By John Hughes
July 24 (Bloomberg) -- Dealers in the U.S. “cash-for- clunkers” program are being forced to disable trade-in vehicles with a chemical under new rules to prevent those who take the government subsidies from reselling the cars.

Dealers must replace the oil in the “clunker” with two quarts of sodium silicate solution and run the engine for up to seven minutes, permanently disabling it, according to rules released today by the National Highway Traffic Safety Administration in Washington.

“Substantial opportunity exists for fraudulent diversion of the trade-in vehicle, largely because its still-functioning engine makes it attractive to return the vehicle to the road rather than relegate it to the scrap yard,” the NHTSA said.

The government is trying to help jump-start slumping auto sales through the program, giving consumers new-vehicle credits of as much as $4,500 for turning in older cars. Sales of cars and light trucks in 2008 totaled 13.2 million, after averaging more than 16 million a year during this decade. Federal inspectors will review dealer records and vehicles for violators of the rules, who would face a $15,000 fine per infraction.

NHTSA officials said in a footnote of the rules that they “understand” vehicles in Germany’s “clunkers” program have been resold rather than scrapped after certifications that the vehicles were disposed.

Sodium silicate is a substance found in dishwasher detergent and used to seal exhaust leaks in repair shops, according to the rules. The agency said it doesn’t believe use of the product will present a hazard to dealerships,
scrap-yard workers or the environment.

Dealer Opposition

Dealers opposed the engine provision and a rule that requires them to possess used-car titles in order to get federal reimbursement. The retailers have said they’re not in the business of destroying engines and that the $50 of the scrap value they are allowed to keep may not cover costs of the action.

Consumers often don’t know where their titles are and getting them could take as long as eight weeks, said John McEleney, chairman of the McLean, Virginia-based National Automobile Dealers Association.

The provisions will “add some time” and “add some cost” for dealers, McEleney said in an interview today. “We need the stimulus so badly we’ll make it work.”

While the law took effect on July 1, NHTSA had encouraged dealers to wait for today’s publication of the rules to begin making transactions.
‘Not That Complicated’

“It’s not that complicated,” Transportation Secretary Ray LaHood said in a Bloomberg Television interview today. “Bring proof of insurance, bring proof that you’ve owned the car for one year, and bring it in.”

President Barack Obama signed the clunkers program into law June 24 after Congress approved it the previous week as part of legislation to finance the Iraq and Afghanistan wars. The $1 billion in federal subsidies may spark 250,000 new car sales, U.S. lawmakers have said.

Consumers will get a $4,500 discount if the new car they are buying gets 10 miles-a-gallon better gas mileage than the model they are trading in. For light trucks, the improvement must be 5 mpg better than the older model.

For a $3,500 credit, the improvement for cars must be 4 mpg or better, and for light trucks, 2 mpg. The trade-in vehicle must be no older than a 1984 model and get 18 mpg or less in combined city/highway fuel economy.

New passenger cars purchased with the discount must get at least 22 mpg in city/highway fuel economy, and light trucks must get at least 18 mpg. Domestic as well as foreign models sold in the U.S. qualify.

The program will end Nov. 1 or when the $1 billion in subsidies expire, whichever occurs first. Congress must decide later this year whether to approve legislation extending the program into 2010.

To contact the reporter on this story: John Hughes in Washington at jhughes5@bloomberg.net
Last Updated: July 24, 2009 17:11 EDT