98-061
Response December 4, 1998
REQUEST LETTER
August 11, 1998
Re: Whether
Utah Law Requires First Security Auto Lease Company to Obtain a Dealer License
Dear Mr. Oveson:
This letter describes a financing program that
COMPANY ("COMPANY ")
is implementing in various states. In connection with
this program, we request your confirmation
that Utah law either will not require a dealer license for First Security Auto Lease Company (the
"Titling Trust") or will not require the Titling Trust to have a physical location or employees to obtain a
dealer license.
As discussed below, all of the objectives of the
dealer licensing requirement will be
met
even if the Titling Trust does not obtain a dealer
license. Utah consumers will only deal
with
entities that are either licensed dealers or are
exempt from the dealer licensing
requirement. In
fact, consumers probably will not even notice the
Titling Trust. If Titling Trusts in
Utah are
required to obtain a dealer license and have a
physical location or employees, such
trusts could
not be used in Utah, which would disadvantage Utah consumers.
I. DISCUSSION
OF AUTO LEASE SECURITIZATION PROGRAM
COMPANY SPECIFIC INFORMATION
COMPANY is seeking to issue securities backed by
automobile lease receivables and the related automobiles (i.e., automobile lease
securitization). Securitization will
enable COMPANY to finance its auto
leases at more attractive interest rates than those otherwise available, in
some cases at "triple-A" interest rates.
Securitization of auto leases has been particularly
challenging due to certificate of title
laws. An investor in auto lease receivables may need
to record its name on each automobile
title
in order to protect its rights adequately. Otherwise,
the investor could be treated as an
unsecured
creditor in an insolvency of the originator/seller.
The cost to retitle a large number of
motor
vehicles is economically prohibitive. As a result,
lessors have experimented with ways to
title cars in the name of a trust (i.e., a "Titling Trust").
A Titling Trust is a trust formed to purchase vehicles
and leases directly from dealers and
other parties originating leases, Title to the
vehicles is then held by the Titling
Trust. The
originator (e.g. First Security) is never listed on
any certificate of title, but owns a
beneficial
interest in all leases and related vehicles acquired
by the Titling Trust. The Titling Trust
hires the originator as a Aservicer"
to collect the lease payments on its
behalf; enforce the obligations of the lessees and to sell the vehicles
upon termination of the leases. At the
time of a securitization, instead of transferring the leases and related
vehicles, the originator transfers a
beneficial interest in the Titling Trust. To be used in connection with
securitization, the Titling Trust must be Abankruptcy remote.@
This means, among other things, that the Titling Trust may have no obligations and may engage only in certain
limited activities (which must be
approved by credit rating agencies like AGENCY=S). As a bankruptcy remote
entity, the Titling Trust is not permitted to have any offices, employees or
business activity.
II. REQUEST
FOR CONFIRMATION THAT UTAH LAW DOES NOT REQUIRE THE COMPANY TO OBTAIN A DEALER
LICENSE
Under Section 41-3-201 of the Utah Statutes Annotated,
Utah Code of 1953 (the "Code")
a person may not act as an automobile dealer in Utah
without obtaining a dealer license from
the
State of Utah. The term "dealer" is defined
in Section 41-3-102(8)(a) of the Code to include a
person, 9(I) whose business in whole or in part
involves selling new, used, or new and
used motor vehicles; and (ii) who sells, displays for sale, or offers for sale or exchange three or more new or used
motor vehicles in any 12-month period." Section 41-3-204 of the Code provides that the applicant must
have employees and a principal place of business to obtain a dealer license.
First Security desires to comply fully with Utah law.
To that end, on June 2, 1998,
COMPANY wrote the Motor Vehicle
Division of the State Tax Commission
requesting the
concurrence of the Division that motor vehicles could
be titled in the name of the Titling
Trust
and that it would not violate Utah law for beneficial
interests in the Titling Trust to be
transferred without retitling the vehicles. On June 10, 1998, the Division communicated in writing to COMPANY its concurrence with these views.
There are several reasons that the Titling Trust
should not be required to obtain a
dealer
license (or, if a dealer license is required, that the
Titling Trust should be permitted to obtain the
license without employees or a physical location):
1. All
objectives of the dealer licensing requirements will be met even if the Titling
Trust does not obtain a dealer license;
2. The
language of the statute does not require the Titling Trust to obtain the
license;
and
3. Such a
requirement would effectively prevent Titling Trusts in Utah. This would
significantly and unnecessarily disadvantage Utah consumers.
Also, it is important to note that all of the objectives
of the dealer licensing requirements
will be met in connection with COMPANY >S use of the
Titling Trust even if the Trust does not
have its own dealer license. Because the Titling Trust
will have no employees of its own, it
will
not deal directly with the public. Instead, First
Security will continue to take all of the actions on
behalf of the Trust that it currently takes on its own
behalf It is difficult to imagine how any
consumer would be adversely affected if the Titling
Trust were not licensed as a dealer. We
cannot think of any public policy consideration that
would justify requiring the Titling Trust to
obtain a dealer license.
In addition, the Titling Trust is not a Adealer"under Utah law. Section 41-3-103(l)(b) of
the Code is an exception to the dealer definition
which is applicable to the operations
of the
Titling Trust. Section 41-3-103(l)(b) states "A
person who sells or exchanges only
those motor
vehicles that he has owned for over 12 months is not
considered a dealer." It is
anticipated that
leases originated by the Titling Trust will have a
term of more than one year. The only
situations
in which the Titling Trust would be expected to own a
vehicle for less than one year would be
in
connection with the sale of a vehicle after a lessee
default. In the limited case of vehicles
repossessed after the lessee's default during the
first year of the lease, the Titling
Trust should be
treated no differently than a bank or finance company
that sells repossessed vehicles after a
borrower's default on a loan.
If Titling Trusts are required to obtain dealer
licenses or are not permitted to obtain
them
without a physical location or employees, the State
Tax Commission would, in effect, be taking
the position that Titling Trusts are not permitted in
Utah. This would be inconsistent with
the
Division's June 10, 1998 letter to COMPANY which found COMPANYS proposed Titling
Trust to be acceptable under Utah law.
If Titling Trusts are not permitted in Utah, Utah
consumers will be adversely affected.
It
should be noted that the overwhelming majority (more
than 40) of states have approved of the
use of Titling Trusts and do not require the Titling Trust to obtain a dealer license. If Titling Trusts are not
permitted in Utah, national banks and finance companies would have to exclude vehicles titled in
Utah from their securitization programs. This would effectively raise the financing cost for Utah vehicles. These
costs would be passed on to Utah
consumers in the form of higher lease rates than the rates patd by
consumers in other states. Because many
consumers prefer to lease vehicles rather than purchase, higher lease costs
could also lead to fewer leases and,
therefore, depressed sales of vehicles in Utah.
The dealer license issue is particularly important for
COMPANY because a substantial
portion of COMPANYS
lessees are in Utah. This is a
limitation that would effect any large
automobile dealer, finance company or bank that
conducts a significant portion of its
auto leasing business in Utah. All auto lessors would be at a competitive
disadvantage to more national finance companies if Utah lessors are not
permitted to establish titling trusts
and seek financing in the capital markets.
We hope that this discussion of COMPANY proposed lease securitization program has
been helpful. We would ask that you confirm to us in
writing that the State Tax Commission
will not require the Titling Trust to obtain a dealer license or, if required, would not require the Titling
Trust to maintain employees or a physical location in order to be eligible for
a dealer license.
Thank you again for your attention to this matter.
Very truly yours,
RESPONSE
LETTER
December 4, 1998
RE: Advisory
Opinion - Whether COMPANY Must Obtain a
Dealer License
Dear NAME,
We have received your request for an advisory opinion
as to whether COMPANY (ATitling Trust@)
must obtain a Utah dealer license.
COMPANY (ACOMPANY @)
has formed the Titling Trust to issue securities backed by automobile lease
receivables and the related automobiles.
This arrangement apparently enables COMPANY to finance its auto leases at more attractive interest rates.
You state that the Titling Trust must be Abankruptcy remote@ to
be used in connection with securitization.
To be so, the Titling Trust must have no obligations and is not
permitted to have any offices, employees or business activity. Business activity will be handled by COMPANY
, which as Aoriginator@ of
the leases, will not be listed on any certificate of title, but owns a
beneficial interest in all leases and related vehicles acquired by the Titling
Trust. COMPANY business activities will include collecting
lease payments, enforcing the obligations of the lessees, and selling the
vehicles upon the termination of the leases.
At the time of securitization, COMPANY
will transfer a beneficial interest in the Titling Trust to the secured
party.
Two issues arise from this situation. First, do leasing companies need to be
licensed as dealers? And second, if
yes, is it the Titling Trust or COMPANY
that needs to be licensed as the dealer? Let us address each issue separately.
Leasing Companies and Dealer Licensing. Do all
leasing companies need to be licensed as dealers? Utah Code Ann. '41‑3‑201(1)
states that a dealer must be licensed.
The definition of dealer for purposes of the Motor Vehicle Act is found
in Utah Code Ann. '41-3‑102(8), which provides that:
"Dealer" means a person:
(I) whose business in whole or in part involves
selling new, used, or new and used motor vehicles; and
(ii) who sells, displays for sale, or offers for sale
or exchange three or more new or used motor vehicles in any 12‑month
period.
It has been the Motor Vehicle Division=s (ADivision@) general practice not to require leasing companies to
obtain a dealer license. Section
41-3-102(8) literally defines a Adealer@ to be an entity that Asells@ vehicles.
While Asale@ has been
defined in Section 59-12-102 of the Sales and Use Tax Act to include lease
transactions, no definition of Asale@ or Asell@ exists in the Motor Vehicle Act. The Division has thus limited its
interpretation of the term Asale@ to include traditonal sales where a title is
transferred to the buyer, but not leases where the title remains with the
lessor. As the Division considers that a leasing company only Aleases@ vehicles and
does not Asell@ them, it does
not generally classify leasing companies as dealers and require them to be
licensed.
Limited Situation Where Licensing is Required. When would
a leasing company need to be licensed?
There is a limited situation where the Division does require a leasing
company to be licensed. To understand
this situation, the exceptions to the definition of "dealer," as set
forth in Utah Code Ann. '41‑3‑103, must be examined. Section 41-3-103 provides the following:
(1) (a) An
insurance company, bank, finance company, public utility company, commission
impound yard, federal or state government agency, or any political subdivison
of any of them or any other person coming into possession of a motor vehicle as
an incident to its regular business, that sells the motor vehicle under
contractual rights that it may have in the motor vehicle is not considered a
dealer.
(b) A person who sells or exchanges only those
motor vehicles that he has owned for over 12 months is not considered a dealer.
(2) (a) A person
engaged in leasing motor vehicles is not considered as coming into possession
of the motor vehicles incident to his regular business; ...
Subsection (1)(b) states that selling vehicles owned
more than 12 months does not make an entity a dealer. That is why a leasing company which Aleases@ its vehicles
for more than 12 months may actually Asell@ them at the end of the lease period without being
deemed a dealer. However, should a
leasing company Asell@ three or more
vehicles it has owned for 12 months or less, it would be deemed a dealer and be
required to obtain a license. This is
true even if the vehicles are sold only after being leased, then repossessed by
the leasing company for lessee noncompliance with lease terms.
Subsection (1)(a) expressly exempts banks and several
other entities from being deemed dealers should they sell repossessed or other
vehicles, because these entities come into possession of the vehicles as an
incident to their regular business.
Each of these entities have a primary purpose other than selling
vehicles. Coming into possession of a
vehicle and having to sell it is incident to, or subordinate or secondary to,
these entities= regular business.
However, Subsection (2)(a) expressly sets apart a
leasing company as an entity that does not come into Apossession of motor vehicles incident to [its] regular
business.@ Instead,
coming into possession of vehicles is part of a leasing company=s primary or regular business. Accordingly, should a leasing company, for
whatever reason, Asell@ in any
12-month period three or more vehicles which the leasing company has owned for
12 months or less, it is deemed a dealer and must obtain a license.
Licensing for COMPANY . Would
COMPANY or the Titling Trust ever need
to be licensed? Should COMPANY or the Titling Trust Asell@ in any
12-month period three or more vehicles which it has owned for 12 months or
less, then it is a dealer unless it comes into possession of the sold vehicles
as an incident to its regular business.
COMPANY is a
banking operation. But it and its
Titling Trust also operate as a leasing company. A bank is subject to the Section 41-3-103(1)(a) dealer exception
when it comes into possession of a vehicle as an incident to its regular
business. A leasing company does not
receive this dealer exception because its possession of a vehicle is not
incident to its regular business. When
a bank conducts both Atraditional@
banking operations and vehicle leasing transactions, which provision applies to
that bank?
The law does
not appear to address this question specifically. However, if one looks at Subsection (1)(a) to try to determine
what these entities have in common so that their possession of a vehicle may be
considered incident to their regular business, it appears that the Legislature
was excepting only those entities that are typically not in the business of
conducting vehicle transactions.
These entities typically come into possession of a
vehicle for reasons removed from the actual sale or lease of that vehicle.
When COMPANY
or its Titling Trust leases a vehicle, it is engaged in the business of
conducting vehicle transactions.
Accordingly, it does not come into possession of these Aleased@ vehicles as an
incident to regular business, and is not afforded the dealer exception of
Subsection (1)(a). The Legislature
expressly treats leasing activities differently from banking activities, even
if both activities can lead to the Arepossession@ and sale of a vehicle where the buyer or lessee
reneges on its payment obligations.
Thus, in this limited situation, where in any 12-month period three or
more leased vehicles are sold which have been owned for 12 months or less,
either COMPANY or the Titling Trust
would need to obtain a dealer licensed.
Which Entity Should be Licensed. In the
limited situation described above, is it COMPANY or the Titling Trust that should be licensed? The purpose of licensing is to provide
greater protection to the public and encourage the fulfillment of tax
obligations. The Titling Trust has no
place of business, no employees, and no obligations. Requiring it to be licensed would accomplish none of the purposes
of licensing. In addition, it is
COMPANY which conducts all the business
activities associated with the leasing business. While COMPANY and the
Titling Trust are separate entities, they are virtually indistinguishable for
their leasing business purposes. For
these reasons, we would require COMPANY , not the Titling Trust, to obtain a
dealer license should the limited situation described above arise.
Please contact us if you have any other questions.
For the Commission,
Joe B. Pacheco, CPA
Commissioner
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