BALTIMORE, AUG. 24 -- Thousands of Maryland car buyers will receive refunds totaling up to $3 million for allegedly bogus "customer service" fees on dealer-financed cars bought in 1986 to 1988 under a settlement worked out between dealers and state officials.

Under the agreement, signed earlier this month, customers who bought new dealer-financed cars or trucks during a two-year period that began Aug. 10, 1986, could receive up to several hundred dollars each in partial refunds for a wide range of itemized charges such as "administrative fees," "dealer processing fees" and "cleanup fees."

"It is certainly the largest or one of the largest recoveries for consumers" by the State of Maryland, said Assistant Maryland Attorney General J. Steven Lovejoy.

Dealers are required to notify affected customers by mail by mid-October. Several thousand customers are thought to be in Prince George's and Montgomery counties, according to dealers.

The agreement ends another chapter in the battle over car buyer fees. Many consumers view the fees as bogus "add-on" charges that allow dealers to reduce the advertised price of a vehicle without reducing their profit. Dealers contend the fees are legitimate charges for preparing vehicles for sale.

The agreement comes after 158 of the state's 350 new car dealers abandoned a court challenge of Maryland Attorney General J. Joseph Curran Jr.'s interpretation of state credit laws affecting automobile sales. Curran said the laws bar various customer "processing" fees when the purchase of a car is financed by the dealer.

Another 53 dealers remain as plaintiffs in the court challenge in Harford County Circuit Court.

Lovejoy said "thousands and thousands" of buyers will be affected by the settlement, but he indicated he does not yet have a precise number.

Both Lovejoy and Joseph Carroll, executive vice president of the Maryland New Car and Truck Dealers Association, said refunds could total $3 million.

"It's very difficult to quantify," Carroll said, "except to say it's a lot." Every dealer will have the option of making refunds in cash or in credits redeemable in merchandise at the dealership.

More important than the refunds, said Lovejoy, is that the dealers will not be charging the fees in the future on the cars they finance. "That's good news for consumers," he said.

The fee squabble started in early 1988 after the state Consumer Credit Commissioner's office received numerous complaints from car buyers that some prices were padded by unnecessary processing charges.

The office asked Curran for an interpretation of the state's Retail Installment Sales Act. On Aug. 10, 1988, Curran issued an opinion, saying the law permits dealers to charge only those fees specifically listed in the statute.

That list, he said, does not include a wide

range of charges known in the car retailing industry as "additional service," "handling," "titling service" and other terms.

Dealers disagreed. And even though Cur- ran's opinion was non-binding, 211 dealers from across the state sued Curran and other officials in an attempt to get a judge to reverse it.

Then earlier this month, 158 of the dealers pulled out of the suit and agreed to a complex arrangement of fee refunds. Anyone charged $50 or less is entitled to a refund, minus $20. Anyone charged more than $50 gets $30 plus half the amount in excess of $50.

Officials said the fees range from $10 to $450.

Carroll stressed that the 158 dealers who abandoned the court challenge did so not because they thought they would lose, but because "it would cost them less to settle than to . . . continue the litigation."

He said the 158 dealers are "confident" the remaining 53 in the case "will ultimately prevail."

Gerard Murphy, president of the Automotive Trade Association for the National Capital Area, said Virginia and the District have no laws prohibiting documentary or processing fees.

He said Virginia has a law expressly permitting fees as long as they are disclosed to consumers and are reported to the state motor vehicle officials.

Carroll said in an interview that the elimination of itemized fees will not reduce the price of dealer-financed cars, but will simply result in the handling and preparation costs being "buried."

He said it is ironic that the state is demanding the elimination of publicly listed fees in dealer-financed sales when such fees are itemized in cash sales.

Lovejoy countered that the fees have been a device to lower the advertised price of cars and lure customers into showrooms. Once a customer agrees to buy a car, the various "handling" fees are added on, he said.

"It is misleading and a violation of the law," Lovejoy said.