First off, I'm no expert in the equipment leasing business; however, but I have some peeps that are. A few days ago I caught a thread on Linkedin reposted from @KeithHachey (Americorp Financial LLC). See the pic below.
The first item that caught my eye was the hashtag #leases and then the text at the bottom for "Impact of Senate Bill 1235 on Equipment Leases.
Of course I followed the link and it lead me to the web site for the State of California Legislative for Senate Bill 1235. Bill 1235 relates to commercial financing in the State of California and the disclosure of the following.
22803.
(a) As an alternative to the disclosures required in subdivision (b) of Section 22802, a provider who offers commercial financing that is factoring or asset-based lending and that offers the recipient an agreement that describes the general terms and conditions of the commercial financing transaction that will occur under the agreement, may provide the following disclosures as an example of a transaction that could occur under the general agreement for a given amount of accounts receivables:(1) An amount financed.
(2) The total dollar cost.
(3) The term or estimated term.
(4) The method, frequency, and amount of payments.
(5) A description of prepayment policies.
(6) The total cost of the financing expressed as an annualized rate.
(b) This section shall remain in effect only until January 1, 2024, and as of that date is repealed.
From what I'm reading, this means that if a business enters into an equipment lease all of the above information needs to be disclosed to that business.
For years and years many in our industry has been using "padded" lease rates.
Let me give an example of "un-padded rates"
A leasing company gives a lease rate to the dealer for 60 months. That rate to the dealer is let's say .0186 for the 60 month term. In order to figure the payment, we take the dollar amount of the lease and multiply it by the rate factor. Let's use $10,000 is the purchase price. 10,000 * .0186 = $186.00. The payment for the business would be $186.00 for the term of 60 months. This would be an example of a lease rate that is not "padded".
The example of a "padded" lease rate would be the following
The rate from the leasing company is still the .0186 for the 60 months, however, the dealer increases the rate factor to the sales force to .0202. Using the same purchase price of $10,000 and multiplying it by .0202 makes the lease payment $202.00 per month. The payment is now $18 higher per month for the term of the lease. The dealer profits $18.00 per month for the 60 month term. The dealer makes an additional profit of $1,080 on the lease.
The way I'm seeing this is the dealer or the leasing company now has to disclose all of those financing items to the business. Thus instead of the purchase price being $10,000 it should be disclosed as $11,080. Along with the annualized rate.
I am not the expert in the language for Senate Bill 1235. I'm hoping that Keith can chime in on this blog and verify what hoops dealers and leasing companies will need to jump through in order to provide office equipment leasing in the State of California.
I titled the "Is This the Beginning of the End for the Padding of Lease Rates?" because I'm not a fan of the practice. I do not believe the "padding" of lease rates is illegal, it's just not the thing to do. If a dealer or a direct manufacturer needs more dollars then just increase the price of the equipment and stop back end process.
We know our law makers, and they will pretty much do anything to make the States extra revenue. The Bill allows requires that the lending institutions that are listed also need a license. I'm sure there is a fee for that. Thus, a Bill like this may becoming to your state or even my state.
Keith are you out there?
-=Good Selling=-
