Invest In America Ford & GM Lease Pilot Program Questions & Answers

Transcription

1 Invest In America Ford & GM Lease Pilot Program Questions & Answers 1. Do the manufacturers require a certain amount of credit union participation in order to proceed with the pilot? a. Participation requirements are based on the amount of membership coverage, not the number of participating credit unions. Ford/GM has said that the participating credit unions must represent a minimum of 25% of the credit union membership of the state. Michigan requires 1.1 million members (4,406,878) New York requires 1.06 million members (4,270,557) New Jersey requires 285,000 members (1,141,654) FL requires 1.13 million members (4,544,122) Philadelphia requires 853,000 members (3,411,789 total for PA) 2. What if there are not enough participating credit unions to meet the 25% minimum coverage for the entire state? a. If we cannot reach the 25% goal statewide, than the area may be reduced to a specific area such as southeast MI for example. If there are no logical smaller markets that can be adequately covered by participating credit unions, the pilot may be cancelled for that state/region. 3. What happens if the participating credit unions can t handle the lease volume generated by the program? a. That is part of the reason we are doing a limited pilot to 90 days. Credit unions will need to make decision if this program is good for them and determine if they will move forward. 4. Is the 39-month lease the only lease that credit unions can offer? a. No, credit unions can offer additional lease terms from 36 months and up. The 39-month lease is the only one that is promoted by the manufacturers. b. The manufacturer subvention will also apply to other lease terms offered by credit unions. 5. Do credit unions have to currently be involved in indirect lending? a. No, credit unions are not required to be participating in any indirect lending programs to participate in the leasing pilot. Both Leasing Partners have systems that will allow credit unions to process the lease applications from the dealers. 6. Can credit unions participate in this program on their own without a leasing partner? a. No, because of the pooled escrow account, credit unions must select one of the approved Lease Partners to help manage their leasing program

2 7. Who determines lease limitations/requirements mileage, etc? a. Each lease partner has its own lease product. The product that is offered determines factors such as annual mileage offered, as well as how much maximum funding is allowed on a lease, etc. The credit union will work with their Lease Partner to determine these limitations. 8. Are credit unions required to have a community or open charter to participate in the program? a. All credit unions regardless of charter type may participate in the program, however, since Ford/GM will be promoting this to the public, credit unions must be willing to open accounts for members who qualify for membership. 9. What risks does the credit union have in participating in the lease program? Credit Risk. The risk of the borrower failing to make regular monthly payments. Under this circumstance the credit union would treat this like a loan and repossess the vehicle. The credit union would be responsible for selling the vehicle and assume the loss or gain associated with that sale. Their chosen Lease Partner may provide some assistance with this. These credit losses are not covered by the escrow account or insurance policy. Residual Value Risk. At the inception of each lease, the residual value is set by the lease partner according to the stipulations of the Residual Value Insurance policy. At lease end, that residual may be more or less than the current market value of the vehicle. The escrow account is designed to cover losses equal to 10% of the residual value amount. The lease partner then carries insurance to cover losses exceeding 10%. The risk to the credit union includes the possibility that between the two approaches (escrow account and insurance) there could potentially be a gap that creates a shortage on the payoff (this is called policy leakage). The chances of this program incurring leakage are remote, but it is part of the risk of offering this type of program. Excess wear and tear and mileage. These fees are charged to the member to cover the cost of repairs and excess mileage. Each Lease Partner may handle these fees differently. The credit union may be responsible for billing and collecting these fees and should discuss this with their lease partner. As with credit risk, if a member chooses not to pay contractually obligated charges at lease end, such as their disposition fee, mileage penalties or excessive wear and tear, the credit union would write that loss of just as with any other lending product the credit union offers. As with conventional auto loans and credit card accounts, there is no guarantee that a member will pay what is due to the credit union. This is why the credit decision is an important piece of the program

3 10. What is the typical lease rate? a. Unlike conventional loans that use an interest rate to calculate the interest on the loan (Reg. Z), a lease uses a money factor to calculate a lease charge (Reg. M). b. A money factor is a five-digit decimal, such as This corresponds approximately to a contract rate of 5.99%. c. Though it is not an exact science, a simple method of arriving at an approximate conversion from money factor to interest rate is to multiply the money factor by (This gives you an approximate rate only, not an exact rate.) d. A money factor of is typical for A paper in the current market. 11. Will this be the only rate credit unions can offer? a. Credit union may offer a lower rate if it chooses to do so for competitive reasons, however the credit union cannot offer a different manufacturer a more competitive rate than what is available on the Ford/GM program. 12. Can the credit union offer higher rates for higher risk borrowers? a. Credit unions can offer leases for multiple risk tiers. The advertised rate is for the top or A tier. The credit union may provide a lease to a higher risk tier at a higher-than-advertised rate. Credit unions should discuss this with their Lease Partner. In general leases are approved only for the top tiers. 13. How is the A borrower determined? a. Each credit union determines their own risk tiers just as they do today. The advertised rate is for their A members. 14. When rates are set are they set for various risk tiers? a. Only the top tier or A paper rate is set and marketed by Ford/GM as a competitive price point to drive traffic into the dealerships. Credit unions will have the option to set a lower rate for competitive reasons, but will not be able to offer a higher rate for this top tier. b. Rates for higher risk loans (B tier) can be raised as determined by the credit union. 15. Are there any fees to the credit union? a. No, there are no fees to the credit union for participating in this program. b. Each lease partner will charge a fee for managing the lease portfolio. 16. What fees are associated with the lease? Acquisition fee Paid by the member at origination ranging from $750 - $1000 and is determined up front by the Lease Partner. This fee is typically capitalized (rolled into the loan amount) and passed through to the Lease Partner to cover the cost of their services, insurance policies and contribution to the escrow account

4 Disposition/Purchase fee The disposition fee ($450) and the purchase option fee ($350) is paid by the member at lease end to cover the cost associated with disposing of the vehicle. Excess wear and tear and mileage fees These fees are paid by the member and potentially billed/collected by the credit union. Each Lease Partner has different methods of handling these fees. Credit unions should consult with their chosen lease partner on how these will be handled. 17. Who monitors rating on insurance company(s) to ensure that the policy remains in compliance with NCUA regulations? a. The Lease Partner and manufacturers monitor the rating of their insurance provider. If the rating goes below a B+ rating the Lease Partner will be required to find another provider. 18. Who pays for the insurance? a. The Lease Partners pay the RVI premium out of the acquisition fee. 19. Can the credit union offer its own GAP or Credit Life/Credit Disability (CL/CD) insurance to the member as part of the lease? GAP insurance is included in each lease by the Lease Partner. CL/CD generally will be provided by the dealer. If dealer does not sell CL/CD, the credit union can add it. If the member wants this as part of the loan amount (capitalized) the lease would have to be rewritten to include this amount (and thus be reflected in the monthly lease payment). It depends on the state wherein the lease is originated as to whether or not CL/CD can be included in the lease. 20. How are dealers forwarding applications to the credit union? a. If the credit union has an indirect lending program they may be able to use the same system. b. If the credit union does not have an indirect lease program it can work directly with its lease partner to initiate the lease pilot program with its local dealers. 21. Will credit unions have to pay the dealers a reserve for each lease? a. With assistance from its lease partner, the credit union can determine if a reserve is appropriate in their market, and what type of reserve is most competitive. It is at the credit union s discretion whether to offer a reserve or not. 22. How is negative equity handled in the case of a member trading in a vehicle and leasing a new vehicle? a. The negative equity is rolled into the purchase price of the new lease vehicle. This does not affect the residual value of the new lease but it will raise the member s payment

5 23. How will the credit union collect the acquisition fee from the member? a. This fee is collected up front. In most cases the dealer rolls the fee into the purchase price of the vehicle. It is part of the loan amount (is capitalized in to the lease). The credit union deducts this amount from the dealer check. The fee is deposited into a general ledger account and forwarded to the lease partner monthly. 24. Will credit unions have the ability to quote a lease payment when members call? a. Yes, each Lease Partner provides a payment calculator, allowing credit unions to calculate and quote lease payments to their members. 25. How does the member pay the amount of sales tax due? a. Sales tax collected at lease origination (such as tax on cap reduction, aka down payment, or any other related upfront tax) is paid to the state and local entities by the dealer. b. In most states, sales tax is collected each month as a sales and use tax on the monthly payment. For example, if the payment is $300, and the sales tax rate is 7%, the total monthly payment is $321. c. The sales tax is remitted to the credit union by the member each month as part of the monthly payment, and that tax is stripped off of the payment prior to the payment being allocated for depreciation and lease charges (aka, principal and interest). d. The tax is posted to a sales tax GL and then remitted to the lease partner at month-end. 26. Who holds title? The title is in the lender s name until lease end. The credit union is the lien holder Lease Partner is the lessor The member is the lessee 27. What happens if the member defaults? a. The credit union handles lease defaults as with any traditional auto loan and is responsible for selling the vehicle, as well as any loss or gain associated with the sale. The credit union s Lease Partner may be able to provide some assistance with the disposition of the vehicle. 28. Could the credit union sustain the loss from the repossessed lease? a. Yes. Just as with any traditional auto loan. The residual value escrow account and insurance policies only apply to vehicles turned in at lease end. 29. How do you determine what the loss will be? a. Same as with a traditional loan. This is based on the current principal balance vs. the amount collected at sale or auction

6 30. Should credit unions expect higher incidents of fraud than with traditional loans? a. There should be no difference than with traditional loans. Based on the credit quality that usually comes with the lease, the credit union could see less fraud. 31. Can credit unions force place insurance if the member does not carry the appropriate insurance? a. No, credit unions cannot force place insurance on a lease. b. There is no insurance provider that will force place insurance on a vehicle lease. c. As well, once the lease is written, it cannot be changed. Any attempt at changing the lease structure would result in a higher payment, which is not allowed under Regulation M. In a case like this the lease would be completely re-written (terminated and then originated again as a used vehicle lease). This type of approach would be time consuming and costly for the lender and the lease partner. d. The lease partner should provide a third-party tracking service that is specifically equipped to track insurance coverages on the lease. e. Check with the lease partner of your choice and make sure there is adequate CL/CPD to cover you in the event your member defaults on insurance for his/her leased vehicle. 32. Does the credit union pay the disposition fee if the vehicle is repossessed? a. The credit union is not responsible for paying the disposition fee if the vehicle is repossessed, however the purchase option fee could be a contractual obligation. b. Check with your specific lease partner to see if it waives purchase option fees on vehicles that terminate as a result of default