In this episode of the Industry Pulse, McGlinchey’s Jason Bichsel discusses the compliance considerations auto lenders should understand related to short-term lease and subscription programs. Auto lenders, such as Westlake Financial Services, have backed subscription models to appeal to a broader array of dealers and customers, and programs such as NextCar’s subscription service create a path to mobility for consumers who may not be able to buy a car, or who do not want the responsibilities of full-time ownership. OEMs and lenders must consider state and federal regulations that could come into play as these programs gain ground. [toggle title="TRANSCRIPT"]Amanda Harris 00:03 Hello everyone and welcome to the June issue of the industry pulse, a monthly market update on trends in auto finance. I'm Amanda Harris, Associate Editor auto finance news. The industry pulse features a rotating Faculty of six industry experts that will give twice annual reports on crucial market topics such as credit quality, credit demand, residual values, regulatory compliance, macro economics and more. I'm happy today to welcome our speaker from McGlinchey Jason Bichsel. Jason is a member in McGlinchey’s consumer financial services compliance practice group. he advises banks, finance companies, online lenders and private companies servicing the automotive industry and regulatory compliance and general business issues. In particular, Jason has a wealth of experience related to auto finance and leasing products, including questions connected with federal and state collections regulations. Prior to joining McGlinchey, Jason served for five years as corporate counsel in the BMW group legal department, which supports BMW Financial Services, he specialized there in mobility and subscription services. So we know the definition of mobility is changing. We've seen auto lenders, such as Westlake Financial Services, recently backing subscription models as a way to appeal to a broader range of dealers and customers. programs such as next car subscription service are creating a path to mobility for consumers who may not be able to buy a car or who may not want the responsibilities of full time ownership. So Jason, thank you for joining us today to discuss the compliance side of these programs. And we're happy to dive in a little bit further on that. Jason Bichsel 01:50 Amanda, it's my It's my pleasure. Thank you for having me. Amanda Harris 01:54 So let's first start by setting the stage. So what are the top of mind you know, compliance considerations for lenders as it relates to these kind of short term leasing programs. Jason Bichsel 02:06 The goal of any new financing product is to give consumers more flexibility and more choice. And you do that by creating something that is non traditional that doesn't fit neatly in the boxes that we have very clearly defined, sort of paths to, for consumer to get access, possession use of a vehicle without paying the full cash price of the car, right, we have traditional retail installment sales or direct lending, we have traditional consumer leasing a 36 month lease with a residual and an option to purchase then we have short term rentals. And that's really the three swim lanes that currently are very well established in the law. From a compliance from a from a compliance management perspective, anytime you're operating in a legal gray area, you know, the top of my compliance concern is well, how do we how do we express both from a marketing perspective and just from from a pure numbers perspective for the consumer, and the attractiveness of this product, the flexibility and choice they are offering while at the same time, keeping the terms of the agreement and the way you're marketing it transparent and non deceptive, because we're operating in an area where we don't have specific regulation targeted to to govern these programs. And so the concern would be, you know, over overarching or reactive regulation that would, you know, remove these products from the market or greatly reduce their effectiveness and attractiveness to consumers. That's, that's, that's the first the first area for, in particular for captives or other OEM affiliates. The second very critical compliance concern is dealer relations, state dealer franchise laws are, again, another area of law that doesn't specifically address the concept of, you know, a vehicle subscription or, you know, some other modern notion of mobility services. How do you how do we negotiate or navigate that relationship with their dealer business partners in a way that makes the product something that's attractive to those business partners to want to sell to their customers and without raising the higher or raising the suspicion that hey, the goal here is to remove people from showers. Amanda Harris 04:48 So you know, with all that in mind, and we've kind of mentioned in my intro that we've seen these programs, you know, pop up, but there they are using different terms. So sometimes we'll see you know, the term Short term lease, sometimes we will see them called a subscription service. So what is the difference there, especially as you know, relates to compliance considerations. Jason Bichsel 05:13 I think the first thing to point out and the most important point is that the term subscription, generally, with very few exceptions, isn't defined in the law, at least as it relates to auto finance, right, it's more of a marketing term. And I think, an effort to capitalize on the general marketplace of hate, consumers like to subscribe to things and have the choice to end that subscription. Within, you know, with very flexible terms, whether it's a very short period of time, or even with with no obligation of more than a single month, we subscribe to we most of us Subscribe now to various media channels, whether it's Netflix or Amazon Prime, and the way that we consume our media, we subscribe to clothing delivery services that allow us to, to avoid going into a store and we we can try on the clothes and send it back, we don't like it. And the options are endless. So you know, an option for for whether it be OEMs, whether it be dealers, whether it be other finance companies to capitalize on that idea of flexibility. And that's really what we're talking about. When we say subscription, it can mean a lot of things, it can mean the subscription to the actual vehicle itself. But I think we also have to be careful because the term subscription is also used to market in vehicle services, like satellite radio, or other services like that. But now our options to purchase within the vehicle and its its internal systems. So it really is a gray area, because we don't know from from product to product, what exactly we're talking about. Within the the term within the traditional idea, to the extent anything could be traditional in the space, we have a subscription, that the concept is a fleet of vehicles. And you know, a consumer wants to drive an SUV for the week, but on the weekend, they might want a convertible to take to the beach, or whatever. And so you can flip in and out of those cars. But it can also mean and some some providers have used that term to mean Well, it's really just a shorter term lease that has either less or no early termination penalty attached to it. But it's one vehicle that is designed to operate as the consumers primary vehicle and then other other products or more rental car pools. And so how do you how do you define exactly what a subscription is. And I think that's going to be the challenge for the law to catch up. How is this defined using the term lease carries with it its own compliance challenges, because once something is called and looks like a product that is very clearly defined in the law, then there are obligations attached to that. And if it is a short term lease, that doesn't fall within the requirements of regulations, then there are going to be UCC requirements that attach or maybe state consumer leasing laws that attach and providers have to comply with those laws. If the product allows for, you know, an initial term of greater than four months, and that that product will probably be defined a consumer lease under reg m, and all of the attendant disclosure requirements that come with that are now going to be requirements. Amanda Harris 08:57 Yeah. So you talked a lot about, you know, these gray areas, and I'm sure you know, as more of these programs are offered digitally, you know, and you kind of mentioned with regulation M which for our listeners and watchers is what implements the consumer leasing act can kind of come into play maybe at different times, depending on what the program looks like. And you know, how its defined by the person offering that? Can you just dive a little bit more into, you know, what lenders should kind of be thinking of when they're talking about defining their program or what terms to use when, when they're launching it digitally, all those things that should be kind of considered. Jason Bichsel 09:39 I talked earlier about transparency and non deceptive mass, which are obviously there. Those are traditional marketing concepts that any any good lawyer worth their salt is going to advise clients to be transparent non deceptive. Rihanna's primarily A disclosure statute requires the disclosure of myriad terms within the confines of a single lease agreement. And when we're talking about a product that may not fall squarely within, you know, what we think of as a traditional lease, it becomes more and more difficult to meet those requirements. For example, if if a if a product meets the definition of a consumer, at least because its initial term is greater than four months, but it doesn't have necessarily an end term, it's not at least a specific specified period of time that the term can be renewed, it becomes more and more difficult than to disclose what the total payments are going to be, for example, it may be difficult to attach a residual value to a vehicle when you don't know exactly when that term is going to have. And, you know, how do how do different ancillary products that might be sold with this plan to the disclosure requirements as well. So there's a lot of complexity. And frankly, we don't know how, how regulators are going to view these, these disclosures. And so anytime you have, and we have established channels, we have, you know, it's clearly not a financing product, it's not a retail installment contract, it's not a direct loan. But it could be a lease, and it could be a lease under reg, or under state law. But it also could be a rental agreement. And the contract, consumer is going to have to either approximate one or the other of these things, or borrow notions from from both swim lanes, so to speak. So in the challenges there, if you if you're a traditional auto lender, your systems, your processes, your compliance management systems are set up to deal with products that you're used to dealing with, in this case, a traditional 36 month consumer leads. If under state law, or in the case of rental car laws, municipal laws, even from a city to city basis, impose additional requirements that you're not used to dealing with, for example, the requirements to provide a car seat child child's car seat with a rental car, are you going to be equipped to handle that? Typically, you're not going to have people on the ground in a market? So how do you manage the vendor relationships, service provider relationships? I mean, all of that is going to come into play? And you know, so really, when we're talking about a new product, the challenge is, which regulator? Do we think is going to gain interest in this product? And how are they going to view it? And so that's, that's, that's how, you know when I, when I talk to clients about how to position these things in the market. What we're talking about is, well, let's let's be as transparent as possible, let's show the clear benefit of the product to the consumer. And let's find out what the most onerous restrictions are. And try to confirm that, hey, they're not going to apply because we've chosen a swim lane where we're treating this as as a lease, and we have a defensible position to treat it as a lease rather than a rental car, for example. So we're not going to provide carseats. Amanda Harris 13:47 So the other thing that kind of comes to mind as we're talking about these programs, and whether you are looking at it as a short term lease or subscription, obviously they're going to the cars are going to come back we kind of mentioned that this is not, you know, it's a way to get a car in the short term, either way, so these are going to come back. And my question is, you know, when that when they do come back to the OEM, what what kind of legislative actions might impact their ability to resell that car, you know, maybe without dealer license, you know, is there a difference? Would they use the term scription versus lease related to that aspect of it? Jason Bichsel 14:27 Again, Amanda, I think this is an area with a lot of gray. However, we're talking about leasing. In general, there's the remote most states will allow the sale of a vehicle or some that don't have a substantial number of states that don't, but many states will allow the sale at the end at the maturity of a lease directly to the lessee. Most states will not allow the sale of the vehicle to a third party other than a licensed dealer without obtaining the dealer license. So that's really it. allenge that if if if you are a manufacturer or affiliate, who is going to have a challenging time obtaining a dealer license to, to be able to justify programs like this, because if a vehicle comes back very early in a term, or after only a couple of months, the residual loss on that's going to be greater. And so how do you? How do you capitalize on other options to use that vehicle without running afoul of a state dealer franchise laws? That's a real challenge. And so, I think, you know, the only way that some of these programs can work is if there's a very close relationship with a dealer network that sees the the true benefit of the of the product, and can assist with some of those downstream challenges. Yeah, absolutely. That's Amanda Harris 16:03 a really good point, too, for kind of how to maybe do this in the best practice kind of way. And so to bring everything we could have talked about into like real life scenarios, are there any court cases that come to mind, in which, you know, OEMs lender should take note of that kind of show how this, you know, kind of plays out? 16:28 Well, last in 2020, Volvo's program care about procured by Volvo was challenged by the California New Car Dealers Association. And the result of that investigation was a finding that basically, Volvo had engaged in unlawful competition with its dealer network. And the reason that things ended up where they are, is because of the direct sale component of the digital sales platform that Volvo had set up. dealers felt that basically that that channel had taken customers out of their showrooms. And then consumers who are I'm sorry, that dealers who participated in the program and acquiesced to it were given priority with respect to getting certain vehicles that were very popular with consumers on their lives. And at least the dealers position was that they were making less money as a result of these transactions than they would with a traditional lease or financing arrangement. And so so that's where they took that position, and it and that investigation highlights some of the unintended consequences of, of programs like this, even though, that California regulator didn't have authority to make a finding with respect to the consumer relationship. It suggested that Volvo had violated consumer laws, state consumer leasing loans. As far as I'm aware, there's never been anything that followed up on that. But you can see how a frustrating situation with with a dealer network can lead to challenges on the consumer side as well. Amanda Harris 18:19 Definitely something to look out for and be aware of. So it's very timely conversation for sure. And so, of course, the last thing I wanted to touch on was, you know, all the things we're talking about with compliance, we know compliance changes, quite often, to all different factors. And, and you just mentioned, you know, dealers and what they want to happen can have an impact on, you know, on companies and their programs. So what do you, you know, see happening in there in the near future, as you know, dealer lobby groups continue to advocate for legislative changes, and how might that affect auto lenders. Jason Bichsel 18:57 So, I think what remains to be seen is how permanent some of the changes that have resulted due to the covid 19 pandemic become, ie, what we saw last year were situations where dealers and OEM affiliates work together to create digital sales and financing platforms that would allow consumers would allow dealers to continue to, to sell and deliver vehicles and finance companies to continue to finance them in a way that that met the requirements of each state's lockdown procedures. And so like when you have a situation where consumers really can't get on site other than maybe to, to show up for a service appointment. You know, how do you how do you continue to sell cars and stay in business? And so those channels have been built they've they've been working and you know, will they remain a change? That one consumers like to avail themselves out to the consumers like it? And does it allow dealers and their financing partners to, to continue to have the type of relationship that they want to have. So that's that's, you know that that is really when you're talking about a digital sales model on a product that sort of makes sense in that that medium, like a subscription. How permanent Well, those changes. And the second thing is what's going to be the impact of vehicle autonomy on how people think about buying, leasing, owning having possession of a car? And how do manufacturers distributors and you know, auto finance companies deal with a situation where there might be fewer cars sold, but the same number of customers? And what products will arise as a result of that? And subscript vehicle subscription is one of those one of those types of products. Amanda Harris 21:11 It'll be follow for sure. And see how all this plays out in the coming years. So we will definitely be following that. Well, thank you so much. I think that's a really great overview. We really appreciate the insight into the compliance side of these things. Obviously, compliance always needs to be, you know, part of the focus for all of our readers, so we really appreciate it. And thank you again, Jason, for joining us. And that will conclude today's episode. So for all of our viewers, please check back to auto finance news for leading industry insights. And we'd also love to hear your feedback on this series. So if you want to share feedback with us, just use email at info at auto finance news dotnet. Otherwise, thank you so much and have a great day. Thank you enjoy it. [/toggle]
