Leasing is the industry’s roller coaster. It rattles around the bottom of the coaster after lessor risk managers pull back on leasing because of residual losses. It starts ascending toward the crest again as short-memory lessor marketing managers and manufacturers begin aggressively leasing as a way to sell vehicles.
Leasing penetration as a percentage of new-vehicle sales hit a high of nearly 34% In 2017 but accounted for around 18% of new-vehicle sales in 2023. Leasing is projected to account for more than one in four new-vehicle sales this year. Electric vehicles are part of the story behind the projected increase.
With the one-third percentage increase in leasing penetration comes the 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 dealer management system correctly, truth-in-leasing disclosure mistakes may not be so prevalent.
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
This lease agreement section discloses how the transaction builds from the selling price to the gross capitalized cost.
Certain items in the gross capitalized cost include the lessor’s acquisition fee, the dealer’s doc fee, voluntary protection 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 are another way of saying negative equity. Just like on a retail deal, the lease disclosure statutes require proper disclosure of any prior credit or lease balance included in the transaction.
The prior credit (negative equity from a retail trade) or lease balance (remaining lease payment, mileage or wear-and-tear amounts to close the prior lease) cannot be added to the cash selling price in the Itemization of Gross Capitalized Cost. Instead, it is to be an itemized disclosure in the IGCC and labeled correctly.
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 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 noncash credit, or customer cash.
A noncash 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, for which 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 noncash credit. Essentially, 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 Leased Vehicle Agreement. A buyer’s order contains a number of representations and warrants and possible state-required disclosures that are not necessarily contained within the Retail Installment Sales Contract.
Many dealers continue to either 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, this means that a dealer may not have the protection outlined in a buyer’s order in a quarter of all new-vehicle sales.
These three disclosure issues are as easily resolved as truth-in-lending disclosure issues on retail transactions. Just takes a little time and programming.
Continued good luck, and good selling.
Gil Van Over is executive director of Automotive Compliance Education (ACE). He is also founder and president of gvo3 & Associates and author of “Automotive Compliance in a Digital World.”
