Originally published in October 2021.
Today we’re going to talk about how to charge a doc fee without attracting the attention of the FTC, the CFPB, or your local bar association.
The story you’re about to hear is true. The details have been changed a bit because I don’t want to embarrass anyone, while at the same time I want to share this as a cautionary tale. But first, a little background.
What's a Doc Fee?
What is a doc fee, and why does it matter how and when it’s disclosed? A doc fee – short for document or documentation fee – is sometimes called a dealer fee or something else. It’s intended to cover the costs a dealership incurs in preparing the documentation related to a retail vehicle sale or lease. Let’s be clear – it does cost money to administer all that paperwork, and there’s nothing wrong with charging for those services.
Over time, as competition and the Internet’s free flow of information created downward pressure on vehicle prices, dealers were tempted to increase their doc fees as a means of holding front-end gross. Many, many dealers gave in to this temptation in states where it was legal to do so. Thus, we now see docs fees over $1,000 in the states that do not cap those fees.
Approximately 1/3 of the states have statutory limits on what dealers may change charge in the nature of doc fees, ranging from $65 in California (for dealerships that don’t provide on-site registration) to $300 in Maryland. For the 35 states that don’t regulate doc fees, it can be the Wild West. So here’s Takeaway No. 1: Know your state’s doc fee limit and don’t exceed it. If your state doesn’t regulate doc fees, don’t be greedy: the tallest blade of grass is usually the first one to get cut!
And here’s Takeaway No. 2: Even if you’ve priced your doc fee appropriately, you can still get in trouble if you don’t advertise it properly. Why is that? Because – regardless of state laws – the FTC’s prohibition on deceptive advertising makes it unlawful for dealership ads to misrepresent the total price a customer will pay for a vehicle. If a $900.00 doc fee is added at the end of a transaction, it needs to be included in the advertised price – full stop.
I got an email about a dealership that did not include its doc fee in its advertised prices, but with pair of reasons for the omission. First, there was strong price competition in its market, so if they included their doc fee in the advertised price, no one would visit their store. Just let that sink in. “We knowingly lie in order to get customers.” Not a sustainable business model.
The second reason was that the dealership didn’t know what the doc fee would be until the customer actually bought the vehicle. How could that be, you might ask? Because the dealership charged one doc fee for customers it financed and a higher doc fee for cash or third-party financed customers. The dealer rationalized this by saying he needed to charge cash customers a higher doc fee to compensate the dealership for the money it did NOT make by financing the vehicle.
We provided that dealer with the information I just described. I hope he will go forth and sin no more. And I hope you always include your doc fee in your advertised prices. Failing to do so can lead to unwanted attention from the FTC, the CFPB, and your local bar association, and we don’t want that.
If you want more detail on this topic, NADA has published an outstanding resource called “A Dealer Guide to Federal Advertising Requirements.” It’s available to NADA members through their website, and I highly recommend it.