It has come to my attention and confirmed by email that it is Chrysler Capital’s corporate policy to not permit negative equity on leases. This is a credit underwriting decision and policy, not a disclosure policy. Chrysler Capital simply does not want any lease transactions where a portion of the proceeds is to cover the customer’s negative equity on a trade.
Negative equity occurs on a lease transaction when the customer is either trading in a vehicle which is financed on a retail transaction or is a lease and the dealership is paying any number of remaining lease payments to terminate the existing lease. The disclosure on a lease agreement typically is “Prior Loan or Lease Balance” instead of the term negative equity.
While it is perfectly acceptable for any lender to have this as an underwriting guideline and standard, I also confirmed that at least one Chrysler Capital credit analyst is encouraging F&I Managers to hide the negative equity on leases by washing the trade in order to get the deal funded. F&I Managers tend to feel they have a de facto hold harmless against potential violations of a federal law because the lender “told me to do it.” Obviously this is an issue.
Dealers must make it clear to their F&I staff that Chrysler Capital does not want leases with negative equity and that the dealer will not condone hiding negative equity on leases through Chrysler Capital just to get the deal funded. In addition to the potential Reg M violation, this act could be perceived by Chrysler Capital to be a violation of its Dealer-Lender Agreement and cause the transaction to become a recourse deal.
These dealers will have to continue funding leases with negative equity through alternative leasing sources. Unfortunately, this may mean the customer or the dealership may lose available manufacturer incentives by sourcing leases to alternative leasing companies.