Channel | F&I

With Great Leasing Comes Great Responsibility

Leasing is picking up as a percentage of all new-vehicle sales, but the failure among agents and dealers to enforce the necessary disclosures is creating a major compliance gap.
By: Gil Van Over

With Great Leasing Comes Great Responsibility

Leasing is the industry’s rollercoaster. It rattles around the bottom of the track after risk managers pull back on leasing as a result of residual losses. It starts ascending toward the crest again as short-memoried marketing managers and manufacturers begin aggressively leasing as a way to sell vehicles.

Last year’s guidance from the Department of Defense on the Military Lending Act (MLA) is another factor that may assist in increased lease penetration. The guidance requires additional disclosures on the sale of GAP, credit life, and accident-and-health (A&H) insurance, to the point that many finance sources will not purchase retail installment contracts that include those valuable products to anyone who is a covered borrower under the MLA. This additional disclosure requirement does not apply to lease transactions and many dealers are working to convert deals to leases to provide covered borrowers with GAP coverage.

With this increase in leasing penetration comes a risk that the plaintiffs’ bar will become interested in understanding the basics of leasing. After all, the logic goes, if dealers make Truth in Lending disclosure mistakes worthy of class-action litigation because they can’t always program the DMS correctly, can Truth in Leasing disclosure mistakes be as prevalent?

As the trusted advisor to the dealer, agents should understand leasing, the potential compliance pitfalls, and the product sales opportunity with leasing.

A little primer on some common leasing disclosure issues is in order. The two greatest improvement opportunities on a lease agreement are the itemization of gross capitalized cost and the “amount due at signing” sections:

Itemization of Gross Capitalized Cost (IGCC): This section of the lease agreement discloses how the transaction builds from the selling price to the gross capitalized cost. Certain items can be included in the IGCC, including the lessor’s acquisition fee, the dealer’s doc fee, F&I products, prior credit or lease balance, taxes, and fees.

Amount Due at Signing (Lease Starts): This section lists the amounts that the customer must pay to start the lease. It includes such items as the capitalized cost reduction, first payment, security deposit and upfront fees or taxes.

Potential Disclosure Issues

“Prior credit or lease balance” is another way of saying “negative equity.” Just like on a retail deal, the lease disclosure statutes require the proper disclosure of any prior credit or lease balance included in the transaction.

The prior credit (negative equity from a retail trade) or lease (remaining lease payment, mileage, or wear-and-tear amounts to close the prior lease) balance cannot be added to the cash selling price in the IGCC. Instead it is to be an itemized disclosure in the IGCC and labeled correctly.

Some dealers make the mistake of including either negative equity or the last few lease payments from a prior lease in the cash selling price.

The 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 available to provide it to the customer if asked.

The lease starts section itemizes what the customer must pay to start the lease and how that amount is paid. The customer can settle up the lease starts with positive trade equity, manufacturer rebate, dealer non-cash credit or customer cash.

A non-cash credit occurs when a dealer agrees to absorb a portion or the entire lease starts. This can typically happen with a sign and drive lease, where the customer does not pay the first payment.

It is a common miscue to disclose that the customer paid cash for the amount of the non-cash credit. Essentially, the amount disclosed as cash collected in the lease starts section must be supported with a receipt in the file.

We Had an Agreement

The third most recurring issue with leasing is not with the lease agreement itself. Rather, it’s the lack of an “order for 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 contained within the retail installment sales contract. Many times, an arbitration provision is contained within and agreed to on a buyer’s order.

Many dealers continue to either try to fit a lease transaction on a buyer’s order or do not have any order executed. Based on the potential 25% leasing penetration, this means that a dealer may not have the protection outlined in a buyer’s order in one-quarter of all new-vehicle sales.

These three disclosure issues are as easily resolved as Truth in Lending disclosure issues on retail transactions. It just takes a little time and programming.

Continued good luck and good selling.

This article was written by:

- has written 10 posts on Agent Entrepreneur.

Gil is the principal of gvo3 & Associates, a nationally recognized compliance consulting, audit, training and review firm. He and his team work with dealerships around the country in implementing F&I and Sales Compliance Management Solutions to help dealers manage and mitigate compliance issues. He is a frequent speaker to industry groups and also provides litigation support on behalf of automotive retailers and insurers. Prior to forming gvo3 & Associates in 2001, Gil was the Chief Operating Officer for Premier Auto Finance, a management company that managed auto finance portfolios for dealer groups.

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