Sidestep the Costly Legal Trap of Deceptive Document Fees
Know your state's rules on documentation and closing fees
Indiana and South Carolina recently addressed preparation and document fees charged by car dealers in the sale of new and used motor vehicles. The cases resulted in auto dealerships having to pay significant amounts to purchasers charged fees at the time of sale.
The Indiana case involved a settlement entered into by the dealership and the attorney general, resulting in the dealership having to pay an estimated $625,000 in consumer redress. In South Carolina, the State Supreme Court affirmed a class action jury verdict in the amount of $1,445,786.
The cases are significant because Indiana and South Carolina, like many other states, allow dealers to charge customers for document preparation, or closing fees. Neither state previously set a limit on the charges. The average charge deemed actionable by Indiana was $479, while the South Carolina case involved closing fees ranging from $249 to $399. Let’s look at each case.
The South Carolina Legislature enacted the Closing Fee Statute in 2000, which reads:
“Every motor vehicle dealer charging closing fees on a motor vehicle sales contract shall pay a one-time registration fee of ten dollars during each state fiscal year to the Department of Consumer Affairs. The closing fee must be included in the advertised price of the motor vehicle, disclosed on the sales contract, and displayed in a conspicuous location in the motor vehicle dealership.”
The dealership, Hendrick Honda of Easley, properly registered its closing fee with the state, included the fee in the advertised price of motor vehicles, disclosed the fee on the contract, and prominently displayed the following notice in the dealership. That language read:
“This dealership charges a $299.00 closing fee as [a] means of reimbursing it for certain overhead costs such as document retrieval and document preparation. It is a charge that is permitted but not required by law. The full cash price charged at any dealership depends on many factors, including all products and services bought with the vehicle.”
Given the statute allowing the charge and Hendrick’s compliance with the requirements, there should have been no issue. The plaintiff in the case, however, alleged that Hendrick “unfairly” and “arbitrarily” charged all of its customers closing fees that were not calculated to reimburse Hendrick for actual closing costs (emphasis added).
The trial judge agreed with the plaintiff and interpreted “closing fee” to mean: “A ‘closing fee’ is a predetermined set fee for the reimbursement of closing costs, such as document retrieval and document preparation, but only those actually incurred by the dealer and necessary to the closing transaction.”
The Supreme Court agreed with the trial judge’s definition, and held: “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.”
At trial, Hendrick was unable to provide evidence of actual expenses incurred for closing that were not related to general overhead. The Supreme Court concluded that “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 (emphasis added). . . . 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.”
Indiana law provides for dealer document preparation fees in § 9-32-13-7 of the Indiana Code:
“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; and
- Is set forth on a buyer’s order or similar agreement by a means other than preprinting.”
The attorney general took the position that the dealer’s fee of $479 did not reflect “expenses actually incurred for the preparation of documents” and was therefore deceptive. The dealership entered into an Assurance of Voluntary Compliance without any admission that it violated the law, and further agreed to limit document fees to $200 or less.
Points to observe
Each of the cases make clear that plaintiffs’ attorneys and state regulators are looking at dealer document/closing fees. Most states that do not set a specific document fee for dealers allow some sort of reasonable fee related to the transaction.
Given the South Carolina and Indiana cases, dealers charging document fees should take a close look at what is authorized in their respective state, and:
- Determine if document fees must reflect actual expenses incurred for preparation of documents.
- Assess the reasonableness of fees charged in relation to actual expenses if a “reasonable fee” is allowed.
- When making these assessments, do not rely on what has customarily been charged in the state.
- Perform the analysis to determine the average closing cost per vehicle.
- Make sure the fee is disclosed as a dealer fee, rather than appearing as a required government fee.
- Make sure the advertised price of vehicles includes the document fee charged.
For further information on this subject, contract the author or visit the Automotive Compliance Consultants website.
David R. Missimer, firstname.lastname@example.org, is general counsel for Automotive Compliance Consultants Inc. He spent 28 years in private practice as a seasoned litigator and trial lawyer representing lenders, auto dealers and numerous other entities and individuals.