Equipment dealers operate in a very competitive market that can make it challenging to maintain the margins needed to provide a reasonable return and support the significant investments in people, processes, technology, tools, real estate and other infrastructure required to conduct business in the manner your customers expect while also meeting manufacturer requirements.
To support the infrastructure investment and recover some of the related costs, many dealers will charge “Other Fees” (e.g., document fees or administrative fees) to customers as part of a whole goods sale transaction. While these fees don’t begin to cover all of your overhead costs, they can be an important component of your business model. Unfortunately, even though there is an important business rationale for these fees, the legal landscape surrounding them can be confusing due to the various legal authorities and issues involved.
Auto Dealers vs. Equipment Dealers
Many of the issues to consider when implementing a program for charging Other Fees are common to the issues facing auto dealers. However, there are elements of your business that can make legal compliance even more complicated. For instance, auto dealers predominantly deal with customers buying for personal or family use.
These customers are defined as “consumers” in the various consumer protection laws that regulate certain business practices in transactions with consumers.
In addition, auto dealers are generally subject to regulations at the state level that establish specific parameters relating to the conduct of their business. These circumstances can be disadvantageous in some ways due to the heightened regulatory burdens, but in the context of understanding how to approach charging Other Fees, this clarity can be a good thing.
In contrast, equipment dealers face a more complicated landscape due to the following factors:
• Customer Base – equipment dealers often have more business customers than “consumers” buying for personal or family use but may still do a significant number of lower dollar volume transactions with consumers.
• Product Mix – equipment dealers have different product mixes, some of which are almost always business-related (e.g., Large Ag) while others are split more evenly between business and personal use (e.g., Outdoor Power Equipment).
• Auto Dealer Laws – equipment dealers sometimes sell products that are regulated under the auto dealer regulations (e.g., ATVs/UTVs).
Due to these differences, equipment dealers may have more flexibility than auto dealers in implementing and collecting Other Fees. However, since some customers of an equipment dealer have the same profile as customers of an auto dealer, implementing a workable and legally compliant process can be more complicated.
What are the Legal Pitfalls?
The challenge for equipment dealers is that there are a number of legal authorities that play a role in regulating the practice of charging Other Fees. These represent a mix of federal and state laws and include the following:
• Truth in Lending Act (TILA) – Federal law that applies to “consumer” financing transactions and is focused on appropriate disclosure of amounts, including Other Fees, charged as part of a financing transaction.
• Uniform Consumer Credit Code (UCCC) – State law that also regulates “consumer” financing transactions and disclosure obligations, but often with additional limitations on the amounts that can be charged to consumers in financing transactions. This law has been adopted (with some variations) in 11 states: Colorado, Idaho, Indiana, Iowa, Kansas, Maine, Oklahoma, South Carolina, Utah, Wisconsin and Wyoming.
• State and Federal Consumer Protection Laws –All 50 states and various federal agencies enforce consumer protection laws. These laws target “unfair and deceptive” trade practices and, in the context of Other Fees, are generally focused on disclosure. Notably, unlike the TILA and UCCC, these laws often apply to both cash and credit transactions.
• Dealer Laws – Certain states have adopted specific legislation that limits the ability of a dealer to charge Other Fees with respect to certain product categories. These are often focused on automobiles but can extend to cover products you might sell (e.g., ATVs, UTVs, trailers, motorcycles).
In addition, the courts and regulatory bodies tasked with interpreting these laws can create additional nuances that need to be considered. For example, a Texas court significantly restricted the ability to charge document fees relating to financing transactions except in certain explicitly authorized categories of products.
More recently, the Federal Trade Commission has started looking into issues associated with “junk” fees charged by auto dealers, something that could lead to additional regulations with further implications for equipment dealers.
While understanding the legal framework is important, dealers also need to remember that the ability to charge Other Fees can also be limited by your agreements with retail financing companies. These companies may take a variety of approaches to Other Fees ranging from (a) allowing any fees permitted by law, (b) allowing fees only up to a certain amount (to account for fees the retail financing company may already be charging), or (c) prohibiting additional fees altogether.
What Should Dealers Do?
I am not aware of a definitive resource that addresses all of the legal implications involved in charging Other Fees. As a result, each dealer needs to investigate the laws and contract limitations that may apply based on the dealer’s specific business model and objectives. However, there are some practical steps you can take in reviewing your processes for charging Other Fees that will limit your legal risk:
• Use your retail financing company as a source of information/guidance – Even though you will ultimately be responsible for legal compliance relating to fees you charge, your retail financing companies face the same types of issues and likely have more expertise on applicable federal and state restrictions on Other Fees.
• Implement Other Fees on both cash and credit transaction – Most laws regulating the imposition of Other Fees are focused on whether the Other Fees really represent an additional “hidden” finance charge included as part of extending credit. If the same fee is charged to both cash and credit customers for the same type of product, this should address that concern. NOTE – Some states will require an Other Fee to be charged to both cash and credit customers as a condition of being able to use one in connection with a financing transaction.
• Evaluate the costs you are seeking to recover through the Other Fees – In several states, Other Fees may be charged in connection with consumer financing transactions if they are “reasonable.” If the state regulators haven’t defined “reasonable” as a specific amount, doing a basic analysis of the types of costs you are trying to recover and tying that to the amount of your anticipated Other Fees can be a good exercise to support a future challenge that your fee amount is unreasonable. This exercise may also have the added benefit of providing some useful talking points for responding to questions from customers about the fee amount.
• Adopt an accurate name/description for the Other Fee and use it on transaction documents – It is important to provide clear disclosure of any fees in sales documentation. If the fee is to recover administrative costs relating to processing documents in a financing transaction, it may be accurate to refer to it as a “Document Fee” and include this in the financing transaction documents. On the other hand, if the fee is designed to recover other general administrative costs that apply to all transactions, using the phrase “Administrative Fee” may be more accurate and should be itemized on the sales invoice so it is charged on both cash and credit transactions.
• Limit Negotiations – Since the ability to charge a fee without specific limitations may be dependent on charging the same fee on cash and credit transactions for the same type of product sale, it can be beneficial to maintain as much consistency in the fee as possible with all applicable customers. Thus, treating Other Fees as required in all applicable product sales and limiting fee negotiations with customers may further reduce your legal risk. NOTE – this does not mean that a fee has to be charged on every product or that the same level of fee has to be charged across the board.
As with many aspects of your operations, legal issues are implicated in charging fees to your customers. These issues need to be considered in establishing your customer policies and, given the various legal limitations, it may make sense to adopt a “lowest common denominator” approach that allows you to implement fees in a way that makes the process simpler to follow and best ensures compliance with the most restrictive laws applicable to your dealership.
Lance Formwalt is the leader of the Equipment Dealer Group at Seigfreid Bingham, P.C. The firm serves as legal counsel to the North American Equipment Dealers Association and many individual equipment dealers. Lance may be contacted at email@example.com or 816-265-4106. Also see www.sb-kc.com. This article is intended to provide general recommendations and is not intended to be legal advice. You should always consult your attorney for advice unique to you and your business.