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Permalink Reply by Christopher Arceri on February 7, 2012 at 6:04pm

Here is a paragraph from a Special Finance article in Oct. 2008, by attorney Randall McCathren titled, "LHPH Opportunities".

LHPH vs. RTO Definitions

You’ve seen the terms “BHPH,” “LHPH” and “RTO” before but rarely are the terms accompanied by clear definitions.  And the products offered under each label sometimes blur the legal differences. 

LHPH programs start with a “true lease” under the federal IRS definition (tax purpose) and Federal Reserve Board definition (regulatory purpose).[1]  While there are a number of technical requirements and some “gray areas,” in general a “true lease” has two main characteristics:

1. A market value residual value (i.e., the residual value can’t be so low that it creates “equity” in the lease or gives the lessee a “bargain purchase option” that is far below the projected fair market value of the vehicle), and
2. A term of at least four months.

If a transaction (denoted as a lease) violates the first requirement, it could be treated as a conditional sale (Regulation Z and the state motor vehicle retail installment sale act then apply).  If it doesn’t have at least a four month term, it is a rental not a lease and then subject to any state requirements for rental transactions.

A “true rental” in an RTO program has no minimum term, i.e., the lessee can terminate after any payment period without further obligation.  Thus, if an RTO transaction has a minimum term of 4 months or longer, it is no longer a “rental” and becomes either a “lease” for federal regulatory purposes (Regulation M applies) or worse, a conditional sale (Regulation Z applies).   

 Why are LHPH Programs Preferable?

There are a number of tax, accounting and regulatory differences between conditional sales and leasing that make LHPH programs more attractive and potentially much more profitable than BHPH programs.  Compared to RTO programs, LHPH programs are much safer from a compliance standpoint since there are “safe harbor” federal requirements that are relatively easy to follow.  RTO programs have no federal safe harbor so the states have created a messy array of rules.  Worse, state attorneys general often view RTO programs as “predatory” and create retroactive restrictions and penalties in response to consumer complaints.

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[1] Meeting both the federal tax and regulatory purposes will also generally keep the transaction safely outside state definitions of “conditional sales” found in the state motor vehicle retail installment sale acts.

 

My recommendation is to stay out of the "gray areas" and programs that state attorneys general would view as "predatory".  Make sure you find the right expert like Mr. McCathren before the AG's office comes knocking on your door. Retroactive penalties can put you out of business very quickly.

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Permalink Reply by Dan Blowers on February 8, 2012 at 12:39pm

Mr. Arceri is close to correct.  Northland uses a Federal Regulation "M" lease with a residual at the end.  It allows the car to be returned at any time without penalty.  It stays out of the "gray areas" and has numerous safety devices to protect the dealer from litigation and State regulators.  Northland has not lost a contract challenge, which they defend at their own expense, in the 21 years that they have been doing RTO. 

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