Volkswagen and U.S. regulators are close to agreement on a plan to recall and fix some 85,000 cars powered by a 3.0-liter diesel engine that contains an illegal "defeat device," according to a new report. Image source: Volkswagen.

Volkswagen (OTC:VWAGY) could be close to announcing a fix for some of the vehicles affected by its diesel-emissions cheating scandal.

Bloomberg is reporting that the troubled German auto giant is "closing in" on a way to modify vehicles powered by a 3.0-liter V6 diesel engine that U.S. regulators say contain an illegal "defeat device." The engines in question were used in about 85,000 Volkswagen, Audi (OTC:AUDVF), and Porsche vehicles sold in the United States.

A plan to fix the most expensive of VW's cheating diesel models
Here's the background: VW has admitted to fitting "defeat devices" to millions of diesel-powered vehicles, roughly 565,000 of which are in the United States. The U.S. Clean Air Act defines a "defeat device" as any system that turns off a car's emissions controls during normal driving (but leaves them on for testing). 

Although there are several VW engines involved in the scandal, only two were sold in the United States: a 2.0-liter turbocharged four-cylinder and a larger 3.0-liter turbo V6 that was designed largely by VW's Audi subsidiary.

About 85,000 of the affected vehicles in the U.S. are VW, Audi, and Porsche models equipped with that 3.0 V6. According to the Bloomberg report, VW is apparently proposing a software upgrade that it says would bring the engines into compliance. 

That would be an inexpensive fix -- but the report noted that VW may also need to replace the affected vehicles' catalytic converters, which could add substantially to the costs of the recall. VW's plan is currently being reviewed by U.S. regulators, and discussions are ongoing, according to Bloomberg. 

This recall could be expensive, but it's far cheaper than a buyback
Replacing the catalytic converters in 85,000 vehicles won't be cheap for Volkswagen. But it beats having to buy back the cars, as VW will likely have to do with the 2-liter models.

VW said last month that it had reached an "agreement in principle" with U.S. regulators to deal with the roughly 480,000 affected vehicles powered by the 2.0-liter four-cylinder. According to a Reuters report, that agreement will require VW to offer to buy back most or all of the affected 2.0-liter-powered vehicles, an effort that could well cost the company several billion dollars

That plan, which is expected to be finalized in June, doesn't cover the 3-liter models. VW first proposed a recall plan for the 3-liter engines back in February. But negotiations were set aside while regulators focused on the much larger number of affected vehicles powered by the a 2.0-liter four-cylinder. 

Still, if VW manages to come up with a repair for the 3.0-liter cars that satisfies regulators without hurting the cars' drivability or fuel economy -- or requiring an expensive buyback -- it may be able to dodge another expensive bullet. Stay tuned.