Why 43 Leasing Companies?

---An “interview” with the “top” FTC Leasing Company Prosecutor

by Christopher Menkin

These questions came from a person I call the top Federal Trade Commission leasing equipment prosecutor, who called me to talk about “forced insurance.” In less than the first 30 seconds, I picked up he not only knew quite a bit about equipment leasing, just by the words he used, the vernacular, but by the questions he started with.

It was not until the end of the conversation did I get to ask him for his background. I learned he had a history of winning cases as the lead attorney against those who violate the law, including large equipment leasing companies.

“How about a leasing company then that gets ten NorVergence leases to fund in the same day, all the contracts have the same equipment, one Matrix box, nothing else, and the contracts range from $20,000, $50,000,$150,000...Wouldn't someone question that?”

My mind went to Doug Hatch at Bank of the West, Allen Moehle at Pacific Capital Bank Leasing, Alan Kissinger at Financial Pacific, and even Marlin Leasing wants social security numbers on principals from a vendor less than one year in business for a $5,000 lease. I also thought of the heads of funding departments that I had direct experience with, and their staff, no way would this happen at any of their places. In my experience, they pick apart some standard issues, questioning everything, let alone something as obvious as this.

I did not answer the question, but thought there were 43 leasing companies who funded NorVergence leases. In the course of funding the leases, no one asked why?

“Also don't you think it is strange that a county assessor's office gets leasing company filings for equipment, one matrix box, and the dollar amounts are quite different on each one? Wouldn't that raise a red flag somewhere with the person making the filing for the leasing company?”

“What about leases written at a 25% yield to the lessor for excellent credits for leases from $50,000 to $200,000 lease, wouldn't that ring someone's chimes?

I have talked to many of the local districts attorney prosecuting staff and various state attorneys general top fraud and telecom chiefs and their staffs on this subject, who knew the law, but where I had to explain more basic. In each conversation, they were becoming more familiar with the “procedures” of equipment leasing, but talking with this top FTC prosecutor was like talking with a Certified Leasing Professional.

He knew about computing leases on an HP calculator, the going “buy rates” at various leasing companies and banks, their restrictions on commissions, and the procedures used when funding a lease.

Specifically I did not ask him if this was “off the record,” and to be fair about it, I am keeping it that way. If I had asked his permission, he would most likely have said no, and then I would not be able to write about our conversation. He did not make any comment or opinion about the matter, so there really is nothing to divulge, except for the questions he asked, which I thought were pretty revealing of what he knows and the direction he may be headed when he goes to court
(the FTC has announced they are investigating NorVergence, its officers, and their roles with various leasing companies.)

The telephone call was arranged via e-mail about the comments I had made on a Yahoo listserve ( he evidently reads the message board or receives the e-mails.) In addition to writing about the calamity, the fact that I was not only in the leasing business, but was a licensed insurance broker at one time, he wanted to know about “forced insurance,” as he called it, the practice in the industry in determining and enforcing it; basically the procedure leasing companies used when the lessee did not provide insurance, how it works and what is covered ( meaning replacement of the Matrix box.)

He went through several scenarios of a fire or a burglary of the business and the procedure of how the equipment value is obtained for replacement or the insurance claim is process from the leasing company's viewpoint.

Surprisingly I learned most of the ERA insurance was not on the “cost to lessor” or “invoice cost,” but on the “stream of payments.” He wanted to know how common that was, and the procedure the leasing companies used, along with providing “more” names of insurance companies who provide this service to leasing companies.

He wanted to know the procedure on how the “equipment” was listed on the certificate, and would an insurance agent question the value, or if the agent had several requests for insurance certificates for the same equipment at different dollar amounts, how would that work? And how would that work from the leasing company's requests or “forced insurance,” especially if it were on the “stream of payments” and not the “invoice” cost.

While I thought most insurance agents have their staff type up the certificates, rarely do they look at them or even question the value of the equipment. Perhaps if it were a vehicle and they saw it was a 1989 Pontiac for $50,000, it would certainly raise questions, but a piece of equipment that they know nothing about and are relying on their customer and also the leasing company who requested it, rather doubt it would be questioned. Even if the agent had several clients where the amounts differed but the equipment was the same description: one matrix box.

The time to correct any problem with the dollar amount was upon signing the lease contract and the insurance verification form, and more than likely the verification by the insurance agent. A replacement would be normally on the “cost to lessor” or “invoice cost” and not the “stream of payments.”

He wanted to know in the “forced insurance” program if the company was receiving many of these requests on the same type of equipment, would that be normal. Also if the equipment was always the same, but the dollar amounts varied from $10,000 to $75,000, would the insurance company question this?

I did not answer the question, but thought there were 43 leasing companies who funded NorVergence leases. Why? Did they ask similar questions?

We talked about many such “forced insurance” situations and procedures. I told him if he wanted to speak to some leasing company officers about their company's procedures, I would try to open the door for him on an informal basis rather than a deposition.

He then asked about the funding of ten leases a day, and in some instances, there were more than that at one leasing company. In all the lease contracts, the equipment was the same, one matrix box, not other information or models, and in some cases, two matrix boxes, all at varying prices from $10,000 to one $260,000.

In most states, service, software, and other such costs are not subject to personal property tax.  The lessor was going by the "invoice cost" or what is known as "cost to lessor."  Most contend they were not aware of the soft costs in the lease. Most likely all the lease figures submitted to the county are incorrect and the lessee should receive a refund in almost all the instances.  The lessee is entitled to a copy of what the county charged the lessor to compare what the lessor charged the lessee---another issue that complicates all the matters.

“What about the ‘implied interest rate?”

In one of the depositions I read on an vice-president of a “bundler” of leases, they had a 12% buy-rate and NorVergence could not discount a contract over 120% of the cost, meaning their “commission” or “administrative fee” could not exceed 20%--no restriction of dollar amount either meaning, a $10,000 or $75,000 lease, under this “application only” program. From some of the contracts I saw, the commissions were well over 15% all the time, on some top credits.

I did not answer the question, but thought there were 43 leasing companies who funded NorVergence leases and wondered if they all were giving such high commissions or “administrative fees.” I have seen several where the discount was capped at 120% of the “invoice cost.” I was told by an ex-employee IFC Credit had 25% yields on their leases.

Another subject centered around late charges and other fees, especially in states where commercial leases may also be considered “consumer” leases, such as in Massachusetts, where “enterprises and consumers” fall into the same category, plus laws regarding telecommunication which may have other such provisions and equal the production afforded similar to the federal consumer credit act.

In the Leasecomm matter, the settlement cancelled $24 million in what were called “deceptively obtained judgments against consumers.”

From the FTC press release:

"Leasecomm's customers got a one-two punch," said Howard Beales, Director of the FTC's Bureau of Consumer Protection. "Leasecomm used sellers of highly suspect business opportunities to sell its financing, and then claimed it had no responsibility for their deception. Companies that try to hide behind the fine print in contracts and lie to consumers about what they're were signing, whether directly or through agents, simply do not pass muster."

Another question I could not answer:

“Could these lessors also claim depreciation or other benefits, as there was no residual at the end of any of the ERA leases? Is that also why the insurance was based on the stream of lease payments?”

Other questions I could explain, but had no direct knowledge or specific information.

“Let's get back to the leasing companies as they have credit and other requirements. How would they accept the ERA contracts, let alone NorVergence as a ‘discounter' of leases?”

This was an easy one to answer as I have personal experience in this. When I first started out discounting and then establishing recourse lines of credit, I would take submit the contract I wanted to use. No one ever asked who was the author ( Barry Dubin, Cooper-White-Cooper) and the Crocker bank attorneys looked it over, and then when I went to Wells, the Wells Fargo attorneys, looked it over. When I went to Union bank, I told them Wells and Crocker approved it. They never checked this statement out, as I would have known, and when I went to the next source, and told them Union Bank, Wells Fargo, and Crocker banker approved it, they never questioned. In opening lines at community banks, they stopped asking as they would check out the experience at the previous banks, look at the financial statements, personal guarantee, and that was that. So once one or two approved it, everyone trusted what I told them. The same most likely happened with the NorVergence “Equipment Rental Agreement,” although it does look like a “ hodge-podge” and even I could see sections that would be difficult to hold up in most state courts as to how they were worded ( now not an opinion, but reality as ruled by various federal and state judges.)

The same procedure is how NorVergence also got into some of the larger leasing companies. In stories hat Leasing News wrote about RW Professional, how hey made a settlement with Old Kent Bank
(employee covenants released when the bank went out of business)
including an agreement not to mention this, or with CIT, where they had a $10 million disagreement, whittled down to $500,000, covered by loss reserves, according to a very reliable source, when they went to the next bank, they used these two as references. Imagine they come to your busy place, brought by the director and then president of a leasing association, doing business with these community and regional banks, and a list of satisfied funding sources. “If they were accepted there, we'll give them a try,” would have been the answer.

Leasing News had been writing about NorVergence complaints for approximately two years, settling the complaints, and also questioning the involvement of the president of a leasing association, who we spoke to on numerous occasions.

During this time, we were threatened with legal action, but did answer telephone calls, including one with top officer of a major bank, who was approached o fund these leases, but heard about some of our articles. We told him not to do it, and why. He then named several financial firms and banks that were funding these transactions, and because of that was quite tempted as the credits looked very good of samples he had been given. He was one of many who called us after the bankruptcy to thank us for the warning. Despite the references they had given him, we had cautioned him enough that he did not want to put his bank at risk.

Interestingly it appears from what I have talked to NorVergence lessees, there were no professional leasing consultants or brokers involved directly, including leasing companies. All of this was handled by the NorVergence sales representative. They were not given any alternatives and told to sign the contract if they wanted “service.”

It also does not appear that systems were “purchased” outright, although there may be cases of that. In the bankruptcy hearing in New Jersey, NorVergence estimated they had 11,000 leases

( “Equipment Rental Agreements.)

The “top” leasing FTC prosecutor never asked why so many leasing companies were required in the fundings of these “Equipment Rental Agreements.” My count from the various list serves was 43, although 25 are being “prosecuted” today. In several instances, from depositions, several leasing companies cut off NorVergence when they started received complaints from their lessees, or learned more about what they were leasing, perhaps.

Perhaps they eventually began to ask why the same equipment with a great disparity of “cost to lessor ” in fundings, insurance, personal property tax ,and NorVergence was forced to find other sources.