C O U N S E L O R L I B R A R Y • PA S S I N G A C Q U I S I T I O N F E E S A L O N G T O T H E B U Y E R ?
Miscellaneous Fees This year’s NIADA Convention featured lawyers everywhere you looked. That really wasn’t surprising, considering the Dodd– Frank Act, the newly created Consumer Financial Protection Bureau, a newly invigorated and strengthened Federal Trade Commission and state attorneys general stirred up by the 2012 FTC Roundtables. So I suppose we should have expected the place to be flush with lawyers and legal presentations. One of the legal sessions at the conference had me presenting with my partner, Patty Covington. Our topic was, “Hello, I’m Your Federal Regulator, and I’m Here to do a Compliance Audit.” After our prepared remarks, we turned, as planned, to questions and answers from the many dealers in attendance. Dealers asked a lot of questions, but we got the same question, phrased in slightly different ways, from at least three dealers. After Patty and I were finished, I attended other legal sessions and heard the same, or nearly the same, question at least three more times. By my informal count, that made it the most frequently asked legal question at the conference. The question went something like this: “My dealership sells some of its retail installment contracts – those involving buyers with less-than-stellar credit – to sales finance companies that charge acquisition fees. Can we pass those acquisition fees along to the customer, either by increasing the car’s price or by showing the fee as a disclosed part of the itemization of amount financed?” For some dealers, the context was slightly different, but the issue was the same. They sold their contracts to sales finance companies at a discount to the amount financed. They had the same question: “Can I make the customer pay for the hit I’m going to take when I sell his installment contract because he’s got bad credit?” For the sake of simplicity, I’ll limit this article to the acquisition fee version. The short answer to the question of whether or not you can pass acquisition
fees along to the customer is probably not. Here’s why. Under the federal Truth in Lending Act, the general rule is any amount a dealer charges for a vehicle in a credit transaction that exceeds the amount charged in a cash transaction, and any amount charged in credit transactions and not charged in cash transactions, is treated as a finance charge and included in the contract’s APR. Under federal law, the amount would be treated as a “prepaid finance charge” for disclosure purposes. It cannot be added to the vehicle’s selling price. That actually isn’t a big deal, though. TILA deals only with disclosure and does not limit the finance charges a dealer selling a car on credit may charge. Disclosing a prepaid finance charge can be difficult since not all retail installment contracts will accommodate a prepaid finance charge, but that problem could be overcome by using a form of contract that will. The big deal arises under state law in the form of limits on the types and amounts of finance charges that can be assessed. Most state laws do not permit the imposition of a prepaid finance charge. Some of these laws, for example, permit only a finance charge that is calculated “on the declining balance of the contract.” That rules out a prepaid finance charge. In the states that do permit a prepaid finance charge, the amount or percentage of the charge may be limited, sometimes severely. For example, many states have a maximum permitted rate for motor vehicle retail installment sales transactions. If a prepaid finance charge is involved, it must be added to the other finance charges assessed to determine if the total exceeds the state’s maximum rate. Then there are the states that have no maximum limits set forth in their retail installment sales laws but have criminal usury laws that set a limit on finance charges. Those criminal usury limits apply to dealers and credit sales. Because the finance charge rates for subprime credit are usually high to start with, it isn’t hard to exceed a
maximum rate cap or a criminal usury cap if the acquisition fee is more than nominal. For federal disclosure purposes, there is a solution, of sorts. Dealers do not like it, and we get all sorts of pushback when we mention it. Here it is: A dealership paying acquisition fees in connection with the sale of its contracts with its poor credit customers should determine (estimate) the aggregate amount of such fees it will pay and should spread that aggregate amount over all cars it sells, including cars sold in cash transactions and cars sold to “good credit” customers. The aggregate amount of the fees should then be treated as an item of dealer overhead, like the light bill or the phone bill, and not allocated in any way to any particular transaction. A dealer might object that the acquisition fees he pays are so high that increasing the cost of all the cars in his inventory makes all the other cars too expensive, rendering his prices not competitive for customers with no credit problems. I understand that problem, but I have no solution that dealers will accept. Maybe there are some deals that, as a practical matter, simply cannot be financed. We think the spread-the-acquisitionfees-over-the-entire-inventory fix works for federal purposes. Any dealer who contemplates actually following this advice should not do so without consulting an experienced credit lawyer. For one thing, that lawyer might not agree with our analysis. For another, there could be state law problems lurking as well, and you’ll need to have someone knowledgeable to give you the green light for those. By the way, the second-most frequently asked question was, “Can I give a discount when a buyer offers cash on the barrelhead?” That sounds like a good topic for my next article. Copyright © 2012 CounselorLibrary.com, LLC. All rights reserved.
BY THOMAS B. HUDSON
w w w. i o w a i a d a . c o m
9/20/12 11:37 AM