Discounts and Surcharges

When it comes to handling payment transactions, understanding the difference between discounts and surcharges is essential for compliance and transparency.

Discounts on Purchases

Discounts, which lower the total regular sale price of an item, are governed by strict regulations under Regulation Z of the Truth in Lending Act, specifically 1026.4(b)(9). Compliance with Regulation Z hinges on whether your dealership is offering the discount on an open-end or closed-end credit transaction. An open-end credit transaction, also known as revolving credit, is a type of loan that allows a borrower to repeatedly withdraw money up to a certain limit (i.e. a normal credit card transaction would be a open end credit transaction). In this circumstance, the dealership may legally allow a discount if the customer pays for a part or service with a non-credit card payment method. This discount can be a set amount or a percentage of the total transaction, but should be clearly disclosed and offered to all customers who pay with the desired payment method.

However, discounts get tricky when they concern closed-end credit transactions. Closed-end credit, also known as installment loans or secured loans, is a type of loan that provides funds to a borrower upfront, with a set end date and fixed payment installments (i.e. a loan to purchase a car). In this circumstances, the regulation requires that the discount be treated as a finance charge for your TILA/Regulation Z disclosures. Consider the following situation: a dealership offers a vehicle for $10,000. If the purchaser pays cash, the price is $9,000, but if the purchaser finances the vehicle with the seller the price is $10,000. The $1,000 difference is a finance charge for those who buy the vehicle on credit. According to the Truth in Lending Act, creditors must disclose the finance charge as a dollar amount and provide a brief description of it.

Surcharges on Purchases

In contrast, applying a credit card surcharge is a more straightforward process, though it still requires careful handling to remain compliant with legal standards and avoid customer charge backs. A surcharge is an additional fee imposed when a customer uses a credit card. Dealerships should create a credit-card surcharge policy that accomplishes the following:

1. Clear Disclosure of Fees and Terms

• Surcharge Disclosure: Ensure that any surcharge fees for credit card payments are clearly disclosed to customers before they complete their purchase. This can be done through signage, terms and conditions on your website, and verbal communication.

• Detailed Receipts: Provide detailed receipts that itemize all charges, including surcharges. Ensure that receipts are clear and include the transaction details, including any applicable fees.

2. Obtain Customer Acknowledgment

• Written Consent: Use an acknowledgment form or electronic consent that confirms the customer is aware of and agrees to any additional fees. This should be signed before completing the transaction.

3. Implement Strong Verification Processes

• Verify Customer Identity: Ensure you use proper identification and verification methods for credit card transactions to reduce the risk of fraud.

4. Maintain Thorough Records

• Transaction Records: Keep comprehensive records of all transactions, including signed receipts, acknowledgment forms, and any correspondence related to the transaction.

• Dispute Documentation: Document any disputes or issues promptly and maintain records of how they were resolved.

5. Provide Excellent Customer Service

• Clear Communication: Communicate clearly with customers about your policies, the total cost of their purchase, and any fees involved.

• Resolve Issues Promptly: Address customer complaints and issues quickly to prevent them from escalating to chargebacks.

6. Use a Reliable Payment Processor

• Chargeback Protection: Choose a payment processor that offers chargeback protection and support. Some processors provide tools and services to help manage and dispute chargebacks.

• Fraud Prevention Tools: Utilize fraud detection and prevention tools offered by your payment processor.

7. Monitor Transactions and Trends

• Regular Review: Regularly review transaction patterns and chargeback trends to identify and address potential issues early.

• Employee Training: Train staff to handle transactions correctly and to be aware of best practices for preventing chargebacks.

8. Provide Clear Refund and Return Policies

• Policy Transparency: Ensure that your refund and return policies are clearly communicated and easily accessible to customers.

• Policy Adherence: Follow your stated policies consistently to avoid confusion and disputes.

9. Respond to Chargebacks Promptly

• Timely Response: If a chargeback occurs, respond promptly with all relevant documentation and evidence to dispute the chargeback effectively.

• Engage with Issuer: Work with the credit card issuer and payment processor to resolve disputes and understand the reason for the chargeback.

We recommend that your dealership use our Surcharge Payment Form, which is accessible to all our dealership subscribers.

Compliance with Ohio and Other States’ Law

It’s important to note that in Ohio, surcharges can only be applied to credit card transactions and not to debit card transactions. Your dealership must be aware of the nuances in state laws on this issue, as the rules governing surcharges can vary significantly from one state to another.

For any questions regarding the implementation of surcharges, compliance with Ohio or federal regulations, or inquiries about the laws in other states, please contact us. Our team is here to provide expert guidance and ensure that your dealership remains compliant with all applicable legal standards.