Grounding Recalls Devalues Trade-ins

Oppose Overbroad Recall Legislation That Creates a “Trade-in Tax” for Consumers

ISSUE

Sen. Richard Blumenthal (D-Conn.) has previously introduced legislation that would have cripple the used-vehicle market by halting a dealer’s sale or wholesale of used vehicles under any open recall. The bill is overbroad because most recalls do not require the drastic step of grounding. Additionally, the bill would create a “trade-in tax” that would instantly devalue a car buyer’s trade-in by grounding recalled vehicles for minor matters, such as a peeling sticker. Finally, the legislation would push recalled vehicles into the unregulated private market, making it more difficult to complete recall repairs. Congress should oppose overbroad recall legislation and instead focus on initiatives to improve consumer response to vehicle recall notices and additional steps to increase recall completion rates.

BACKGROUND

Dealers support a 100% recall completion rate. Franchised auto and truck dealers play a vital role in ensuring that recalled vehicles are fixed, since they are authorized to complete manufacturer recall repairs. However, dealers cannot repair vehicles until the manufacturer provides the remedy and parts. For example, from 2010 to 2014, the average delay for parts to fix a recalled passenger vehicle was 60 days. Even after the parts become available, vehicle owners must respond to recall notices to complete the recall work.

Sen. Blumenthal has introduced legislation that would prohibit a dealer’s sale of a used vehicle under open recall for the past three Congresses. This legislation, introduced last Congress as S. 1971, would have hurt consumers by devaluing many trade-ins, making it more difficult for a car buyer to purchase a newer, safer vehicle. The measure also would have mandated the extreme step of grounding vehicles for such minor matters as an incorrect phone number in the owner’s manual or a peeling sticker on a visor. Rep. Jan Schakowsky (D-Ill.) introduced similar legislation in the 115th Congress.

A study by J.D. Power found that enactment of legislation that was nearly identical to S. 1971 would result in an average “trade-in tax” of $1,210, with some consumer trade-ins suffering devaluations of up to $5,000. By devaluing trade-ins and not regulating private sales, vehicle owners would be incentivized to sell their vehicles in the private market, where almost no safety or consumer protections exist. This legislation would make it less likely that recalled vehicles get fixed, and the bill’s proponents have offered no supporting safety analysis – despite an estimated $1.1 billion cost to consumers.

KEY POINTS

  • Overbroad recall legislation, like S. 1971, would make it more challenging for consumers to both trade in their recalled vehicle and afford a newer, safer vehicle. Due to a lack of replacement auto parts, it can take months for recalled vehicles to be repaired. Since a used vehicle depreciates by 2% per month on average while sitting idle on a dealer’s lot, this bill would force dealerships to either pay consumers significantly less for trade-ins with open recalls or not accept trade-ins at all.
  • During the Obama administration, the National Highway Traffic Safety Administration took the position that not every recall warrants the vehicle’s immediate grounding. S. 1971 would have treated all recalls the same and diminished a recalled vehicle’s trade-in value by an average of $1,210. This would harm many car buyers who rely on their trade-in value to make a down payment on a newer vehicle. 
  • Unrepaired vehicles will be pushed into the unregulated private market. Vehicle owners with devalued trade-ins will have an incentive to sell their vehicles in the private market, making it less likely that recall work will be done in a timely manner, if at all.

STATUS

Last Congress, S. 1971 was referred to the Senate Commerce, Science, and Transportation Committee but was not considered. In 2015, during consideration of the highway reauthorization bill, the committee rejected an amendment similar to S. 1971. Congress should oppose bills that create a “trade-in tax” on millions of consumer trade-ins without even guaranteeing that a single additional recalled vehicle gets fixed.

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March 9, 2021