Auto Lease Correspondent Program

Generally, commercial banks have not been as active in auto leasing as have the major automobile finance companies. Last year's Report of Condition and Income showed that out of 9,321 banks, only 1,753 had lease receivables. Banks with assets exceeding a billion dollars held almost all of those receivables, but only 57 percent of those banks had lease-financing receivables.

According to an article by Ronald S. Loshin in Auto Financing Update, banks have avoided auto leasing for a number of reasons. First, they had major concerns about assuming the residual value risk; that is, the risk that the actual residual value of the vehicle at the end of the lease would be significantly below the forecasted value which had been built into the terms of the lease. In addition, since auto leasing is not lending, a successful program requires special accounting systems, adherence to unique legal and regulatory requirements, and specialized administrative knowledge and skills.

Last year, PNC Bank found itself in a position where it had an excellent administrative staff and support programs that were not being fully utilized by its own auto leasing program. Yet, expanding the program outside of its market area would be costly and potentially hazardous. To utilize its leasing capacity more fully, it developed a Lease Correspondent Program.

A key first step in developing the program was to deal with other banks' concerns about the residual value risk. PNC Auto Finance Corp. had already moved away from self-insurance to a financially sound insurance carrier that was sufficiently comfortable with PNC's leasing policies to insure the risk. Since PNC would be providing those same policies to its clients, the insurance company was ready and willing to take on additional clients.

The division of responsibility between PNC and the clients of its Lease Correspondent Program is simple and logical. Since the clients are located outside PNC's market area, they are responsible for the marketing and origination tasks. PNC provides the lease documentation and origination software. The clients' employees are already skilled in indirect auto lending. With sales training from PNC, they can apply those same skills to evaluating indirect auto leasing. Given their knowledge of the market, the clients are also responsible for pricing and underwriting the lease. Since they screen the lease applications, the clients also bear the credit risk.

Because PNC has the skills and capacity to service lease portfolios, it recommends that it assume responsibility for all collections in the early stages of a delinquency. When an account is 30 to 60 days delinquent, PNC can either continue collection activities or hand off the account to the client.

Currently, the Lease Correspondent Program is targeted at large banks involved in indirect auto loans. The first major institution to sign on was Regional Bank in Birmingham, Alabama. Another client is the American Electronics Association Federal Credit Union, which is now writing 100 auto leases per month under the program.

On a Related Subject:

Educational Materials Regarding Vehicle Leasing

You might consider educating consumers or your staff with material offered by the Federal Reserve Board. The 41-slide presentation provides explanatory notes and script for each slide. It is designed to be used with the Fed's brochure, Keys to Vehicle Leasing—A Consumer's Guide. The material is available online at www.federalreserve.gov/pubs/leasing. Click on "Guide" for Educators. Or write: Federal Reserve, Publication Section, Mail Stop 127, Washington, DC, 20551.