A customer who leases a vehicle generally has the option to purchase it. May a dealership charge a dealer processing fee to a customer who exercises that option? While dealers may have justification for doing so, the practice could lead to liability.
Is it Authorized?
The Consumer Leasing Act and its implementing rules in Regulation M mandate many lease disclosures. Relevant to this article, a lessor must disclose whether the lessee has a purchase option, if so the full purchase price when the option is exercised, and when the customer can exercise the option.
The most important clarification in determining the propriety of a processing fee when the option is exercised is in the Official Staff Commentary explaining Regulation M. That clarifies that the price listed in the purchase option clause of a lease must be disclosed as:
A sum certain or as a sum certain to be determined at a future date by reference to a readily available independent source. The reference should provide sufficient information so that the lessee will be able to determine the actual price when the option becomes available.
The comment also clarifies that “purchase option fees” may be included, either as a part of the purchase price, or as a separately itemized element.
Given these requirements, how may a dealer add a doc fee to the price that the lessee has the right to pay under the lease? The vehicle price or the method of determining it from a specified source is stated in the lease. That price may include a purchase option fee, or one may be charged if separately stated in the lease, but that is a fee for the lessor set at the beginning of the lease. Adding a dealer doc fee to the customer’s purchase transaction at the termination of the lease is probably not authorized in the lease or by statute. A Plaintiff’s lawyer could claim that a dealer added a processing fee without statutory or regulatory authorization is violating the Consumer Leasing Act, as well the Virginia Consumer Protection Act.
Separate Transaction?
Some dealers may argue that a doc fee is appropriate because the sale to a customer by the dealer after the dealer pays off the vehicle is a totally separate transaction. That may not persuade a court. The dealer generally only pays off the vehicle after the customer has agreed to purchase it. And the two-step process of vehicle acquisition and sale by the dealer on which this theory relies is seldom transparent to a customer. Generally, the customer believes that he or she is simply exercising a purchase option. The customer does not view it as an opportunity for the dealership to take the lessee’s option, use it to purchase the vehicle, and sell it separately to the customer for an opportunity to charge a processing fee.
Even where the dealership has the customer sign a form that explains the process, it still can be seen as an attempt to improperly take a right of the customer under the lease to the dealer’s own benefit to enable the addition of a processing fee. This is especially the case where the dealer was the original lessor and assigned the lease to the leasing company. As the original lessor, the dealer paying off the lease is probably simply reacquiring the lease rather than buying the vehicle. An attempt to charge a dealer processing fee not specified in the lease could lead to liability.
Red Carpet Lease Cases
A plaintiff’s lawyer may claim that the practice of adding a dealer processing fee on the purchase under a lease that does not provide for it is like the Ford Red Carpet Lease cases that were settled in 2004. In those cases, dealerships were charging customers more than the payoff amounts from the lessor to process early terminations, usually when the lease vehicle was being traded. The plaintiffs in those cases charged that the practice violated the law since it ignored the customer’s buy out rights set forth in the leases. Ford elected to settle the cases with 38 states and provide compensation to eligible lessees. Plaintiff attorneys may charge that, just like the Ford Red Carpet Lease cases, a dealer adding a processing fee to a customer’s exercise of a lease purchase option is contrary to the terms of the lease and a violation of federal and state laws.
Conclusion
Adding a dealer processing fee to a lease option exercise is a practice that could lead to a legal action. There is no authority under the Consumer Leasing Act for addition of a dealer processing fee at the exercise of a lease option that does not provide for it. While there is work in processing a lease purchase, the amount to be earned from the doc fee is overshadowed by the potential for liability.