Tennessee law fuels used-car recall fight

Proponents of a new Tennessee law regulating sales of recalled vehicles call it a step forward in closing what some call the used-car loophole. Consumer and safety groups call it a sham that's written not to protect consumers from dangerous cars, but to shield dealers from lawsuits.

At issue is whether disclosure of an open recall offers the consumer enough protection against a safety defect.

Under federal law, new vehicles with open recalls cannot be sold. But the ban doesn't extend to used vehicles. That gap has frustrated efforts by manufacturers and safety regulators to improve recall repair rates, as vehicles under recall get harder to track as they pass from owner to owner. Efforts in Congress to close the loophole sputtered amid opposition from dealer groups, as did an effort by AutoNation to withhold recalled used cars from the retail market.

The Tennessee measure, which takes effect Jan. 1 and was supported by the state's dealer lobby, doesn't bar the sale of used vehicles with pending recalls. Rather, it requires dealers to check a recall database before selling a vehicle and either perform the recall repair or notify the customer of any defect. Customers would have to sign a form acknowledging they were notified. (Vehicles subject to a manufacturer's do-not-drive order would have to be repaired before sale.)

The impetus for the law was a fatal accident, but the final language represents a compromise among automakers, dealers, auction houses and others, said Bob Weaver, president of the Tennessee Automotive Association, a dealer advocacy group.

"The bottom line is that transparency is always the best policy so consumers can make the best decision," he said.

Yet safety advocates say the policy is a cop-out. They warn that the disclose-and-sell rule sets a precedent for other states to roll back safeguards for used-vehicle purchases, which are governed in many states by consumer protection laws. Rather than increase transparency, they say, the law attempts to shield dealerships from responsibility if a vehicle sold with a recall is involved in an accident.

"They are trying to legalize fraud," Rosemary Shahan, president of Consumers for Auto Reliability and Safety, told Automotive News. "It's written to protect unscrupulous car dealers."

While there's no federal law barring sales of used vehicles under recall, used-car buyers are indirectly protected by state and federal laws against unfair and deceptive trade practices. The Tennessee law is designed to nullify those types of protections, Steven Taterka, a former assistant state attorney general who represents consumers in auto fraud cases, said during a conference call for reporters. The only enforcement mechanism listed for noncompliance, he said, is through the Tennessee Motor Vehicle Commission, which licenses dealerships. No explicit right for private legal action is granted.

Public interest groups have successfully beaten back efforts by dealer associations in New Jersey, California, Maryland and Virginia to indemnify retailers from liability for an accident involving a recalled vehicle, even if they disclose the defect.

Safety advocates say the database check requirement is a sham because it allows retailers to pick any recall database, including private ones that may not have complete, timely data, to fulfill their disclosure requirement.

Last month, the Tennessee dealer group selected a vendor called AutoAp as a preferred provider of recall compliance services for its member dealers. AutoAp promises its customers daily recall updates that it says are more current and accurate than the federal government's database.

In the aftermath of major recall crises involving General Motors ignition switches and Takata airbag inflators, dealers have been under pressure from safety groups and regulators to do more to stop the flow of defective vehicles into the marketplace. But dealer groups say it's ultimately manufacturers' responsibility to ensure the safety of vehicles, and they can't afford to hold back inventory indefinitely while they wait for manufacturers to provide replacement parts. The challenge is especially thorny for dealers carrying trade-ins from brands they don't sell or service.

As a partial solution, disclosure policies have been mostly embraced by dealer groups.

In November 2016, AutoNation reversed its policy of not selling any vehicle with an open recall after Takata parts shortages caused vehicles to pile up on lots and other dealership groups failed to follow suit, putting the company at a competitive disadvantage. AutoNation fixes vehicles immediately if the parts are available; notifications are posted on ones it can't repair.

The federal government has been aggressive on the issue in recent years. In January 2016, the Federal Trade Commission reached settlements with GM, Koons Automotive Cos. and Lithia Motors Inc. over complaints the companies deceived customers when they failed to disclose in advertising that certain cars being marketed were subject to safety-related recalls. The allegations centered around certified used-vehicle programs that broadly claimed rigorous inspections.

The consent orders, which were finalized late last year, prohibit the dealerships from claiming their certified used vehicles are safe or have been subject to stringent checks unless they are free of unrepaired safety recalls or the companies clearly disclose the existence of the recalls.

Consumers for Auto Reliability and Safety and the Center for Auto Safety are suing the FTC over the disclosure allowance.