'Cash for Clunkers' Requirements: Dealers at Risk While Additional Funding in Limbo

Aug. 1, 2009— -- Car dealerships around the country have gone from dismal to dynamic in a matter of days, thanks to the government's "Cash for Clunkers" program. But because the initial response overwhelmed the program and drained it of funding, dealerships that close deals over the weekend could be venturing into risky territory.

On Friday, the House of Representatives quickly passed legislation to add $2 billion in funding to the cash-strapped program. But the Senate will have to pass the exact same bill next week since the House went into recess yesterday and will not be around to hash out differences.

In the meantime, car dealerships that continue to offer the government's incentive to customers are doing it on faith.

The program pays consumers cash vouchers if they trade in their gas-guzzling cars for a new car. It has been so successful that the $1 billion allocated for it ran out within a week, and officials estimate that 250,000 cars have already been sold as a result.

Industry Group: Dealers May 'Face a Risk'

Ethan Rossignol, a sales manager at DARCARS Toyota of Silver Spring, Md., expected to surpass the dealership's July goal of 270 by about 100 cars, largely because of the program. But he said that the dealership had already gone out on a limb to the tune of $1 million.

"[It's] a little bit of a risk," Rossignol told ABC News.

In a statement on its Web site, the National Automobile Dealers Association (NADA) said it appreciates the administration's effort to continue the program, but it advised dealers to proceed with caution while the additional funding remains in limbo.

"NADA aggressively supports such additional funding and is working to secure it," said NADA chairman John McEleney, who is also a multifranchise dealer in Iowa. "Moreover, NADA has been given specific assurances by the Administration that all transactions consummated through today will be honored based on their belief that sufficient funds remain available.

"Nonetheless, until further definitive guidance on the availability of funding is provided by the Administration, dealers who accept additional 'clunkers' deals may face a risk that they will not be reimbursed," the statement read.

One of NADA's suggestions was for dealers to take deposits in lieu of consummated sales, "with an eye toward legislative success next week."

Meanwhile, noting Web site issues and other glitches, many have criticized the Clunkers' program for its own clunkiness.

"A borderline train wreck," said Charlie Swenson, general manager at Walser Toyota in Bloomington, Minn., according to The Associated Press.

Transportation Secretary: Program Is a 'Lifeline'

During the House debate, many Republicans expressed their support for the program but said the government needs to fix several problems, including an online redemption system that has been overwhelmed by dealers trying to file claims.

But other GOP members were not so supportive.

"The auto industry does not have a monopoly on the hard times in this country," said Rep, Jeb Hensarling, R-Texas. Referring to the struggling chicken farm in his district, he proposed that the government should start a "'Cash for Cluckers' program and pay people to eat chicken."

Democrats argued that the program works in stimulating the economy and promoting environmentally friendly vehicles.

This morning on "Good Morning America Weekend," Transportation Secretary Ray LaHood adamantly defended the program and encouraged Americans to head to the showroom.

"This is a lifeline to the industry," he said, expressing confidence that the Senate would pass the legislation to secure an additional $2 billion. "Anybody that says this is not working doesn't know what they're talking about."

President Obama Praises the House

In short remarks Friday, President Barack Obama also praised Congress for its quick action and said he was "pleased with the progress" made in the House.

The program "has succeeded well beyond our expectations and all expectations, and we're already seeing a dramatic increase in showroom traffic at local car dealers," the president said.

The $2 billion will be transferred from an untapped stimulus program, so technically, no new taxpayer money will be involved. But Obama said Friday that the government would work to replace the stimulus funding being used to extend the program.

'Cash for Clunkers' Guidelines

Here's how the "Cash for Clunkers" program works:

People who owned a car made in 1984 or later that got 18 miles to the gallon or less could qualify.

The car had to have been registered and insured over the past year, and it must have been able to start.

If applicants to the program traded their clunker for a car that got four more miles per gallon, the government gave them $3,500.

If the new car got 10 miles more per gallon, the person got $4,500.

People trading an SUV, minivan or small pickup only had to improve their mileage by 2 to 5 miles per gallon.

The vehicle purchased had to be brand new and cost less than $45,000.

ABC News' Z. Byron Wolf and Elizabeth Leamy contributed to this report.