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Before You Pull the Trigger on That Lease Program…

by Thomas B. Hudson, March 18 2010

Congress is considering several bills that will impose finance charge caps on auto financing, a bill that will strip auto creditors of their secured status in bankruptcy court if the finance charge exceeds a certain amount, and a bill that directs the Federal Trade Commission to eliminate or reduce a dealer's ability to participate in the finance charge imposed in a retail installment contract. On top of that, some states have passed laws that prohibit undocumented aliens from registering vehicles, eliminating a market that has become important to some dealers.

Dealers who are concerned about these and other developments have begun to give some thought to replacing their financing programs with leasing programs, or at least adding leasing programs to their offerings. If you are such a dealer, here are a few tips and suggestions that you might want to consider.

1. Leasing is not just another form of financing. Despite the fact that many dealers and many car buyers believe that leasing is just another way to finance a car, it just isn't that simple. Leasing will require a different contract, for sure, but it will also require different programming, different servicing, additional dealership insurance policies, accounting changes, risk considerations and tax and licensing implications. Some of these differences are very significant, but small things will be different, as well - for example, different advertising rules will apply to leases, and registration and titling will be different.

2. Time to go to school - law school, that is. A dealer selling cars on credit typically deals with a state retail installment sales law, his state's version of Uniform Commercial Code Article 2 and the federal Truth in Lending Act and Regulation Z as the principal laws and regulations that shape the credit sale transaction. Over the years, even those dealers who haven't made a study of these laws have learned, through osmosis, if nothing else, quite a lot about these laws.

A dealer who switches to leasing will find himself in a different jungle. Some states (perhaps a double handful) will have a lease law that operates like a retail installment sales law, providing protections for the lessee, but it will be UCC Article 2A that applies to the leasing transaction rather than Article 2, and it will be the federal Consumer Leasing Act and Reg. M that will apply.

If you're thinking about getting into leasing, I suggest that you get yourself a copy of each of these major laws and become acquainted with how they work. I'm not suggesting that you become your own lawyer, but I am suggesting that you will need a familiarity with these laws to understand what your lawyer and your accountant will be telling you. There aren't a lot of other resources out there that I can recommend, but you should check out "The Keys to Vehicle Leasing," a consumer education pamphlet that you can locate on the Federal Reserve Board's website. Our own F&I Legal Desk Book also has a chapter on leasing. You should check the FTC's web site, as well as those of your state's consumer protection agencies and your dealership associations.

3. Different legal perils. If a leasing program is not done correctly, a dealer can find, to his horror, that the portfolio of leases he is holding aren't leases at all. As an example, a consumer lease that sets the residual for a leased vehicle at $1, or at some other very low figure, may be "recharacterized" as an installment sale for regulatory purposes, with devastating results.

4. Be careful who you deal with. We've seen several purveyors of lease programs, and of "lease-here, pay-here" programs that frankly simply don't know what they are doing from a compliance standpoint. They profess to offer documents and programs that comply with applicable state and federal laws, but when asked to produce the legal and regulatory opinions backing up their claims, seem never to be able to produce them. I'll repeat here the warning we always give dealers who are approached by vendors who are selling programs that are subject to state and federal compliance requirements - if the vendor cannot produce the legal backup for its sales spiel, reach for your handy 10-foot pole.

5. Invite everyone to the party. Before you dip your tootsies in this particular pond, you need to meet with your lawyer, your accountant, your insurance company, your software vendor, your servicing company, perhaps even a vehicle leasing consultant and anyone else who can help you with your conversion to leasing.

6. Allocate some serious money to the effort. Don't try to go into leasing on the cheap. It will cost you some money to spend time with the professionals whose help you will need in making the transition. Our firm's lawyers don't work for free, and I don't know many accountants who do, either.

If after reading through all of these warnings, you're still interested in doing a leasing program, by all means, have at it. And, if in a year or two you have time and can remember to do so, drop me a line and tell me how you're doing!

*Thomas B. Hudson, Esq. (tbhudson@hudco.com) is the author of a new book, Street Legal, and is the Editor/author of the CARLAW® F&I Legal Desk Book. The books are available at www.counselorlibrary.com. He is also the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry. He is also a partner in the Hudson Cook, LLP law firm. Spot Delivery, CARLAW and the books are produced by CounselorLibrary.com LLC. For information, call 410-865-5411 or visit www.counselorlibrary.com.