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Cash for clunkers traffic jam angers dealers © Justin Sullivan/Getty Images

Extra8/19/2009 4:00 PM ET

Clunker traffic jam angers dealers

Dealers are on the hook for hundreds of millions of dollars -- and some are pulling out of the rebate program altogether. But that's the dealers' problem, not yours.

By Rick Newman, U.S. News & World Report

When car dealers start doing business with the federal government, whaddya expect? Perfect harmony?

Of course not. Several weeks into the Cash for Clunkers program, it turns out that delivering a couple of billion dollars' worth of rebates for hundreds of thousands of car purchases can generate a few flat tires.

The Department of Transportation announced Thursday that the program will end at 8 p.m. ET Aug. 24.

The department's latest update on the Car Allowance Rebate System (CARS) shows that the government has received applications for about 457,000 rebates totaling $1.9 billion. But so far, the feds have approved only a fraction of those, leaving dealers furious -- and holding the bag.

The Transportation Department won't say exactly what the rejection rate is, but in an Automotive News survey, some dealers said up to 80% of their rebate applications had been rejected. Some dealers are waiting for payments totaling as much as $200,000, the survey found. About 13% of dealers said they've suspended clunker deals because of red tape and concern about getting paid by the government.

Buyers, meanwhile, should make sure the dealer isn't putting the burden of obtaining a rebate on them. And those still looking for a clunker deal should be able to find plenty of dealers continuing to play along.

Caught shorthanded by program's success

It's obvious that the National Highway Traffic Safety Administration, the agency administering CARS, has been overwhelmed by the popularity of a program that has surprised just about everybody, including the masterminds in Congress who had to triple the funding a week after clunkers kicked in. The NHTSA initially detailed 225 people to process those 400,000 claims; it's working on assigning 1,000 more to the program to help speed the rebates.

To put this in context, there are only about 635 full-time workers at the entire agency, and their principal job is to set safety standards, perform crash tests, conduct research and regulate the automakers. So the NHTSA is swelling to nearly twice its regular size -- by borrowing workers from other agencies -- to manage a program that will come and go within six weeks.

The NHTSA also has to make sure nobody's claiming that a rusty tricycle constitutes a clunker worth $4,500 toward a new ride. Don't get me wrong: I'm not suggesting that anybody would ever attempt to take advantage of wanton congressional spending and defraud the U.S. government. But do we trust car dealers and their customers enough to go by the honor system?

Many of the rejected clunker claims are being sent back to dealers because of paperwork snafus like unsigned sales agreements, mismatched serial numbers and forms that fail to include the make, model and year of the clunker being traded in. Hmmmm. Those are all harmless mistakes, no doubt. But if people at the NHTSA weren't eyeballing every application, chances are that there would be a newspaper headline somewhere declaring "Man gets clunker rebate for Matchbox car." It still might happen.

Tension grows as delays lengthen

Dealer groups have been meeting with the NHTSA to straighten out the foul-ups and make sure their own members are following procedures and playing by the rules. Odds are this will all get sorted out soon, the pace of rebates will pick up and dissident dealers will quiet down.

Meanwhile, delayed rebates have caused tension between some dealers and their customers. It's just like money to ruin a beautiful relationship.

The government has gotten complaints about a few dealers who seem to be putting their customers on the hook in case there's a problem with the CARS rebate coming through. Now, in a negotiated deal it's always a good idea to put the financial risk on the other guy. Except that in the CARS program, dealers aren't allowed to do that.

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Clunker program hits rough patch with dealers © CNBC
Rebate program needs a tuneup
The Cash for Clunkers program is hitting a bit of a rough patch with dealers, CNBC's Phil LeBeau reports. Mike Jackson, the CEO of AutoNation, shares his insight.

Banned practices include forcing the buyer to leave a deposit for the amount of the clunker rebate, in case the government doesn't cough it up, and forcing the buyer to sign an agreement to pay the dealer the rebate amount if the government rejects the application. In general, the burden is on the dealer, not the car buyer, to dicker with the feds and make sure the paperwork is correct (unless you lie on the application, which could invalidate the whole deal).

Consumers can see the complete list of rules at Cars.gov, and buyers can report suspicious dealer activity to the government by calling 1-866-CAR-7891.

Continued: Popular models in short supply

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