The overwhelming popularity of “Cash for Clunkers” threatens the overall success of the government’s $3 billion incentive program.

With more than 390,000 submissions from dealerships, the National Highway Traffic Safety Admin. is overwhelmed as it tries to manage the program.

There are at least three pressing issues, says Scott Addison, director-corporate programs for the Fitzgerald Automotive Group, which has stores in Pennsylvania, Maryland and Florida.

1. Dealers aren’t getting paid the reimbursement money in a timely manner;

2. When they do get paid, dealers have no way of telling which deals have been reimbursed;

3. NHTSA, under the oversight of the U.S. Department of Transportation, has yet to devise a wind-down process for when the program’s funds begin to near depletion, which could be before Labor Day.

The biggest problem is that dealers aren’t getting paid yet, says Bailey Wood, director-legislative affairs and communications for the National Automobile Dealers Assn.

It’s more than three weeks into the program and numerous dealers are reporting being reimbursed for very few deals. This, despite the fact the government has 10 days from the time the dealer submits the paperwork to reimburse the dealer.

Dealers submitted paperwork for more than 390,000 cash for clunker sales totaling $1.6 billion through the program’s first three weeks, NHTSA says.

Several groups report being owed money that extends into the millions of dollars, Wood says, mentioning the DarCars Automotive Group, which still was owed $3.8 million as of Aug. 14.

The Fitzgerald group was owed about $2.2 million last week. The government paid $250,000 of this Aug. 13, Addison says.

“Every morning, instead of, ‘Scott, how are you?,’ it’s, ‘Scott, how is my money doing?’ which is how it should be,” Addison says.

The problem is, dealers are taking a big hit on their operating capital because they essentially are funding the program until the government pays them back.

Dealers use loans from banks or manufacturer-owned finance firms to buy their inventory from their auto makers. Dealers were planning to use the reimbursements from the government to pay back those loans.

“A lot of dealers could be selling themselves into bankruptcy if they’re not careful,” Addison says.

Wood says several dealers have told NADA they are have stopped selling cars under Cash for Clunkers because they can’t afford to continue participating.

Honda Financial and Toyota Financial last week began allowing their dealers extra time to pay back loans on vehicles sold under Cash for Clunkers.

Addison has been helping NHTSA with the program since the agency first began designing the incentive scheme in late May. He says the problem is the agency was set up to handle 3,000 submissions a day but is being overwhelmed with thousands more because of the program’s popularity.

Both Wood and Addison are quick to point out that NHTSA has been very responsive to the issues dealers are raising. “It has been holding conference calls and meetings everyday with various dealers and dealer associations,” Wood says.

The government agency says it is trying to correct the problem. “The DOT is committing enormous resources and working overtime to process the overwhelming volume of applications both quickly and responsibly, while getting rebates paid for complete and valid deals,” it says in a statement emailed to Ward’s.

NHTSA has added about 125 people in the last week for a total of 350 to help process the submissions more quickly. It hopes to have more than 1,100 by the end of this week.

But it’s not all NHTSA’s fault. Another issue is that are submitting large numbers of deals that have incorrect or incomplete information. NHTSA is required by law to reject those deals, although, dealers are able to resubmit them once they have been corrected.

“DOT has also been holding daily sessions with dealers and their associations to emphasize the importance of submitting fully complete applications and avoiding common but important mistakes. The information we are asking for is required under law to make sure we provide money only for legitimate transactions,” NHTSA says.

NADA is hosting a webinar on Aug. 19 in which Addison and Kevin Reilly, owner of Alexandria Hyundai, will provide dealers with hints on how to submit claims that will not be rejected.

Another pressing problem for NHTSA is that dealers have no way of knowing which deals have been approved or reimbursed, Addison says.

“The money just shows up in the dealer’s account,” he says. “NHTSA does have a lot on its plate, but this potentially could be a big problem.” The agency tells him it is working on the matter.

Addison also says NHTSA has to devise a way to wind down the program once funds start to get low, or else it will run into the same problem it faced July 30, when the agency nearly shut down Cash for Clunkers because the government did not know how much of the original $1 billion was left.

Based on the number of submissions thus far, about $1.4 billion still is available under the program.

Still, dealers are worried they could lose significant money on deals that are in the pipeline waiting to be approved when the money runs out.

“It is one of the best questions out there,” Wood concurs.

cbanks@wardsauto.com