Flood-car fraud sure to rise from the mud

on Sep3

Flooded cars are pictured at a dealership after Tropical Storm Harvey in Orange, Texas. Photo credit: REUTERS

If history is any guide, the first flood-damaged vehicles from Harvey are days away from changing hands, and dangers to unsuspecting buyers are greater than ever, a veteran fraud fighter warns.

“It normally takes a few weeks after a hurricane, but it could be as soon as 10 days to two weeks after a storm’s first landfall,” said Frank Scafidi, public affairs director at the insurer-funded National Insurance Crime Bureau.

Scafidi says the consequences of unknowingly driving a vehicle with compromised electronics have worsened since the days of Katrina, given the proliferation of sensitive electronic components that govern key systems such as airbags, driver-assistance devices and active safety technology.

“Think how far automotive electronics have come since 2005,” Scafidi said.

Automakers, insurers, lenders and dealers have implemented several levels of screening to prevent criminals from making superficial repairs, obtaining scrubbed titles and reselling flood-damaged vehicles.

But “it still happens,” Scafidi said. Historically, about half the vehicles damaged by flooding are resold, some to unsuspecting buyers, Carfax Inc. estimates.

With an estimated 300,000 to 500,000 vehicles damaged by the massive rainfall and flooding after Harvey first hit Aug. 25, the opportunity for fraud is substantial.

The sheer scope of Harvey and Houston’s distinctive profile will compound storm cleanup difficulties. Simply put, Harvey dumped more rain than any other storm in U.S. history, and on a uniquely vulnerable city: flat, sprawling, populous, car-dependent Houston.

Mitchell Phillips, who as global director of data for Urban Science has for 30 years studied the effects of hurricanes on auto sales, sees some new wrinkles in Harvey.

“Houston is bigger, and there are more victims,” he said.

Phillips looks for a post-flood uptick in replacement demand for pickups in truck-loving Texas, even bigger than he noticed after Katrina. But he expects normal local auto sales to follow the post-hurricane pattern of a 30-day dip, an upward spike at 60 to 90 days then a gradual drift back to normal volume at 12 to 18 months.

The peak in fraudulent sales of flood-damaged vehicles is most likely to come in two or three months as insurers process claims and reimburse victims, Scafidi said.

“What attracts [scammers] is the price,” Scafidi said. “If a used vehicle sells for $20,000 to $25,000, that’s a quick score. These clowns may only have to sink $2,000 in repairs into it.”

But most title-washing criminals sell their shoddily repaired vehicles far from where they were damaged. Consumers who live near recently flooded areas tend to be suspicious and more likely to inspect any vehicle for hidden damage.

“They may put them on transporters and ship them far away,” Scafidi said. “We’ll see them all over.”

It’s not illegal to repair and resell a flood-damaged car, as long as the damage is disclosed to the buyer on the title. But especially after Katrina, more criminals learned how to wash titles by reregistering damaged cars in states that would reissue titles without notice of damage.

Combating that is the National Motor Vehicle Title Information System, a federal database that allows states to share data on vehicles that have been issued titles such as “scrapped,” “junk,” “salvage” and “water damage.”

Unfortunately, not all states participate. And that’s not improving.

A July 2015 Automotive News article noted that the federal unit’s website, vehiclehistory.gov, listed only 38 states that made inquiries before issuing new titles, six more that submitted data and another six states and the District of Columbia “in development” to start submitting information. The site also claimed it possessed 96 percent of U.S. vehicle title information.

As of last week, the website’s list of state participants was virtually the same, but the percentage of data captured has fallen to 94 percent.

Scafidi said his group offers a free, public database of vehicle identification numbers for buyers to check whether a vehicle has been reported as a salvage vehicle by one of its member insurers.

“If all states would submit their data in real time, we could knock out a lot of these scams,” he said. “We’re not there yet.”

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