Grounding Recalls Devalues Trade-ins

S. 1634/H.R. 3449 Would Reduce Buyers’ Trade-Ins by an Average of $1,210

Issue

Sen. Richard Blumenthal (D-Conn.) and Rep. Jan Schakowsky (D-Ill.) introduced bills that could cripple the used-car market by halting the sale or wholesale of any used car under open recall by a dealer. These bills are overbroad because most recalls do not require the drastic step of grounding. Also, these bills would create a “trade-in tax” that would instantly devalue a car buyer’s trade-in by grounding recalled vehicles for such minor matters as a peeling sticker. The bills would also push recalled cars into the unregulated private market, making it more difficult to complete recall repairs.

Background

Franchised auto dealers play a vital role in ensuring that recalled vehicles are fixed, but dealers cannot repair vehicle until the manufacturer provides the required remedy and parts. From 2010 to 2014, the average delay for parts to fix a recalled vehicle was 60 days.

S. 1634 (Blumenthal) and H.R. 3449 (Schakowsky) would prevent dealer sales of all used vehicles under open recall (but not private sales). A 2015 study by J.D. Power found that enactment of these bills would result in an average “trade-in tax” of $1,210, and some consumers’ trade-ins would incur devaluations of $4,000 to $5,000. These bill would prevent car buyers from purchasing recalled vehicles for such minor matters as an incorrect phone number in the owner’s manual. Proponents of these bills have offered no supporting safety analysis, despite the estimated $1.1
billion cost to consumers if these measures were enacted. In the last Congress, the Senate Commerce, Science, and Transportation Committee rejected this legislation when it was offered as an amendment to the 2015 highway reauthorization bill.

Key Points

  • These bills would make it difficult for car buyers to trade in vehicles with open recalls and harder for consumers to afford a newer, safer vehicle. Because of a shortage of auto parts, it can take months for recalled vehicles to be repaired. As a used vehicle depreciates on average 2 percent a month sitting idle on a dealer’s lot, this bill would force dealerships to pay consumers significantly less for trade-ins with open recalls, or not accept them at all.
  • The National Highway Traffic Safety Administration admits that not every recall warrants the vehicle’s immediate grounding, yet these bills would diminish a recalled vehicle’s trade-in value by an average of $1,210.  Many car buyers rely on the value of their trade-in as part of their down payment for their new vehicle. 
  • Unrepaired vehicles will be pushed into the unregulated private market. Faced with devalued trade-ins, vehicle owners will have an incentive to sell their vehicles in the private market, making it even less likely that recall work will be done in a timely manner, if at all.

Status

S. 1634 was referred to the Senate Commerce, Science, and Transportation Committee and has one cosponsor. H.R 3449 was referred to the House Energy and Commerce Committee and has four cosponsors. Congress should focus on legislation that increases recall completion rates, and oppose proposals that create a “trade-in tax” on million of customer trade-ins while not guaranteeing that a single, additional recalled vehicle gets fixed.

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August 21, 2017