Automotive recalls are at an all-time high, but drivers frequently don’t have the required repairs performed on their vehicles to remedy these issues even when they are safety related.
The U.S. Senate is considering legislation that would force dealerships to perform all safety recalls before selling or leasing a used car, but new data from the industry indicates that move could send trade-in values plummeting.
Under the Used Car Safety Recall Repair Act, which was proposed by Senator Richard Blumenthal (D-Conn.), auto dealers would have to fix all outstanding safety recalls before selling or leasing a used car.
That, says a new report, could adversely impact the value of trade-ins at dealerships. The National Automobile Dealers Association (NADA) commissioned the report from J.D. Power last year to evaluate exactly how big an impact the proposed recall law would have on consumer trade-ins. The verdict: in 2014, vehicle trade-in values could have declined by an average of $1,210 or as much as $5,713 under the proposed law.
According to NADA, trade-ins play a key role in franchised dealership sales because most consumers fund their down payments this way. Roughly 10 million cars are traded in to dealers each year.
The proposed law was designed to help address the low recall completion rate in the U.S. According to Autotrader, the U.S. recall completion rate in 2014 dropped to 48 percent from 56 percent the previous year.
“There are now more than 46 million cars and trucks on our nation’s roads with unrepaired safety recalls; last year alone, five million used cars subject to safety recalls were sold to new owners without the necessary repairs,” Blumenthal said when he announced the legislation last March. “This critical legislation will protect consumers and help reduce the number of unsafe cars on the road.”
The J.D. Power study identified a number of costs that the dealer would incur in order to sell those trade-ins if there were outstanding recall issues. For the purposes of the report, J.D. Power focused on the cost of financing the vehicle purchased from the consumer, the cost of storing the vehicle, the cost of insurance and depreciation costs.
“Based on our analysis, depreciation has the highest cost,” says Jonathan Banks, executive analyst at the Used Car Guide division of J.D. Power, and the report's lead author. “This varies by vehicle and is also impacted by seasonal factors. The expected costs provided in our report are based on the actual depreciation amounts that occurred on the affected vehicles during the calculated delay period for each recall.”
The $1,210 figure represents the weighted average for both in-brand trade-ins and out-of-brand trade ins. Out-of-brand trade-in costs would likely be higher because out-of-brand dealers incur additional costs when holding the vehicle during the repair delay and when transporting the vehicle to an in-brand dealer for repair, the report states.
Data used for the report included the National Highway Transportation Safety Administration (NHTSA) recall database, and a survey of 800 dealer representatives. The survey provided data on expected costs of purchasing a trade-in vehicle subject to recall. J.D. Power also estimated depreciation costs based on auction sale transactions, and the cost of the capital used to purchase the trade-in using the prime-rate average from the last 10 years. The company also used NHTSA data to estimate typical time frames for repair delays.
Overall, the potential cost could be as much as an aggregate of $1.078 billion in trade-in value reductions, not including trade-ins to independent dealers and the 11 percent of 2014 recalled vehicles not included in the analysis because the data was not available.
According to government and industry data collected for the study, repair delays resulting from the challenges faced in engineering, producing and distributing the replacement parts can be significant. Dealers also have to estimate what the delay will be, which can further exacerbate the trade-in value reductions that customers face. Dealers are likely to discount the trade-in value more to avoid that risk.
"Assuming a repair delay that is shorter than the actual repair delay is a risky proposition for a dealer, and thus they are more likely to act as if they believe the range of repair delays will be on the high end of the range of repair delays observed in the past for recalls of similar scale and complexity," Banks says. "In a hypothetical scenario, a lack of clear information could reduce the trade-in value offered to a consumer by hundreds of dollars if a trade-in manager were to overestimate a 30-day recall delay by an additional 30 days."
Recalls with repair delays longer than 90 days accounted for approximately 69 percent of all recalled vehicles traded-in during a repair delay period. Repair delays vary, however. In some cases, those delays are just a few days. In others, particularly where parts are scarce or have to be engineered, they can last 12 months or more. For example, the repair delay associated with Honda’s Takata airbag recall was 206 days. The Toyota spare tire carrier recall affecting the Sienna had a repair delay of 411 days.
According to the franchise dealer survey used for the research, logistics costs associated with a trade-in that requires safety recall repairs were estimated at approximately $235, with additional time delays (beyond the repair delay) of approximately 12.3 days.
Dealers already perform many repairs
One element of this analysis that the report was unable to estimate was the impact of dealers that are already performing all of the recall repairs prior to resale. J.D. Power was unable to evaluate how much of this type of work is already being done, although Banks says that in their survey of dealers, “virtually all of them perform recall repairs on vehicles brought in as trades when parts or a remedy is available. There isn’t really a gauge since there are many recalls where there are parts delays, or a remedy has not been established. So many vehicles have an open recall that dealers are unable to fix.”
Nationwide dealer AutoNation, for example, announced in September 2015 that it would no longer sell, lease or wholesale vehicles with open safety recalls.
"There's no way to expect that customers would or should know of every safety recall on every vehicle they might purchase, so we will ensure that our vehicles have all recalls completed," said Mike Jackson, Chairman, CEO and President of AutoNation. "We make it our responsibility as a retailer to identify those vehicles and remove them from the market until their safety issues have been addressed."
NHTSA has also launched a new public awareness campaign, Safe Cars Save Lives, to encourage drivers to check for open safety recalls.
Banks says that shortening the repair delay window is an important step in improving recall completion. “To be effective there needs to be accountability and clarity on when recall remedies are established and parts are available to fix the recall,” Banks says. “There needs to be strong communication with dealers and customers so consumers know when and where to bring the vehicle for repair, and for dealers to know the wait times so they can plan and schedule effectively to ensure recall repairs are completed.”
Blumenthal’s bill is currently under review by the Senate Committee on Commerce, Science, and Transportation. To obtain the NADA/J.D. Power report, click here.
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