COMPLIANCE OVERDRIVE
Look Before You Lease meeting dealers and hearing their takes on current challenges and trends facing the industry. leasing. I have heard a number of dealers comment on how they would like to expand their dealership and start leasing vehicles. growing a business, dealers must consider the differences between selling and leasing. allowing a customer to use your vehicle for At the end of the lease, the customer returns the vehicle and doesn’t owe you any more money as long as the vehicle has only reasonable wear and tear and was driven no more than the agreed mileage. If there is an option to purchase, the option price bears some relation to the vehicle’s expected market value at the time the option is exercised. In other words, the lessee doesn’t have the option to purchase disguised as a lease. Adding leasing to an independent
dealership might sound simple. You’re already arranging loans and payments for the vehicles you sell, so why not expand
consumer lease requirements.
lease disclosure equivalents of the Truth in But it’s not as easy as it looks. Here are key areas to consider when making your decision. Licensing: selling vehicles also allows you to lease vehicles. Your current license might not be Insurance: is transferred to the buyer. You focus on
security interest in the vehicle. You probably have property and liability insurance to protect your inventory and sales. However, when a dealer leases a car, he still owns it. If the vehicle is involved in an accident, you might be subject to liability as the owner. As part of researching a leasing operation, meet with your legal counsel and insurance carrier to make sure you protect against liability exposure with appropriate insurance coverage. Pricing: Determining the sales price of a vehicle is pretty straightforward. You know your costs to purchase and prepare margins, and sell the vehicle for more than your costs. You know at the time of sale whether you are making money on the deal. complicated. It might be easy to determine what the vehicle is worth today, but how do you know what it will be worth when the lease is up, say, two or three years from many miles it will be driven and how well it is maintained. There are also unknown variables.
the market value at the end of the lease the dealer is on the hook if the residual value is less than predicted. You won’t really know if you’re making well you predicted the residual value. You might be two or three years into the lease residual values too high – and by then it’s too late. Documentation and disclosures: You can’t just modify a retail sales contract to make it a lease. If you are planning to include leasing, you must make sure your documents meet state and federal
additional disclosures and consumer protections. As part of your leasing startup, you will need to create a unique document set of disclosures and contracts. Taxes: In a lease you retain ownership, so you might roll your sales taxes to purchase the vehicle into your costs and lease calculations, but you might also need to collect use or other taxes on the payments throughout the lease term. to understand your tax obligations and how they differ for leases. Collections: If a buyer doesn’t make timely retail contract payments, you can repossess the car. Fear of losing the car can help motivate a buyer into making past due payments. In a lease, the lessee doesn’t own the car and may expect to return it and walk away at the end. That might make it a little easier for the lessee to emotionally handle repossession, but it might mean the lessee isn’t afraid of having the car repossessed and isn’t as motivated to make past due repossess a vehicle, the lessee has even less motivation to pay any balance still due. If a car is returned with wear or damage beyond what’s agreed on in the lease, it those costs. You can use the lessee’s damage deposit, so make sure you set it at a practical amount – it might be the only money you end up recovering for excess wear and tear. These are only some issues to consider when starting a lease program. You can identify more by simply reading a motor vehicle lease contract. The differences between selling and leasing are dramatic and can’t be overlooked. Your operations and compliance can be affected by the type of transaction, the vehicle and the state in which you are doing business.
BY CHIP ZYVOLOSKI
CHIP ZYVOLOSKI IS A SENIOR ATTORNEY FOR INDIRECT LENDING AT WOLTERS KLUWER FINANCIAL SERVICES. FOR MORE INFORMATION, VISIT WWW.WOLTERSKLUWERFS. COM/INDIRECT.
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