Fiat Chrysler Automobiles (NYSE:FCAU) has taken a lot of heat for dragging its feet on some important safety recalls.
And now, the Feds are making FCA pay for it.
U.S. Transportation Secretary Anthony Foxx announced on Sunday that FCA had acknowledged violations of the Motor Vehicle Safety Act, which governs recalls, and that the automaker had agreed to a whopping $105 million in penalties.
That's the biggest financial penalty ever imposed by the National Highway Traffic Safety Administration (NHTSA). It's a hard hit for cash-strapped FCA.
But there's an even harder hit in the settlement: FCA has agreed to buy back -- potentially -- over a hundred thousand defective SUVs and pickups.
Big fines, and a potentially huge buyback program
Under the agreement, FCA will have to pay a $70 million fine up front. It is also required to spend at least $20 million on meeting the terms of the order, which include an industry outreach program as well as extensive changes to FCA's internal procedures around recalls.
FCA also agreed to three years of aggressive oversight of its recall and safety efforts by an independent monitor approved by NHTSA. And FCA will pay another $15 million if that independent monitor discovers additional violations of the consent order or the Motor Vehicle Safety Act.
FCA is also required to offer a refund to owners of some of the recalled vehicles. In three separate recalls, covering steering and rear axle issues on a series of trucks including Ram pickups and Dodge Durango SUVs, FCA will offer to buy back unrepaired vehicles under certain conditions, refunding the original purchase price less depreciation.
The recalls in question cover roughly 578,000 vehicles, but FCA said on Monday that "well over 60%" had already been fixed, leaving around 200,000 trucks eligible for the buyback offer.
How much will all of this cost?
The easy answer is "more than $90 million." But the final bill, including the costs of completing all of the recalls and buybacks, is still unclear.
No matter what, it will all add up to a big hit for FCA, which reported just $101 million in net income in the first quarter. It's a step up from the last biggest-ever NHTSA penalty, the $70 million that Honda agreed to pay in January for failing to disclose accident information to the U.S. government.
And it's a big step up from the $35 million fine that General Motors paid for its failures around the ignition-switch defects that touched off last year's record wave of recalls.
Whatever the final cost, FCA will pay it. In a brief statement issued on Sunday, the company said that it admitted to everything in the NHTSA Consent Order and that it would accept the consequences. It doesn't have a choice.
Among those consequences, FCA is required to make an effort to be an industry leader around recall best practices. NHTSA has in the past accused FCA of foot-dragging around several recalls, including one of over 1.5 million Jeeps linked to fires.
It's clear that the agency wants to see a big change in behavior from FCA. And it's also clear that the Feds want to put the rest of the industry on notice.
Who will be next to feel the heat from the Feds?
The NHTSA took a lot of heat last year for its failure to be more aggressive with GM early on. Part of the message here is that things have changed: The government is no longer comfortable assuming that automakers have all of these safety issues under control -- and the consequences for being less than aggressive about recalling and repairing potentially defective vehicles will now be much more harsh.
And that leads to another question that should keep auto-industry investors alert: Who will be next to feel the NHTSA's wrath? Stay tuned.
John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.