analysis. The staff of the Commission is in the process of examining these 
factual, legal and economic issues. 

Another possible law enforcement approach that we have identified is to focus on 
national franchised auto repair outlets such as tune-up, transmission, and brake re- 
pair shops. These types of specialty repair shops held about 13 percent of the auto- 
motive aftermarket service outlet market share in 1990. "^ Although holding only a 
relatively small share of the total market, the franchised auto-aftermarket industry 

Sears from replacing or upgrading an automotive part or service that is not necessary according 
to the manufacturer's specifications or accepted trade practices, unless the recommendation is 
reasonable and unless the consumer is informed that the service or part is not necessary accord- 
ing to specifications and the consumer agrees to the repair. 

In addition, in July, 1992, Sears also agreed to settle charges brought by New Jersey as a 
result of that State's auto repair investigation. Among other provisions of this settlement, Sears 
agreed to contribute $200,000 to establish an "Automotive Repair Industry Reform Fund," to be 
administered by NAAG. This money was used to create the NAAG Auto Repair Task Force in 
which the FTC is participating, and to fund the Task Force's information-gathering, legislative, 
investigative, and education projects. 

Finally, in January, 1993, the Wisconsin Attorney General's Office resolved a case against 
Sears concerning allegations that Sears had oversold certain parts and services, made unneces- 
sary repoirs to cars, and billed customers for repairs which were not made. Among other provi- 
sions of the settlement, Sears agreed to hire an independent contractor to conduct 10 undercover 
inspections at Sears Auto Centers in Wisconsin over the next 18 months and to provide a repwrt 
of each undercover investigation to the state. 

■*Tire stores held a 8 percent market share, specialty repair shops 13 percent, auto parts 
stores 7 percent, and home and auto stores 1 percent. Miscellaneous other outlets held the re- 
maining 1 percent market share. MVMA Motor Vehicle Facts & Figures '92, (Motor Vehicle 
Manufacturers Association: Detroit, MI) 1992 at p. 66. 

^The Commission receives few consumer complaints about auto repair fraud. Of the 41,215 
consumer complaints in the Commission's consumer complaint system for 1992, only 76 com- 
plaints (.18 percent) involved auto repair fraud. 

«In Link v. Mercedes-Bem of North America, Inc. et al. 788 F.2d 918 (3rd Cir. 1986), the Ap- 
peals Court upheld a lower court finding that the use of fiat-rate manuals did not constitute 
an illegal conspiracy to raise and fix prices because not only did the dealers set their own hourly 
rates for labor charges, but they also decided voluntarily whether to use a fiat rate manual and, 
if so, whether to use the manufacturer's manual or that of an independent, third-party pub- 
lisher. 

'MMMA Motor Vehicle Facts & Figures '92, p. 66. 



12 

still had substantial sales: $13.8 billion in sales in 1990, with $15.4 billion in sales 
projected for 1991.^ 

As you know, the Commission enforces a trade regulation rule concerning fran- 
chising and business opportunities (the "Franchise Rule"), 16 C.F.R. §436, which re- 
quires franchisors to aisclose certain information to prospective franchisees. In the 
context of auto repair, we are concerned than some franchisors may misrepresent 
the availability of training and assistance that will be provided to franchisees, or 
the degree of technical expertise required to operate a iranchise. These franchisor 
misrepresentations, in turn, may cause injury to consumers, for example, by the de- 
livery of inadequate or incompetent auto repair service by franchisees, who are im- 
properly trained because training is not provided as promised. By focusing the Com- 
mission's enforcement eflbrts on the large franchise cnains, we may help address re- 
pair problems that may be of nationwide scale. 

For example, the Commission recently obtained a temporary restraining order and 
an asset freeze from the District Court in New Jersey against Car Checkers of 
America, which sells franchises for a mobile car inspection service. FTC v. Car 
Checkers of America, Inc., Civ. No. 93-623 (MLP), (D.N.J., filed February 8, 1993). 
The Commission's complaint alleged, among other things, that the company falsely 
represented that investors without prior technical experience could perform a suffi- 
cient number of car inspection services to turn a profit. The complaint also alleged 
that Car Checkers represented that it provided all of the tools necessary to conduct 
car inspections, but allegedly failed to disclose that their system was incompatible 
with some car models. 

COORDINATION AND LIAISON WITH STATE AND LOCAL AGENCIES 

The Commission shares the Subcommittee's views on the importance of federal- 
state coordination in addressing consumer protection issues. The FTC staff has been 
participating in several of the activities undertaken by the Auto Repair Task Force 
created by the National Association of Attorneys General ("NAAG"). Similar joint ef- 
forts in the areas of 900 numbers, telemarketing fraud, and environmental advertis- 
ing and marketing have been extremely successful in the past, and the Commission 
hopes that our coordination with the states in the Auto Repair Task Force will con- 
tinue that success. 

One way we can work together to combat auto repair fraud is through education — 
helping consumers learn how to anticipate fraudulent repair schemes. One of the 
principal activities of the NAAG task lorce in which the FTC staff participates is 
the development of an auto repair fraud consumer education campaign in coopera- 
tion with the American Automobile Association ("AAA"). This campaign will use a 
variety of media to disseminate information to consumers and will tailor the infor- 
mation to the market in each state. Each organization will use its extensive dis- 
tribution network to promote this education campaign. We will continue working 
with NAAG and AAA to develop and complete this consumer education project. 

We are exploring other opportunities for consumer and business education regard- 
ing auto repair services.^ The NAAG Auto Repair Fraud Task Force plans to con- 
duct a forum for discussing the issues raised in the auto repair industry. The FTC 
staff is working with NAAG to plan this forum. Commission staff will attend the 
discussions, review any findings, and make recommendations to the Commission on 
what role, if any, the FTC mi^t play in resolving the problems identified. We hope 
that this forum will identify additional problems and suggest additional avenues for 
Commission and state action. 

As discussed above, many state and local governments have statutes and regula- 
tions that specifically govern the auto repair industry. The FTC staff plans to par- 
ticipate with the NAAG Auto Repair Taslc Force in summarizing the state laws in 
the auto repair area in order to obtain a more accurate picture of the extent and 
types of regulations currently in force. Such a summary also will assist the staff of 
the Commission in providing helpful information to consumers with auto repair 
problems. 

In conclusion, the Federal Trade Commission shares the concerns of this Sub- 
committee about the fraudulent practices occurring in the auto repair industry, and 
the economic injury suffered by consumers as a result of those practices. The FTC 
is actively pursuing a range of activities to consider the specific problems in that 



""Bumper to Bumper Auto Care," Nation's Business (October 1991) p. 70. 

*An active consumer and business education program in this area is poramount. In December 
1978, this Subcommittee directed the General Accounting OfTice ("GAO") to examine the federal 
role in dealing with consumers' auto repair problems, including the relationship between federal 
agencies and state and local governments. "The 1980 GAO report recognized the important role 
that consumer education can play in combating auto repair fraud. 



13 

industry and possible solutions to those problems, as well as to clarify the federal 
role in this field. 

Thank you for the opportunity to appear today and report on Commission activi- 
ties in combating auto repair fraud. I am pleased to respond to any questions the 
Subcommittee may ask. 

Senator Bryan, Thank you very much for your testimony. 

At the conclusion of the panel I will have a few questions. 

Let us turn next to Attorney General Del Tufo. 

Let me say, for the record, that we have appreciated very much 
the cooperation that your office has provided to this subcommittee. 
One of your able staff lieutenants was with us last July to share 
testimony from your office's perspective, and we are particularly 
pleased to have you here today to give us not only any insight that 
you might care to with respect to New Jersey, but in your role as 
chairman of the national task force. 

STATEMENT OF ROBERT J. DEL TUFO, ATTORNEY GENERAL, 

STATE OF NEW JERSEY 

Mr, Del Tufo. Thank you very much. Senator. And thank you 
for your kind remarks. And it is a pleasure and a privilege to be 
here today, especially to appear along with representatives of the 
FTC, with whom the attorneys general, over the past several years, 
have had many meaningful and fruitful cooperative efforts. And 
also my distinguished neighbor. Bob Abrams; it is a pleasure to be 
here with him. 

I also, at the outset, would simply like to commend you, Senator, 
and your committee, for keeping this issue in the public eye. I 
think that your interest in this subject matter and the hearings 
that you have conducted and are conducting are very important 
ones. 

I am pleased to speak as the attorney general of a State that has 
been in the forefront of trying to do something about automobile re- 
pair fraud, and also as the chair of the National Association of At- 
torneys General, Auto Repair Task Force. After seeing the video, 
I guess I appear also as a consumer who has been through many 
auto repair nightmares and tune-up terrors. I do not know that I 
am going to be able to fix my own brakes, but it is an idea. [Laugh- 
ter.] 

The NAAG task force was created as the result of an agreement 
entered into by the New Jersey Attorney General's office and Sears 
Roebuck and Co., under which Sears contributed $200,000 toward 
the formation of the initiative. I would say to you also. Senator, in 
response to your opening remarks, that Sears has been cooperative 
in working on these things. And I am pleased to announce here 
today also that Tom Udall, the Attorney General of New Mexico, 
has agreed to serve as the cochair of this group. He is a fine young 
man, and we certainly welcome him aboard. 

As the TV video which you played indicates, as there stated, the 
single most constant consumer complaint involves auto repair 
fraud. Fully one-fourth of the complaints that are received by the 
consumer affairs division in my office cover the same type of sub- 
ject matter. And following investigations into auto repair practices 
by New Jersey and California last spring, and following your hear- 
ings in July, tne complaints even increased dramatically. 



14 

We knew that consumer problems were bad, Senator Bryan, but 
I guess we did not really know how bad. And they are significant. 

If I may, you summed it up well at the hearing m July when you 
said, and I am quoting, "there was a disturbing pattern in the auto 
repair industry that consumers are defrauded regularly through a 
host of schemes, including bait-and-switch tactics, the exploitation 
of concerns about safety, and the sale of unneeded parts." 

I would say, based upon what you have done here with your com- 
mittee, and based upon what some of the States have accom- 
plished, we have come a long way in the past seven months. Con- 
sumers truly used to be in the dark, but awareness has substan- 
tially increased. And if the industry used to feel free to operate as 
it saw fit, it is now clearly on notice that business as usual is not 
acceptable and is a very dangerous practice. 

When the results of the investigations in New Jersey and Califor- 
nia were announced, Sears came forward with a good corporate cit- 
izen offer to change its corporate practices and to spearhead indus- 
trywide reform. I say very emphatically that the rest of the indus- 
try should follow suit, engage in self-examination and correction 
and reform. The task force is prepared to help make those types 
of changes. 

As of today, we have some 23 States in the task force, together 
with the Federal Trade Commission, pledged to participate in a 
three-part program. This is a really unique opportunity to change 
the way an industry does business, and we do have momentum 
now, because of what has occurred over the past year or so. And 
I think we should really try to press the advantage and move 
ahead as responsibly and dramatically as possible. 

The initiative that we propose has really three prongs to it. The 
first is an effort to identify industrywide practices that may be un- 
fair or deceptive and that require correction. Obviously, in order to 
come to corrective measures, we must obtain a full and complete 
profile of the industry to understand how it functions in all areas. 

We are going to do this by putting task force members in place 
to evaluate things within their States, and also to try to get some 
assistance from the industry. Because we believe it important to 
try to include the industry in this process we have mailed letters 
to a variety of trade members and associations and manufacturers 
and fi-anchise dealers seeking data and pertinent materials. And 
we have requested industry input on existing problems and the 
identification of solutions. 

We also believe it would be useful to sponsor some public forums 
in the not-too-distant future so that the information that we receive 
may be scrutinized further and subjected to the crucible of public 
debate, and we might also, obviously, obtain some additional infor- 
mation from citizens at these public hearings. 

Now, I guess the question is, or one question is, Will the indus- 
try, in fact, be cooperative? Will it, as a whole, respond as respon- 
sibly as Sears did a few months ago? 

I hope so. I have every reason to believe that perhaps it will. We 
have already received an invitation to meet on industrywide issues 
from an industry group forged by Sears, which is called Mainte- 
nance Awareness Program, MAP, a group that apparently has rec- 
ognized the benefits of working partnerships, and is offering to de- 



15 

velop industrywide self-policing procedures. And, obviously, self-po- 
licing is the most economical and the most correct and one of the 
best ways of trying to deal with the problem. 

We want to encourage the effort, and we want to help this orga- 
nization focus its direction so that consumer needs will be best met 
and best served. 

As you heard last July and, indeed, as we heard on this video, 
Senator, that you played here this morning, customers not only feel 
vulnerable when they need auto repair services, they are vulner- 
able. And also, as the video indicated, an important area and the 
second prong of our attack against auto repair fraud involves 
consumer education. 

Obviously, fraud is going to persist as a really significant prob- 
lem, just so long as consumers are helpless to help themselves to 
determine whether, in fact, fraudulent or unfair practices are oc- 
curring. What we need, basically, are savvy consumers. Accord- 
ingly, in cooperation with the Federal Trade Commission and the 
American Automobile Association, we will be formulating and issu- 
ing educational brochures, videos, news releases, and public service 
announcements. 

My prepared remarks indicate that by summer we will be ready 
to move ahead with this program. That might be a bit optimistic, 
and we will shoot for it, but certainly by the fall or the early fall, 
we will be in a position to move ahead. 

Finally, enforcement efforts must be continued and will be en- 
hanced. Litigation and undercover auto repair investigations are 
really essential and are effective as deterrents and as vehicles for 
both compensatory recovery and punitive redress. They are also ex- 
pensive. Accordingly, the task force has set aside $125,000 of the 
$200,000 for a revolving fund to provide seed money to States wish- 
ing and willing to aggressively police the auto repair industry. 

We are going to make grants to States who apply for such assist- 
ance for use in auto repair investigations and litigation. It is the 
intention that the loans will be repaid as these investigations and 
as the litigation bear financial fruit. 

We are nopeful, too, that the fund might even grow, and that, as 
States succeed in recovering money from these enforcement efforts, 
they will not only reimburse the fund, but also make additional 
contributions to enhance it. I hope that they follow New Jersey's 
lead, which, in a statesman-like posture, authorized $200,000 of its 
settlement to fund the creation and initial operations of the task 
force. 

So, in a nutshell, we would like to find out fully how the industry 
works, what makes it tick. We would like to recommend necessary 
changes. We would like to encourage self-policing by the industry 
itself. We want to make our consumers savvy, so we are going to 
pursue education vigorously. 

And as the perhaps ultimate deterrent, as the mechanism for re- 
dress in the event these other measures do not succeed 100 per- 
cent, we want to pursue vigorous undercover enforcement, and we 
intend to assist States who wish to help themselves in this area. 

So, Mr. Chairman, thank you again for giving me the opportunity 
to be here, and thank you again for all of your efforts in this area, 
which benefit, so much, the consumers of this country. 



16 

[The prepared statement of Mr. Del Tufo follows:] 

Prepared Statement of Robert Del Tufo 

I am pleased to speak to you today as the Attorney General of a State in the fore- 
front of combating automobile repair fraud. 

I also appear before you as tne Chair of the National Association of Attorneys 
Generals Auto Repair Task Force. 

The task force was created as a result of the agreement entered into by the New 
Jersey Attorney General's office and Sears Roebuck & Company. Sears contributed 
$200,000 toward the formation of the task force. Today, I am pleased to announce 
that Attorney General Tom Udall of New Mexico has agreed to serve as vice chair 
of that task force. 

Fully one-fourth of complaints received by the Consumer Affairs Division of the 
Department of Law and Public Safety, which the New Jersey Attorney General 
heads, involve and relate to auto repair. Following auto repair investigations bv 
New Jersey and California last spring and summer, and after this subcommittee s 
hearings last July, my oflice and other attorneys general offices were inundated 
with complaints about industry abuses. We knew that consumer problems with auto 
repair were bad. We did not know how bad. Senator Bryan, you summed it up well 
when you observed at the last hearing that, and I quote, "There was a disturbing 
pattern in the auto repair industry; that consumers are defrauded regularly through 
a host of schemes, including bait and switch tactics, the exploitation of concerns 
about safety and the sale of unneeded parts". 

We have come a long way in the last seven months. Consumers used to be in the 
dark. Now awareness has increased. If the industry used to feel free to operate as 
it saw fit, it is now on notice that business as usual is a dangerous practice. 

When the results of the investigations in New Jersey and California were an- 
nounced. Sears came forward with a "good corporate citizen" offer to change its cor- 
porate practices and to spearhead industry-wide reform. The rest of the industry 
should lollow suit and engage in self-examination, correction, and reform. The task 
force is prepared to help. 

As of today, twenty-tnree states have joined the task force and, together with the 
Federal Trade Commission, have pledged to participate in a new three part program 
to attack fraudulent practices in the auto repair industry. This presents a unique 
opportunity to make fundamental changes in the way an entire industry does busi- 
ness. Allow me to describe briefly and more specifically the three prongs of this ini- 
tiative. 

First, the task force will seek to identify industry-wide auto repair practices that 
may be unfair or deceptive. We must obtain a better profile of the industry and un- 
derstand how it functions in all areas. We shall do so. For the inquiry will be broad 
based and will include even standard industry practices that may be operating to 
the detriment of consumers such as the use of flat rate manuals. Commission based 
sales, overly aggressive sales pitches and other promotions. Our recent New Jersey 
investigation revealed an obviously infirm system of incentive compensation for em- 
ployees, a system which was uniformly in place and contributed to overselling. We 
expect other issues to reveal themselves as we go along. Ultimately, the task force 
will issue a report of its findings and offer recommendations as to how best to ad- 
dress consumer auto repair problems. 

We wish to include industry as part of this process. Letters have been mailed 
seeking data and pertinent materials to trade members and associations, shop man- 
ual publishers, manufacturers and franchise dealers. We have also requested indus- 
try input on the nature of existing problems and the identification of possible solu- 
tions. Once this information is gathered and analyzed, we shall be asking the task 
force to consider sponsoring public forums where the information may be scrutinized 
even further and where additional citizen input may be obtained. 

Will the industry be cooperative? Will the industry respond as responsibly as 
Sears did? I hope so. And I have every reason to believe it will. Already I have re- 
ceived an invitation to meet on these issues from an industry group forged by Sears, 
which has, in a positive vein, sought to make the agreement it reached with the 
state of New Jersey a model for the entire industry. The industry group, called 
M.A.P. for "maintenance awareness program", apparently recognizes the benefits of 
a working partnership and is offering to develop industry wide self-policing proce- 
dures. We wish to encourage this eifort, and to help focus its direction so that 
consumer needs will be best met and served. 

As you heard last July, consumers not only feel vulnerable when they need auto 
repair services, they are vulnerable. Thus, tne second prong of our attack against 
auto repair fraud entails consumer education. Regardless of other remedies, fraud 



17 

will persist as a significant problem so long as customers are helpless to determine 
whether it is in fad, occurring. We need savvy consumers. Therefore, in cooperation 
with the Federal Trade Commission and the Automobile Association of America, the 
task force wiU issue educational brochures, video news releases and public service 
announcements. By summer, we hope that a comprehensive consumer education 
program will be ready to go to help consumers with car trouble. 

Finally, enforcement efforts must and will be enhanced. Litigation and undercover 
auto repair investigations are essential and effective as deterrents and as vehicles 
for both compensatory recovery and punitive redress. But they are also expensive. 
Therefore, the task force has set aside $125,000 of the $200,000 for a revolving fund 
to provide seed money to states wishing and willing to aggressively police the auto 
repair industry. Grants will be made to states for use in auto repair investigations 
and litigation. The loans will be repaid as the investigations and litigation bear fi- 
nancial fruit. The fund may even grow if states, as they succeed in recovering money 
from these enforcement efforts in terms of both compensatory damages and pen- 
alties, not only reimburse the NAAG fund but also make additional contributions 
to enhance it. New Jersey adopted such a statesmanUke posture when it authorized 
$200,000 of its settlement to fund the creation and initial operations of the task 
force. I hope and expect other states to be as altruistic. 

In conclusion and summary, the task force believes that the underside of the auto 
repair industry must be exposed to light. We must know precisely how this industiy 
works, and we must motivate industry members to function in a manner which will 
benefit the consumers they serve. Industry self-policing is constructive, economical 
and of obvious import here. 

The task force will thus be urging industry members to make consumer oriented 
changes and to institute self-policing procedures. We shall watch and work with 
them to see how far reform will reach. We shall also be educating consumers so that 
they have the capacity to watch out for themselves and to assist our enforcement 
efforts. And, through monetary grant assistance, we shall enable individual states 
to conduct investigations and to bring enforcement actions so as to deal forcefully 
with those who do not follow good practices. We simply cannot let up; we cannot 
lose the window of opportunity that is now open. We must capitalize on the momen- 
tum we now have with both consumers and the industry. 

On behalf of my state and the entire NAAG task force, I wish to thank you for 
the opportunity of appearing here today. More importantly, I wish to thank the sub- 
committee for continuing to keep this issue in the public eye. This is the only way 
to ensure it receives the priority attention it assuredly deserves. 

Senator Bryan. Thank you very much, General Del Tufo. We ap- 
preciate the leadership that you have shown, not only in New Jer- 
sey, but nationally. And we will look forward to having a little col- 
loquy with you to get the benefit of your thoughts with respect to 
some of the other observations that the preceding witness and, I 
am sure, that General Abrams is about to share with us. 

General, it is a pleasure to have you here this morning, as well. 
I know that you have a specific legislative proposal that you have 
advanced before the New York State legislature. And I hope during 
the course of your testimony you might share with us what that 
consists of. 

STATEMENT OF ROBERT ABRAMS, ATTORNEY GENERAL, 

STATE OF NEW YORK 

Mr. Abrams. Thank you, Senator Bryan, for those comments and 
for the opportunity that you have provided me to come before you 
today, for your extraordinary leadership in helping to focus this 
country on a continuing problem, and for allowing me to be with 
some distinguished colleagues who I have had the privilege of 
working with in the past. 

Commissioner Azcuenaga and I have shared a podium like this 
on several occasions and, of course, I am always honored to be in 
the presence of one of the most effective and dedicated and out- 



18 

standing attorney general in the country, Attorney General Bob 
Del Tufo. 

Mr. Chairman, in our experience, auto repair problems continue 
to be a major source of consumer complaints. Common problems in- 
clude faulty repairs, unnecessary repairs, unanticipated repair 
costs that are very commonly called the "5 o'clock surprise," over- 
charging, and outright fraud. 

Certainly these problems are not new. More than a decade ago, 
NHTSA, the National Highway Traffic Safety Administration, esti- 
mated that consumers lost over $20 billion annually on unneces- 
sary auto repairs. That meant that for every $1 spent on car re- 
pairs, 40 cents was wasted. The Center for Auto Safety concluded 
in its 1990 Lemon Book that NHTSA's findings of waste in auto re- 
pair were still true today. 

Those were the words they used back in 1990 and I have no rea- 
son to believe that there is any less fraud and abuse in 1993, as 
clearly the showing of the footage reflects in part that this is a 
problem in Las Vegas, throughout Nevada, New York, New Jersey, 
and the entire country. 

Auto repair fraud has long been a priority of my office. So, for 
example, back in 1980 we issued a major study of the flat-rate 
manual system used by most repair shops in New York. We found 
that 56 percent of the time consumers were charged for more hours 
of labor than the mechanic actually spent doing the repair itself. 

At that time we proposed remedial legislation that would have 
required auto repair shops to maintain actual labor time records 
for work performed, to disclose the actual time spent and to tell 
consumers how the labor charge was computed, whether by actual 
time or by flat rate. We also advocated State certification of me- 
chanics. Unfortunately, however, thus far neither proposal has 
been adopted in New York. 

New York State laws and regulations require repair shops to give 
consumers written estimates on request, perform only authorized 
work, provide a detailed invoice of all parts and labor, and to offer 
to return used parts. While our State provides important protection 
to consumers, I am committed to further strengthening existing 
law. 

And so you have requested that I focus particularly today on two 
legislative initiatives in the auto repair area which my omce pro- 
posed to the 1993 legislative session, this present session; namelv 
restrictions on incentive compensation plans and then, second, 
mandatory repair warranties. 

The first proposal is based on investigations by my office and 
other States of auto repair practices by Sears, Roebuck and Co., 
which we believe is not unique to that company alone, but is in- 
deed widespread in the industry. These investigations revealed 
that service advisers were offered a commission compensation plan 
based on a percentage of their sales. 

Thus, the service advisers' total income was directly tied to their 
volume of sales. In addition, specific sales goals were set for certain 
products, such as shock absorbers or springs, and there were con- 
tests conducted to reward the greatest sales increases. My office 
concluded that the service advisers frequently recommended and 



19 

sold auto repair services, as well as products, that were totally un- 
necessary. 

In June 1992, as a direct result of the various investigations into 
its practices, Sears voluntarily ceased all commission compensation 
and goal-setting programs. In October 1992, in a settlement with 
our office, it agreed to pay New York $300,000 in costs for the at- 
torney general's investigation. 

It should be noted that Sears fully cooperated with our investiga- 
tion. Our agreement also incorporated the restitution provisions of 
the California and national class action judgments. And so as a re- 
sult. Sears is offering coupons worth $50 to more than 75,000 New 
York consumers. 

The need for our legislation is further corroborated by the find- 
ings of a report that was recently issued by the New York State 
Consumer Protection Board. That board studied the compensation 
plans of auto repair chains in New York. It found that 12 out of 
14 companies provide some form of commission compensation to 
their employees. The firms were identified as AAMCO, 
Bridgestone, Cole, Cottman, Goodyear, Jiffy Lube, Lee Myles, 
Meineke, Midas, Monroe, Montgomery Ward, and QuickLube. 

At least 10 of those firms base such commissions on factors 
which include the sales of parts or services. To deal directly with 
this issue of incentive compensation, we have proposed a bill which 
would prohibit repair shops from using commission plans to com- 
pensate the sales personnel. 

The proposed legislation also addresses another problem that we 
encountered with Sears, allowing salespeople with little or no ex- 
pertise in auto mechanics to actually diagnose the vehicles and 
then recommend needed repairs. Under the bill submitted by my 
office, a repair shop could only use competent mechanics to inspect 
and diagnose a vehicle. And that is one of the agreements and ccm- 
mitments we had from Sears and so we seek to now incorporate 
that in the laws of the State of New York, 

The bill would also provide for both a private right of action and 
enforcement by the attorney general. Aii injured consumer could 
recover actual damages or $250, whichever is greater, and the 
court could triple the award of actual damages up to $1,000 for any 
willful violations. 

Our second legislative proposal would require repair shops to 
offer a statutory written repair warranty with a duration of 90 
days or 4,000 miles, whichever comes first. The shop would be re- 
quired to correct any defective repair at no cost to the consumer, 
and it has to be done quickly, at least within 10 days of receiving 
the car. If it is impracticable for the consumer to return the vehicle 
to the shop, the consumer — let us say the consumer, £ifter a repair, 
is visiting a relative halfway across the country — the consumer 
would be reimbursed for the reasonable cost of any repair made. 

The repair warranty could exclude problems that are caused by 
collision or abuse, negligence, theft, vandalism, fire, or any other 
casualty loss. The bill would provide both for a private right of ac- 
tion and for enforcement by the attorney general. 

According to our department of motor vehicles, as of December 
1, 1992, New York had more than 25,000 registered auto repair 
shops serving more than 10 million motor vehicles. While DMV 



20 

regulations obligate repair shops to provide "quality repairs," cur- 
rent law requires the DMV to find "willfulness" or "gross neg- 
ligence" in order to take administrative action. But faulty repairs 
due to either simple negligence or incompetence or mistake can be 
equally harmful for consumers and, in fact, are far more likely to 
occur, 

A statutory warranty of repairs would therefore provide essential 
new protection to consumers. Further, the need for a statutory war- 
ranty is especially strong in light of court decisions that have held 
that the implied warranty of merchantability found in the uniform 
commercial code does not apply to services such as auto repairs. It 
applies to products and things that are sold in the marketplace, but 
not to services per se. 

Many repair shops already give repair warranties on a voluntary 
basis. So, for example, Shell Oil Auto Care Centers, and Goodyear 
Auto Repair Centers, all operating in New York, offer customers re- 
pair warranties of 90 days or 4,000 miles, the same duration as 
provided in our bill. 

Similarly, in certain upstate areas of New York, the American 
Automobile Association, through some of its affiliated service sta- 
tions and repair shops, offer consumers what it calls approved auto 
repair, and that also provides consumers with a repair guarantee 
of the same duration in the bill. So, we are not asking anything 
that is outlandish or unreasonable, because existing leaders in the 
industry, some of them provide that kind of protection today. 

The bill also is patterned on the successful statutory used-car 
lemon law warranty first proposed by my office and enacted into 
law in 1984. We are very proud of that. We became the first State 
in the country to adopt a used-car lemon law and these kinds of 
protections for repairs made are found in that statute. 

And so, Mr. Chairman, I end where I began, thanking you for the 
chance to be here this morning and thanking you for your extraor- 
dinary leadership in focusing the public's attention on a bread and 
butter issue which is of enormous consequence to them in a period 
when dollars are hard pressed for the average family. 

Senator Bryan. Thank you very much. General Abrams. And we 
thank you for your leadership and wish you well with these legisla- 
tive initiatives that your office is supporting in New York. 

Let us begin our questioning with Ms. Azcuenaga. Tell me, if you 
will, the current jurisdictional scope? If the Commission chose to 
become more involved in this issue, do you have the ability under 
current law to promulgate rules, for example such as Attorney 
General Del Tufo and Attorney General Abrams have talked about 
with respect to warranties, with respect to service compensation in- 
centive programs, flat-rate manual practices, accelerated mainte- 
nance schedules? 

What is the scope of the authority that the law confers upon you 
at the present time if you, at the discretion of the Commission, 
chose to exercise it? 

Ms. Azcuenaga. Mr. Chairman, we do have authority under the 
Magnuson-Moss Act to issue rules that have the force and effect of 
law. There are certain requirements that we have to meet before 
we can issue those rules. For example, we have to find that there 
is a widespread problem in the industry of conduct that does vio- 



21 

late the FTC Act, and then find whether we have a remedy that 
would improve that situation, rather than just impose regulatory 
requirements without accomplishing much. 

When we do issue rules in areas such as this that affect States 
and localities, one of the issues that often comes up is preemption. 
There are many States that have laws in this area. Some of them 
think that their laws are optimally drafted and might not like to 
have a Federal Trade Commission rule. That would not stop us 
from issuing one in an appropriate situation, but that is an issue 
we always have to deal with. 

Senator Bryan. Well, I am just simply trying to inquire without 
suggesting at this point what you ought to do. But at least you 
would have the authority to do so. 

Mv understanding is that you have, as an agency, promulgated 
used-car rules which require the disclosure of certain things before 
a customer buys that automobile and that as an enforcement mech- 
anism you use what is referred to as a sweep. Can you tell me, 
first, whether I am correctly informed? And, second, how the sweep 
works and, in your judgment, is it an effective mechanism to help 
control the marketplace? 

Ms. AZCUENAGA. Yes, you are absolutely correct, Mr. Chairman. 
We have used sweeps, I think very effectively, in the enforcement 
of our used-car rule, and we have worked with the States and they 
have worked with us and have been very helpful. 

The way that works is we combine our efforts with those of the 
States and in the used-car area, for which we have a disclosure 
rule, we send investigators out. They visit the used-car lots and es- 
sentially do a count of how many cars have the disclosures and how 
many do not. It is a fairly easy thing to accomplish and since we 
have undertaken the sweeps, we believe that compliance with our 
used-car rule has risen in a significant fashion. 

Senator Bryan. I know that the Commission chairman has devel- 
oped a much closer working relationship with the States' attorneys 
general. That has been noted on prior occasions before this sub- 
committee and in different contexts. 

But specifically, do you have any type of formalized mechanism 
as you look at problems that are as pervasive as this, that are 
clearly national in scope? And recognizing this morning that we 
have two leaders who have done an outstanding job in representing 
the consumer interests of their own State, as to how you might 
more effectively work together, recognizing that they are pursuing 
initiatives in their own States but recognizing that there may be 
a role for the Federal Trade Commission to assist them. What type 
of mechanism, if any, do you have? 

Ms. AzcuENAGA. Well, Mr. Chairman, that is one of the reasons 
we are so very happy that NAAG has formed the task force on auto 
repair and has invited us to participate in that task force. We will 
be working with the task force to the extent we can on each of its 
activities. We hope to provide assistance as we go along, where we 
can, and we also hope that through the task force we will have 
greater communication on these issues so that the States can pro- 
vide us information and help us find cases, in particular, cases that 
we can address on a national basis perhaps more effectively than 
they can address on a State basis. 



22 

One of the things that is already well along in the task force is 
the consumer education campaign that to which Greneral Del Tufo 
referred. That is actually quite exciting; I am quite excited about 
it anyway, perhaps as a consumer as much as a commissioner. 

And not only do we have Federal-State cooperation on this, but 
we have also engaged in Government-private cooperation with the 
American Automobile Association. For example, AAA is preparing 
the first draft of the pamphlet we hope to issue describing the 
major component systems of automobiles. 

With respect to each system, the pamphlet will provide a list of 
questions that consumers can and probably should ask when they 
go into an auto repair shop, and in addition, will provide possible 
answers, the kinds of answers they might get. So that people like 
me, I am sorry to say, can go in and try to make some sense out 
of the situation in dealing with a repair shop. I think the brochure 
is going to be extremely useful for consumers and I am delighted 
that it is underway. 

Senator Bryan. Well, it is not just people like you, it is all of us. 
[Laughter.] 

You go in and hold your breath and pray for a result that you 
can afford. With respect to the areas that you have indicated that 
you are looking at, the flat-rate manual, the incentive compensa- 
tion systems, and the low-balling — those are the three areas that 
you pointed out in your testimony — how soon before you are able 
to share with us the product of your analysis? What kind of time 
line are we looking at? 

Ms. AZCUENAGA. Well, Mr. Chairman, we are working with the 
State task force and it is gathering information. We would like to 
continue to coordinate with them and make the best use of that 
joint effort in preparing the report. We will have a little better idea 
of timing perhaps within 30 to 60 days. On the other hand, if this 
subcommittee, of course, wants something by a date certain, we 
will comply. 

Senator Bryan. Well, I certainly applaud the cooperative efforts. 
I mean that is a situation that did not exist prior to the new Com- 
mission and so I think we want to encourage that. I do not suggest 
that you want to charge off on your own without working with, you 
know, the attorneys general who have a tremendous background of 
experience in this. 

In addition to the three areas that you have mentioned specifi- 
cally, at our hearing in July, and I think maybe you will have a 
chance to at least see some of the record that was developed there, 
there were two other areas that were mentioned as potentials for 
abuse. 

One was the accelerated maintenance programs which are in ex- 
istence, at least in some repair shops. That is, you go into your re- 
pair shop and they have got a schedule of when you need to have 
your oil change, when you have to have certain maintenance items 
performed. The testimony indicated that these schedules oftentimes 
go far beyond what the new car warranty requirements are and, 
in effect, are a very subtle way of getting into the consumer's pock- 
et unnecessarily. 

Most people having — I suppose the automobile today is the sec- 
ond largest investment people make, their home being the largest. 



23 

But you used to be able to buy a home for the cost of a new auto- 
mobile today, so if you see something — and you have got a $15,000 
or $20,000 automobile and you see the maintenance schedule and 
it says come in every 2 weeks and get your oil changed. Now that 
is hyperbole, I do not suggest that the record indicated that, but 
your first inclination is you want to protect that investment and so 
you are going to come on in. 

Have you had that experience at all in terms of any of your anal- 
ysis so far? Or what are you hearing about that practice? 

Ms. AZCUENAGA. Well, Mr. Chairman, we share your concern 
about subtle attempts to get money from consumers that consum- 
ers should not be required to pay. I do not know that we have stud- 
ied that particular issue, but it is one that I think would be of in- 
terest for us to study and it is certainly something we could look 
into along with the other issues and address in our final report to 
the subcommittee. 

Senator Bryan. OK. Attorney General Del Tufo, let me follow up 
on your task force and see exactly where — what kind of time line 
are we looking at before the States can make application, as you 
have shared with us in your testimony, to receive money for sting 
operations or consumer educational programs? Are you set up now 
that you can receive those applications, or have you indeed dis- 
persed any of the money? 

Mr. Del Tufo. The money has not been dispersed as yet, Sen- 
ator, but I think we are just about at the point where we can re- 
ceive applications and start becoming active. We hope to have at 
least five grants out this year, to five States, obviously, for the pur- 
pose of conducting these investigations. 

I would also comment, if I may? 

Senator Bryan. Please. 

Mr. Del Tufo. In response to the last question, that one of the 
other objectives of this task force is to gather information about 
practices in the industry as a whole. So, we are not going to be con- 
fined to any one particular practice; we are going to try to cover 
the waterfi'ont. And certainly the one that you mentioned will be 
among them. 

And, really, if there are others that come to the attention of the 
committee, I know that our staffs work very closely together, we 
would like to have them so that we can pursue it. And we have en- 
joyed such a good relationship since Janet Steiger has been at the 
FTC and with the present Commission, so we look forward to really 
working hard in that area. 

Senator Bryan. Share with us and let me invite General Abrams 
to comment too, if it refers to him. What role do you see the FTC 
playing in working with the States in addressing this pervasive 
problem? 

Mr. Del Tufo. The FTC has much expertise and a national 
reach and I think, first of all, can be very helpful in this edu- 
cational area, which seems to tie in with many activities that the 
FTC engages in already. 

And as I say, there are so many things that are important here, 
but certainly, an educated consumer, a savvy consumer, is one of 
the most important things that we could have going for us. Because 
it will prevent fraud and in addition to that, if there are some un- 



24 

scrupulous operators out there, we need savvy customers to tell us 
about it. We cannot be every place all the time. 

So, I see the FTC playing a major role there. I also would invite 
and appreciate assistance in any other area. I think frankly that 
the — probably on the undercover investigate side — that seems to 
me to be more of a State- oriented activity. But with the education 
and with the work of the task force to gather information about in- 
dustry practices and to come up with recommendations, I certainly 
welcome FTC participation. 

Because, in response to some of your earlier questions here 
today. Senator, we ought to try to get all the information in and 
we ought to evaluate it and then we ought to try to decide what 
is in the best interest of the American consumer. Do we need some 
nationwide regulations from the FTC? Do we need some nationwide 
legislative attention from the Congress? Do we want to proceed on 
a State-by-State basis? 

I think that evaluation and those ultimate recommendations 
which we will bring back to you, of course, are very, very impor- 
tant. And I think we need to have not only the attorneys general 
parochial interest or the State interests, but a national perspective 
as well. I think the kind of debate that could go on in that task 
force over ultimate solutions would be a very healthy one and come 
up with the strongest possible package for protecting people from 
this side of invidious fraud. 

Senator Bryan. General Abrams, do you have a thought? 

Mr. Abrams. Yes. I would personally like to see the FTC become 
aggressive in this area, take a look at adopting the kinds of rules 
that I outlined in my testimony that is the basis of the legislation 
that we are seeking to enact in New York State; to deal with the 
Commission issue, to deal with the salesperson who has no exper- 
tise or training at all; to deal with the area of warranty for those 
parts, for the 90-day or 4,000-mile period. 

That could be done by the Federal Trade Commission and protect 
people all across the country. I am optimistic about our legislation, 
but there are powerful forces on the other side. 

I indicated in my testimony that more than a decade ago, we put 
in some legislation to deal with the flat-rate manual. It never got 
passed and it is not entirely clear whether we can sail through 
both houses of the legislature with our bill. 

If the FTC were to take some leadership, then that could not 
only protect New Yorkers, but people all across the country, and 
the FTC could do it without preempting the States. Obviously, that 
is a very sensitive and important issue for the States. We should 
not be preempted, but we should be given the privilege and the op- 
portunity to enforce Federal regulation or law. 

And so, in States like New York, where there is the power, legis- 
latively, statutorily, to enforce FTC regulations and rules, we 
would then be able to do that. Where there are States that do not 
have that power, we should pursue what has been talked about for 
a number of years, legislation in the Congress that will enable 
States to have the standing to go into Federal court and enforce 
Federal regulations of the Federal Trade Commission. 

So, speaking for myself personally, I would think that that would 
be a responsible thrust on the part of the FTC, based in part on 



25 

the record that you have so carefully documented in the course of 
these public hearings, that this is a substantial and widespread 
problem; that it involves an incredible number of people in this 
country and a big dollar amount. 

Mr. Del Tufo. Senator, may I just add one thing? 

Senator Bryan. Certainlv. 

Mr. Del Tufo. I certainly agree with my colleague on this score. 
And I just want to emphasize again, that if the work of this task 
force confirms what we suspect, that these practices are not in a 
locale or in a particular State but do spread nationwide, then obvi- 
ously there is some real need and efficiency in having some na- 
tional attention directed to it. 

Senator Bryan. In Greneral Del Tufo's testimony, he indicated 
that, as part of the task force operation, they want to invite and 
to include responsible members in the business community. And I 
certainly agree with that. I think that makes some sense. 

My question. General Abrams, to you is that it seems like the 
legislative approach that you have taken in New York is a very 
reasonable — it is a pretty balanced approach. There may be some 
give and take as there generally is in the legislative process, both 
at the State level and certainly here at the national level. 

What kind of response are you getting from the industry with re- 
spect, say specifically, to the two areas that you talked about, the 
compensation incentive programs for the service writers and the 
warranties? That strikes me as being a pretty reasonable and a 
modest step in some Sears to give them credit and acknowledge 
that they are going to discontinue the service compensation incen- 
tive program. 

What kind of response do you get from the industry? 

Mr. Abrams. Well, it is a mixed bag. Some in the industry that 
are already providing some of these benefits and services, whether 
it is the warranties or the elimination of the commission compensa- 
tion program, but then you get the response, Why are you picking 
on us? And why are we different from anybody else that works on 
a commission basis? 

And I think there is a difference. I think it has been dem- 
onstrated that there is rampant abuse and fraud in this particular 
industry. We are not finding it on the part of shoe salesmen or on 
the sellers of life insurance. 

In those cases, the consumers are also placed in a different posi- 
tion. They are not as vulnerable. You can exercise your own discre- 
tion and make reasonable judgments, based upon going next door 
to another shoe store or making selected phone calls about finding 
out what the rates of another insurance company are. 

As the footage showed, with respect to auto repairs we are not 
all in that same equal footing and equal position. We have had 
broad-based editorial support for our proposals. When we surfaced 
with them a little over a month ago, we were able to get very posi- 
tive editorial strength from newspapers from around the State and 
of course, consumer groups and others. 

So, we are hopeful that we will be able to get this measure 
passed in the legislature and that those components of the industry 
that are waging opposition will not be able to prevail. 



26 

Senator Bryan. Well, as a former attorney general, I have a pref- 
erence for the kind of approach that both of you are taking. But 
it seems to me that there is a noteworthy observation. 

That so frequently in the past when there is failure at the State 
level to respond to a problem which is as pervasive as this, clearly 
as that footage in Las Vegas could have been taken in any commu- 
nity in America. And I think everyone in this room fully recognizes 
that. 

Indeed, if there is no action taken, obviously it invites a larger 
Federal role. I think a cooperative State and Federal relationship 
is the most appropriate. And this Commission, I think through the 
chairman, has set that tone and both of you have acknowledged 
that. 

You have also talked about the consumer education. There is no 
question that that is a part of it. And I guess maybe. General Del 
Tufo, if I may, let me ask you to be a bit more specific in terms 
of the type of consumer education program that you are talking 
about. Clearly, pamphlets and brochures are nice and I do not 
mean to denigrate that. But at least implicit in General Abrams 
comment and what the film, I think, shows is that most of us do 
not thoughtfully contemplate, now this morning is the day I am 
going to go down and get my automobile tuned up or just have 
them check the transmission. 

Generally there is a provoking event. You cannot get the car into 
reverse. The car does not start. Some indication that you are about 
to have a crisis and you are just limping in to the repair facility, 
the vulnerability that General Abrams talked about. 

In those circumstances, obviously the consumer does not have 
the benefit of looking at Consumer's Report or Consumer Union, 
which you might spend weeks looking at to see whether you are 
going to buy certain type of stereo equipment, for example. 

Is there some other approach that might be more direct and 
more helpful in terms of reaching in a more comprehensive man- 
ner, the public, to educate them on the pitfalls of making a decision 
for a car repair? 

Mr. Del Tufo. I think the task force is amenable to considering 
anything that sounds reasonable and certainly amenable to picking 
the ones that are going to be the most effective. 

I agree with you. I do not think that eschewing the distribution 
of brochures, for example, is something that we should consider. 
Everything falls into place and everything has some effect. But 
there are some things that are more effective than others. 

And I think that the subcommittee will take that into account. 
Now, I would on that score say that the FTC has a lot of experience 
in consumer education and getting the word out. So, we are going 
to be guided considerably by that experience and what makes sense 
from a national perspective in getting things out there. 

Second, in a number of areas in my experience as attorney gen- 
eral I have found the television stations to be very, very coopera- 
tive and interested in being good citizens and putting a message 
out for people. 

And I think that we would ask the television stations and the 
cable stations and other media such as that to cooperate with us 



27 

on a volunteer basis to try to alert the public to things that are 
going on. 

I mean, we can tell the public about some of the things that were 
on this video, second opinions, parts, a variety of things. 

We had a problem in New Jersey — I guess we have had a prob- 
lem nationwide — but particularly in New Jersey in the fall, around 
Christmas time, of carjacking. The offense poses a serious threat 
to the personal safety of people, not only to property. 

We managed to assemble a Federal, State cooperative law en- 
forcement effort and a program of public education involving public 
information brochures and videos. And the stations were wonderful 
in terms of running these tips on how people could protect them- 
selves from being physically harmed by a would-be thug who would 
do a carjacking. 

I think that the auto repair problem is so pervasive and so ex- 
pensive and touches everybody in this society so closely, as Greneral 
Abrams pointed out, that we will find these media outlets very 
willing to work with us. And again, I am sure the FTC will have 
some other ideas and we are ready to listen. 

Senator Bryan. You led into an area. General Del Tufo, that I 
was going to ask you about. Clearly, television is such an effective 
medium in reaching so many people that clearly some type of PSA 
that reaches people before they face that crisis with their auto- 
mobile I would Lhink would be very, very helpful. And we will be 
interested to see what the response is as the Task Force ap- 
proaches that. 

General Abrams, you have suggested a couple of legislative ap- 
proaches here. Is the association, does NAAG work on, in effect, 
taking the best out of every legislative initiative of the 50 States? 
You know, part of the thing that we are — at least a revitalized fed- 
eralism is to recognize the States as these great laboratories of ex- 
periment. Not all wisdom resides in the banks of the Potomac. 
Some States have done some extraordinarily effective things in a 
whole host of areas, whether we are talking about medical care re- 
form or as we are talking about this morning, in terms of consumer 
initiatives to protect the public. 

Do you get together or is there a mechanism for you to do so to 
address this problem and say, "Look, here is what has worked ef- 
fectively in our State as far as a legislative approach." And perhaps 
you and Greneral Del Tufo and your colleagues at your annual 
meetings work on model legislation that, indeed, you would offer to 
your colleagues. Obviously, it would be their decision as to whether 
to support that type of legislative approach. 

But there is a lot of experience out there and I suspect some 
things that are undertaken work reasonably well and others that 
are well intended, frankly, just do not have the kind of effect that 
is intended. Maybe you can respond to that. 

Mr. Abrams. Yes, Senator Bryan. As you well know, being a 
former attorney general and a former member of the National As- 
sociation of Attorneys General, there always has been excellent co- 
ordination and cooperation between the States. Partisanship plays 
no role in our deliberations. No matter what part of the country the 
attorney general comes from, whatever is the party affiliation, it is 
absolutely irrelevant as we collectively get together and share in- 



28 

formation about what we are doing and define goals about how we 
can better protect our own citizens. 

And clearly, I think, in the intervening years since you and I 
served together, there has been even increased cooperation, ad- 
vances on what has gone on before, to the extent that there has 
been cooperation in multi-State investigations, multi-State litiga- 
tion. For the first time in the history of the country, all 50 jurisdic- 
tions have gotten together in a single action and brought antitrust 
enforcement cases and other enforcement and consumer protection 
cases. 

And so on the legislative front as well, there is the opportunity 
for us to share and learn and forge ahead. My own perspective is 
the best education program that we could launch are the new rules 
that are adopted by the FTC, telling people about how everybody 
in American is protected for the 4,000 miles or the first 90 days 
of a repair. And how no longer will auto repair companies be able 
to hire salespeople and pay them on the basis of commissions. 

Or legislation that would be adopted at the Federal level, al- 
though I think the rule level at the FTC would certainly be appro- 
priate. So, I think there are a number of avenues that are open to 
us. 

Individual AG's could go to their State legislatures. We can con- 
tinue to share information at the national NAAG level, so that we 
can do that in our own respective States. We can encourage the 
Federal Government, through the FTC, to take some initiative on 
their part and all do it in the crucible of good feeling and good will 
and sharing information and priding each other as to how we could 
end what continues to be a pernicious and pervasive abuse that 
really eats away at the pocketbooks of Americans. 

And again, the series that you brought to us from Las Vegas 
with the kinds of numbers in the $1,500, $1,700, $1,800 level when 
it is totally unnecessary. And families are facing tuitions of 
$20,000, if your child is going to go to a private education. This is 
big dollars. And so I think this is an important issue. It continues 
to be one of the most preeminent — we get hundreds of thousands 
of complaints every year in New York brought to the attorney gen- 
eral's office. 

And there is automobile fraud and abuse right up there, probably 
No. 2 in our office next to mail order complaints that come in. And 
so it is an important issue that I think can be dealt with even more 
effectively in the days ahead because of the leadership of this sub- 
committee, the task force formed at NAAG and the contemplation 
by the FTC, trying to take some of these efforts. 

Senator Bryan. A final question to the two attorneys general 
with respect to the Sears settlement. Among the other things that 
we were told in the July hearing is that Sears would provide inde- 
pendent audits — I think they used the term "mystery shoppers" — 
to make sure that the abusive practices which generated the wide- 
spread complaints around the country were no longer being pur- 
sued. 

And of course they did, as both of you have indicated, state that 
they would discontinue having the service writer be compensated 
on an incentive commission basis. 



29 

Share with me, if you know, to what extent, in the course of your 
monitoring, has in the first case, the service incentive compensa- 
tion practice been ehminated and what has been the experience 
with the so-called mystery shopper to monitor the practices that 
are occurring out there in their own shops, if you know? 

Mr. Del Tufo. I would have to get back to you specifically about 
that. I would say, Senator, that the practices have been discon- 
tinued and as General Abrams mentioned, the $50 certificates are 
available. The funding for this NAAG task force and other funding 
for vocational training of mechanics in New Jersey has been pro- 
vided. 

So, I do not know about that one particular item. But based upon 
the performance of Sears under the settlement as I know it. Sears 
has been responsible and, I think, enlightened. Once the practices 
were called to their attention, they did take corrective action. 

Again, I believe the industry ought to take note of a company 
that does something like that. Sears has received a lot of notoriety 
because they are the ones that came forward and tried to resolve 
some things. I call on the rest of the industry to do the same thing. 

Senator Bryan. General Abrams, you are from New York? 

Mr. Abrams. Yes. I believe as part of the agreement they have 
eliminated those practices and have honored that. I do not know 
about, as Bob has mentioned, the specifics of their monitoring. 
There are certain reporting requirements that were part of our set- 
tlement and we can check with them on what they have done and 
get back to the committee. 

And although Sears has gotten the headlines, as I tried to indi- 
cate in my testimony, they should not be singled out because this 
has been part of an industrywide problem that has occurred in a 
very widespread manner. So, let us hope that the kinds of reforms 
and changes that they have undertaken and that they are advocat- 
ing in terms of other competitors and other companies are going to 
take place and happen. 

Senator Bryan. Well, I think Ms. Azcuenaga, General Del Tufo, 
General Abrams, you have added a great deal to our record this 
morning. We appreciate your insights and, obviously, want to con- 
tinue to work with all three of you. And I can assure you that this 
subcommittee will continue its interest in the subject matter and 
we will have some follow on conversations. Thank you very much 
for joining this morning, we appreciate it. 

For the record, Senator Jim Exon, who is a member of this com- 
mittee who could not join us this morning has asked that his state- 
ment be incorporated as part of the record of these proceedings in 
which the Senator does outline his concern for a piece of legisla- 
tion, S. 431, the vehicle damage and disclosure act, and that will 
be made a part of the record. 

[The prepared statement of Senator Exon follows:] 

Prepared Statement of Senator Exon 

Mr. Chairman, I congratulate you on your efforts to expose auto repair fraud. I 
want to bring to the suBcommittee's attention a related consumer auto fraud known 
as salvage fraud. 

On February 24th, I introduced S. 431, the Vehicle Damage Disclosure Act. This 
legislation will help stamp out this most serious and dangerous form of consumer 
auto fraud. 



30 

When a car is destroyed in a crash it is generally sent to a junk yard where it 
is stripped for parts or in some cases rebuilt. Most states require that salvaged cars 
carry a designation on their title so that consumers are alerted to the condition of 
the auto they are purchasing. 

Unfortunately, several states do not require such a designation. Fraud artists use 
these states to wash titles of salvaged cars clean of any salvage designation. Once 
a clean title is obtained, rebuilt wrecks are put on used car lots and sold to 
unsuspecting consumers. 

Experts have estimated that car buyers lose as much as $4 billion a year to sal- 
vage fraud and unknowingly face increased risks of injury and accident. 

The Vehicle Damage Disclosure Act would require states to carry forward any sal- 
vage designation from another state and check records which are readily available 
to state officials. In addition, the U.S. Department of Transportation would be re- 
quired to implement a nation-wide uniform title branding procedure. 

I am proud to report that the state of Nebraska has one of the best consumer pro- 
tection title laws. Unfortunately, my state is surrounded by states with less restric- 
tive laws, limiting the protection Nebraska can provide to consumers. 

In 1986, I authored legislation to clamp down on odometer fraud. That law re- 
quires that odometer readings be carried on auto titles. The le^slation has proved 
to be an overwhelming success. A recent study released by the U.S. Department of 
Transportation proved dramatic reductions in odometer fraud. Very few cars are 
now sold with odometers which were spun backwards to "erase" road miles. 

Passage of this legislation will prevent states from facilitating the laundering of 
titles, discourage criminal activity and help keep unsafe vehicles off the road. 

Mr. Chairman, there are many legitimate rebuilders who provide good service and 
value and honest auto dealers who care for their customers. These individuals are 
especially disadvantaged by the fast buck operators who play the current system to 
wash titles of their salvage designations. 

In addition, salvage fraud is used by the underworld to clean titles of stolen cars. 

The CBS news broadcast of 60 Minutes exposed the severe danger and fraud in- 
volved in the sale of salvaged cars. Often salvaged autos have dangerous defects and 
are prone to malfunction. CBS caught auto dealers in the act of misleading cus- 
tomers as to the history of known salvaged autos. 

It is time to clamp down on this fraud which cheats consumers out of their hard 
earned money and puts dangerous vehicles on the road. 

The Vehicle Damage Disclosure Act would require states to carry forward any sal- 
vage desimation from another state and check records which are readily available 
to state olTicials. In addition, the U.S. Department of Transportation would be re- 
quired to implement a nation-wide uniform title branding procedure. 

Passage of this legislation will prevent states from facilitating the laundering of 
titles, discourage criminal activity and help keep unsafe vehicles off the road. 

Mr. Chairman, this legislation is straight forward and I would hope it would earn 
the support of the subcommittee and the full Commerce Committee. I ask my col- 
leagues to join me in this effort to protect American consumers from salvage fraud. 

Tnank you Mr. Chairman. 

Senator Bryan. Our second, and concluding panel consists of Mr. 
Evan Johnson, who is the Montgomery County Office of Consumer 
Affairs representative, and Ms. Alyson McCarthy who put together 
the television footage that we began this hearing with. If I could 
get Ms. McCarthy and Mr. Johnson to join us at the witness table 
please, and then we will begin our second round of testimony. 

Good morning to you both, and thank you for joining us. We will 
begin with Mr. Johnson and let Alyson McCarthy bat clean up this 
morning for us. 

Mr. Johnson, we have your testimony which is made a part of 
the record, but we want to invite you to share with us the benefit 
of your own experience. 

STATEMENT OF EVAN JOHNSON, AUTO UNIT ADMINISTRATOR, 
MONTGOMERY COUNTY, MARYLAND OFFICE OF CONSUMER 
AFFAIRS 

Mr. Johnson. Thank you, Mr. Chairman. I am Evan Johnson 
and I am administrator of the Auto Unit in the Montgomery Coun- 



31 

ty, Maryland Office of Consumer Affairs. And we truly appreciate 
the opportunity today to present the perspective of a local agency 
on the auto repair consumer problem. 

Our office, founded in 1971, has 33 employees and last year han- 
dled over 5,000 consumer complaints, the large majority of which 
were resolved to the consumer's satisfaction. Auto repair com- 
plaints comprise approximately 20 percent of the total — pretty close 
to what you are hearing from the other agencies that have testi- 
fied. 

While there are certainly important national and State level is- 
sues involved in auto repair, the large majority of auto repair shops 
continue to be distinctly local in nature. The local government 
consumer protection agencies are ideally situated to monitor and 
take appropriate action to deal with this industry. 

Our office realized early on the importance of the auto repair 
consumer problem and was able to accomplish the passage of a 
county auto repair act to supplement our authority under the basic 
county consumer protection act. Our repair act goes beyond the 
Maryland Automotive Repair Facilities Act, and one of its central 
features is that we conduct a registration program of auto repair 
shops in Montgomery County. 

Besides assisting in monitoring and educating the industry, 
shops know that the program includes the threat of loss of licensed 
status if they engage in auto repair fraud. 

We also have the authority, both under this law and others we 
administer, to issue civil citations in individual cases imposing a 
$500 fine for each violation of an applicable statute. These citations 
are, of course, contestable in court, but we have found judicious use 
of them to be an effective tool for a local agency, which is nec- 
essarily largely complaint directed, particularly in these days of 
limited resources. 

We have also found benefits in having a unit that specializes in 
automotive complaints and issues, and a large majority of our auto 
unit's workload continues to be on auto repair complaints. Two of 
the investigators in our unit are certified master technicians by the 
National Institute of Automotive Service Excellence — qualifications 
which we believe provide major advantages in dealing with auto re- 
pair complaints and issues. 

For example, one of these technician investigators handled the 
complaint in late 1991 in which the consumer alleged the shop had 
unnecessarily replaced the wheel hub and bearing assembly of a 
Chevrolet Cavalier. The consumer had followed our advice and ob- 
tained the replaced parts, and our investigation confirmed there 
was nothing wrong with them. 

The merchant was cited for misrepresenting the necessity of the 
repairs. The shop contested the citation in court, but the county 
prevailed. The case became more noteworthy after the events of the 
last year because the shop involved was one of our Sears Auto- 
motive Centers. 

We would like to describe briefly an auto repair initiative we 
began last fall that is probably best labeled a return to the basics. 
We noted from our consumer complaints and other available infor- 
mation that many of our repair shops were not complying consist- 
ently with some of the basic requirements of applicable laws, such 



32 

as the requirements to disclose the customer rights on work orders, 
to obtain additional authorization for further work, to pass along 
parts manufacturers' warranties, and to return replaced parts to 
customers. Oftentimes, it appeared that the complaints we were re- 
ceiving were related to the failure to comply with such legal tech- 
nicalities. 

The first step in our initiative was to send to each of the over 
800 repair shops in our county a thorough letter discussing their 
key obligations, offering our assistance in complying, and warning 
of enforcement action for noncompliance. That letter and the sam- 
ple repair invoice we provided the shops are attached to our writ- 
ten testimony. 

The response has been very encouraging. Upon receiving our 
package, a number of repair snops contacted us to take us up on 
our offer to review their forms and procedures for compliance with 
the law. The appropriate changes have already been made by them. 

Other shops apparently chose not to change at that point, and as 
we receive consumer complaints against shops, our letter has put 
us in a strong position to resolve the complaint and change the 
shop's practices. 

The initial results in our followup system indicate that we are 
being very successful in doing so. We believe that by continuing 
this initiative, we will significantly improve the practices of well- 
meaning shops in Montgomery County, and will have less than 
scrupulous shops in the bind of having to adopt procedures that 
will make repair fraud more difficult to get away with, or to spot- 
light themselves by resisting the adoption of such procedures. 

Today we call on the Federal Trade Commission to play a leader- 
ship role in coordinating a major Federal, State, and local agency 
initiative in combating auto repair fraud, and we hope that local 
agencies will be given access to any funds that become available for 
such an initiative. 

I will add that I am encouraged by what I am hearing about the 
task force that is going on. That concludes my prepared statement, 
Mr. Chairman. I would be pleased to respond to any questions you 
might have. 

[The prepared statement of Mr. Johnson follows:] 

Prepared Statement of Barbara B. Gregg, Executive Director, and Evan 
Johnson, Auto Unit Administrator, Montgomery County, Maryland, Office 
OF Consumer Affairs 

I am Evan Johnson and we appreciate the opportunity today to present the per- 
spective of a local agency on the auto repair consumer problem. The Montgomery 
County Ofilce of Consumer AlTairs, founded in 1971, has 33 employees and last year 
handled over 5,000 consumer complaints, the large majority of which were resolved 
to the consumers' satisfaction. Auto repair complaints comprise approximately twen- 
ty percent of our total. 

While there are certainly important national and state level issues involved in 
auto repair, the large majority of auto repair shops continue to be distinctly local 
in nature. Local government consumer protection agencies are ideally situated to 
monitor and take appropriate action to deal with this industry. 

Our Office realized early on the importance of the auto repair consumer problem 
and was able to accomplish the passage of a County auto repair act to supplement 
our authority under the basic County consumer protection act. Our repair act goes 
beyond the Maryland Automotive Repair Facilities Act, and one of its central fea- 
tures is that we conduct a registration program of auto repair shops in Montgomery 
County. Besides assisting in monitoring and educating the industry, shops know 
that the program includes the threat of loss of licensed status if they engage in auto 



33 

repair fraud. We also have the authority, both under this law and the others we 
acmiinister, to issue civil citations in individual cases, imposing a $500 fine for each 
violation of an applicable statute. These citations are, of course, contestable in court, 
but we have found judicious use of them to be an effective tool for a local agency 
which is necessarily largely complaint directed, particularly in these days of limited 
resources. 

We have also found benefits in having a Unit that specializes in automotive com- 
plaints and issues, and a large majority of our Auto Unit's workload continues to 
DC on auto repair complaints. Two of the investigators in that Unit are certified 
Master Technicians by the National Institute of Automotive Service Excellence 
(ASE), qualifications which we believe provide major advantages in dealing with 
auto repair complaints and issues. For example, one of these technician-investiga- 
tors handled a complaint in late 1991 in which the consumer alleged a shop had 
unnecessarily replaced the wheel hub and bearing assembly of a Chevrolet Cavalier. 
The consumer had followed our advice and obtained the replaced parts and our in- 
vestigation confirmed that there was nothing wrong with them. Tne merchant was 
cited for misrepresenting the necessity of repairs. The shop contested the citation 
in court, but tne County prevailed. The case became more noteworthy after the 
events of the last year because the shop involved was one of our Sears Auto Centers. 

We would like to describe briefly an auto repair initiative we began last fall that 
is probably best labeled a return to the basics. We noted from our consumer com- 
plaints and other available information that many of our repair shops were not com- 
plying consistently with some of the basic requirements of applicable laws, such as 
the requirements to disclose the "Customer's Rights" on work orders, to obtain addi- 
tional authorization for further work, passing along parts manufacturers' warran- 
ties, and to return replaced parts to customers. Oftentimes, it appeared that com- 
plaints were related to the failure to comply with such legal "technicalities." 

The first step in our initiative was to send to each of the over 800 repair shops 
in our County a thorough letter discussing their key obligations, offering our assist- 
ance in complying, and warning of enforcement action for noncompliance. That let- 
ter and the sample repair invoice we provided the shops are attacned to this testi- 
mony. The response has been very encouraging. 

Upon receiving our package, a number oi repair shops contacted us to take us up 
on our offer to review their forms and procedures for compliance with the law. The 
appropriate changes have already been made. Other shops apparently chose not to 
cnange at that point. As consumer complaints come in against such shops, our letter 
has put us in a strong position to resolve the complaint and change the shops' prac- 
tices. The initial results in our follow- up system indicate we are being successful 
in doing so. 

We believe that continuing this initiative will significantly improve the practices 
of well-meaning shops and will put less than scrupulous shops in the bind of having 
to adopt procedures that will make repair fraud more difficult to get away with or 
to spotlight themselves by resisting the adoption of such procedures. 

We call on the federal Trade Commission to play a leadership role in coordinating 
a major federal, state, and local agency initiative in combating auto repair fraud. 
We hope that local agencies will be given access to any funds that become available 
for such an initiative. 

That concludes my prepared statement, Mr. Chairman. I would be pleased to re- 
spond to any questions you may have at this time. 



letter from montgomery county government to repair shops 

October 20, 1992. 
Attn: Owner and Service Manager 

Dear Montgomery County Auto Repair Licensee: The recent controversy over 
Sears' auto repair practices has highlighted how important consumer trust is to the 
automobile repair business. Many of the fundamental requirements of the consumer 
laws governing the automobile repair industry foster communication and consumer 
trust. Unfortunately, we are seeing many violations of these fundamental require- 
ments and a corresponding decline of trust in the industry. This letter is to remind 
you of these key requirements. Rededicating your business to complying with them 
will increase the trust consumers have in you — as well as avoid potential problems 
with our agency. 

For your reference, we enclose copies of the county and state automobile repair 
acts, which govern repairs in the county. Although many shops are familiar with 
these laws, review is always helpful. In addition, we want to highlight the following 
key provisions of these ana other applicable laws. 



34 

Return Replaced Parts — Both the county and state repair laws require that re- 
placed parts be returned to consumers. Consumers do not have to ask to have their 
replaced parts returned; each is to be returned unless the customer expressly states 
that he or she does not want it. (Written proof of this waiver is best, and our en- 
closed sample Invoice Includes a space for the consumer to waive this right.) Obvi- 
ously, good business practices dictate that dirty parts be appropriately packaged so 
they don't soil the consumer's car. 

Tne only exception Is for parts that are required to be returned to a manufacturer 
or distributor under a warranty agreement. Core parts are not exempt from this re- 
quirement. When a core part is involved in a repair you should explain to the 
consumer how much money they can save if they let you retain the part. They may 
then opt to waive their right to the part. If they do waive their right to a core part 
you should still make the old part available for inspection by the consumers or tneir 
representatives. 

Of all your obligations to a customer, probably none is more important than re- 
turning replaced parts. In fact, the hignest court in Maryland has held that when 
key parts In a repair job are not returned the customer Is not obligated to pay for 
the repairs. Design & Funding v. Betz, 292 Md. 265, 438 A.2d 1316 (1981). And we 
will be taking enforcement action when we find that a shop has violated this re- 
quirement. 

Estimates — All shops in Montgomery County should know that consumers have a 
right to an estimate upon request and to a written estimate for repairs exceeding 
$25.^ (You should have posted a sign stating this right. If not, we have them avail- 
able for $10 each.) But tnere are important requirements for estimates beyond these 
basics. 

Charges for estimates must be disclosed — ^You may charge a reasonable fee for giv- 
ing estimates but only if the fee is disclosed to the customer beforehand. This disclo- 
sure has to make it clear to consumers what they are getting into. If providing the 
estimate requires teardown, the disclosure must also state the cost of reassembly 
if the customer chooses not to have you proceed with the work. Similarly, if you 
have a minimum checkout fee, it must be disclosed ahead of time. 

Recording Authorizations — Customers may not be charged for unauthorized work. 
If work was not originally authorized you may get the customer's additional author- 
ization by oral permission, but county law requires that the shop document the ad- 
ditional authorization in writing. To help prevent later questions, it is best to get 
some type of personal ID, such as a social security or driver's license number, from 
the consumer at the time of the oral authorization and to include this on your docu- 
mentation. If a complaint raises questions of authorization we will be asking to see 
the hard copy documenting the authorization. 

Similarly, as most shops know, if work is going to exceed an estimate by more 
than 10 percent, the consumer must authorize the new estimate beforehand. This 
is not a olanket authorization to exceed an estimate by up to 10 percent. There 
should be a documentable reason anytime an estimate is exceeded. We will be evalu- 
ating that explanation whenever a complaint involves an alleged increased estimate. 

DISCLOSURE OF CHAKGES 

Labor Charges — We continue to get many complaints and questions about how 
labor is calculated. County law requires that the repair invoice disclose whether 
labor is charged by clock hour, flat rate manual, or other flat rate measure. Many 
invoices just say "flat rate used" or similar language. This is not sufficient to make 
customers understand the system. The disclosure needs to be as specific and de- 
scriptive as possible. For example, our enclosed sample invoice says, "Unless other- 
wise specified, labor time billea is flat rate time estimated for each job in industry 
manuals and not actual time spent." We are not wedded to this language but we 
believe it is a much better description of the flat rate manual system. 

If the lack of such a specific aescription is the only flaw in your invoice (see the 
"Invoices" section of this letter) it may not be worth changing, but we are calling 
on every shop to make better disclosures of the labor billing system before the work 



^Body shops, before beginning work, also are required by the state Automotive Crash Parts 
Act to give the customer a hst of the replacement parts it mtends to use, sp>ecify whether they 
are "genuine" (OEM) or "aflermarket," and if any are aftermarket include the statement: 

"This estimate has been prepared based on the use of aftermarket crash parts that are not 
manufactured by the original manufacturer of the vehicle or by a manufacturer authorized by 
the original manufacturer to use its name or trademark. The use of certain aflermarket crash 
parts may modify the original manufacturer's warranty on the crash parts being replaced. Upon 
request of the customer, the body shop shall provide, if available, a copy of any warranty for 
an aftermarket crash part used." 



35 

is done. This should include signs posted where customers authorize repairs. If a 
shop has a night-drop system, a sign should also be by the night-drop box or the 
disclosure made on the night-drop slip. Our Auto Unit stafT are available to give 
you assistance in wording these or any other disclosures. 

Miscellaneous Charges — The customer must also have notice, before work is start- 
ed, of any miscellaneous charges, such as shop supplies or hazardous waste disposal. 
The County Code considers a conspicuous sign to be evidence of notice, so these dis- 
closures can be included on the same sign describing the labor billing system. The 
portion on miscellaneous charges must state that the charge will be made and the 
method of its computation. As with labor charges, there also need to be disclosures 
to give notice to customers making night drops. 

Miscellaneous charges also should have some relationship to the work performed 
on a particular car. lor example, if the work is a minor adjustment not involving 
any potential waste, a hazardous waste disposal charge is inappropriate and will 
surely generate consumer complaints. 

Pass Along Parts Manufacturer's Warranties — ^Most shops summarize their own 
parts and labor warranties on the invoice; but in many cases the parts are also war- 
ranted independently by the manufacturer and we rarely see those warranties 
passed along. If the parts are warranted to the consumer by the parts manufac- 
turer, it is the shop's legal duty to pass along to the consumer a copy of that war- 
ranty. In many cases the manufacturer's parts warranty is longer than the shop's 
and gives the consumer additional rights, such as the right to get warranty work 
done at other authorized shops. If you have difficulty getting copies of the manufac- 
turers' warranties to pass along, please let us know as we consider this a very im- 
portant issue and will be happy to take it up with the supplier or manufacturer. 

Vehicles Left On Lot — We receive a number of complaints arising from vehicles 
that are left on repair shops' lots. 

Storage Charges — Consumers must have notice of the shop's storage charge policy 
before they can be imposed. Again, a conspicuous sign is evidence of notice. Even 
if you give notice, storage charges may not accrue until 24 hours from the notifica- 
tion to the consumer that services are completed, unless otherwise agreed. 

Removal of a Vehicle — There are instances when a shop wants a vehicle ofT its 
lot. In the past, you might have just called towers to have the vehicle towed and 
impounded oy them. Since the summer of 1990, however, the County has had in 
effect Chapter 30C of the Code (copy and summary enclosed), which regulates tow- 
ing from private property without the consent of the vehicle owner. This Chapter 
applies to towing off of your lot and makes it more complicated than just calling 
a tow truck. The main requirements of this law are: 1) A vehicle owner must have 
been warned by signs on the lot of the parking restrictions and towing. (For lots 
over 100 places, stickers may be attached to the vehicle.) 2) You must have a stand- 
ing written contract with a tower to do such towing. 3) You ordinarily must specifi- 
cally authorize each tow off vour property. Clearly, if you are going to engage in 
this type of removal of vehicles you need to familiarize yourself with the law and 
take the necessary actions first. 

An alternative for having vehicles removed from your premises is to proceed 
under the state Abandoned Vehicles Law. (Md. Transp. Code Ann. §§25-201 — 25- 
210.) If you believe a vehicle left on your property may qualify as "abandoned" you 
may contact the Abandoned Vehicle Section of the Montgomery County Police De- 
partment at 840-2454. That section will give you more information on its proce- 
dures, but ordinarily a consent form must be signed by the shop's owner or manager 
and then the police will put a notice on the vehicle for 48 hours before removal. The 
police will then have the vehicle removed and impounded at no cost to the shop. 
The Abandoned Vehicle Section will also accept "cannibalized" vehicles but they are 
towed at the shop's expense and a signed consent form is required. Again, contact 
the Abandoned Vehicle Section for full information. 

Invoices — There is a saying that "good paper makes good friends." Unfortunately, 
many repair shops give consumers repair orders/invoices that do not provide the le- 
gally required information necessary for good communication with the consumer. 
Enclosed is our sample invoice, which includes the key disclosures for repair in- 
voices (indicated by tne black circles with letters) and, just as importantly, explains 
the requirements. As the sample notes, invoices do not have to be in this form, but 
the required disclosures must be made clearly and conspicuously, on body shop 
forms as well as those of straight mechanical shops. Local affiliates of national or 
regional chains also must comply with these requirements. 

Some shops may use an initial work order and a separate final invoice. In that 
case, the "Customer's Rights" statements need to be on tne work order the consumer 
signs to authorize the work. They also need to be on night-drop envelopes. 



36 

But even the best invoice form isn't enough if it is filled out hap- hazardly. Note, 
for example, that "O" on our sample invoice highlights that each final invoice is sup- 
posed to contain the customer's instructions or description of the vehicle's symptoms 
and the shop's diagnosis of the problem. Many shops don't bother to do this on the 
final invoice, only listing what they did. This lack of communication must change. 
Perhaps even more im.portant is the requirement noted in "P" on our sample that 
the shop's owner, manager, or designee (other than the mechanic(s) doing the work) 
sign to verify that the vehicle was tested or test driven as necessary and the me- 
chanic's work was done satisfactorily. We see many repair invoices where this was 
not done. This reflects very poorly on quality control and puts the shop in an ex- 
tremely poor position when faced with a comeback type of complaint. 

We will be taking enforcement action against shops with invoices that fail to com- 
ply with basic legal requirements. It is your responsibility to review the enclosed 
materials and make the necessary changes in your forms and the way you fill them 
out. If you have noncomplying forms, you don't necessarily have to throw them out; 
you can use rubber stamps or attach a second page with the necessary disclosures. 
If you have questions, feel free to contact the Auto Unit, if you wish you may submit 
a copy of your invoice for our review and we will tell you what, if anything, needs 
to be changed. Many shops have already done this. If you're moving on your own 
to change your forms, it's a good idea to run a sample by us before you invest too 
much in the project. We'll work with you and be as flexible as possible, but the re- 
quired disclosures must be made. And please, rem.imber that state law requires you 
to give the consumer an invoice any time you A^ork on a car, even if there is no 
charge such as with warranty work. 

Your Warranties — Our sample invoice reflects the requirement that the invoice 
specify any express warranty on parts and labor. We have used 90 days/4000 miles 
in our sample, but you may give a longer or shorter express warranty if you wish. 
In fact, you don't have to give any express warranty of your own (but as noted pre- 
viously you do have to pass along the warranty of the parts manufacturer or sup- 
plier). 

If you give your own express warranty, all limitations must be stated and it is 
advisable to be as specific as possible about what is covered and what you and the 
consumer are obligated to do if a problem arises. Many shops have chosen to do this 
in a separate warranty document that they give the consumer with the final invoice, 
or on the back of the invoice itself. 

In addition to express warranties there are implied warranties. In Maryland, 
whenever you sell a part to a consumer — even a used one — there is an implied 
(unstated) warranty that it is fit for ordinary use and will last a reasonable length 
of time. Maryland law does not allow implied warranties to be disclaimed or limited 
in any sale of goods or service to a consumer, so an invoice you give to a consumer 
should not contain language like "seller disclaims all warranties." If you have ques- 
tions about warranties, feel free to call the Auto Unit. Also, "A Businessperson's 
Guide to federal Warranty Law" is available free from the federal Trade Commis- 
sion, Public Reference Branch, Washington, DC 20580, (202) 326-2222. 

Most of the items discussed in this letter are things that should be done merely 
as a matter of good business practices. In Montgomery County they're not only good 
business, they're also the law. Thank you for your attention and, again, please feel 
free to contact us if we can be of any assistance. 
Very truly yours, 

Evan W. Johnson, 
Administrator, Auto Unit. 



37 



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NOTICE TO CUSTOMERS 

I. Unless oiliorwise spociliod. labor lime 
billed IS Mat rale iimo oslimalod lor each 
|ob in industry manuals and not actual 
lime spent 

2 All parts and labor are warranted for 90 
days or 4000 miles, whichever occurs 
lirst 

3 All labor porlormod and pans roptaced 
woro nocossary to porlorm repairs 

4 All parts aro now unless olhonviso spoci- 
liod U- Used/ R - Rebuilt 


CUSTOMER'S RIGHTS 

1. You are entitled to a wrlllon estl- 
matoupon request If repairs will 
exceed $25.00. Do you want a 
written estimate? YESn NOfl 

2. You may not be charged an 
amount more than 10% greater 
than an estimate without your 
consent. 

3. You are entitled to Iho return ol 
any replacod parts except those 
that must be returned to the manu- 
lacture under warranty agree- 
ment. If you do n<?t vKnl II^B 
parts. Initial here; 


4. Repairs not originally authorized 
by you will not be charged to you 
without your consent. 


Cuslomer's Signature 

1 hereby authorize the repair work lislod. 
You and your employees may oporalo the 
abovo vt'liiclo lor purposes ol loslinQ. in- 
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Senator Bryan. Thank you very much, Mr. Johnson. Ms. McCar- 
thy, it is a pleasure you have you here with us. That was an excel- 
lent piece of reporting, as I shared with you privately, and we ap- 
preciate your coming back here to share it with this committee. 

Now, we would invite your comments and testimony in terms of 
where you think we ought to go from here. 

STATEMENT OF ALYSON McCARTHY, CONSUMER 
INVESTIGATIVE REPORTING UNIT, KTNV-TV, LAS VEGAS, NV 

Ms. McCarthy. Thank you Mr. Chairman, Senator Bryan, it is 
a real pleasure to be here today and be able to share with you some 



39 

of our research in the area of car repair, which you have already 
seen. 

My name is Alyson McCarthy. For 3 years now I have headed up 
a consumer investigative reporting unit for KTNV-TV in Las 
Vegas, NV. Contact 13 is a consumer information, referral, and 
problemsolving service. Through our hotline, we receive hundreds 
of calls and letters every week. 

The single most common complaint remains car repair problems. 
With few laws to protect the consumer, these car owners lose hun- 
dreds, and as you have seen, even thousands of dollars in each 
case — money they cannot afford to lose. As cars become increas- 
ingly more complicated, the consumer finds himself at an ever in- 
creasing disadvantage. 

To give you an example of what we did not have a chance to in- 
clude in our reports, I went through the last 100 letters concerning 
car repair complaints that came in us, most since our investigation 
aired, and I have listed here some of the most common auto repair 
ripoff scenarios for you. 

The first, heading the list definitely, is the unnecessary repair. 
For one example, a woman went into a shop with an engine light 
on. She was given an estimate of $1,300 to $1,500 to replace what 
was a perfectly good engine. She was advised by her father to take 
the car elsewhere, and fortunately she did. A second opinion turned 
up the real problem, a leaking water pump. The actual cost to re- 
place it was $300. 

Doing repairs without prior customer authorization is another 
problem — charging for parts and labor that are not done. In one 
case, a car owner was charged for an alternator that was never re- 
placed, and in many cases it is confirmed by other mechanics. 

In another instance, a woman claims that her old engine was 
simply cleaned, repainted, and put back into her car. Again, an- 
other mechanic told her that that is likely what happened when 
she had the same problem. 

Not honoring even written warranties is another problem. Me- 
chanics often assume that the consumer will not follow through 
with what is really their only recourse, and that is small claims 
court action. Many consumers do not. We encourage them to do so. 

Car being held for ransom — this is a common practice. The 
consumer is not allowed to leave with their vehicle until the bill 
is paid in full, even if it is being disputed. Again, the only recourse 
they have is small claims court after the fact. 

Repairs taking way too long, even weeks longer than originally 
told or originally agreed to, making the car owner go without their 
needed transportation. 

Incompetent mechanics — these mechanics do not repair the car 
correctly the first time, causing the car owner to have to go back 
repeatedly. This is a problem — in some cases the oil has not been 
replaced during a simple preventative oil change. As you saw, the 
engine froze up, causing that car owner to pay over $2,000 to have 
his engine replaced. 

Now, that car owner was encouraged to go to small claims court. 
That car owner won the case, but to this day he cannot collect, be- 
cause that is a whole other ball of wax. 



40 

Suspected sabotage — car owners who take their car in for preven- 
tive maintenance such as a tune-up or an oil change. Days later, 
they have a mystery leak, or days later their car breaks down. 

Charging more than the written estimate, above the 5 percent of 
$40 as allowed by current Nevada State law. 

Companies closing shop and opening up under another name. 
Again, leaving the consumer without any recourse. This was the 
case with the transmission shop that you saw in our piece. They 
closed up shop about 2 weeks after we aired, and reopened under 
a new name; lots of balloon, lots of fanfare. 

I think it is important to note that most of the people who come 
to Contact 13 are seniors on fixed income, or they are low-income 
families who are, in many cases, just scrapping by and they iust 
do not have the hundreds or thousands of dollars tnat they endf up 
losing for faulty or unnecessary repairs. 

This comment by one Las Vegas car owner I think sums up the 
frustration pretty clearly. "It is terrible when you take your car to 
a company and pay your hard earned money to be taken to the 
cleaners." But for them to continue doing this over and over to peo- 
ple who put their lives in their hands is as bad as a thief who robs 
you, except this is done in front of your face. I think it is about 
time for someone to put a stop to unethical and unreliable compa- 
nies who are being allowed to stay in business. How can a 
consumer possibly be made aware of such ripofF joints? 

Of those 100 letters that I reference here, 70 people actually in- 
cluded receipts of the money that they felt they been robbed of, 
lost. The total amount exceeds $65,000 in just those 70 cases. 

I think that pretty much sums up what is going on in Las Vegas. 
I think what Attorney General Del Tufo said was particularly true. 
This is a problem that could be found in any community, certainly 
not Las Vegas alone. And I think the idea of the use of stings is 
particularly important in getting to the bottom of this problem be- 
cause that was one reason we decided to launch our investigation 
was we were not getting anywhere, and we are a problemsolving 
unit. 

But oftentimes we will contact the car repair shop and we will 
say to them, "What is your side of the story?" And a lot of times 
they will just tell us, in our opinion the job needed to be done, in 
our opinion the work needed to be done. And there is really very 
little you can do to prove otherwise for the consumer. 

And I think the use of the stings is where we really got our first 
results. By putting the fear of God into some of these car mechan- 
ics, I think we have gone a long way in helping to at least clean 
up the industry in part in our own community. 

Thank you. 

[The prepared statement of Ms. McCarthy follows:] 

Prepared Statement of Alyson McCarthy 

My thanks to Chairman Senator Richard Bryan and subcommittee members for 
inviting me to share with you my research in the area of auto repair fraud. 

My name is Alyson McCarthy. I've headed up a consumer investigative reporting 
unit for KTNV-TV, an ABC affiliate in Las Vegas, Nevada for three years. 

Contact 13 is a consumer information, referral and problem solving service. 
Through our hotline, we receive hundreds of calls and letters every week from the 
community. The single most common complaint coming over our hotline is car repair 
problems. 



41 

With few laws to protect the consumer, these car owners lose hundreds, often 
thousands of dollars each, with little or no recourse under the law. 

And with cars becoming increasingly more complicated, the consumer is at an 
ever increasing disadvantage when trying to self-diagnose car problems. 

My staff went through our last 100 letters concerning car repair complaints. The 
most common scenarios are as follows: 

1. Making unneccesary repairs: In one example, a woman is given an estimate 
of 1300-1500 dollars to replace a perfectly good engine. She was advised by father 
to take the car elsewhere. A second opinion turned up the real problem * * * a 
leaking water pump * * ♦ actual cost came to 300 dollars. 

2. Doing repairs without prior customer authorization. 

3. Charging for parts and labor that is not done: In one case, a woman was 
charged for alternator never replaced * * * confirmed by another mechanic. An- 
other consumer claims she was charged for a new engine, but her old engine was 
simply cleaned, repainted and put back in car. 

4. Not honoring warranties: Mechanics assume consumer won't follow through 
with small claims court. 

5. Car being held for ransom: Consumer is not allowed to leave with vehicle with- 
out paying bill in full even if the bill is being disputed. 

6. Repairs taking too long: Days, even weeks longer than originally told. 

7. Incompetent mechanics: These mechanics do not repair the car correctly, caus- 
ing car owner to come back repeatedly for work to be done right. In some cases, 
oiihas not been replaced during oil change, causing engine to freeze up on the way 
home from the shop. 

8. Suspected sabotage: Car owners who take their car in for preventive mainte- 
nance, such as a tune-up or oil change, days later, they have an oil leak, or car 
breaks down. 

9. Charging more than written estimate * * * above the 5 percent or 40 dollars 
as allowed by state law. 

10. Companies close shop and open up under a new name * * * leaving consum- 
ers without any recourse. 

It's important to note that most of the people who Contact 13 are senior citizens 
on fixed incomes and low income families. In many cases, they are "scraping by," 
and certainly can't afTord to lose hundreds or thousands of dollars in faulty or un- 
necessary repairs. 

This comment by one car owner sums up the frustration: "It is terrible when you 
take your car to a company and pay your hard-earned money, to be taken to the 
cleaners, but for them to continue doing this over and over to people who put their 
lives in their hands, is as bad as a thief who robs you, except this is done in front 
of your face. I think it is about time for someone to put a stop to unethical and unre- 
liable companies who are being allowed to stay in business. How can a consumer 
possibly be made aware of such rip-off joints?" 

Of those 100 letters, 70 people actually included receipts or estimates of how 
much money they have lost. The total amounts exceeds 65,000 dollars in just these 
100 cases. 

I would be happy to answer any questions you may have. 

Once again, I thank you Senators for your time today. 

Senator Bryan. Thank you very much. That was very illuminat- 
ing, I take it that perhaps in terms of your ranking of the prob- 
lems, that list — is that roughly kind of a one through nine in terms 
of the priority? The first and the most significant, you pointed out, 
was the unnecessary work, at least in your own experience. 

Ms. McCarthy. Definitely. The unnecessary repair appears in 
our case to head the list. 

Senator Bryan. Looking at the situations as you found them, 
what do you think is the most effective way for dealing with it? 
The problem is out there, no question about it. Sting operations do, 
in my judgment, serve a deterrent value, as you point out. What 
else, as you see it, needs to be done? What can we do to really pre- 
vent this sort of egregious misconduct? 

Ms. McCarthy. In my opinion, I think that threefold approach 
is an excellent idea that was represented by Mr. Del Tufo as part 
of the task force approach. I think that is an excellent idea. 



42 

I think that for so long there has been a attitude of a lack of en- 
forcement. There is an unchecked attitude out there on the part of 
the auto mechanic that for so long they have been able to get away 
with what they are doing without anybody looking over their shoul- 
der, without anybody telling them that they cannot do it, that there 
is a real strong feeling that they can do whatever they want. I 
think that just the actual threat is enough to get us off to a good 
start. 

Senator Bryan. Mr. Johnson, you bring a somewhat unique per- 
spective. Our hearing this morning has been structured as you, Ms, 
McCarthy, no doubt have observed, that we will have all three lev- 
els of government involved and the media, each of which have an 
opportunity to play a very meaningful role in this problem. 

Maybe you could put this in a little perspective without going 
into great detail. But you have, as your testimony indicates, gone 
further than the State law in Maryland by adopting at the county 
level some initiatives of your own and your office operates, I pre- 
sume, under the aegis of that authority. 

Tell us just very generally what the Maryland law is, the State 
law. What does the State law require, if anything, car repair busi- 
nesses to do, and what options are available, remedies are avail- 
able to a motorist, a consumer who feels that he or she has been 
ripped off at the State level, and then I want to put the local piece 
in place. 

Mr. Johnson. The Maryland State auto repair law is a fairly 
brief law. The main provision is that it requires customer rights to 
be on the initial work order. The rights are, you have a right to 
a written estimate if it is going to be more than $50, that they can- 
not exceed the estimate by more than 10 percent, that you have the 
right to have your parts returned, and that work not originally au- 
thorized by the customer may not be billed without obtaining fur- 
ther authorization. 

That is the core of the State law. It does not do a whole lot more 
than that. 

Senator Bryan. Let us go over those pointers. A disclosure provi- 
sion as to the rights of the consumer. The second piece again, if you 
would, please? 

Mr. Johnson. I was simply summarizing what the disclosure is. 
And there are four key rights that they highlight, which are the 
estimates, the right to parts, not to have the estimate exceeded, 
and that you have to authorize additional work. 

Senator Bryan. Now, what is the enforcement mechanism? It is 
nice to have those rights, but if there is not an enforcement mecha- 
nism — again, I am not trying to be critical of Maryland law, I am 
trying to put this into perspective. I suspect that the pattern in 
Maryland exists elsewhere that you have got State law that 
purports to confer rights upon consumers, but without an enforce- 
ment mechanism it is somewhat meaningless. 

As Ms. McCarthy points out, a lot of the people that Contact 13 
hear from are people that are not particularly sophisticated people 
that are on fixed incomes, people who do not have the access to the 
courts, and the panoply of all the theoretical legal rights that 
might be available. Is there an enforcement mechanism as such, 
Mr. Johnson, in the Maryland State law? 



43 

Mr. Johnson. Well, the enforcement is that it is part of the 
Consumer Protection Act, which the Maryland Attorney General 
enforces. In Montgomery County, we would indirectly enforce that, 
saying that a violation of the State act would also be a violation 
of our county act. But too often, it is just as we have been hearing 
here. People have to go to court. 

I will say, I feel in Maryland that the attorney general does have 
a good consumer complaint handling program, and we are proud of 
our own program, that we are able to resolve many things without 
going to court. 

But in terms of violating those rights you are talking about, it 
happens a lot of times. It is very difficult to document. What our 
initiative is focussed on is that a lot of people are not getting those 
rights given to them. And at least the starting point is to make 
sure that the procedures are proper and you give people a chance 
to be informed, more informed than they are. 

Senator Bryan. How does vour office function with respect to the 
Maryland Attorney Greneral s office? In other words, a consumer 
comes in with any one of the types of problems which was illus- 
trated in Channel 13's television footage — any one of those is a rip- 
off. 

Now, does the consumer typically go to the Maryland Attorney 
General's consumer protection division, or however it is character- 
ized, or do they go to your office in Montgomery County, or do they 
go to both? In other words, how do you coordinate so the Maryland 
Attorney General's office is not working a case, you all are working 
a case, and you are not aware that each of you are working it? 

You have limited resources. There are many more complaints, I 
am sure, than you have the resources to handle. And to do duplica- 
tive or redundant work is the last thing in the world you want to 
do in terms of providing protection to consumers. 

Mr. Johnson. Sir, we have some informal arrangements. I think 
you will find that most Montgomery County consumers will come 
to us before they go to the State. I often find that consumers cc let- 
ters, and oftentimes when the attorney general's office finds that 
it has been filed with Montgomery County we touch base, and they 
normally defer to us. I think that they would say that their re- 
sources are sufficiently taxed with complaints from the rest of the 
State. So, we have that sort of informal coordination. And we talk 
often, and do some initiatives together. 

Senator Bryan. Of the regulations that your Montgomery County 
ordinance provides, what do you find most helpful in assisting con- 
sumers? 

Mr. Johnson. Other than our existence to mediate and arm 
twist, the most effective thing that I think should be considered if 
people are looking at doing new local or State statutory initiatives, 
we find the citation authority to be useful to a local agency in indi- 
vidual complaints. We do not have to prove a broad pattern or 
practice but if we find a clear violation in an individual case we 
can issue a fine. Obviously, we can use the threat of it to resolve 
a complaint, and we find tnat a really effective tool, in many cases. 

Senator Bryan. So, I mean, to use the idiom of the street, that 
civil citation is a very effective hammer for you in order to bring 
the OiTending auto repair shop into this mediation process. I pre- 



44 

sume if you were just a mediator and did not have any ability to 
pursue a civil penalty, that there would probably be less coopera- 
tion. Is that a reasonable assumption? 

Mr. Johnson. I think that is reasonable. I think our resolution 
rate would be lower without that authority, no doubt about it. 

Senator Bryan. And give us just some general perspective. I 
mean, if you have got, in a given period of time, 100 such com- 
plaints, and let us assume that theoretically vou validate all, but 
there are 100 legitimate grievances out there tnat cry out for relief, 
out of the 100, how many are you able to solve with this mediation 
process? 

Mr. Johnson. Approximately 70 percent of the complaints that 
come in. And I must say that we only screen them to be sure there 
was a transaction in Montgomery County, but we do not screen 
them for validity, so probably some of the 30 percent that we do 
not resolve may not be terribly meritorious complaints. But we do 
resolve a large percentage of them. 

Senator Bryan. Ms. McCarthy, the attorneys general commented 
that sting operations are expensive. If it is not privileged or propri- 
etary information, do you have an idea as to what the sting oper- 
ations that you all conducted, how much that cost? 

Ms. McCarthy. We ended up doing two full stings, the stings 
that actually appeared, although we took our vehicles into 10 dif- 
ferent shops. Now we were fortunate in that the big up-front 
money, the $800 transaction, was refunded to us quite promptly, 
so we got that money back. I would say we investigated — I mean, 
we probably investea about $400 that was actually lost. What do 
you say. Clay? Is that pretty close? Clay was the photographer in 
that investigation, as well. 

Senator Bryan. But in terms of your up-front cost, you were for- 
tunate, I know, in the one case to get the $800 back. 

Ms. McCarthy. Right. Exactly. 

Senator Bryan. But, I mean, in terms of what was your budget 
going in? I mean, was it a couple of thousand? 

Ms. McCarthy. That is about right. We estimated about a couple 
of thousand dollars, based on what we were hearing beforehand, 
and that was a lot of these estimates before the mechanics would 
even open the hood was going to be $1,200, $1,500, all the way up 
to $1,800. We thought, in the instance with the transmission sting, 
we might have to put out $1,800, so — to replace a transmission. 

Senator Bryan. In terms of what causes the problem, obviously, 
some of it is just simply outright fraud. Some of it is greed. Some 
of it, I suppose, is based upon these contests or these incentive 
compensation programs for people that otherwise would play by the 
rules recognize that, gee, I can make a few extra bucks and, you 
know, my expenses are kind of high this week, and maybe 

Ms. McCarthy. Christmas is around the corner. 

Senator Bryan [continuing]. Yeah, Christmas is just around the 
comer or the — you know, the anniversary or the kids birthday, the 
tuition is due at school the next semester, all of those things. Your 
thoughts at all in terms of what really is the underlying cause of 
all of this. 

Ms. McCarthy. Well, I am going to refer again to the one trans- 
mission sting that we did do, because in looking back at that I was 



45 

trying real hard to try and determine what the motivation there 
was. And at first I thought it was dishonesty. I thought that they 
perhaps saw that this was an excellent opportunity to make some 
bucks. 

Senator Bryan. Just naked greed, yeah. 

Ms. McCarthy. Exactly. And again, I think the commission fac- 
tor is very important here, like the one mechanic had said, they 
will drive up their sales to keep those commission rates up there 
by performing — not necessarily charging you for a transaction that 
does not take place, a repair that is not made, but charging for a 
repair that was not needed at all. And in those cases, the work gets 
done, but the act, itself, is just as dishonest, is it not? 

Senator Bryan. Sure. 

Ms. McCarthy. But in retrospect, with the one transmission 
sting that we did do, I think part of the problem was incompetency 
and the fact that these mechanics were rushing. And as he admit- 
ted, the had two mechanics working on the same car. By the time 
the first mechanic pulled the plugs, he later admitted to us that 
one of the plugs was, in fact, loose. In fact, very loose. And in this 
instance, the wire leading into the transmission is very secure. It 
is not loose. If it is loose, it is disconnected because it snaps on and 
you have to physically unsnap it to take it off. 

At that time, I said "Well, if it was loose, why would you not, 
that early on in the procedure, simply plug it back in and see if 
the car is no longer stuck in third?" Never even crossed his mind 
to do that. They had already taken the job. The job was to be done. 
He had several jobs waiting to be done after that one. 

Second mechanic comes in by the time the transmission is pulled, 
and of course, he does not know anything that the first mechanic 
has done. So, I think that is what led to that particular problem. 

Senator Bryan. You know, we have all smiled a little bit at some 
of that footage, and, vou know, the outraged response of people who 
have been victimized, but it may be — it may appear to be funny if 
that were not your car, that not the circumstances that you find 
yourself in where maybe your only means of transportation in a 
community like Las Vegas without a car, you are immobilized. 

Ms. McCarthy. Right. 

Senator Bryan. What does all of this mean in human terms? I 
mean, we have talked about the technical nature of it and what the 
attorneys general can do and the Federal Trade Commission and 
office like Mr. Johnson's. What does this really mean in human 
terms? 

Ms. McCarthy. I think it is devastating to a lot of the people 
who find themselves victimized by car repair, for a couple of rea- 
sons. Not only are you depriving them of money that is needed to 
raise their families or money that they are not getting because they 
are on a fixed income, particularly in cases of seniors where they 
have high medical costs and other priority money matters, not only 
are you depriving them of the money but in many cases these sen- 
iors and these families find out when the problem is not fixed cor- 
rectly and they have to take it down the road to another shop, they 
find out that they have been ripped off, and it is an awful feeling. 

It is a terrible feeling because it just^it picks at your trust and 
makes you feel ever-increasingly vulnerable. You lose your trust in 



46 

the system, and I think it is just a terrible thing to put anybody 
through. I think devastating moneywise, devastating esteemwise, 
and it is just something that no one really should have to experi- 
ence. 

Senator Bryan. Ms. McCarthy, did any of this which was — as I 
have said, I thought was extraordinarily well done — generated any 
interest for State legislative initiatives along the lines, say, of At- 
torney General Abrams and perhaps what Attorney Greneral Del 
Tufo has in New Jersey? 

Ms. McCarthy. It sure has. In fact, on the State level we do 
have proposed legislation. I wish I could tell you what the specifics 
of that is right now. We are waiting to receive a copy of that. I still 
believe it is in the hands of our legislative counsel, but it is being 
drafted and it would address some of these problems. And again, 
I think that was all part of the response that we received. 

I know Assemblyman William Patrick is working on that effort, 
as well as others, and we are looking forward to seeing what they 
do come up with. 

Senator Bryan. Well, I commend you personally, and compliment 
the station. It is in the highest traditions of journalist public serv- 
ice, in my judgment, I mean, to see that, kind of puts it all in per- 
spective, and any one of us could identify with any one of those 
people coming in with a transmission. 

Ms. McCarthy. I think we have all been there. 

Senator Bryan. We have all been there. And some of us, I sus- 
pect, not only have we been there but perhaps unknowingly we 
have been had. 

Ms. McCarthy. I have got to tell you, the week after this aired 
I took my car in and, just real briefly, the mechanic at this shop 
was under my hood. He said, "Can I please check your oil?" I said, 
"Please, by all means do." He could not find the dipstick. This is 
a Toyota Corolla. He must have spent 5 minutes out there because 
he did not want to come back and tell me he could not find it. But 
the funny part of it is I could not find it either, it was so hidden 
in the engine there. And I thought, this is so ironic. These cars are 
getting so increasingly complicated if you cannot find your dipstick. 
That is ridiculous. 

Senator Bryan. I wonder what the flat-rate manual says about 
that? Thirty minutes to find the dipstick. 

Ms. McCarthy. I just thought I would throw that in. 

Senator Bryan. Mr. Johnson, if you know, I am kind of intrigued 
by the local laws relating to this problem. I mean, yours is obvi- 
ously a metropolitan county, highly sophisticated. To what extent 
do other communities or counties in America, if you know, in effect 
embellish, add to, the provisions that may exist at the State level 
to provide this extra measure of protection for the consumers that 
you in Montgomery County do? 

Mr. Johnson. There are many cities and counties that have 
consumer protection agencies similar to ours. But in terms of spe- 
cial statutes on auto repair, as far as I know, there may only be 
a handful in the country on a local level. One I know of, I believe, 
is Dallas, TX. And we find it helpful. 

You can do a lot of the things we do under basic consumer pro- 
tection statutes, but having a specific auto repair statute, we die- 



47 

tate many things that are in the invoices. Our disclosure require- 
ments go beyond those I described in the State law. The licensing 
program, those kinds of things are great on the local level, I think, 
and should be done more. 

Senator Bryan. Mr. Johnson, were you there when the ordinance 
was adopted? Were you part of the program? 

Mr. Johnson. No, I was not. I have been there 5 years, and that 
ordinance was one of the first proiects of the office which was 
founded 20 years ago, so we have had that a while. 

Senator Bryan. I ask the question in this context, if you know, 
was it argued at the time that the board of supervisors, the county 
commission — excuse my ignorance of not knowing the political 
structure in Montgomery County — but as they embarked upon this 
ordinance, wgs the argument made that there has been action at 
the State level, and therefore you are preempted at the county level 
from going fiirther. Anecdotally, or from what you know, did any 
of that debate occur at the time the ordinance was enacted? 

Mr, Johnson. I believe that our ordinance was adopted before 
the State statute. 

Senator Bryan. I see. 

Mr. Johnson. Montgomery County, in this State, has been a 
leader. We hear that kind of argument on various items of interest 
to us now on a regular basis. 

Senator Bryan. Because I would assume that a State that had 
a statute that purported to address any aspect of this problem, I 
am sure that the argument would be made, if the local authorities 
wanted to go further, that the State legislature has already spoken 
to the issue and thereby have effectively preempted local govern- 
ment action. If your ordinance predated, then obviously, the pre- 
emption argument could not be advanced. 

Mr. Johnson. We do hear it in other contexts. 

Senator Bryan. OK. Well, let me again thank both of you for 
joining us here today, particularly Alyson, for sharing that film 
footage with us. We wish you, Mr. Johnson, the very best as you 
labor on behalf of the consumers in Montgomery County. 

Mr. Johnson. Thank vou. 

Ms. McCarthy. Thank you very much. 

Senator Bryan. Thank you. 

[Whereupon, at 11:28 a.m., the hearing was adjourned.] 



APPENDIX 



Prepared Statement of Lawrence S. Hecker, Chairman, Maintenance 

Awareness Program 

Good morning Mr. Chairman. My name is Lawrence Hecker and I serve as Chair- 
man of the Maintenance Awareness Program (MAP) and President of the Auto- 
motive Parts and Accessories Association (APAA). I'm here today to outline the 
steps that the automotive repair industry has initiated since your hearing in July 
to Detter address the issues of our industry. These include developing vehicles for 
better communications with customers, working with regulatory agencies, and deal- 
ing with other problems within the industry. 

Last year, when several states took action against Sears and other repair outlets, 
it became more apparent to members of our industry that problems that existed be- 
tween repair outlets and their customers needed to be addressed. Many of those 
problems centered around the issues of poor and incomplete communications be- 
tween the consumer and repair outlet. 

It was then that Sears' Chairman Edward Brennan took the lead, and through 
the organizational efforts of APAA, orchestrated a meeting of key industry rep- 
resentatives to seek solutions. At that meeting, understanding the need for improve- 
ment, a number of automotive retailers and suppliers, with Sears at the lead, initi- 
ated the Maintenance Awareness Program (MAP). 

MAP operates as an adjunct to the Automotive Parts and Accessories Association 
drawing participation from automotive repair retailers, independent repair facilities, 
automotive parts and accessories manufacturers, car companies, trade press and the 
associations which represent each of these groups. MAP has already begun to talk 
with regulators who work with the auto service mdustry to form a working partner- 
ship, in an efTort to develop better, more effective communications between industry 
ana buyers of automotive service. 

We recognize that often a major frustration of car owners is their inability to con- 
sistently feel comfortable with the maintenance and repair work on their vehicles. 
One of MAPs goals is to improve quality and consistency in the auto repair indus- 
try. We also intend to provide motorists with sufiicient and understandable informa- 
tion about their vehicles so that they can make informed choices as to the level of 
repair and/or maintenance they wish their vehicles to receive. This will result in 
consumers receiving fair value for their dollar. 

MAP accomplishes its work through its six industry subcommittees. The process 
reflects our desire (1) to develop practices for our own people as they inspect and 
service their customer's automobiles and light trucks, (2) to educate consumers on 
the importance of regular inspections and ol performing preventive maintenance on 
their vehicles, and (3) to educate those consumers who are interested in the proper 
way to perform those inspections and maintain their own vehicles. 

The first subcommittee, the Uniform Inspection Procedures Subcommittee, is de- 
veloping guidelines for the inspection of each of the eight major component systems 
of the automobile to be used as a check list by industry personnel. Our plan is for 
all participating shops to have and use this cnecklist. A vehicle owner frequenting 
any of these retailers will be assured, thereby, of uniform inspection practices. 

But map's commitment to excellence in the inspection process does not end there. 
We are also working with the mechanic/technician certification organization, A.S.E., 
to develop and administer qualifying tests for service advisors and inspectors that 
we intend will be incorporated into an industry-sponsored certification process. 

Since it would not be fully effective for industry to efiect these inspection proc- 
esses on its own, we have initiated contact with the Task Force created by the Na- 
tional Association of Attorney's General and will submit those guidelines our com- 
mittee develops for their consideration and adoption as model inspection guidelines 
in each of the fifty states. 

A second subcommittee, the Consumer Preventive Maintenance Committee, has 
an its main objective to increase the level of awareness consumers and drivers have 

(49) 



50 IIII!liilli:||liiin 

3 9999 05982 125 4 

about the need for regular, preventive maintenance of their vehicles. A uniform pre- 
ventive maintenance checklist is being developed by the committee to help consum- 
ers determine what needs attention on their cars — and when. 

We are also working with the Car Care Council, the U.S. Department of Com- 
merce and the Consumer Information Center at Pueblo, Colorado to develop and dis- 
tribute a consumer guide entitled "Under the Hood and Around the Car" . In addi- 
tion to being distributed by the automotive industry, we plan distribution through 
the Consumer Information center, and other government agencies. 

The Consumer Education Subcommittee is developing an interview process to 
identify the needs and f)erceptions of motorists-seeking more information concerning 
auto repair. It is also developing the educational segment for a consumer exposition 
which will instruct motorists regarding the maintenance needs of their vehicles and 
how to render proper care. 

The Industry Preventive Maintenance Subcommittee is developing uniform pre- 
ventive maintenance checklists for service personnel to use when recommending 
preventive maintenance to consumers and, equally important, guidelines for commu- 
nicating the basis and benefits of those recommendations to the consumer We have 
looked at many of the checklists presently in use throughout our industry, and are 
attempting to combine the best features into a standard industry checklist for each 
of the major systems on a modern vehicle. Where possible, we will include diagrams 
of the systems for use by the service advisor in discussing recommendations with 
the consumer. Most importantly the checklists will indicate whether the basis of the 
recommendation is for preventive maintenance, performance improvement, or is 
mandatory due to failure of a part or a system. 

The Proactive Issues/Liaison Subcommittee maintains contact with consumer 
groups and governmental administrative agencies for the purpose of establishing on- 
going cooperative relationships. 

The Image Enhancement Subcommittee has developed a program to enhance the 
image of the aflermarket service specialist by developing a profile of the ideal pro- 
fessional specialist and is seeking to identify individuals who exemplify that ideal. 
In addition, this subcommittee will develop materials which can be utilized by voca- 
tional instructors to improve the quality of communications that take place between 
service advisors and customers. The image we strive for is that of a professional 
service advisor/technician dedicated to customer satisfaction and properly serviced 
vehicles. 

Attached to my testimony is a more complete summary of Subcommittee Goals 
and Objectives. In summary, some of the particular action items which may be of 
interest to you include: (1) the development with A.S.E. of a certification category 
and examination for service advisors and inspectors; (2) a set of preventive mainte- 
nance and inspection guidelines for each automotive system wnich we will seek 
agreement on frpm regulatory agencies so that they may be used industry wide; (3) 
an acceptable self-policing proceaure in order to enforce uniform standards through- 
out the industry thus earning the acceptance of regulators and consumers and; (4) 
development, in cooperation with the Consumer Information Center and the U.S. 
Department of Commerce, of a consumer guide for distribution throu^ the Center 
at Pueblo, Colorado through various other governmental consumer oflices and 
through our industry. 

We feel that the strength of the Maintenance Awareness -Program is that it rep- 
resents our entire industry and not any individual company or segment of the in- 
dustry. As an umbrella organization, we hope to work with consumer groups and 
governmental agencies to publish material that looks at preventive maintenance 
and car care from the consumer's viewpoint and not from the perspective of selling 
any particular product or service. We are anxious to work with regulators at all lev- 
els to agree on standards and to enhance communications with our customers, who 
are also the constituents that hold government accountable to protect them. 

Mr. Chairman, this completes my prepared testimony. Once again, thank you for 
the opportunity to inform you and your committee of our efforts. 



Prepared Statement of David F. Sxyder, Senior Counsel, American 

Insurance Association 

Each year, automobile insurers pay more than $22 billion for repair or replace- 
ment of motor vehicles. As one of the largest consumers of auto repair services, in- 
surers and their policyholders have a shared interest in holding the line on auto 
repair costs and aeterring auto repair fraud. While the hearings of this Committee 
have been directed toward auto repair fraud as it affects individual consumers, re- 



51 

pair fraud and higher than necessary costs also affect automobile insurers and their 
policy holders in a direct and financially significant manner. 

On behalf of the American Insurance Association, I am pleased to provide these 
comments on this important consumer/insurer issue. The Association represents 250 
insurers, which provide private passenger automobile insurance and one third of the 
country's commercial automobile insurance. 

THE COST OF AUTO REPAIR IS AN IMPORTANT INSURANCE AND CONSUMER ISSUE 

According to data issued by the National Association of Insurance Commissioners 
(NAIC) in 1991 Profitability Results for Automobile Insurance, insurers paid out 
roughly $20 billion in physical damage claims (claims for repair or replacement of 
motor vehicles) and related expenses under private passenger automobile insurance 
and more than $2.2 billion in commercial automobile insurance physical damage 
claims and related costs. While injuw costs outweigh motor vehicle repair and re- 

filacement costs, these claims are almost one half of total automobile insurance 
osses and related expenses. 

ISO/NAII Fast Track Data is a continually updated sample of paid claims used 
by insurance regulators and insurers to examine trends in losses. According to this 
data, the average property damage liability loss cost per insured car has increased 
27.6 percent; the collision loss cost has increased by 11.8 percent and comprehensive 
loss cost has increased 52.6 percent, from 1985 through the end of 1992. Loss costs 
have two components: frequency, or the number of claims per 100 insured cars, and 
severity, or the average amount paid per claim. 

Partly as a result of the accident prevention measures enacted by the Congress, 
as well as other public and private efforts, there has been a decline of 14.6 percent 
in the frequency of property damage liability claims and 22.2 percent in tne fre- 
quency of collision claims. Comprehensive claims frequency however, has increased 
9.33 percent, reflecting, we believe, growth in auto theft. 

Despite the relatively positive data on the frequency of claims, the severity, or the 
average amount paid for each claim, has increased significantly. From 1985 through 
the end of 1992, the average property damage liability, collision and comprehensive 
claim severity have increasea 27.6 percent, 43.8 percent and 40.1 percent respec- 
tively. Thus, the average cost of each physical damage claim has risen substantially 
over the years, resulting in higher average claims payments per insured car. 

The cost of auto repair to the average insurance consumer is documented by an- 
other NAIC report. Automobile Insurance Database (January, 1993). Nationally, the 
average collision insurance premium was $206.16 and the average comprehensive 
premium was $103.92, nearly one half of the combined average total auto insurance 
premium of $686.47. Thus, in the aggregate, and on an individual basis, auto repair 
costs are important to insurers and insurance consumers. 

INSURERS ARE ENGAGED IN MANY ACTIVITIES TO CONTAIN THE COSTS OF AUTOMOBILE 

REPAIR AND FRAUD 

Insurance companies, individually, and in cooperative efTorts employ a variety of 
measures to help fight fraud and contain the costs of auto repairs using their eco- 
nomic clout for the ultimate benefit of consumers. 

To detect and deter fraud, insurers are engaged in a number of activities. Insurers 
train claims personnel to recognize potential fraud. Many insurers also have Special 
Investigation Units which review claims files to focus on cases where the charges, 
or the claim itself, appear to be out of line. These files get special attention, are 
investigated and are forwarded for civil or criminal action. 

Insurers inspect vehicles before, during and after repair work, where allowed, to 
assure that the damage did not pre-exist the accident, that the work ordered was 
in fact done and that no additional work was done. Insurers also sponsor data bases 
to assist law enforcement and help the industry fight fraud. In the public arena, 
insurers support federal and state policymakers who advocate cost control and anti- 
fraud legislation. An example of this is the Anti-Car Theft Act of 1992, passed by 
the Congress last fall. 

To control costs, some companies use computerized data bases to determine the 
reasonable cost of repairs. The insurer then authorizes payment for the pre-deter- 
mined value of the designated repairs. This helps prevent overcharging. 

Some insurers, where permitted by state law, maintain a list of shops which they 
recommend to consumers. These shops have been found to do high quality work at 
a reasonable price. Claimants may take their vehicles to any shop they choose, but 
if they go to a non-recommended shop, they will be paid only the amount the rec- 
ommended shop would have charged for the repair, similar to preferred provider or- 
ganizations in the health care field. 



52 

The public supports these cost containment efforts. A December 1992 Public Atti- 
tude Monitor indicated a 66 percent level of support for an insurer paying only the 
amount agreed to with the preferred provider. See Attachment 1. 

Insurers also support efforts to maintain competition in repair parts, against ef- 
forts to eliminate aflermarket repair parts. The cost of ailermarket parts can be 
substantially less than equivalent parts made by the original equipment manufac- 
turers. If after market parts competition is eliminated, the cost of auto repairs will 
skyrocket. So, preservation of this competition is essential to cost control. 

There are, however, potential obstacles to insurer cost containment efforts. In 
some states, automobile insurers can be effectively barred from looking at a vehicle 
while it is being repaired. Laws are being advocated by some special interests to 
prevent insurers from holding down repair costs by mandating insurers to pay what- 
ever a repair shop charges, for example, for glass repair. Finally, legislative, litiga- 
tion and foreign trade initiatives have been pursued to curtail competition in repair 
parts by eliminating afler-market parts. So far, most of these measures have not 
succeeded. 

ONE ACTION THE FEDERAL GOVERNMENT CAN TAKE TO ASSIST IN CONTAINING REPAIR 

COSTS AND FIGHTING REPAIR FRAUD 

One of the best ways to fight repair fraud and costs is to prevent the damage, 
in the first place. A recent Insurance Institute for Highway Safety report docu- 
mented costly and unnecessary damage that occurs in low speed crash tests: at 5 
mph, some cars sustained more than $2,000.00 damage. Damage at such low speeds 



unnecessarily increases costs and creates opportunities for fraud, because in many 
cases, the car, if properly designed, wouldn t be in the shop at all. See Attachment 
2. 

Existing law (15 U.S.C. 1911 et seq.) authorizes the National Highway Traffic 
Safety Administration (NHTSA) to promulgate standards to eliminate or substan- 
tially reduce vehicle damage or to substantially reduce the cost of repair after dam- 
age has occurred. Despite this wide-ranging authority, current NHTSA regulations 
at 49 CFR Part 581, only govern collisions at 2.5 mph or less. This, by any reason- 
able measure, is an inadequate use of the authority delegated by the Congress. 

The National Highway Traffic Safety Administration (NHTSA) should be encour- 
aged by the Congress to fully implement its bumper strength regulatory authority, 
in consultation with consumers, insurers and auto makers. Such action could signifi- 
cantly reduce auto repair costs and opportunities for fraud. We believe many 
consumer groups would also support this action. 

CONCLUSION 

Auto repair costs and fraud are a major and shared concern of insurers and insur- 
ance consumers. Cooperative action, at both the federal and state levels, is needed 
to contain costs and deter fraud. 

[Attachments 1 and 2 may be found in the committee files.] 

O 



ISBN 0-16-040655-2 



9 78 



160"406553 



90000