Grounding Recalls Devalues Trade-ins

Overbroad Bills Hurt Reduce Buyers' Trade-Ins by an Average of $1,210

Issue

Last Congress, Sen. Richard Blumenthal (D-Conn.) and Rep. Jan Schakowsky (D-Ill.) introduced bills that would prohibit dealers from selling or wholesaling a used vehicle under open recall. These bills were overly broad because most vehicle recalls do not require the drastic step of grounding the vehicle. Additionally, these bills would create a “trade-in tax” by instantly devaluing millions of car buyers’ trade-in vehicles by grounding vehicles for such minor matters as a peeling sticker. The bills would push recalled vehicles into the unregulated private market, making it even less likely the recall repair is completed.   

Background

Franchised auto dealers play a vital role in ensuring that recalled vehicles are fixed, but dealers cannot repair vehicles 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. 900/H.R. 1181, introduced by Sen. Blumenthal and Rep. Schakowsky last Congress would have grounded all used vehicles under open recall sold at dealerships (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 bills 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.

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 proposals 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. By devaluing trade-ins, vehicle owners may decide 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

The Senate Commerce, Science, and Transportation Committee rejected S. 900 when it was offered as an amendment to the 2015 highway reauthorization bill. Sen. Blumenthal plans to reintroduce similar legislation this Congress. Congress should focus on legislation that increases recall completion rates, and oppose proposals that create a “trade-in tax” on millions of customer trade-ins while not guaranteeing that a single recalled vehicle gets fixed.

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March 8, 2017