Article Contributor: Jim Radogna
Two recent actions for alleged dealer fee violations in South Carolina, and Indiana are a potential cause for concern in other states due to the likelihood of copycat legal actions. While these states had no caps on dealer fees, a private lawsuit in South Carolina resulted in a $3.6 million verdict, and an attorney general action in Indiana resulted in a $625K settlement. Both cases alleged that the dealers overcharged customers because their fees did not reflect expenses actually incurred by the dealers for services.
Although the state doesn’t offer guidance on what dealers can charge, the court in South Carolina interpreted “closing fee” to mean a “predetermined set fee for the reimbursement of closing costs, but only those actually incurred by the dealer and necessary to the closing transaction.” Under that interpretation, the court reasoned that the dealer had to provide evidence it calculated the cost comprising its closing fee, which it could not do. Further, a justice stated, “Although we agree that the Closing Fee Statute is a disclosure statement and the department serves as a repository for the required filings, we find that the Closing Fee Statute does more than require disclosure of the ‘Closing Fee.’
According to a press release from the office of Indiana attorney general, “Under Indiana’s Motor Vehicle Dealer Unfair Practices Act, auto dealers cannot require a motor vehicle purchaser to pay a document preparation fee unless the fee reflects expenses actually incurred for the preparation of documents and was negotiated by and disclosed to the customer.” The dealer was found to have charged doc fees around $479, which the AG ruled was higher than could be justified to cover costs.
Indiana law is more specific than South Carolina as far as the requirement that actual expenses be calculated. “It is an unfair practice for a dealer to require a purchaser of a motor vehicle as a condition of the sale and delivery of the motor vehicle to pay a document preparation fee, unless the fee”:
- Reflects expenses actually incurred for the preparation of documents
- Was affirmatively disclosed by the dealer
- Was negotiated by the dealer and the purchaser
- Is not for the preparation, handling, or service of documents that are incidental to the extension of credit
- Is set forth on a buyer’s order or similar agreement by a means other than preprinting
Other states, such as Connecticut, have regulations that are similar to South Carolina in that they primarily address disclosure of the dealer fee but do not offer guidance on the amount a dealer can charge: “A ‘dealer conveyance fee’ or ‘processing fee’ means a fee charged by a dealer to recover reasonable costs for processing all documentation and performing services related to the closing of a sale including, but not limited to, the registration and transfer of ownership of the motor vehicle which is the subject of the sale.”
So, in a private lawsuit or AG action in a state like Connecticut, the questions may well be what amount is considered “reasonable” and how are the costs justified?
Although all cases are different, information from the South Carolina court may lend some insight on how to avoid, or defend against dealer fee attacks. The following excerpts from the case would seem relevant:
- The dealership’s expert witness in the SC case testified that the dealership’s average closing costs, which were $506.96, greatly exceeded the $299 fee the plaintiff paid. But in calculating the average closing cost, he included expenses for the salaries of finance and sales managers, the building, utilities and outside services.” The court disagreed. “All of these are general operating expenses and not directly tied to the closing of motor vehicle sales. If a motor vehicle dealer wishes to be compensated for these expenses, it may include them as part of the overall purchase price of a vehicle.”
- The court further opinioned that the term “cost” in the context of the “Closing Fee” Statute “would refer to the amount of money a dealer is required to expend to perform the services it provides to a customer at closing, and to otherwise comply with the disclosure, documentation, and record retention requirements imposed under state and federal law. While we recognize the difficulty a dealer may face in determining the exact amount of a specific purchaser’s closing fee prior to closing, we agree with the trial judge’s interpretation that the amount charged must bear some relation to the actual expenses incurred for the closing.”
- The court emphasized that a “closing fee” is not limited to expenses incurred for document preparation, retrieval, and storage. However, any costs sought to be recovered by a dealer under a closing fee charge must be directly related to the services rendered and expenses incurred in closing the purchase of a vehicle. Given that each vehicle purchase is different, compliance with the Closing Fee Statute does not require that the dealer hit the “bull’s-eye” for each purchase. A dealer may comply with the statute by setting a closing fee in an amount that is an average of the costs actually incurred in all closings of the prior year.