Positive image and attitude influences our behavior and our actions, and defines what we can or cannot do.

Respectfully yours,

Rebecca Chernek

I applaud Professor Chernek’s February 5 article; Leasing in Today’s Market. I couldn’t agree more with her regarding a dealership’s responsibility regarding lease disclosures. However, the consumer must share equally in being responsible. Too often, consumers delegate their responsibilities to others and that carries a very high risk. For instance, every lessee should know how to create a simple one page lease proposal detailing MSRP, purchase price, gross cap, cap reduction, adjusted cap, cost of money (money factor/interest rate), payment, amounts due at lease signing, GAP coverage, disposal fee, purchase option, early termination criteria, mileage allowance, etc.. The information (e.g., cost of money, residual factor) necessary to make calculations should be provided in advance by the dealership so that the customer is well positioned to create an intelligent lease proposal and is able to make informed decisions. Once completed, the customer simply FAXES/emails the proposal to the dealer. There is no excuse for unpreparedness on the part of the consumer. Abdicating this responsibilty (e.g., computing lease payments) to a dealership may not be in the best interests of the consumer.

Salesmanship is a game that should and must be played fairly. However, customers must remember that dealerships, like any business, seek to maximize profit. This does not relieve the dealership of their responsibilty of fair and honest salesmanship as it must be done within the bounds of sound ethical practice. What is perceived as fair and equitable to one may not seem fair and equitable to another because individuals have different value systems. Ignorance usually carries a penalty. Our society tries to eliminate penalties associated with ignorance by making poor excuses for the unitiated or the misinformed or uninformed via litigation and that is wrong! If everyone were truly intelligent, responsible, and behaved rationally, there would be no need for federally mandated regulations like Reg. M or Reg. Z.

Reg. M, despite changes in 1998, still needs considerable work in the area of disclosure. In order for consumers to intelligently compute payments or create lease proposals that make good sense, certain information must be disclosed including cost of money (i.e., money factors, interest rates). Most fund providers use money factors, especially banks, while a few, like GMAC SmartLease, use interest rates. Currently, Reg. M does not require that the cost of money be disclosed. Their reasoning was that consumers would be confused. How presumptuous!!! How dare they presume that consumers would be confused! I’m not confused! As a consumer, I’m insulted and that makes me furious! Frankly, I believe that their reasoning is nothing more than a smoke screen or a poor excuse for non-disclosure. The retail automotive industry doesn’t want cost of money disclosed and their lobbyists in Washington worked very hard to insure that it didn’t happen! Fortunately, there are some retail leasing agents that voluntarily disclose money factors and residuals like LeaseCompare. I’m not advocating disclosure of the cost of credit in percent terms or an APR similar to that of Reg. Z. I’m simply asking that Reg. M require disclosure of the money factor or, in the case of GMAC, the interest rate used to compute the payment. Yes, it is an interest rate despite what leasing industry folks believe. An interest rate is defined as the rental rate paid for borrowed capital.

At any rate, no pun intended, a lease contract has traditionally been a contract of adhesion which means that it is a non-negotiable agreement between parties of unequal bargaining power. However, in order to craft a fair and equitable agreement and in the interests of fair gamesmanship, good faith bargaining demands that all parties have equal access to all pertinent information including cost of money, residual factors, etc. There can be no exceptions!

Another area of Reg. M that needs to be addressed is uniformity of calculations. Not all fund providers compute payments or early termination charges in the same way and there is nothing wrong with that as long as the methods used are actuarially sound and don’t violate accepted principles of financial mathematics. Unfortunately, some use actuarially unsound methods to compute lease payments. For instance, GMAC SmartLease computes their payments by discounting the residual one month nearer to the present. That makes absolutely no sense whatsoever. My guess is that they do it because they don’t charge a disposition fee. However most, if not all, of the finance captives don’t charge a disposition fee either. Up until five or six years ago, Ford Motor Credit (FMC) added 0.00110 to the capitalization (annuity) factor (which they called an acquisition factor) to account for their industry high acquisition fee. This meant that consumers would pay an additional $1.10 each month for every $1,000 of capitalized cost. So, a consumer with an adjusted cap of $26,000 would pay an additional $1.10 x 26 = $28.60 each month or $1,029.60 over a 36 month lease just to cover Ford’s acquisition fee. Ford has since discontinued this practice but I don’t believe it was due to Regulator pressure. My guess is that it was an internal decision. I understand that FMC now uses money factors instead of interest rates. Fifth Third Bank used an interest rate to compute lease payments in the same way that installment loan payments are computed. Therefore, lease payments were inflated by a factor or (1 + i) where i = annual interest rate/12. Again, this practice is actuarially unsound as lease payments are made at the beginning of the month (annuity due) and not deferred 30 days (ordinary annuity) as is typical with installment loans. I believe Fifth Third has discontinued this practice but, under current regulation, is certainly free to resume this practice at any time should they choose to do so. Perhaps what is needed is an Appendix similar to Reg. Z’s Appendix J that establishes computational standards. I’ll be happy to draft it!

Another area that needs to be reviewed is lease software. In those very few cases where the first payment is rolled into the lease or capitalized, I have discovered that the lease payment is calculated incorrectly. Fourteen months ago, I spoke with one software developer and, after considerable discussion, they finally agreed that their methodology was incorrect and agreed to correct it. As of today, they have yet to fix it! Recently, I wrote a yet to be published paper that addresses this issue. Most software developers use a two stage procedure to compute the payment which is clearly inappropriate. Hopefully, my paper clearly delineates the concerns emanating from inappropriate lease payment calculations that arise when using this two stage procedure and the need to carefully compute the appropriate sales tax liability. Inappropriate or skewed computations only serve to justify the rationale for incorporating standard computational methods in the Federal Reserve Board’s Regulation M paralleling those of its Regulation Z cousin.

Another concern is that dealerships need to EMPOWER their sales associates to make good business decisions. Knowledge is power and empowerment goes a long ways toward fostering ethical business practice. Dealerships should require sales candidates to have business finance degrees, train them, and above all PAY THEM to retain them; particularly the good ones! A sales person running back and forth to a sales manager for an hour or two is very bad business practice and reduces a sales person to the role of an order taker and adds to the frustration of the customer. Sales personnel need to be educated in the areas of financing and that includes leasing. Many can’t even compute a lease payment and that is absolutely disgraceful! When a sales person asks me what they can do to earn my business, I quickly tell them that they need to be honest and competent as I’m very direct and have no diplomacy whatsoever. And so, I have found that a one page lease proposal eliminates a lot of unnecessary conversation and saves a lot of time and money as well! Here’s a thought… as a good will gesture, perhaps dealerships could invite consumers to attend dealer sponsored seminars on consumer retail leasing a few times each year during slow periods like December or January. I gave a leasing seminar that was attended by 43 people and, according to the feedback, it was a smashing success! In a fiercely competitive market, dealerships need to find ways to reach out to the public. Educating customers may be an outstanding venue for attracting and keeping customers. Many will appreciate the gesture because so many of them want to learn. Ah, I know what you’re thinking… dealerships aren’t in the business of educating, right? You may want to re-think your position. The first step, though, is dealerships must have a highly educated and competent staff before they can help or educate others. Explaining to the customer that the “computer did it” just isn’t going to cut it anymore!

It should be painfully obvious to anyone that we need more change. Some people just can’t seem to do the right thing which is why we need laws and regulation. Many will try to get away with a much as they are able to get away with unless they have a strong inner constitution or laws regulating them to do otherwise.

Lastly, I won’t apologize for this long winded commentary because I think everything I’ve said, needed to be said.