How to Launch Your LHPH Program
Now that we have laid out the substantial reasons for why a dealer would want to either transition from buy here pay here to LHPH or build a new lease here pay here program, the question becomes, “how do I make LHPH a reality for my dealership?”
There are three primary hurdles every dealer encounters when they start this process. The first is their Dealer Management System (DMS) technology. There are a handful of DMS technologies with a compatible LHPH module capable of accurately creating and printing your lease contracts. The conversion to one of these DMS systems can take two or three months and is sometimes the barrier that stops the process of starting a LHPH business.
The second challenge is access to capital. Many lenders do not understand leasing and, as a result, the options are not as numerous as BHPH funding sources. Lenders do exist; however, you may need to put some time and effort into identifying the right one and ensuring your internal processes, accounting, and compliance are in order to solidify the relationship.
The third hurdle is the fear of the unknown. BHPH lending is familiar to most dealers, they have experience with it and feel comfortable with the model. LHPH sounds different and unfamiliar. The benefits are compelling, however, making a change and taking a chance creates a feeling of anxiety that prevents progress.
If you follow this “how-to” guide and engage the resources provided throughout this paper, you will find you can create your own LHPH program and take advantage of all the opportunities this model can offer you, your dealership, and your customers.
Determine “Pay-As-You-Go” Status
The first step in the process of building your LHPH program is to understand your state tax laws for leasing. With retail installment BHPH contracts , sales tax is paid to the state at the time of loan origination. However, in thirty-one (31) states*, when leasing a vehicle, the sales tax is remitted to the state on the actual monies collected by the dealer (i.e. down payment, first payment). Sales tax is then collected on the payment stream from the lessee payments avoiding any negative impact to the dealer’s cashflow.
Understanding the tax implications of leasing in your specific state is a key starting point for forecasting cashflow and identifying the operational needs of your LHPH business. In the Appendix you will find a list of the “pay-as-you-go” states as of 2016. State tax laws can and do change often, check with your DMV and consult your local counsel to ensure you are compliant with all state regulations.
Review and Understand Reg M
Before you launch your LHPH program, it is imperative that you become familiar with Regulation M: Consumer Leasing. It is to LHPH what Reg Z is to buy here pay here financing companies. Here is a link to the regulation and commentary on compliance.
All of Reg M is important to read and understand, however, dealers should pay particularly close attention to the disclosure requirements and the advertising rules set forth in the document. Advertising is naturally the most visible element of a dealer’s operation and, therefore, the easiest to scrutinize. An additional resource for information regarding Reg M compliance is CARLAW F&I Legal Desk Book by Thomas Hudson, Michael Benoit, and Ralph Rohner.
In addition to Reg M, every state will have its own regulations revolving around the lease product. You should always engage your own legal counsel to ensure you build and maintain your operation in compliance with Reg M and your state and local laws.
Identify a LHPH Compatible DMS
Identifying a LHPH compatible Dealer Management System (DMS) that can accurately print and calculate a lease properly is an essential step to starting your program. There are a handful of DMS systems that currently provide a lease here pay here software. These include:
- AFS Dealers – afsdealers.com
- DeskManager – automanager.com/auto-dealer-software/
- Deal Pack – dealpack.com
- Auto Master System – auto-master.com
Licensing and Forms
The necessary forms and contracts for your LHPH business are typically available through the standard forms libraries of the LHPH compatible DMS systems or by contacting Reynolds & Reynolds or Wolters Kluwer. However, we advise our dealers to have their own counsel, or a reputable firm such as Hudson Cook, review each document prior to launch to ensure they are current and comply with all state and federal regulations.
Dealers entering the LHPH business should contact their state department responsible for the licensing of motor vehicle retailers to inquire about any additional licenses necessary for leasing. Some states do require a lessor license or additional certifications to operate a LHPH business.
Engage Legal Counsel with Consumer Leasing Experience
Retaining qualified legal counsel is a necessity for any dealer whether they specialize in retail, BHPH, or LHPH. A local attorney with state-specific knowledge is a must and we also recommend engaging a firm with consumer leasing experience as you prepare your LHPH program. Hudson Cook, LLP is an automotive industry standard with extensive experience in all things auto related, including leasing.
Be sure to run your lease contract and any additional documents you intend to use for your used car leasing program past your counsel to ensure they are fully compliant.
Insurance Requirements and the Graves Amendment
Virtually all States require the buyer/lessee to have full coverage, or at least State Minimum Financial Responsibility Limits (liability), to finance or lease a vehicle. These state minimum coverages can vary substantially by state. In addition, the lease agreement the lessee signs may require greater coverage than the state minimum car insurance requirements. It is important to be aware of both, so the lessee and lessor are compliant with state regulations and with the lease agreement.
In 2005, President George W. Bush signed into law the Transportation Equity Act of 2005, a comprehensive transportation bill which included the Graves Amendment. This amendment relieved rental car companies and lessors of vicarious liability which before, meant the renters and lessors could be held liable for the negligent acts of a driver who was using the vehicle. The Graves Amendment declares that leasing companies shall not be held vicariously liable under any State law for damages sustained in a motor vehicle accident.
There are a handful of states that may require additional due diligence on the part of the lessor. Always consult your legal counsel to identify any state-specific insurance regulations that may apply.
Retain an Accounting Firm with Consumer Leasing Expertise
One element that every dealer entering the LHPH business should be aware of is accounting. Lease accounting is different than what most dealers are accustomed to from their BHPH or retail experience. However, proper lease accounting will allow the dealer to maximize the tax benefits afforded them from the used car lease product.
Using a LHPH compatible software (DMS) will help with the proper reporting, however, retaining an accounting firm with consumer leasing expertise is highly advised. They can assist you with transitioning your current books and advise you on the best way to optimize your standard and bonus depreciation for tax purposes. One such firm with extensive consumer leasing experience to consider is Katz, Sapper & Miller.
Enlist an Expert Advisor
Another step many dealers will take as they develop their lease-here pay-here business model is to enlist an expert advisor. There are a number of resources available in the market, from training seminars provided by Mark Dubois with NIADA, LHPH 20 Groups, to dealer consultants such as AFS Solutions and Northland Dealer Services, and even owners of large LHPH dealers who actively help other dealers enter the space. All of these are excellent opportunities to leverage the knowledge of LHPH experts for best practices you can build into your dealership.
Develop Internal Credit and Collections Procedures
If your dealership has experience in the BHPH market, you have likely developed a set of credit underwriting guidelines and collections practices that have worked for you over the years. If that is the case, not much will change when you convert to LHPH. You may want to review your collections procedures regarding repossession and bankruptcy now that you have additional protections from the lease product.
If you are entering the LHPH market without a BHPH background, you will want to research and develop a strong set of underwriting and collections practices to launch your lease here pay here program. There is no shortage of industry best practices available through the National Alliance of BHPH Dealers (NABD), the National Independent Automobile Dealers Association (NIADA), industry conferences, Dealer 20 groups, expert BHPH consulting services, industry specific periodicals such as BHPH Dealer Magazine, and online resources that can provide quality advice.
Be sure to document your credit and collections procedures for internal use and training which will reduce employee turnover and provide consistency across your business. These will also be documents you can provide your future lending partners to build confidence in your internal controls and overall servicing expertise.
Identify a Lending Partner
Locating a lending partner for a LHPH program can be a challenge. Many lenders are unfamiliar with the lease product and, therefore, shy away from providing capital for leases.
For dealers in the incubator stage of building their LHPH business, you may have success working with your local bank where you have a strong relationship. A small to mid-size line of credit will be enough to get your portfolio started and gain experience and performance history in the business.
For those dealers with experience in the BHPH or LHPH industry, lenders who specialize in LHPH lending, such as LHPH Capital, could be a good fit. These highly experienced companies with access to larger amounts of capital will require at least two to three years of successful BHPH or LHPH experience. You will also need certified financial statements, business and personal tax returns, bank statements, documented processes and procedures, and a portfolio with at least six(?) months of history to demonstrate collection performance.
Training Your Staff
Some dealer principals are concerned with whether their staff will be open to a LHPH business. We have found that by training the sales and finance departments, using much of the information in this ebook, we have been able to overcome this concern. Starting with the “Language of Leasing” document (located in Appendix B) is a wonderful way to set your team at ease with the concept. The Language of Leasing compares terms your team is familiar with from traditional financing to their leasing equivalent.
Combine this information with a few example deals/leases and an explanation of all the value leasing provides the customer and your team will quickly realize LHPH is not a difficult concept. In fact, it will actually help them (and you) roll more cars down the road each month.