12 Cfr 714.5

§ 714.3

12 CFR Ch. VII (1–1–16 Edition)

excess wear and tear and excess mileage charges as established under the
lease.
§ 714.3 Must you own the leased property in an indirect leasing arrangement?
You do not have to own the leased
property in an indirect leasing arrangement if:
(a) You obtain a full assignment of
the lease. A full assignment is the assignment of all the rights, interests,
obligations, and title in a lease to you,
that is, you become the owner of the
lease;
(b) You are named as the sole
lienholder of the leased property;
(c) You receive a security agreement,
signed by the leasing company, granting you a sole lien in the leased property and the right to take possession
and dispose of the leased property in
the event of a default by the lessee, a
default in the leasing company’s obligations to you, or a material adverse
change in the leasing company’s financial condition; and
(d) You take all necessary steps to
record and perfect your security interest in the leased property. Your state’s
Commercial Code may treat the automobiles as inventory, and require a filing with the Secretary of State.

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§ 714.4 What are the lease requirements?
(a) Your lease must be a net lease. In
a net lease, your member assumes all
the burdens of ownership including
maintenance and repair, licensing and
registration, taxes, and insurance;
(b) Your lease must be a full payout
lease. In a full payout lease, you must
reasonably expect to recoup your entire investment in the leased property,
plus the estimated cost of financing,
from the lessee’s payments and the estimated residual value of the leased
property at the expiration of the lease
term; and
(c) The amount of the estimated residual value you rely upon to satisfy
the full payout lease requirement may
not exceed 25% of the original cost of
the leased property unless the amount
above 25% is guaranteed. Estimated residual value is the projected value of
the leased property at lease end. Esti-

mated residual value must be reasonable in light of the nature of the leased
property and all circumstances relevant to the leasing arrangement.
§ 714.5 What is required if you rely on
an estimated residual value greater
than 25% of the original cost of the
leased property?
If the amount of the estimated residual value you rely upon to satisfy the
full payout lease requirement of
§ 714.4(b) exceeds 25% of the original
cost of the leased property, a financially capable party must guarantee
the excess. The guarantor may be the
manufacturer. The guarantor may also
be an insurance company with an A.M.
Best rating of at least a B + , or with
at least the equivalent of an A.M. Best
B + rating from another major rating
company. You must obtain or have on
file financial documentation demonstrating that the guarantor has the
resources to meet the guarantee.
§ 714.6 Are you required to retain salvage powers over the leased property?
You must retain salvage powers over
the leased property. Salvage powers
protect you from a loss and provide
you with the power to take action if
there is an unanticipated change in
conditions that threatens your financial position by significantly increasing your exposure to risk. Salvage powers allow you:
(a) As the owner and lessor, to take
reasonable and appropriate action to
salvage or protect the value of the
property or your interests arising
under the lease; or
(b) As the assignee of a lease, to become the owner and lessor of the leased
property pursuant to your contractual
rights, or take any reasonable and appropriate action to salvage or protect
the value of the property or your interests arising under the lease.
§ 714.7 What are the insurance requirements applicable to leasing?
(a) You must maintain a contingent
liability insurance policy with an endorsement for leasing or be named as
the co-insured if you do not own the
leased property. Contingent liability
insurance protects you should you be

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