Flooded cars go to market with little to stop them

— -- The Chevrolet Cavalier that Erik Leiken discovered on the Internet lacked curb appeal. Though only 5 years old, the car, with patches of primer paint, appeared to have had a hard existence.

Still, the odometer showed only 70,000 miles. And the car was a private-party bargain at $2,400, far below what he figured a dealer would charge.

But by the time the Chevy broke down a second time in San Diego freeway traffic, Leiken concluded that he had bought a clunker damaged in Hurricane Katrina.

"I should have had alarm bells going off," says Leiken, 21, who says his suspicion was confirmed by mechanics who found telltale rust, salt and water damage in the engine and residual moisture in the trunk. A Carfax vehicle-history report proved the car was in Louisiana when the hurricane struck.

As the second anniversary of the storm approaches, relatively little has been done to protect consumers from the estimated thousands of flooded cars and trucks from Katrina that eluded scrappers. And that's to say nothing of the cars and trucks that will become flotsam in hurricanes yet to come.

Here's why:

•A crazy quilt of state vehicle laws allows unscrupulous sellers to "wash" flood designations from vehicle titles by registering them in states that don't recognize water damage as trouble.

•The federal government has yet to fully implement a 15-year-old law creating a national database of vehicle histories. Many states still aren't participating.

•Legislation languishes in Congress aimed at forcing insurance companies to share vehicle loss data, including flood damage, with online auto history companies such as Carfax and Experian.

The insurance industry has its own computer system listing loss data, but it's not shared with outsiders. Critics say wider distribution of the database could help reduce the number of flood-damaged cars making their way to sales lots.

"There is evidence these cars are being cleaned up and sold to unsuspecting consumers," Sen. Trent Lott, R-Miss., said in a statement earlier this year. "A number of these cars are unsafe and shouldn't be on the roads. And folks are overpaying for vehicles they believe are mechanically sound."

Louisiana officials estimate that 350,000 to 400,000 cars were lost to Hurricanes Katrina and Rita in August and September 2005. Mississippi had at least 60,000.

The vast majority were scrapped. About 200,000 cars were branded on their permanent paperwork as having received some sort of damage in the storm. But at least 15,000 of those were registered in another state anyway, Experian reports.

And nearly 45% of those managed to lose their storm-damaged designation in the process.

In effect, their titles were washed, re-registered in a way that erases any mention of them being flood-damaged.

Damages can be hidden

Flood-damaged cars are considered time bombs, slowly being eaten away as salt corrodes onboard computers and other vital components. Outside, they can be cleaned up and look good as new on a sales lot. "These cars were immersed in salt water for two or three weeks. … They were in bad, bad shape because of the salt," says Rodley Henry, a deputy director for Louisiana's attorney general.

And buyers often don't find out until it's too late.

Buyers like Marc and Megan Johnson. The 2005 Pontiac Grand Am they bought from a Chicago-area dealer started to stall in traffic. When they took the $13,000 car to a mechanic, an unusual stink under the hood signaled flood damage. Their attorney, William Huttel, says the paper trail leads back to Louisiana, where the car was registered at the time of Katrina. The couple are awaiting an arbitration proceeding against the dealer.

Flooded-car nightmares are not new. Darr Shelton, a retiree now living in Sun City, Ariz., didn't know the 1969 Lincoln he bought as a collector car about a decade ago had gone through a flood until he hit a bump in the road and "sandy mud" appeared in the cabin.

The more you hosed it out, the more sand you got," says Shelton, adding that the car started having other problems as well. He had it repaired but, "I didn't feel safe in it anymore." He sold it to buyer who, despite being told its problems, wanted to fix it up and display it at classic car shows.

Then, as now, consumers have few protections to ensure they are not buying flood-damaged cars, because of wildly divergent state laws.

A car denoted on its title as having been flooded in one state may not be recognized as flooded in another. States even differ on the extent of damage to a car that constitutes a total loss from flooding.

A survey last year by the American Association of Motor Vehicle Administrators found 13 states that didn't specifically mention flooding as a separate category in explaining why a car might have been classified as salvaged or rebuilt. They were Alaska, Arkansas, Colorado, Hawaii, Idaho, Kansas, Massachusetts, Missouri, Nebraska, New York, North Dakota and Vermont. South Dakota didn't have its own flooding designation either, but it carries one over if it comes from another state.

Titles can be washed clean

A recent criminal case shows how title washing works.

In June, auto dealer Kenneth Wayne Elliott pleaded guilty in federal court to conspiring to transport flood-damaged cars with false titles across state lines. Elliott was the last of three indicted in the fraud case for failing to tell the Arkansas motor vehicle department in 1998 that 55 cars they bought in from Louisiana had been flood-damaged.

With new Arkansas titles that made no mention of the flood damage, some of the cars were taken to Elliott's sales lot, Jackie's Auto Sales in Reeds Spring, Mo., to be sold. Others were sold at auction.

Elliott received a year of home detention and $300,000 fine under a plea-bargain arrangement.

Opportunists are "enabled" by insurance companies, which sometimes aren't clear about which cars declared a loss actually can't be repaired and are fit only for parts, says Dick Diklich, a retired instructor in auto technology at Metropolitan Community College-Longview in Lee's Summit, Mo. He now serves as an expert witness on vehicle condition and value.

The insurance industry wants dangerous cars off the road, says Bob Passmore of the Property Casualty Insurers Association of America, an insurance industry trade group.

After Katrina, insurers cooperated in creating a database that listed vehicle information numbers, or VINs, of more than 300,000 vehicles considered total losses. But insurers say some cars declared totaled can be cleaned up and resold even after a flood.

For instance, a car flooded in fresh water might incur a total-loss payout by the insurer but be fit for the road after being cleaned up, Passmore says.

National database lags

One way to protect consumers from damaged cars would be to complete a federal database tracking every vehicle title history electronically by VIN. State motor vehicle officials would be able to tap into a car's history in seconds to see if it had been flooded or declared a total loss at any time, regardless of whether it had been re-registered in another state.

But 15 years and $13 million later, 21 states still aren't participating and others are only contributing batches of information with no way to tap the system. Only nine states — Washington, Nevada, Arizona, South Dakota, Indiana, Kentucky, New Hampshire, Florida and Virginia — are full online participants, the motor vehicle administrators association reports.

A cost-benefit analysis prepared for the Justice Department in 2001 found that for an initial investment of about $33 million, the Motor Vehicle Title Information System, as it's called, would yield benefits up to $11.3 billion a year by reducing vehicle theft and fraud.

Now, after years of languishing, there is renewed attention to get it working. The reason? Terrorism.

Vehicles were used in the New York World Trade Center bombing in 1993 and the Oklahoma City Murrah federal building bombing in 1995. The FBI thinks at least one salvaged U.S. vehicle was used in an Iraq bombing.

That has the Justice Department interested in the database as a way to trace vehicle histories instantly. It "is taking this issue very seriously," says Rachel Weintraub, a lawyer for the Consumers Federation of America, who attended a Justice Department strategy session on the system last month. "It was sort of a sea change" in attitude about the system, she says.

At present, 60% of all U.S. vehicles are listed on the system. Officials hope to have 75% within the next six months and say they're working hard to get them all.

"We are fully committed to reaching nationwide implementation," says Jim Burch, deputy director for Bureau of Justice Assistance. "This crime-fighting tool is a major win for consumers and law enforcement alike."

Legislation not moving

As a stopgap, bills by Lott and Rep. Cliff Stearns, R-Fla., are aimed at putting more pressure on insurers to share vehicle-loss data. Lott, who lost a car and house to Katrina, wants to require insurers to share with online auto-history report services data about vehicles they declare total losses. Hearings have been held in the House and Senate, but the bills have yet to pass either side. The insurers would have to reveal why the car was declared a total loss, such as flood, accident or other reason. And because the record is electronic, it would thwart title washers.

Experian supports the measure. Carfax says it is unnecessary because it would simply duplicate information it already gets from state DMVs. The property casualty association is opposed.

While everyone searches for an ultimate solution, some consumers suffer. Leiken, who bought the Chevy, says he managed to get a few days' use out of the clunker and about 300 miles before he realized it wasn't worth fixing and donated it to a San Diego charity. He said the seller told him it had been bought at an auto auction.

"It still bothers me," says Leiken, a student now living in Davis, Calif.