Knowledge of Reg M - Vital As More Dealers Seek to Control Lending
Regulation M implements the Consumer Leasing Act (CLA) and governs consumer leases for personal, family, or household purposes that exceed four months and are for amounts up to $66,400 (as of 2023, adjusted annually). It primarily focuses on the leasing of personal property, such as vehicles, ensuring that consumers receive meaningful disclosures to compare lease terms effectively.
- Disclosure Requirements: Dealers must provide clear and conspicuous disclosures of lease terms, including the amount due at lease signing, monthly payments, total payments over the lease term, and any end-of-lease obligations.
- Limitations on Advertising: Reg M sets standards for advertising lease terms, requiring that certain triggered terms be disclosed if specific lease terms are advertised.
- Early Termination and Penalties: It mandates disclosures regarding early termination conditions and potential penalties, ensuring consumers are aware of the costs associated with ending a lease prematurely.
Regulation Z (Reg Z) – Truth in Lending Act
Overview: Regulation Z implements the Truth in Lending Act (TILA) and applies to credit transactions, including loans and credit sales, primarily for personal, family, or household purposes. It aims to promote informed use of consumer credit by requiring disclosures about terms and costs.
- Disclosure Requirements: Lenders must disclose the annual percentage rate (APR), finance charges, amount financed, total payments, and payment schedule.
- Right of Rescission: In certain transactions, consumers have the right to cancel the credit agreement within three business days.
- Advertising Standards: Reg Z stipulates that if certain credit terms are advertised, additional terms must be disclosed to prevent misleading information.
Benefits of Reg M Over Reg Z for Franchise Dealers Using LHPH Model
For franchise dealers adopting the LHPH model, operating under Regulation M can offer several advantages over Regulation Z:
1. Simplified Disclosure Requirements:
- Less Complex Disclosures: Reg M's disclosure requirements are generally less complex than Reg Z's. There is no need to calculate and disclose an APR, which can simplify the leasing documents and reduce compliance burdens.
- Focused on Leasing Terms: Disclosures under Reg M are tailored to leasing, making it easier for dealers to communicate terms that are most relevant to lease transactions.
2. Asset Ownership and Control:
- Retention of Title: Under a lease, the dealer retains ownership of the vehicle throughout the lease term. This can provide greater control over the asset compared to a financed sale.
- Facilitated Repossession: In the event of non-payment, reclaiming a leased vehicle can be more straightforward than repossessing a vehicle sold under a credit agreement.
3. Revenue Opportunities:
- Residual Value Realization: Dealers can benefit from the residual value of the vehicle at the end of the lease term, potentially reselling or re-leasing the vehicle.
- Fee Income: Additional revenue can be generated from end-of-lease fees, such as excess mileage or wear and tear charges.
4. Reduced Credit Risk Exposure:
- Shorter Terms: Leases often have shorter terms than traditional auto loans, reducing the period during which the dealer is exposed to credit risk.
- Lower Monthly Payments: Lower lease payments can attract a broader customer base, including those who might not qualify for traditional financing.
5. Marketing and Competitive Advantages:
- Attracting Consumers: Offering leases can make vehicles more accessible to consumers who are payment-conscious, enhancing market competitiveness.
- Customer Retention: Lease terms can encourage repeat business, as consumers return at the end of the lease term to lease a new vehicle.
Considerations and Compliance
While Reg M offers these benefits, it's essential for dealers to:
- Ensure Accurate Disclosures: Even though disclosures may be less complex, accuracy is crucial to avoid regulatory penalties.
- Understand State Laws: Be aware of any state-specific leasing laws that may impose additional requirements beyond federal regulations.
- Implement Robust Compliance Programs: Regular training and compliance audits can help prevent violations of Reg M and other applicable laws.
Conclusion
For franchise dealers considering the LHPH model, operating under Regulation M can provide significant advantages over Regulation Z. The simplified disclosure requirements, retention of asset ownership, and potential for additional revenue streams make LHPH an attractive option.
