Some of you may remember Emily Beck, a former partner in our law firm who left us to run her family’s car dealerships in Virginia. Having a smart lawyer around who had grown up in the car business was a very valuable asset for our firm, and we miss her.

The one thing I don’t miss, however, is being boxed around the ears by her about document fees.  See, I used to rail about dealers charging doc fees because I thought it was nothing more than dealers nickel-and-diming their customers — the same way hotels do when they charge you $250 for a room, then want to charge for local phone calls, bottled water and using the gym. Every time Beck would hear me rant, she’d dress me down, saying that doc fees are a part of dealer income that they won’t give up unless they were forced to do so by law. She claimed I was just making dealers mad. She was probably right.

So, I decided to quit grousing about doc fees. … publicly, anyway.

Doc fees have been in the legal news lately, however, indicating that I’m not the only one who doesn’t like them. The most recent round of cases challenges the imposition of doc fees as compensation for completing deal documents as an “unauthorized practice of law.” This particular challenge hasn’t been successful in every state, but it has in some states — even where state law expressly permits dealers to impose a doc fee.

Other lawsuits have claimed that the doc fee is a finance charge for federal Truth in Lending Act (TILA) disclosure purposes. That claim won’t fly if the dealership charges the same doc fee on credit sales as it
does on comparable cash transactions. But don’t get caught for charging some or all of the doc fee for filing out credit and security documents. That’s a no-no and it would be a TILA claim that sticks. 

Other challenges that plaintiffs’ lawyers have leveled are that the doc fee is just more dealer profit, is unrelated in amount to the work performed (we’ve seen $995 doc fees), and that characterizing doc fees as being charged to prepare documents is an unfair and deceptive act or practice under state UDAP laws.

It’s important to note that dealers also face UDAP claims if they don’t mention a mandatory doc fee in their ads but spring it on buyers at the closing of the transaction. 

Those are the types of challenges we’ve seen so far, but my friend Gregory Arroyo e-mailed me with a question on doc fees that I hadn’t seen before. He had received a question from a reader and decided to kick it over to me. Here’s a quick summary:

“Basically, the F&I manager is asking if she can charge different doc fees for different model years. She wants to charge more for the current model year than the older model year. She’s a powersports dealer, but I’m sure the answer to this question can apply to auto dealers as well.”

You can’t answer a question like this without knowing more. Does the state have a doc fee law that imposes a maximum amount limit or other requirements? Will the doc fee that this F&I manager wants to charge be imposed in financed transactions and in comparable cash transactions? What is the rationale for the imposition of a smaller doc fee on the older model-year deals?

One of the ways dealers can best position themselves in court if they get a doc fee challenge is to document the various chores that the doc fee is supposed to compensate them for, along with the time involved in each chore. They need to also be sure that there is a reasonable relationship between the time charged and the amount of the fee. The documentation we suggest should be done before the doc fees are charged, not after a lawsuit is brought.

If this F&I manager prepares that sort of documentation, it seems that there would need to be an explainable reason for the lower fee on older model-year deals. If there isn’t, that leaves room for a plaintiff’s lawyer to argue that the fee is arbitrary and bears no relationship to the work performed. But if a reason for the difference does exist — and the F&I manager can document that reason — I don’t see a problem with her proposal as long as the fees on both the newer and older model credit deals are the same as for the older model cash deals. As always, make sure your own lawyer agrees with me before implementing such a plan.

Thomas B. Hudson Esq. is a partner in the law firm of Hudson Cook LLP and the author of several books, available at © 2011, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to F&I and Showroom magazine. HC# 4850-6985-3451 (11/11).