Leasing is the auto industry’s roller coaster.
It rattles at the bottom after risk managers pull back after residual losses. It ascends towards the crest again as short-memory marketing managers and automakers aggressively use it to deliver vehicles.
New-car leasing penetration bottomed out at about 16% in 2009 after enjoying a few years above 20%. In 2012, leasing accounted for around 22% of deliveries. It is projected at 25% in 2014.
This increase in leasing comes with risks. For legal reasons, it’s important for dealers to understand the basics of leasing. Dealers do not want to make Truth-in-Lending disclosure mistakes worthy of class-action litigation.
A little primer on some common leasing-disclosure issues is in order. The two greatest improvement opportunities on a lease agreement involve these sections:
- Itemization of Gross Capitalized Cost (IGCC). This discloses how the transaction builds from the selling price to the gross-capitalized cost that can include lessor acquisition fees, dealer document fees, finance and insurance products, prior credit or lease balances and taxes.
- Amount Due at Signing (Lease Starts). This section lists what the customer must pay to start the lease. It includes capitalized-cost reduction, first payment, security deposit and upfront fees and taxes.
There are potential disclosure issues. Prior credit or lease balance is another way of saying negative equity. Just like on a retail deal, lease-disclosure statutes require proper disclosure of any prior credit included in the transaction.
The prior credit (i.e. negative equity from a retail trade) or lease balance (i.e. remaining lease payment, mileage or wear-and-tear assessments to close the prior lease) must be an itemized disclosure and labeled correctly.
Some dealers mistakenly include either negative equity or the last few lease payments in the cash-selling price.
IGCC is an optional disclosure to be contained within the lease agreement. If the lessor opts to omit the disclosure from the lease agreement, it must include an option for the consumer to request a separate IGCC.
Some F&I Managers are unaware of this requirement and admit they do not have the forms to provide it to the customer if asked.
The lease-starts section itemizes what the customer must pay to begin the lease and how that amount is paid. The customer can settle up lease starts with positive trade equity, manufacturer rebates, dealer non-cash credit or cash.
A non-cash credit occurs when a dealer agrees to absorb the entire lease starts or a portion of it. This can typically happen with a sign-and-drive lease in which the customer does not pay the first payment.
It is a common miscue to disclose the customer-paid cash for the amount of the non-cash credit. The amount disclosed as cash collected in the lease starts section must be supported with a receipt in the file.
The third most recurring issue with leasing is not with the lease agreement itself, but rather the lack of an order for a leased-vehicle agreement.
Dealers outside of California generally have a buyer’s order executed during the retail process. This order contains a number of reps and warrants and possible state-required disclosures that are not necessarily in the retail-installment sales contract.
Many times an arbitration provision is contained within and agreed to in a buyer’s order.
Many dealers continue to try to fit a lease transaction on a buyer’s order or they do not have any order executed. Based on the potential 25% leasing penetration in 2014, this means a dealer may lack the protection outlined in a buyer’s order in a quarter of all new-vehicle deliveries.
These three disclosure issues are as easily resolved as Truth in Lending disclosure issues on retail transactions. Takes a little time and program them in the dealership-management system.
Continued good luck and good selling.
Gil Van Over is the President of gvo3 & Associates, a nationally recognized compliance consulting firm that specializes in F&I, sales, safeguards and red-flag compliance. Gvo3’s website is www.gvo3.com.