Credit Cards: Read Your Agreements!

The passage of the Dodd-Frank financial regulation bill last year, as well as a recent campaign by Ally Bank to encourage use of credit cards in vehicle sales transactions, has led to some misconceptions about credit card use in dealerships. Here are some frequently asked questions and answers about credit cards in a dealership.

Q:        Do I have to accept credit cards for sale transactions? 
A:        No. Most credit card agreements permit dealers to accept credit cards in their service and parts departments without having to also accept them in their sales departments.

Q:        Didn’t a federal law passed last year allow my business to offer cash discounts? 
A:        Yes. Section 1075 of the Dodd-Frank Act provides that a merchant may offer discounts and incentives to customers to pay by cash or check provided that the merchant offers that right for all types of credit cards it accepts and the discounts or incentives are available to all prospective card users and disclosed conspicuously.

Q:        By that logic, do I have the right to impose a surcharge for someone to use a credit card? 
A:        Not exactly. There is no federal law that makes surcharges illegal in merchant transactions. However, the agreements between merchants and credit card issuers generally prohibit surcharges. There was nothing in the Dodd-Frank Act that required credit card issuers to allow surcharges for the use of credit cards, so that prohibition may still be in your agreement. In addition, the laws in a number of states prohibit surcharges to customers who pay by credit card.

Q:        If I have to take the card without a surcharge, can’t I impose a maximum? 
A:        Probably not for transactions in your dealership based on your merchant agreement. The Dodd-Frank Act did regulate merchant agreements by specifically permitting merchants to set minimum amounts for which a credit card may be used to no more than $10.00. It also provided for regulation of merchant agreements to permit maximum amounts which may be charged, but only for government agencies and educational institutions. Most merchant agreements for car dealers prohibit a dealer from establishing maximum amounts for which the card may be used.

Q:        If Ally is encouraging the use of credit cards for down payments, does that mean it’s allowed generally? 
A:        It depends what your indirect lending agreement provides with the lender to whom you intend to assign the customer’s retail installment sale contract. Some lending agreements prohibit down payments by credit card. In the event of a default, the finance source can look to a dealer who accepted a credit card down payment contrary to the agreement to repurchase the customer’s defaulted loan.

Q:        If I accept the down payment on a credit card, and I am permitted to do so under my indirect lending agreement with the finance source, isn’t that a problem under the Truth in Lending Act? 
A:        No. While some generally believe that it is a problem under TILA to take a credit card for a down payment, the amount on the credit card is subject to its own set of disclosures by a different creditor. Use of a credit card should not affect the disclosures made under the Truth in Lending Act.

Q:        Isn’t accepting a credit card a problem if a customer is unhappy with the purchase of the vehicle? 
A:        That is the most difficult issue with credit card sales. Credit card users have substantial rights to challenge the transaction and to seek a refund of the amount paid. When a customer does that, a merchant who receives a notice of dispute has a very tight and inflexible time period to respond and to justify the amount charged to the customer’s credit card. It is easy for the notice to come in and to escape attention in the office. If you miss the response date, the chargeback will be imposed. This is always a very painful lesson for any dealer who has suffered a loss because of a credit card challenge.

If you are determining how you will deal with credit cards in your sales department, read your agreements. Consult the master agreement with each of your finance sources to determine what each says about accepting credit cards for down payments. Review your merchant agreements with credit card issuers to determine what restrictions are imposed.