I’m from the South, and remember vividly the first time I heard the instructions for planting kudzu: “Throw it on the ground and run like hell.” I think about the kudzu every time I pick up the phone and talk to a dealer who says that he is in the rent-to-own or lease-to-own business. Why? Because there is more misinformation circulating about these programs than about any other independent dealership topic that I know of, that’s why.
Occasionally, we are asked to actually look at one of these programs before a dealer implements it. There are two telltale signs that we look for that almost always spell trouble, one in LHPH programs, the other in RTO programs.
The LHPH problem is the so-called “dollar-out” lease. We see these frequently. In such a lease, the lessee is offered the option to buy the leased vehicle at the end of the scheduled lease term for $1, or for some other nominal amount. The problem with such a provision in a lease is that, depending on the definitions in your state’s law, it can turn the “lease” into a retail installment sales contract for the purposes of state law, which means that the so-called “lease” has to contain all of the provisions and disclosures required by the state’s retail installment sales act. At the federal level, such a provision has the same effect, making the “lease” subject to Federal Reserve Board Regulation Z (a real lease would be subject to Regulation M, which is a completely different kettle of fish). Because the documents were never intended to comply with these state and federal laws, they are often in flagrant violation of them.
The RTO problem that scares us to death is the RTO program that has an initial rental term of more than four months. The problem with a long initial rental term is that it brings the RTO program within the scope of the definitions of Regulation M. Because the RTO programs that we see seldom comply with Reg. M, the resulting documents are full of federal violations.
These certainly are not the only problems we are seeing in LHPH and RTO programs, but these issues just seem to be the flavor of the month. Usually a program that has one of these problems has plenty of additional problems.
So when the LHPH or RTO salesperson comes calling, be careful. Some companies offering these programs are responsible outfits that have done their homework. Others are, shall we say, not so diligent.
We’ve developed a pretty good test for determining which is which. We tell dealers that when they are offered any new program (not just LHPH or RTO, but any program) by a vendor, they should request copies of the vendor’s legal opinion that says, without too many unsettling qualifications, that the program complies with all applicable federal and state laws.
When the dealer asks for such an opinion, the vendor either provides it or not. If no opinion is available, there’s a reasonably good possibility that none exists. In such a case, we advise the dealer to run like hell (that’s a legal term that means “run like hell”).
If the vendor produces an opinion, we first review it to see who wrote it and whether the author’s credentials indicate whether he or she is likely to have a clue what he or she is talking about. We then review the text of the opinion itself, and see whether it looks like the lawyer has identified and answered all of the important issues that such an opinion needs to address, and whether we agree with it.
After all, a dealer doesn’t want someone planting kudzu on his lot.