You can make book on it. At every conference at which I conduct a legal presentation, I can’t get two minutes into the Q-and-A portion of my session before someone asks about bank fees, or acquisition fees.
The fees the questioners are asking about are the ones subprime finance companies charge dealers for buying retail installment sales contracts (RISC), reflecting the obligations of buyers with not-so-good credit. And the questions are always the same: Can I charge those fees to the buyer? If so, how? If not, why?
The answer is a messy stew of federal law, state usury and other laws, and the ability of generally available form RISCs to accommodate the necessary entries required by state and federal law. I’m afraid the only thing I can deliver to questioners is the standard lawyer’s response: “It depends.” In this article, I’ll try to offer a slightly better answer.
The first thing “it depends” on is how the acquisition fees are imposed. Now let’s look at some alternatives:
1. Dealer “Eats” the Fee: If the dealer treats the aggregate amount of such fees as a general overhead item — much like the cost of electricity — not attributable to a particular deal (i.e., “eats” the fee), the fee will not be a finance charge or part of the APR for federal law disclosure purposes and need not be shown on the RISC. The analysis under state law is likely to be the same, but that would need to be confirmed on a state-by-state basis.
2. Dealer Adds the Fee to the Price of the Car: If the dealer wants to separately charge the fee to the buyer in credit transactions in which such a fee is charged, the dealer may be tempted to add the fee to the cash price of the car. In such a case, the fee will be a finance charge and must be disclosed as such for federal law disclosure purposes. The fee will likely be a “prepaid finance charge,” creating tricky federal law disclosure issues in the “Itemization of Amount Financed” that most available RISC forms are not set up to accommodate.
State law issues may also arise since some states have their own disclosure laws, and many states have definitions of “cash price” or similar terminology that would preclude adding the fee to the cash price. Because the fee is likely treated as a finance charge for state law purposes, adding it to the cash price could create state compounding issues.
3. Dealer Charges the Fee as an Item Separate From the Price of the Car: Even trying to charge the fee separately outside of the cash price in a credit transaction can be problematic. Some states limit the fees and finance charges that may be imposed in a consumer credit sales transaction. If support for the fee cannot be found in the state statute or administrative rule, there’s a risk that it’s prohibited.
Some states prohibit finance charges that are imposed in some manner other than by the application of a rate to the buyer’s declining balance, precluding the imposition of an additional dollar amount finance charge. Some states prohibit prepaid finance charges of any sort. Again, many commonly used RISCs are not set up to accommodate the disclosure of these fees.
Finally, if the fee and other finance charges, added together, exceed the state maximum finance charge limit, the fee must be limited to an amount that will not exceed the statutory limit.
So, in an effort to provide something more useful that an “It depends” answer, here’s what we think the answer might be: A dealer could impose the fee on the customer as a separate charge, provided that (i) the fee is disclosed as part of the finance charge and is used to calculate the APR; (ii) state law does not prohibit the fee; (iii) state law permits a prepaid finance charge; (iv) state law permits the calculation of finance charges using methods other than the imposition of a rate on a declining balance; (v) the total finance charge (including the fee) does not exceed the maximum finance charge rate permitted by state law; (vi) the RISC used by the dealership accommodates the disclosure of the fee as a prepaid finance charge; (vii) the dealership’s DMS system is programmed to accurately populate the fields in the RISC; and (viii) whatever method a dealer settles on to charge the fee does not violate the dealer’s agreement with the company that buys the dealer’s finance contracts.
It’s a difficult analysis, and one you don’t want to try on your own. So make sure to get your lawyer involved.
Thomas B. Hudson is a partner in the law firm of Hudson Cook LLP and the author of several widely read compliance manuals available at CounselorLibrary.com. ©Counselor Library.com 2013, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to Bobit Business Media. HC# 4820-1591-3238 (10/13).