Is This the Beginning of the End for the Padding of Lease Rates?

 

First off, I'm no expert in the equipment leasing business; however, but I have some peeps that are.  A few days ago I caught a thread on Linkedin reposted from @KeithHachey (Americorp Financial LLC).  See the pic below.

The first item that caught my eye was the hashtag #leases and then the text at the bottom for "Impact of Senate Bill 1235 on Equipment Leases.

Of course I followed the link and it lead me to the web site for the State of California Legislative for Senate Bill 1235.  Bill 1235 relates to commercial financing in the State of California and the disclosure of the following.

22803.
 (a) As an alternative to the disclosures required in subdivision (b) of Section 22802, a provider who offers commercial financing that is factoring or asset-based lending and that offers the recipient an agreement that describes the general terms and conditions of the commercial financing transaction that will occur under the agreement, may provide the following disclosures as an example of a transaction that could occur under the general agreement for a given amount of accounts receivables:
(1) An amount financed.
(2) The total dollar cost.
(3) The term or estimated term.
(4) The method, frequency, and amount of payments.
(5) A description of prepayment policies.
(6) The total cost of the financing expressed as an annualized rate.
(b) This section shall remain in effect only until January 1, 2024, and as of that date is repealed.
From what I'm reading, this means that if a business enters into an equipment lease all of the above information needs to be disclosed to that business.
For years and years many in our industry has been using "padded" lease rates.
Let me give an example of "un-padded rates"
A leasing company gives a lease rate to the dealer for 60 months.  That rate to the dealer is let's say .0186 for the 60 month term.  In order to figure the payment, we take the dollar amount of the lease and multiply it by the rate factor.  Let's use $10,000 is the purchase price. 10,000 * .0186 = $186.00. The payment for the business would be $186.00 for the term of 60 months.  This would be an example of a lease rate that is not "padded".
The example of a "padded" lease rate would be the following
The rate from the leasing company is still the .0186 for the 60 months, however, the dealer increases the rate factor to the sales force to .0202.  Using the same purchase price of $10,000 and multiplying it by .0202 makes the lease payment $202.00 per month. The payment is now $18 higher per month for the term of the lease.  The dealer profits $18.00 per month for the 60 month term. The dealer makes an additional profit of $1,080 on the lease. 
The way I'm seeing this is the dealer or the leasing company now has to disclose all of those financing items to the business.  Thus instead of the purchase price being $10,000 it should be disclosed as $11,080. Along with the annualized rate.
I am not the expert in the language for Senate Bill 1235.  I'm hoping that Keith can chime in on this blog and verify what hoops dealers and leasing companies will need to jump through in order to provide office equipment leasing in the State of California.  
I titled the "Is This the Beginning of the End for the Padding of Lease Rates?" because I'm not a fan of the practice.  I do not believe the "padding" of lease rates is illegal, it's just not the thing to do. If a dealer or a direct manufacturer  needs more dollars then just increase the price of the equipment and stop back end process.  
We know our law makers, and they will pretty much do anything to make the States extra revenue.  The Bill allows requires that the lending institutions that are listed also need a license. I'm sure there is a fee for that.  Thus, a Bill like this may becoming to your state or even my state.
Keith are you out there?
-=Good Selling=-

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from today's Leasing News.

 Ralph Petta Reaction to Tom McCurnin's

"Is the Disclosure Too Complicated? of SB 1235"

[http://leasingnews.org/hires/petta_ralph2018.jpg]

From:

Ralph Petta

President and CEO

Equipment Leasing and Finance Association

1625 Eye Street, NW * Suite 850

Washington, DC 20006

"Allow me to take exception and set the record straight with respect to Mr. McCurnin's statement in his September 21 article(1) about passage of disclosure legislation in California, SB 1235 that "... if ELFA lobbied against the bill, it didn't do a very good job." Mr. McCurnin's simplistic characterization of ELFA efforts on this bill misses the mark on a number of fronts.

"I would point out to you and your readers that Mr. McCurnin was not at the negotiating table with the sponsor of the bill, Senator Glazer, his staff and the California Department of Business Oversight (DBO). ELFA was. The association marshalled the resources of our entire state government relations team-staff, attorneys, and legislative and regulatory policy experts on the ground in Sacramento- and met countless times over many weeks and months with Senator Glazer, his staff and the DBO to make what began as a bad bill, better for the equipment finance marketplace and our members. It was the intent of Senator Glazer to provide checks on what he and other California legislators consider predatory lending to commercial entities in the state by requiring a variety of disclosures in lending agreements. That's the key-lending agreements. The intent was not to include equipment leasing and finance transactions within the scope of the bill. But as often happens in the drafting of measures like this, on too many occasions, unintended consequences result.

"With introduction of SB 1235, ELFA communicated to Senator Glazer its strong opposition and testified to this effect before the Senate Finance Committee and Assembly Banking and Finance Committee in Sacramento. As a result, Senator Glazer took to the floor of the California Senate to emphatically make the point that it was not his intent to include lease financing in the bill's scope and that these transactions would be carved out of the final measure.

"The association then went to work with Senator Glazer and his staff to find language that would exempt lease financings from the bill. Easier said than done. The most difficult issue in the entire negotiation was trying to arrive at a definition of a lease financing. Bill drafters insisted that disclosures apply solely to loans and loan-like transactions. Finding the precise language to make this lease-versus-loan distinction-particularly in dealing with policy makers who are not all that familiar with our industry-proved extremely challenging. However, after weeks of negotiations, we ultimately arrived at what we believe to be language that provides an exemption under the bill for true lease transactions conducted in the state. Loans and loan-like products are covered under the bill.  This was the best outcome possible given the circumstances, and we, therefore, informed Senator Glazer that we would remove our formal opposition to the bill, and it moved forward to final passage by huge margins in both houses of the legislature. If and when the measure is signed by Governor Brown, ELFA will continue to work with the DBO to help craft workable implementing regulations.

"The association never supported this measure and only removed our opposition very late when we had achieved exempting language in a bill that we were convinced would not be defeated. But, rarely is trying to influence the direction of legislation-some call it lobbying--a black and white affair. The sausage making is messy-whether in Sacramento, Springfield, or Washington, DC. Legislating involves compromise. ELFA's guiding advocacy principles and strategy involve being collaborative with policy makers where it makes sense to do so. Our objective is to kill, amend, or render harmless any legislative or regulatory policy matter the negatively impacts the equipment finance industry.  This is what ELFA members expect of us. "

From Kit Menkin, cc: Tom McCurnin

Senator Glazer said in the Question and Answer section, page 2:

"One other note: we worked very closely with the Equipment Leasing and Finance Assn. on the part of the bill that deals with lease financing. In the end they were satisfied that the language was fair and workable for the leasing industry, and they did not oppose the bill." (2) In our masthead, our policy is explained in every news edition:

"When an article is signed by the writer, it is considered a "byline". It reflects the opinion and research of the writer."

 

In this regard, I am forwarding your email to Tom McCurnin, should he wish to respond.

From Ralph Petta, cc: Tom McCurnin

"ELFA does not support the final bill. We have decided not to oppose it. There is a difference."

From Tom McCurnin, cc: Kit Menkin

"If there a difference between non-opposition and support it's lost on me-the result is the same.

"By surrendering to Sen. Glazer I'm sure it contributed to the lopsided vote. Given the hatred for the bill, voiced by many members I was surprised at ELFA's surrender."

(1) Is the Disclosure Too Complicated? State Senator Steven Glazer Position on CA SB 1235 (Part 3 of 3) By Tom McCurnin, Leasing News Legal Editor http://leasingnews.org/archive...09_21.htm#disclosure

(2) Page 2, Question and Answers

 http://www.leasingnews.org/PDF...p;AwithSenGlazer.pdf

<http://leasingnews.org/archive...p;AwithSenGlazer.pdf>

 

[https://www.clune.net/images/d..._photo_lrg4_blue.jpg]<https://www.clune.net/clune-turns-60.php>

 

Kevin F. Clune CLFP, President

Clune & Company LC | The Leasing Professionals

5950 Roe Avenue | Mission, Kansas | 66205

O: 913.498.3000 | 800.862.6633 D: 913.236.3546 www.clune.net<https://www.clune.net/> | kclune@clune.net

The Company You Keep

Part Three

Leasing News Exclusive:
Is the Disclosure Too Complicated?
State Senator Steven Glazer 
   Position on CA SB 1235 (Part 3 of 3)

By Tom McCurnin
Leasing News Legal Editor

The bill to require full disclosure of interest rates is awaiting Governor Jerry Brown's signature. It was reviewed to be recorded and sent to his office late last week. It seems unlikely he will not sign it as it passed the State Assembly 72-3 and in the Senate 28-6 .It then will be up to the California Department of Business Oversight to set up the formula and procedure by January 1, 2019. 

What If Disclosure is Too Complicated?

Leasing News asked Senator Glazer that in some cases providing a single number would be too complicated for the lender. In response, he stated that it was his intention that the calculation includes only those costs which are unavoidable by the borrower. Furthermore, where the costs could vary over the course of the financing, the disclosure will be based on the best estimates available at the time an offer is made and a deal is closed. The legislation directs the Department of Business Oversight (DBO) to provide guidance to providers of financing on exactly what to disclose and how to calculate it, and in the case of an estimate, what level of accuracy will be required. No lender will have to disclose terms unless the department can tell them exactly how they need to do it.

In short, the Department of Business Oversight assured him that the disclosure requirements in the bill were practical and that they had the expertise and the resources to enforce them.

Are Two Disclosures Necessary?

Leasing News asked Senator Glazer how the disclosure would be implemented in cases where offers or lease quotes are given, and the ultimately lease document has the operative interest rate embedded in it. Our concern was whether that would involve a two-step disclosure process. In response to that question, the Senator stated that it was his intention that disclosure would be done before final papers are drawn up, because otherwise the customer would not know what they are getting into. Indeed, the purpose of the bill is to allow borrowers to comparison shop using these disclosures, so having only disclosure when the papers are signed does not satisfy that goal.  However, it will ultimately be up to the DBO to determine the steps. If borrowers complain that providers of financing are not providing disclosures at the time an offer is made, the DBO has the means to investigate and take action against any provider who is violating the law. 

Will Brokers Have to Disclose if the Deal is Funded by a Bank?

Leasing News was also concerned about brokers and how their obligation to disclose would be impacted if the lease was ultimately funded by a bank, an exempt entity. Senator Glazer addressed these concerns by stating that the bill requires providers of financing to disclose. If the broker is a subsidiary of the bank, it would be exempt. If not, then the broker would have to provide interest rate disclosures, even if the funds ultimately come from an entity that is exempt.

How Will the DBO Implement the Statute?

It was interesting to learn that the DBO assisted in the drafting, feels perfectly capable of interpreting the statute and, if necessary, enforcing it. Many of the questions and criticisms of the bill stemmed from some ambiguity in the statute. He addressed those concerns by stating that the DBO has looked at every provision and is perfectly capable of interpreting it. Therefore, I would expect rules to be promulgated by the DBO to address the concerns of equipment lessors and merchant cash advance lenders. 

What are the takeaways from this interview and SB 1235?

▪ First, I Was Surprised at the DBO’s Involvement in the Bill. According to Senator Glazer the California Department of Business Oversight reviewed every sentence of the Bill and has signed on to interpreting and enforcing it. This is actually a great relief that the DBO will enact new regulations to clarify any ambiguities in the Bill. 

▪ Second, Brokers Will Have to Comply. This is great news, because some brokers supply inaccurate and misleading interest quotes dressed up in the term “lease factor.” That number is often misunderstood as the operative interest rate. Therefore, many of the bad brokers will not want to disclose interest rates and may just cease brokering leases in California. 

▪ Third, Only Banks and Their Subsidiaries Will Not Have to Disclose. Although I thought that conclusion was obvious, Senator Glazer confirmed my understanding.

The bottom line to this question and answer series and the bill is this—Regulation Z was enacted in 1968 because many lenders did not provide accurate information for loans. The same condition exists today, due mainly to the high interest internet loans to commercial borrowers. If Regulation Z made sense in 1968, SB 1235 makes sense today. The bill will allow commercial borrowers to shop credit, which is good for small businesses’

I was shocked that the bill passed with overwhelming support from even the most conservative senators and representatives. If ELFA and the MCA lobbied against the bill, they didn’t do a very good job.

Finally, all is not lost because the California Department of Business Oversight will enact clarifying regulations which will smooth over any ambiguities.

Questions by Tom McCurnin/Answers by Senator Glazer 
http://www.leasingnews.org/PDF...p;AwithSenGlazer.pdf

 

McCurnin Part I:
http://leasingnews.org/archive...2018/09_17.htm#state

McCurnin Part 2: 
http://leasingnews.org/archive...09_19.htm#opposition

Final Bill that Passed:
http://leginfo.legislature.ca....l_id=201720180SB1235

Tom McCurnin is a partner at Barton, Klugman & Oetting in Los Angeles, California.

Tom McCurnin
Barton, Klugman & Oetting
350 South Grand Ave.
Suite 2200
Los Angeles, CA 90071
Direct Phone: (213) 617-6129
Cell (213) 268-8291
Email: tmccurnin@bkolaw.com
Visit our web site at www.bkolaw.com
Previous Tom McCurnin Articles:
http://www.leasingnews.org

Part Two:

Leasing News Exclusive:
 The Opposition and How Senator Steven Glazer  
   Got SB 1235 Passed (Part 2 of 3)

By Tom McCurnin
Leasing News Legal Editor

 

The bill was "Engrossed and Enrolled" and presented to the Governor at 5 p.m., September 12th, awaiting his decision to sign or veto.

How He Pushed It Through the Legislature

What are the takeaways from this interview and SB 1235?

▪ First, I Was Surprised at the Overwhelming Support of Trade Groups for the Bill. When he rattled off the trade groups’ names, I realized this bill really did have broad support. 

▪ Second, I Was Surprised at the overall Lack of Opposition to the Bill. Certainly portions of the ELFA opposed this bill. Overwhelming the MCA Industry reportedly was against it. But in the end, Senator Glazer specifically stated that ELFA had no formal opposition. If the MCA industry groups lobbied as hard as they said they did, given the huge support by the most conservative members of the legislature, they didn’t do a very good job. 

▪ Third, I Was Shocked At the Overwhelming Political Support in the Senate and House. Only a handful of representatives voted against this bill, and to have this bill pass by such wide margins clearly evidences bi-partisan support, even from conservative Republican representatives. If the bill was so bad, where were the votes?

The bottom line to this interview is that I was shocked the groups that provided input and support and surprised that the lending industry did not lobby very effectively. 

The Opposition
The Senator met with the Equipment Leasing and Finance Association (ELFA) on the part of the bill that deals with lease financing. According to Sen. Glazer, ELFA was satisfied that the language was fair and workable for the leasing industry, and they did not oppose the bill. 

(Leasing News is aware that ELFA opposed the bill in its preliminary forms, but ultimately withdrew its opposition and supported the final bill, which exempted interest rate disclosure for true leases. Leasing News is also aware that notwithstanding ELFA’s support for the present bill, many members are individually opposed to the bill. Editor).

(Leasing News is also aware the MCA industry led almost all of the lobbying efforts and testified during all of the hearings, according to Sean Murray, President and Chief Editor of deBanked. "We covered it extensively," he told Leasing News. "Glazer met frequently with representatives from the MCA industry and MCA was the most debated issue of the bill the entire time even on the night it passed the state Senate. Editor).

In short, Senator Glazer enlisted the support of more than 60 organizations from across the policy spectrum that helped us build the bipartisan coalition in the Legislature to pass the bill by such wide margins, 72-3 in the Assembly and 28-6 in the Senate. That margin of approval speaks volumes that this was a truly bi-partisan bill and Senator Glazer worked on building a consensus. At the end of the day, only a handful of representatives were convinced that the bill was bad policy. 

Will Interest Rate Disclosure Be Too Complicated?
When asked whether interest rate disclosure would be too complicated for some lenders to accomplish, Senator Glazer stated that providing an annualized rate to borrowers is crucial to help them compare one offer to another. By way of example, if one offer will provide $15,000 at a cost of $3,000 and a term of six months and another will be for $17,000 and cost $3,500 for four months, it is almost impossible to determine which of those is a better offer for the borrower without knowing an annualized rate. He noted that given the variety of financing types available in the commercial market, providing an annualized rate might be more important for small business borrowers than it is in consumer lending.

I’ll note this paradox. If interest rate disclosure is too complicated for the lender to put in a single number, then it is too complicated for a borrower to figure out. This was the reason for Regulation Z. On a certain level, the high interest internet lenders, which do not disclose interest rates, are to blame for this legislation. 

Role of the Department of Business Oversight
Leasing News wondered whether the California Department of Business Oversight (DBO) had any input in the bill’s wording. To our surprise, Senator Glazer stated that he worked hand in glove with the California Department of Business Oversight. The Department of Business Oversight provided technical advice on the bill in order to shape it into a measure that the department could implement and enforce if the governor ultimately decided to sign the legislation. The Department assured Senator Glazer that the disclosure requirements in the bill were practical and that the DBO had the expertise and the resources to enforce them. So, nothing in the bill will be a surprise to the DBO.

For the next edition, Leasing News will explore how the disclosures in the bill are intended to work, and what Senator Glazer thinks the future will hold for this bill in California and nationally. 

How Sen. Glazer Obtained Bi-Partisan Support
The Senator has a history of consensus building. Indeed, his mission statement is to represent the people of his Senate district, not political parties or special interests. Furthermore, he has a goal to pursue bipartisan decisions. In his opinion, they are always better and long lasting. 

It is for this reason that after he came up with the idea for the interest rate disclosure bill, he worked with Marketplace Lending Assn., the Responsible Business Lending Coalition, The Opportunity Fund, Lending Club, and the Economic Development and Financing Corporation. 

Senator Glazer believes that what is good for small business is good for California. Therefore, he solicited input from every major small business trade group in California and obtained their opinions in writing the bill and their support once the bill was finalized. Some of the trade groups which supported the bill included the National Federation of Independent Business, the California Small Business Assn., Small Business California, the Small Business Finance Institute, and Small Business Majority. 

He also enlisted the input of various economic opportunity groups, such as the California Association for Microenterprise Organization Development, the California Reinvestment Coalition, and the Greenlining Institute. These entities, usually non-profits, lobby banks and other lenders to create positive economic opportunities for low-income borrowers and seek to protect consumers from unscrupulous lending and predatory financial products and services.

Part III:  I’ll let the readers know about Senator Glazer’s feelings on how the bill works vis-à-vis disclosure, when we get down to brass tacks. Stay tuned. 

Part 1 of the Interview Series:
http://leasingnews.org/archive...2018/09_17.htm#state

Tom McCurnin is a partner at Barton, Klugman & Oetting in Los Angeles, California.

Tom McCurnin
Barton, Klugman & Oetting
350 South Grand Ave.
Suite 2200
Los Angeles, CA 90071
Direct Phone: (213) 617-6129
Cell (213) 268-8291
Email: tmccurnin@bkolaw.com
Visit our web site at www.bkolaw.com
Previous Tom McCurnin Articles:
http://www.leasingnews.org

Here is a report from leasingnews.org.  One of their legal editors is doing a three part review of this legislation.

Leasing News Exclusive:
State Senator Steven Glazer and 
the genesis of CA SB 1235 (Part 1 of 3)

By Tom McCurnin
Leasing News Legal Editor

This is important not only if you are doing commercial business in California, but this may affect other states. If you are new to this, here is legislation passed both the assembly and senate, awaiting California Governor Jerry Brown’s signature that changes commercial disclosure in accounts receivable purchase transactions, including factoring, asset-based lending transactions, merchant cash advance, commercial loans, commercial open-end credit plans, or lease financing transactions. It may lead to other states following the lead.

It requires:

(1) The total amount of funds provided.
(2) The total dollar cost of the financing.
(3) The term or estimated term.
(4) The method, frequency, and amount of payments.
(5) A description of prepayment policies.
(6) The total cost of the financing expressed as an annualized rate

Here is a three-part collection consisting of an in-depth Question and Answer Session via email with State Senator Steve Glazer. This is Part One and in Part Three, the full Questions and Answers will be available in PDF. The first draft of this article was viewed by Daniel Weintraub, Chief of Staff for Senator Glazer. I greatly appreciate his cooperation and assistance.

SENATOR STEVEN GLAZER, AUTHOR OF SB 1235 PART ONE OF THREE

State Senator Glazer Answers Some Questions About SB 1235 and the Genesis of the Bill

Part One will focus on the reasons for the bill and its genesis. Part Two will focus on some of the provisions and the necessity for interest rate disclosure. Part Three will drill down and address specific provisions relative to the timing of disclosures and how the disclosures will affect banks and their brokers. The most important takeaway of this interview is the broad, across the legislature consent for the bill, even from the most conservative legislators. 

Leasing News has been following the story of SB 1235 for months now. For those of you who haven’t followed the nuances of this new bill, some background information might be useful. 

Background of Interest Rate Disclosure
Prior to 1968, lenders were not legally compelled to disclose the annual interest rates to their borrowers.  Prior to World War II, the United States was a cash society, but the late 1950s saw a spike in consumer credit. Many lenders used inaccurate and deceptive formulas, resulting in many consumers paying as much as three times as what they thought. Congress investigated the problem and, as a result, enacted the Truth in Lending Act in 1968. The Act was expanded in 1974 to include credit cards and again in 1988 to include home loans. It was added to the federal regulations as Regulation Z. 

The goal of Regulation Z has been to compel the lender to tell the borrower the highest amount he or she may possibly pay for borrowing money. Regulation Z does not tell a borrower how much the lender may charge. It merely requires the lender to disclose what it is charging to the customer in a clear and understandable manner.

Regulation Z applies only to consumer loans. There is no law in the United States which compels a commercial lender to disclose interest rates. 

After the economic crash of 2008, the rule making authority for Regulation Z was transferred to the Consumer Financial Protection Bureau. Since 2016, the present administration has essentially gutted the CFPB, and, in 2017 actually invited the states to make their own regulations regarding lending. 

State Senator Steve Glazer Mission to Reform Lending
Fast forward to late 2017. California State Senator Steven Glazer became concerned about high interest rates California borrowers were paying and the lack of transparency and consistency in the loan documents of lenders. Some lenders disclosed the interest rates, some did not, and others disclosed the interest rates in a misleading manner. Senator Glazer sat down with the small business association trade groups to find that many small businesses in California were bewildered at the high interest rates they were paying for loans. 

Senator Glazer began the process to draft a bill to require commercial lenders in California to disclose the interest rates in their offers and loan documents. This was a first in the United States and it was obvious from the beginning that he would receive both support from some groups and criticism from others.  He faced an uphill battle to reach a consensus between commercial borrowers and commercial lenders.

A complete consensus was not possible, and many leasing lawyers were ferocious in their criticism of the bill.  My opinion was different. First, while non-disclosure or playing hide the ball on interest rates is fundamentally in the best interest of lenders, it simply did not seem fair that some lenders would disclose interest rates and others would not, or if they did, would do so in a misleading manner.  Second, Regulation Z has not affected the consumer loan business model in any respect. If anything, it promoted competition (a good thing) and informed choices by borrowers. Finally, many banks already disclose interest rates on commercial loans, so why not level the playing field? 

SB 1235
In any event, the result was SB 1235, a bill which was passed this month and will likely be signed by Governor Jerry Brown. It is a monumental piece of legislation which will require equipment lessors, lenders and merchant cash advance lenders to disclose their interest rates. 

After its passage, Leasing News sat down with Senator Glazer to ask him about his professional life, the genesis of the bill, the support and opposition he received for the bill and how he envisions the bill working to improve lending conditions in California.

In this first part of the interview, Senator Glazer talked about his background and the genesis for the bill.

Senator Glazer’s Background
Senator Glazer graduated from San Diego State. He formed a consulting company in Orinda, California. He held a variety of senior positions in the California Legislature, which include posts with then Assemblyman Gray Davis and then-Senate President Pro Tempore David Roberti.  In addition, he served as Jerry Brown’s senior political advisor from 2009-2012. Glazer won a May 2015 special election to succeed Mark DeSaulnier, who was elected to State Senate in 2014. Glazer defeated fellow Democrat, Assemblywoman Susan Bonilla. He won his re-election campaign in November, 2016, and began a new four-year term. (1)

The Genesis of SB 1235
Leasing News asked Sen. Glazer how he got the idea for interest rate disclosure in a commercial context, something unknown in American law. In response, he stated that has been a strong proponent of policies to promote economic opportunity and mobility. In 2017, he learned that a growing consensus that small business owners were often bewildered by the array of innovative financing available, especially on the internet. 

As a result, he began to explore the possibility of providing the same kind of Truth in Lending disclosures for small business borrowers that have been commonplace in consumer lending for half a century. He saw the research that had been done by the U.S. Federal Reserve and others, and his staff and he studied several model disclosures developed by different trade associations in the commercial lending industry. Several of these included APR. He believed that without an annualized rate, a disclosure would not give borrowers the information they need to compare financing of different amounts, terms and charges.

Is SB 1235 a Template for National Interest Rate Disclosure?
Given the cutting edge of this legislation, and the fact that California often leads the nation in trend setting, Leasing News asked Senator Glazer whether this bill might be a template for a national bill on interest rate disclosure. In response, Senator Glazer stated that California is so big and diverse that California often leads the nation in setting policy on emerging issues. He thought that it was appropriate that the California Legislature do something to make APR disclosure in this state.  Senator Glazer believed that such a bill would give small business owners the information they needed to compare the costs and consequences of the different kinds of financing available to them and their businesses. This would help them sustain and grow their companies while avoiding problems caused by taking on more debt than they can afford.

His bill closely followed the recommendations of the Conference of State Bank Supervisors’s FinTech Industry advisory panel, so he hopes that it will become a model for the nation.

For the next edition, Leasing News will explore the details how he shepherded this bill through a divided legislature with the support of conservative republicans, an amazing achievement.

What are the takeaways from this interview and SB 1235?

▪ First, Senator Glazer Represents California First. I was impressed how he has dedicated his life to serving California, in a legislative aid capacity, city council, mayor and now State Senator. He is a politician on the rise, and a man to watch in California State Government.

▪ Second, He Believes That This Will Give California Borrowers More Informed Choices.  Under this bill, California borrowers will know exactly what the annual interest rate of the loan for which they are applying.  I believe that a borrower that is so informed will be less likely to default, as there will be no surprises.

▪ Third, Since This Bill Was Drafted in Connection With the Conference of State Bank Supervisors Advisory Panel to Financial Crimes Enforcement Network, It May Have National Consequences. Given the present administration’s view on CFPB regulation, it is unlikely that in the near term, this will occur. However, expect to see many states enact this bill in a similar form.

The bottom line to this electronic interview is that I left being very impressed with Senator Glazer’s commitment to California and the protection of its citizens and the use of trade and business groups to form a consensus in the legislation. Given the regulatory vacuum in Washington, DC, California simply had to step up and level the playing field. For the next edition of Leasing News, I’ll let the readers know about Senator Glazer’s specific nuances of the bill.

  1. Senator Glazer Biography
    http://leasingnews.org/PDF/glazer_bio2018.pdf

Tom McCurnin is a partner at Barton, Klugman & Oetting in Los Angeles, California.

Tom McCurnin
Barton, Klugman & Oetting
350 South Grand Ave.
Suite 2200
Los Angeles, CA 90071
Direct Phone: (213) 617-6129
Cell (213) 268-8291
Email: tmccurnin@bkolaw.com
Visit our web site at www.bkolaw.com
Previous Tom McCurnin Articles:
http://www.leasingnews.org

 

Czech posted:

Padded lease rates are used to "pad" the pockets of dealer principals who are taking commissions away from their sales people. It's a dishonest but standard practice that should be eliminated, so this sounds like healthy change in the right direction.

In some cases, more is made on the lease padded rate than the salesperson makes in commissions.  

Others may tell you that they use the "padded" rates to create promo's for the reps.  Do I look like I need an incentive to sell?  Frak that, if you need an incentive to sell then you need to get a job at Mickey D's

Padded lease rates are used to "pad" the pockets of dealer principals who are taking commissions away from their sales people. It's a dishonest but standard practice that should be eliminated, so this sounds like healthy change in the right direction.

Hello Art and the rest of the P4P members - 

Our industry association (ELFA), along with several independent law firms that represent many of our industry members are reviewing this legislation to determine the actual effects it will have on the industry as a whole and to provide guidance so that our members will be in compliance with the legislation.

What we know at this point is that is you are involved in offering financing to businesses in California, you will be subject to this legislation unless you are an exempt organization (banks, ILC's).  

A comment from one of our industry attorneys is that true leases that offer a fixed purchase option may not be exempt from the disclosure, even if the purchase option is not nominal.  The concern for true leases with a fixed purchase option would be mainly for TRAC leases (autos, trucks) and companies that offer an FMV lease with the FMV not to exceed a certain percentage (I have done quite a few of those in the past).  If you are offering $1.00 buyouts, 10% buyouts, software only financing (Installment Payment Agreement ("IPA"), Finance Agreement) - you must adhere to the disclosure rules.   

Now to big question - how will this affect the Office Imaging world - here is my two cents.  As many of our largest leasing companies are bank owned/affiliated (Wells, CIT, Everbank/TIAA, US Bank, Leaf, Marlin) - many of these companies will be exempt from the disclosure requirements - nothing to change.  The remaining independents (Great America, Xerox Financial, Canon Financial) may be the ones forced to adhere to these rules.  Since most of the contracts for MFP's today are written are FMV leases, they may well be exempt from the disclosure rules.   The problem that you may run into would be the occasional $1.00 MFP's/IT/Software deals that are done.  As IT and software become a bigger component of the industry offerings, your documentation and how you present your pricing will need to change - your now have to follow two sets of rules.  In my opinion that near term change to this industry as a whole will be negligible.  

Now to the bigger picture - Industry practices will have to change in the future - and that goes for excessive padding of lease rates along with automatic renewal clauses, excessive fees, no early payoffs, etc.  Over the last several years I have seen court cases that threw out excessive interest, even when the customer agreed to the interest.  There are legal discussions going on that if a vendor offers a blind discount to a finance company in order to buy down the interest rate (think 0% financing specials) and it is not disclosed to the customer, that is illegal.   California has moved to have interest rate disclosures for lease financing, more states are taking up the automatic renewal clause, NY - well NY is always doing something crazy.  Many of the consumer statutes are now being construed to mean small business customers.  What do most of these have issues have in common - Transparency.

Regulation is coming to this industry, no matter how hard we fight it.   Transparency is going to be at the forefront of doing business with customers.  Even if we forget the regulatory landscape - think of what many of our customers want and require from their vendor partners - they want transparency, not hidden clauses and tough to follow contracts. 

The world is changing - are you embracing the change or fighting it?

Keith

 

This bill may not apply to Fair Market Value leases. There is no mention of establishing the residual value of the asset which makes the interest rate impossible to calculate. Is a .0278 rate on a 36 month FMV truly -0- interest? Of course not. If you don't end up with title to the equipment, you really haven't financed anything. What is the interest rate on a Hertz Car Rental? What is the difference between that an a 36 mth FMV other then the length of term?

If anything you should be bumping outright purchase prices and discounting leases.  The customer who purchases their equipment outright keeps their equipment too long and may go elsewhere when the time comes to upgrade anyway.

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