Why Can Dealers Sell Used Cars With Unfixed Recalls?

CARS.COM — Federal law prohibits dealers from selling a new car with an unfixed recall, and rental car companies from renting an unfixed car. But dealers can sell still sell cars with dangerous problems, from faulty Takata airbag inflators to bad GM ignition switches.

They just have to be considered used.

Related: Recall Basics: Everything You Need to Know

No federal law bans dealers from selling used cars with unfixed recalls. It's called "the used-car loophole" and the fight to change it turns up plenty of debate. Safety advocates claim the loophole puts consumers at risk, while a major dealer group says a ban on such sales would reduce values for owners who are trying to trade their cars in.

Cars in Limbo

To overturn the loophole would take an act of Congress, and Sen. Richard Blumenthal (D-Conn.) tried to do just that. Blumenthal led the charge to ban the sale of used cars with recalls but, amid pushback from new-car dealers, his proposal didn't make it into the last federal highway bill, which Congress passed in late 2015.

Opponents of the bill say a ban on the sale of used cars with unfixed recalls would keep some cars in limbo for weeks waiting for parts, ultimately reducing their trade-in value.

Bills to prohibit the sale of used cars with unfixed recalls "are overly broad because the majority of vehicle recalls do not require the drastic step of grounding the vehicle," the National Automobile Dealers Association wrote in September. "Dealers cannot repair vehicles until the manufacturers provide the required remedy and parts. From 2010 to 2014, the delay for replacement parts under recall was an average of 60 days."

The variance in potential repair delays was huge: While some recalls between 2010 and 2014 had no delays, J.D. Power and Associates found, more than a third had repair delays of more than 90 days. One recall repair part delay was a staggering 704 days. The severity of issues being recalled in general also varies, from minor consequences to those that result in significant risk of death.

Older cars and those with less significant recalls have lower compliance rates for recalls, J.D. Power notes. Any prohibition on the sale of these cars "is likely to cause substantial issues for dealers and consumers."

Jacqueline Gillan, president of Advocates for Highway and Auto Safety, disagrees with the current law, and likened the situation to flying a commercial jet with an unfixed recall: Passengers simply wouldn't board.

"There's just this double standard. We're in this situation because of the industry's malfeasance," Gillan said in an interview with us. "And now they come running and saying, well, we don't have the parts and how can you penalize us financially?"

Lower Trade-in Values

Jonathan Banks, J.D. Power's vice president of vehicle analysis and analytics, told us that dealers, if they were forced to repair recalls for used cars, would likely try to determine whether the remedy was available, and, if not, calculate an expected timeframe for the remedy based on past recalls of similar complexity. Then they would try to mitigate that with lower trade-in estimates.

"They would try to figure out a fairly complicated equation in their head as part of the trade-in process," said Banks, one of the study's authors. "You tend to err on the side of being conservative and you'd try to overestimate your costs."

In the end, that could cost some owners more than $1,200 per affected car, J.D. Power estimated.

The firm estimates that under a ban of used-car sales with unfixed recalls, owners who traded cars into franchised dealers with unfixed recalls in 2014 would have received, on average, $1,210 less for their trade if those dealers were barred from selling the car until its recall was fixed.

Consumers can typically get a recall fixed for free, but it's not that easy for a dealer, Banks noted. In particular, if a consumer tried to trade in a car with an unfixed recall to a dealer from a different brand, that dealer would have to factor in the cost to ship the car over to its branded dealership to get the repair. Indeed, J.D. Power's study found that among trade-ins with unfixed recalls, dealers would give hundreds of dollars less in trade-in for an affected car from a different brand.

J.D. Power estimates that consumers trade in around 10 million used cars into franchised dealerships each year, and from 2010 to 2014, 13.2 percent of all cars traded into franchised dealers had a recall. But in 2014, 44 percent of that group had a recall for which parts were not yet available. If a ban were in effect, that would mean that nearly 750,000 cars in 2014 that would have likely faced lower trade-in values from franchised dealers, J.D. Power said.

Still, Gillan doesn't think consumers should have to bear the risk associated with unfixed recalls.

"That should be a burden that's shouldered by the industry and not consumers," she said. "You're asking consumers to accept that situation by putting their lives in danger, and I find that unacceptable. If the part's not available, sit down and figure out how to get that part available."

Critical Recalls

A few recalls have what NADA spokesman Jared Allen calls a "stop-drive" notice, where regulators have deemed the defect too dangerous to go unfixed. Allen pointed to a recent case with some Honda and Acura models hit with Takata airbag recalls. Laboratory tests showed that the inflators, in high-humidity climates, could rupture as much as 50 percent of the time, yet some 313,000 cars were still unrepaired. Regulators advised owners to stop driving these unrepaired cars. In such cases, NADA recommends that dealers not sell any of these unfixed cars to consumers or at auction, Allen said, though he admitted the organization has no legal authority to force such a stop-sale.

At the other end of the spectrum are recalls for which a solution is already on hand. Both Banks and Allen said the vast majority of dealers fix them.

Thus, the gap remains for cars that have unfixed recalls that are under a parts delay but which aren't critical enough to prompt a stop-drive notice. Any such ban on their sale could deter dealers from accepting them as trade-ins at all, J.D. Power says, and consumers with those cars might be incentivized to try and sell them private-party, where there are fewer regulations.

Upended Process

Meanwhile, "some used-car dealers have taken steps to voluntarily agree to only sell used cars with no open recalls," Sen. Blumenthal's office said in an email, adding that the senator plans to reintroduce his bill in 2017. "We must help level the playing field for these dealers that want to do the right thing."

National Highway Traffic Safety Administration officials say they want every car with an unfixed safety recall to be repaired before sale, lease or rental. The agency has requested the ability to ban the sale of used cars with unfixed recalls, but it has not received that authority.

Joseph Colella, a safety advocate who heads up Traffic Safety Projects, said he's "very interested" in closing the loophole but thinks it will be difficult.

"NHTSA would have difficulty closing the loophole, whether mandated by Congress or not," Colella said in an email. The agency would need to get a cost-benefit analysis through various review agencies, including the government's budget office, before any final rule takes effect.

Another wrinkle: The incoming administration of president-elect Donald Trump likely means a new NHTSA chief and Secretary of Transportation.

"Today is a good time to advance the process but tomorrow may not be," Colella said. "Right now, the agency is committed to recall enhancement. A new Administrator (and Secretary) means new priorities."

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