Dealers need to pump the brakes when applying the typical doc fee to the back end of vehicle lease transactions, especially those transactions where customers simply exercise the purchase option at the end of their lease term.
November 8, 2023
By Barrie Charapp Beaty
Mahdavi, Bacon, Halfhill & Young, PLLC
Charging a documentary fee or processing fee on the front end of a vehicle lease transaction is not a new concept. However, dealers need to pump the brakes when applying the typical doc fee to the back end of vehicle lease transactions, especially those transactions where customers simply exercise the purchase option at the end of their lease term.
In vehicle leases, the lessee has the option to buy the vehicle under two scenarios: 1) at the end of the lease term for a fixed price, or 2) during the lease term for a price based on a formula. Regardless of the option, the lessee has a contractual right to buy the vehicle for a purchase option price.
The federal Consumer Leasing Act (“CLA”) and Regulation M (a federal regulation that supplements the CLA), along with applicable state leasing laws, govern vehicle leases to ensure meaningful disclosure of leasing terms. This includes any purchase option fee that may be charged at the end of the lease term. The CLA and Regulation M require the purchase option price to be disclosed as a sum certain, or a sum certain that can be determined at a later date by reference to readily available independent sources that provide sufficient information so that the lessee can determine the actual price at the time they exercise the option to purchase.
A purchase option fee (i.e. official fees for taxes, licenses, registration and other applicable governmental fees) is typically disclosed or itemized as a part of the purchase option price. Some lease agreements include a disclosure that the purchase option price does not include fees for tags, taxes, and registration as opposed to itemizing the actual fees. Many dealers have adopted a practice of charging doc fees at the end of lease buyouts under the belief that such doc fees are properly categorized as purchase option fees.
However, this belief is not supported by CLA or Regulation M, which does not expressly allow disclosure of the purchase option price without including such other fees such as a doc fee and does not include doc fees as official fees for taxes, licenses, registration, and other governmental fees.
And just like with any practice by dealers that is perceived to negatively impact consumers, it has gained the scrutiny of the FTC and plaintiffs’ lawyers. This scrutiny has also led to proactive audits by manufacturers’ captives, who may have programs regulating purchase options at the end of the lease terms, requiring dealers to reimburse consumers for doc fees charged on lease buyouts.
- If the original lease doesn’t disclose the specific amount of the doc fee as a separate purchase option fee in the lease buyout, then dealers should exercise caution and adopt a best practice approach to avoid costly agency investigations and consumer litigation. What does this mean for dealers? If the consumer is exercising a straight buyout of the lease, and the imposition of the doc fee amount is not separately disclosed as a purchase option fee in the original lease, then a doc fee cannot be charged. It does not matter if the lease buyout is being exercised with a dealer different from the dealer that handled the original lease.
- If the original lease doesn’t disclose the specific amount of the doc fee as a separate purchase option fee in the lease buyout, but in exercising the purchase option the consumer wishes to also purchase an extended warranty, service plan, or other product, or obtain a certified inspection or dealer-arranged financing which requires the dealer to prepare a new buyers order, etc., then charging a doc fee for the separate services of the dealer may be appropriate and is viewed as less controversial. However, this practice has not been blessed by the FTC and there is no guidance in case law to support or reject this practice.