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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