The CLA [Consumer Leasing Act] disclosures related to a lessee’s purchase option can affect your ability to charge a documentary fee to a lessee purchasing a vehicle pursuant to the disclosed purchase option.
Most motor vehicle leases offer the lessee the option to purchase the leased vehicle for a stated, fixed price if the lessee chooses to exercise the purchase option at the scheduled end of the lease term (the “scheduled end option”) or based on a formula if the lessee chooses to purchase the vehicle before the scheduled end of the lease term (the “early termination option”). Under both options, the lessee has a contractual right to purchase the vehicle for the applicable option price (the “lease purchase option price”). The lease purchase option price is legally binding on the holder of the lease (the “lease holder”).
If a lessee elects to purchase the vehicle, many leasing companies will enlist a dealer to handle the sale (a “dealer-lessee purchase transaction”).[i] Some leasing companies reassign the lease and sell the vehicle to the dealer. In these cases, the dealer, as the lease holder, is contractually obligated to sell the vehicle to the lessee at the lease purchase option price. Other leasing companies simply sell the vehicle back to the dealer, in which case the dealer takes ownership of the vehicle subject to the lessee’s right to purchase it for the lease purchase option price.
For the purposes of this discussion, we assume a documentary fee (however labeled) is a fee a dealer charges a vehicle purchaser for services related to registering and titling the vehicle where the amount of the charge does not vary depending on whether the buyer purchases for cash or on credit and is not regarded as a finance charge under TILA.
For the reasons discussed below, charging a documentary fee in a dealer-lessee purchase transaction risks a claim against the lease holder (and potentially the original lessor and other lease holders) that the practice breached the contract and or violated the CLA, unless:
- The original lease disclosed the amount of the documentary fee charged in the dealer-lessee purchase transaction as a separate purchase option fee; or
- The sum of the documentary fee and the price charged the lessee for the vehicle (excluding official fees and the price of any voluntary protection products sold to the lessee in connection with the dealer-lessee purchase transaction)[ii] is equal to the lease purchase option price.
If a documentary fee will be added to the lease purchase option price in a dealer-lessee purchase transaction, these Reg M requirements can be interpreted to compel disclosure in the original lease of the amount of the documentary fee as a kind of “purchase option” fee. For a scheduled end option, the lease must state a sum certain for the lease purchase option price. If there is a purchase option fee, Reg M permits a lessor to disclose it separately. And while it permits the lessor to disclose that official fees are not included in the lease purchase option price, Reg M does not give similar permission to disclose that the purchase option price does not include other fees and charges, such as a documentary fee. Taken together, this suggests that a lessor should either disclose the amount of the documentary fee as a purchase option fee or a part of the fixed lease purchase option price.
For an early termination option, a lessor must disclose the purchase option price as a sum certain or as a sum certain to be determined at a future date by reference to a readily available independent source. In most leases, the lease purchase option price is disclosed as a formula that incorporates elements of the early termination charge that are used to determine how much to add to the fixed purchase price provided for in the scheduled end option. Again, Reg M permits the lessor to contract for the early termination option price and a separate purchase option fee and to disclose that official fees are not included in the disclosed lease purchase option price. But as with the scheduled end option, it does not give similar permission to disclose that the purchase option price does not include other fees and charges, such as a documentary fee. Therefore, the choices for providing for a documentary fee as part of the lease option price in the early termination option are essentially the same as those discussed above for the scheduled end option.
If a lease does not disclose the documentary fee as a purchase option fee, charging a documentary fee in addition to the lease purchase option price risks a claim that the initial disclosure of the lease option price was not accurate and thus violated Reg M. It also risks a claim that the lease holder breached the original lease agreement by charging more than the agreed to lease option price.
A lessor could argue that a documentary fee is for separate services performed by the dealer for transferring title to the lessee and re-registering the vehicle. As such, the dealer should be able to charge additional consideration for these separate services. This argument is strengthened if the dealer offers lessees the option to perform these services themselves to avoid the charge and some lessees elect that option. But there remains a risk that a court or regulator will conclude that the term “purchase option fee” as used in Reg M includes such services and thus must either be disclosed separately or included in the lease option purchase price.
This summary is offered for informational purposes only and is not intended as legal advice. Consult an attorney who is familiar with federal, state, and local law addressing these topics and your operations for guidance on the legal sufficiency of your operations.
[i] In some states, the exercise of a lease purchase option must be handled in this way because a motor vehicle dealer license is required to handle the transaction and the leasing company is not eligible to obtain the required license.
[ii] While not free from doubt, a strong case can be made that, if properly disclosed, the dealer is free to sell separate optional products and services to the lessee for additional consideration above and beyond the lease purchase option price.
