The real recall problem: Carmakers aren't held financially accountable

The auto recall system is broken. More than 200 million vehicles nationwide have been placed under recall since 2013, yet 53 million of those vehicles are still in service. How is this possible?

The Automotive News editorial "Repair order"(April 29) clearly identified the problem but failed to acknowledge what everyone in the car business knows: The root cause of the crisis is that the current recall system doesn't hold automakers financially accountable for slow-walking repair parts or failing to complete open recalls. The result is a system in which carmakers have a perverse financial incentive to stall and shift the financial burden of their manufacturing defects to dealers and consumers.

The only way to fix this problem is to better align financial incentives to protect the consumer's investment and promote highway safety by getting the most dangerous vehicles repaired or off the road. Public policymakers and other highway safety stakeholders must understand that auto manufacturers view recalls as an expense and that under the current system, they really have no financial incentive to see recalls through to completion. New-car dealers, on the other hand, see recalls as revenue and an opportunity to serve their customers. That's because state laws all across the country give consumers access to free-of-charge recall repair services at local dealerships, paid for by the automaker. When it comes to recalls, the dealers' financial interests line up nicely with their consumers', while the interests of the automakers don't.

The notion that the auto industry can just "come together to close the loophole in used-car recalls" is nice but hopelessly naive insofar as it fails to recognize that the real problem is money.

You cannot fix a broken system, improve highway safety or protect consumers unless you hold automakers financially accountable. No amount of cooperation will bring about faster repairs or address the shortage of recall parts and procedures from the manufacturer if automakers are not held financially accountable. The sad facts are that a quarter of vehicle owners simply choose not to fix their vehicle when it is under recall and automakers have no real financial interest in seeing recall completion rates improve. Every vehicle under recall that doesn't roll into the shop for repairs is found money for automakers and a lost opportunity for dealers.

Consumer advocates and some lawmakers have called for a complete ban on the sale of vehicles under recall. That is not a practical solution and would simply add insult to injury by allowing automakers to continue to shift the costs of their manufacturing defects to dealers and consumers. The overwhelming majority of vehicles that would be affected by such a ban are owned by hardworking Americans who would immediately find one of their most valuable family assets devalued. Since a dealer cannot take a trade-in that they cannot sell, a ban would prevent many prospective buyers from trading in used cars that represent the consumers' down payment on a new and safer vehicle. That doesn't help anybody.

It should be noted that federal law already prohibits the retail sale of any new motor vehicle under recall. And NHTSA requires automakers to pay dealers 1 percent per month of the wholesale value of grounded new-vehicle inventory. The law in New Jersey and many other jurisdictions is clear: Automakers are required "to compensate [dealers] for all reasonable costs ... relating to a product recall." Still, we are not aware of a single automaker that is fairly or fully compensating its dealers; not under state law, not even under federal law. All of this has the demonstrated effect of shifting hundreds of millions of dollars of expense from automakers to neighborhood new-car dealers and consumers.

What we need instead of an outright ban is a new, more carefully crafted model for dealing with outstanding used-car recalls — one that places the financial burden squarely on the automakers to move quickly to furnish dealers with replacement parts and repair protocols. To begin, manufacturers must be required to declare whether a recalled vehicle is suitable to drive and sell. If a used vehicle under recall is too dangerous to drive and sell, then these vehicles should be grounded everywhere, and automakers should be required to pay the current owners — whether consumers or dealers — for the costs associated with the grounding. If a vehicle is suitable to drive and sell but a manufacturer nonetheless wants a dealer to hold it pending the availability of recall repair parts, that manufacturer may direct its dealers to refrain from selling but must reimburse those dealers for the costs they incur when holding the vehicles. This simple solution would make it possible for dealers to continue to take these vehicles in trade and ensure that consumers are fairly compensated when they do.

New-car dealers in many states are working to overhaul the recall system to make it safer, more effective and fairer for everyone. The focus of our efforts is on boosting recall completion rates, and the best way to accomplish that — the only way to accomplish that — is to hold automakers financially accountable. Let's face it: Automakers will never "come together" behind a legislative solution that prevents them from shifting the cost of their mistakes to dealers and consumers. Cooperation is great. In theory. But for cooperation to work, it must be backed by systemic change that compels automakers to assume financial responsibility for their manufacturing defects.