Eliminating Dealer Service Fees

Earl Stewart has spent 33 years serving as the owner and general manager of a Toyota dealership in North Palm Beach, Fla. He's also the man lobbying the Florida state legislature to eliminate what has been a profit staple at many dealerships across the country — dealer fees.

Some have called Stewart's plight self-serving, accusing him of trying to gain favor with consumers. Stewart doesn't disagree, but his main purpose is to even the playing field. Since he stopped charging fees five years ago, his Earl Stewart Toyota dealership went from the No. 3 volume Toyota dealership in Palm Beach County to No. 1.

"From a selfish standpoint, if I advertise a car for $25,000 and another dealer advertises the same car for $24,500, but he's got a $1,000 dealer fee, he can make more money on the car than I can and I'm advertising a higher price," he said. "It's not a level playing field. So all I can do is advertise that I don't charge a dealer fee and that's what I do."

During his testimony before the Florida Senate Commerce Committee, Stewart said dealer fees were unjust because dealers hide the fees among a batch of legitimate state, local and federal fees. Most of the time, he added, customers think the fees are required by law.

The problem is that dealer fees can go by at least 22 different names, so there's no standardization and no limit as to how much a dealer can charge. Regulations vary by state and some cap the amount dealerships are allowed to charge.

The Florida Automobile Dealers Association (FADA) contends that laws governing how dealer fees are advertised already exist. "The concern this one dealer presented was that all dealers wanted to advertise on a perfectly even playing field. It was the opinion of this one dealer that because dealers charge a fee, it gives them something that in some ways disguises the true price of the car," said Ted Smith, president of FADA. "We have to ask ourselves, do we have a law that keeps the consumer aware of the price of the car. If we do, maybe what the dealer is saying is ... that it's a case of enforcement problems."

The Florida Deceptive and Unfair Trade Practices Act states that dealer service fees must be included in the vehicle's advertised price, but there are several different interpretations of what that means. It's why Florida Senator Alex Diaz de la Portilla is drafting a bill that provides a framework for governing dealer fees.

Defining Dealer Fees a Challenge

Most auto dealers in the United States charge customers a dealer service fee for tasks such as documentation preparation, but the practice has come under scrutiny in recent years by some who claim it is a means of price gouging when the fees are not properly disclosed to the consumer.

Current Florida law states that dealers may not pass on any costs reimbursed by the manufacturer. They must be specific fees a dealer would incur as part of delivering the vehicle. At the recent Florida Senate hearing, the Commerce Committee determined that dealer fees were one component in the entire negotiated sales process.

The FADA's position is that use or nonuse of a fee is a dealer's choice. It argues that dealers are already required to list and explain all fees on the buyer's order, whether they are for F&I document preparation, vehicle inspections, or cleaning and adjusting the purchased vehicle.

"Whether or not a dealer charges a service fee and how it is advertised is a pricing decision in its purest form. We don’t believe any legislature in the country should get in the middle of telling dealers or any other retailer what they can charge for a profit," said the FADA’s Smith. "Since 2004, there have been nine complaints about dealer service fees, which is not an alarming number in a $50 million industry in this state."

[PAGEBREAK]

Stewart, who once served as a FADA director, disagrees with the argument that Florida law already requires dealers to disclose fees in the buyer’s order. He contends that some dealers are good at listing them so they appear as legitimate taxes, and believes dealers need to be upfront with those fees in their advertisements.

In 2004, the Florida Attorney General Office conducted a study on how dealers disclose service fees in their ads. It decided that fees could be added to the advertised price.

"The question is, when the law says it has to be included in the advertised price, what does that mean?" Smith asked. "Can the price be footnoted?"

Stewart adds the fees to the advertised price. His problem is his competition doesn't.

"Dealers scold me and say, 'He's just taking the amount of the dealer fee and putting it toward the price of the car,'" he said. "It's true, but that's what you should do because it allows the customer to compare apples to oranges."

"If everybody advertised the price of a car plus fees, the customer could shop and compare, make an intelligent choice, and buy the car at the best price."

Another Threat to Dealer Fees Looms

A legislative attack on dealer fees would be a blow to an already challenging automotive sales environment, but one legal expert said there's an even bigger threat to dealer fees than legislation.

Terry O'Loughlin, director of compliance for Reynolds & Reynolds, spent 15 years in the Florida Attorney General's Office prosecuting and investigating automotive dealers. He warns that some plaintiff's attorneys are equating the fees dealers charge to attorney's fees, and are arguing that dealers should be required to have a license to do so.

"How on earth can a dealer engage in the practice of law by having a prepared form purchased by a foreign provider?" he said. "Why would he be held liable under some legal theory if he was just completing a form?"

The problem is regulators and plaintiff's attorneys believe dealer service fees are a way of gouging the customer. O'Loughlin believes that laws should protect consumers by ensuring they're involved in fully disclosed transactions. If that's done, then consumers and dealers can engage in commerce in a fair manner.

"The failure of the public is it doesn't insist on reading and going through the line items to see if the fees are all valid. Everything's negotiable," O'Loughlin said.

James Ganther, president of the Tampa-based Mosaic Compliance Service, agrees and said the strategy employed by attorneys is ridiculous.

"At least one of the cases I've read has indicated that receiving a fee for filling out a contract is the practice of law," he said. "That's crazy because the practice of law actually has nothing to do with whether or not you get paid for it."

Ganther, like O'Loughlin, believes that disclosure of dealer fees should be regulated. However, he wonders why automotive dealers are always singled out. "Why do people point their finger at dealers for control of what should be a free economy," he said. "If you tell me I have to pay this dealer fee because it is a tax the dealer has to pay to the state, I would agree that is deceptive. But in Florida, if you have a dealer fee, you have to have a state-mandated disclosure of what's in it."

California’s Attempt at Limiting Dealer Reserve

In California, the civil code lays out the precise order in which various payments must be disclosed by dealers to consumers on the contract itself, according to Ryan Mass, director of government affairs for the California Motor Car Dealers Association (CMCDA). What's traditionally called a "doc fee" is not a government fee, and in California it's limited to $55 for sales and $45 for leases. Compared to other states, California's dealer fee limits are among the lowest in the country. At least 30 states don’t have any regulations for doc fees.

[PAGEBREAK]

"The California Car Buyer's Bill of Rights is a piece of legislation enacted in 2005," said Mass. "The goal of the bill, which we supported, was to make the car-buying process more transparent so consumers could understand what they were getting."

One requirement under the law is the pre-contract disclosure statement, which discloses, among other items, the price of a sold service contract, as well as the monthly cost of purchasing the vehicle with or without the service contract. Document fees must also be disclosed on the pre-contract disclosure statement, as well as the final contract.

Another component of the Car Buyer's Bill of Rights is the used-car cancellation option, which mandates that dealers give their customers who purchase a used car for under $40,000 the option of returning the vehicle within 48 hours. Under the law, dealers can charge up to $500 for the option, which must be disclosed, along with any restocking fees.

Mass said that eliminating the doc fee would make it difficult to figure out how to absorb the cost of document processing required by the state. He believes this would cause the price of cars, parts, service, and service contracts to increase. It's a sentiment shared by O'Loughlin.

"The question is cost of capital. When a bank lends money to a consumer, the bank is not going to tell the consumer what kind of profit it is making on the deal," he said. "Why should a dealer be any different? It's really a nanny state concept at work here that consumer organizations have to look out for the public, when in fact the public should look out for itself when it negotiates."

Regulations Fuel Dealer Fees

Paul Metrey, director of regulatory affairs for the National Automobile Dealers Association, said the cost of compliance has had a major impact on doc fees. The trend over the past decade has been the implementation of several new federal requirements that have impacted dealers. For instance, the Federal Trade Commission (FTC)'s Privacy and Safeguards rules mandated that dealerships develop comprehensive risk assessment and auditing measures to protect consumer information. The Fair and Accurate Credit Transactions Act of 2003 also imposed new duties and costs for dealers. Now, dealers are faced with the added expense of complying with the FTC’s Red Flag Rule, which requires that dealers institute new procedures to protect consumers from identity theft.

"By Nov. 1 of this year, dealers must have comprehensive procedures to block fraudulent transactions from occurring at the dealership," said Metrey. "This requires conducting a risk assessment, implementing safeguards to comply with the Red Flag Rule, and instituting new training. These are added costs to the dealership and it's a reality they’ve had to deal with for some time now."

The costs associated with running a dealership aren't forgotten at Earl Stewart Toyota. However, Stewart believes the industry needs to consider its own image when it comes to how those costs are passed onto the customer.

"I have three sons in the business and a grandson who will hopefully come into the business one day. I want them to be proud of what they do and not ashamed," he said. "Car dealers get a bad rap today. There are a lot of people who think we're a joke. You can turn on Jay Leno or David Letterman any night and they're telling jokes about politicians, lawyers and car dealers."