Leasing is the industry’s roller coaster. It plummets to ground level when residual losses spook risk managers into pulling back. It starts ascending toward another crest as short-memory marketing managers and manufacturers begin aggressively leasing as a way to sell vehicles.

Cox Automotive’s latest year-end Industry Insights and Forecasts report shows leasing’s share of new-vehicle transactions peaked in 2019 at 33%, then dropped to one in five amid pandemic-era inventory shortages and zero-percent financing options. The penetration has steadily increased since then to 28% last year.

Affordability concerns will likely push leasing penetration back up to prepandemic levels in the next year or two.

With the increase in 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 dealer management system correctly, can TIL disclosure mistakes be as prevalent?

A little primer on some common leasing disclosure issues is in order.

IGCC and Lease Starts

The two greatest improvement opportunities on a lease agreement are:

• Itemization of Gross Capitalized Cost: This section of the agreement discloses how the transaction builds from the selling price to the gross capitalized cost. The itemization may include 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 taxes and fees.

Just like on a retail deal, the lease disclosure statutes require the proper disclosure of any prior credit or lease balance, aka negative equity, 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. It must be a properly labeled and itemized disclosure.

Some dealers make the mistake of including either negative equity or the last few lease payments 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 and admit they do not have the forms available to provide it to the customer if asked.

“Lease starts” 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, e.g., 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 Missing Buyer’s Order

Another recurring issue is the lack of an “order for leased vehicle” agreement.

Dealers outside of California generally have a buyer’s order executed during the retail process. It contains a number of representations and warrants and possible state-required disclosures that are not necessarily contained within the sales contract. An arbitration provision is often 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 simply ignore it for roughly a quarter of all their new-vehicle transactions.

These issues are as easily resolved as disclosure issues on retail transactions. Just takes a little time and programming.

Continued good luck and good selling.

Gil Van Over, a recent inductee of the Bobit Business Media F&I Hall of Fame, is executive director of Automotive Compliance Education (ACE), founder and president of gvo3 & Associates, and author of “Automotive Compliance in a Digital World.”