1. ASSET FINANCE
INTERNATIONAL
IN ASSOCIATION WITH
WHITE CLARKE GROUP
AUTO & ASSET FINANCE
COUNTRY SURVEY 2016
United
States

2. United States
Auto and Asset Finance
Country Survey 2016
2
United States
Auto and Asset Finance
Country Survey 2016
White Clarke Group
White Clarke Group is the market leader in software
solutions and business consultancy to the automotive
and asset finance sector for retail, fleet and wholesale.
White Clarke Group solutions enable end-to-end
credit processing and administration to streamline
business practice, cut operational cost and deliver
outstanding customer service. White Clarke Group has
a 24-year track record of leadership and innovation
in finance technology, consultancy and new market
entry. Clients value White Clarke Group's industry
knowledge, market intelligence and innovation. The
company employs some 600 finance and technology
professionals, with offices in the UK, USA, Canada,
China, Australia, Austria and Germany.
whiteclarkegroup.com
© Asset Finance International, 2016, All rights reserved.
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Author: Nigel Carn
Asset Finance International Ltd.
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UNITED KINGDOM
Telephone: +44 (0) 207 617 7830

3. United States
Auto and Asset Finance
Country Survey 2016
3
United States
Auto and Asset Finance
Country Survey 2016
Acknowledgements
Gary Amos, CEO of Commercial Finance Americas, Siemens Financial
Services
Bill Bosco, Principal, Leasing 101
Jonathan Dodds, Chief Executive Officer – Americas, White Clarke Group
Chris Enbom, CEO, Allegiant Partners
Brendan Gleeson, Group CEO, White Clarke Group
Dave Mirsky, Chief Executive Officer, Pacific Rim Capital
Tom Partridge, President, Fifth Third Equipment Finance
Bob Rinaldi, CEO, Commercial Industrial Finance
Alan Sikora, CEO, First American Equipment Finance, a City National Bank
company
Bill Stephenson, CEO and Chairman of the Executive Board at DLL
Adam Warner, President, Key Equipment Finance
Marguerite Watanabe, President, Connections Insights
Stephen Whelan, Partner, Blank Rome LLP

4. United States
Auto and Asset Finance
Country Survey 2016
4
United States
Auto and Asset Finance
Country Survey 2016
Contents
Acknowledgements 3
The US at a glance 6
The US equipment and auto finance market 8
Equipment finance trends 8
Performance in 2015 and 2016 9
What the experts say – Market performance 11
Economic factors 13
What the experts say – Industry confidence 14
Lending trends 16
Market prospects 18
What the experts say – Industry initiatives 19
Business confidence 21
Small business hesitancy 22
What the experts say – Small business awareness 24
of equipment finance

5. United States
Auto and Asset Finance
Country Survey 2016
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United States
Auto and Asset Finance
Country Survey 2016
Auto sector finance trends 26
Leasing bucks the downward trend 26
What the experts say – Investment in technology 29
Technology – The top priorities for auto financing 31
sources
The justification for technology improvements 31
Technology improvements most often evaluated and 31
implemented today
The key to getting ahead with technology 33
What the experts say – Lease accounting changes 34
Lease accounting rules issued in 2016 36
Overview of the impact 36
Preparing for the new standard 36
Lessor issues 37
Lessee issues 37
A look ahead 38
The legal and regulatory environment 39
True sale 39
Hell or high water 39
Bankruptcy remote? 39
Tarnished ‘golden share’ 40
An unenforceable covenant? 40

6. United States
Auto and Asset Finance
Country Survey 2016
6
The US at a glance
This new Asset Finance International country survey aims to
provide a balanced assessment of the latest developments in the
equipment and auto finance markets in the US.
Key areas covered and principal findings include:
ƴƴ Figures from the industry body, the Equipment Leasing and Finance
Association (ELFA), show that new business volumes (NBV) in the US
equipment leasing market grew by 12.4% to $123 billion in 2015
ƴƴ However, NBV in H1 2016 fell 6.6% compared with the same period a year
earlier, the first drop into negative growth for six years.
ƴƴ Against expectations, the US economy has been growing only slowly, at a rate
that has actually been trending downward. However, data on the US labour
market has been much more positive.
ƴƴ Business investment has fallen for three consecutive quarters to mid-2016,
possibly because businesses are not anticipating stronger economic growth
and are therefore holding back on investing.
ƴƴ Data for equipment finance lending show independent lessors experienced
the strongest rate of growth in 2015, although this segment still trails banks
and captives for market share.
ƴƴ By far the largest year-on-year growth in 2015 was in the large-ticket
market segment, although the middle- and small-ticket segments still have
considerably higher total volumes.

7. United States
Auto and Asset Finance
Country Survey 2016
7
ƴƴ In 2015 the equipment finance market was dominated by the transportation, IT,
construction, and agriculture segments, although of all market segments only
transportation, IT and construction saw any growth over the previous year, and
the only significant growth was in transportation.
ƴƴ Forecasts for equipment investment in 2016 have been trimmed. Projections
are for sluggish conditions for most segments, with the best prospects for IT
and medical equipment, whilst agriculture is predicted to fall further.
ƴƴ Business confidence has slumped, following a general downward trend since
early 2015.
ƴƴ Confidence among small businesses is also falling, leading to a cautious
attitude to borrowing and investing in their businesses.
ƴƴ In the auto sector, new vehicle sales are down after 66 straight months of
growth. However, fleet sales are growing, as is the volume of new vehicles
financed by leasing which now accounts for around one-third of the market.
ƴƴ Although there has been a slight rise in delinquencies in auto financing,
leasing remains very prime.
The opinions and comments of a select group of equipment finance industry
leaders are provided throughout this survey. Topics under analysis are:
ƴƴ Market performance;
ƴƴ Industry confidence;
ƴƴ Industry initiatives;
ƴƴ Small business awareness of equipment finance;
ƴƴ Investment in technology; and
ƴƴ Lease accounting.
There are also special articles covering:
ƴƴ Technology – The top priorities for auto financing sources;
ƴƴ The latest developments in the Lease Accounting Project; and
ƴƴ Recent legal and regulatory developments in the US equipment and auto
finance market.

8. United States
Auto and Asset Finance
Country Survey 2016
8
Martin Nixon
The US equipment and auto finance
market
Since the last Asset Finance International report on the US
equipment and auto leasing industry a year ago, the sector
continued to grow in 2015 but recently the rate of growth of new
business volume (NBV) has gone into reverse.
The prospect of a deceleration in the market was well flagged up; however, the
decline in sector growth rate and the extent of the underlying factors behind the
collapse in momentum have been greater than expected.
There are, of course, many diverse elements that affect an industry as large as this
in any year, but 2016 has already seen some exceptional events on the global front
and domestically there is the matter of the presidential election to come.
Globally, the economy continues to grow only slowly; oil and commodities prices
remain low. Central banks are tending to support national economies by keeping
interest rates low or even reducing them, while in the US it is still expected that
they will be raised, although the timing of the next increase is uncertain due to
weaker than expected economic data.
And the US equipment and auto finance sectors, which over recent years
have continually grown faster than the economy, have also been affected by a
downbeat attitude.
Equipment finance trends
By the beginning of 2016 the US equipment finance sector had grown in value to
an estimated US$1 trillion and it remains the largest national market in the world.
Its interests are represented by the Equipment Leasing and finance Association
(ELFA).
Gathering statistical information on an industry of this size is a major undertaking,
but the ELFA produces an annual Survey of Equipment Finance Activity (SEFA)
that covers key statistical, financial and operations information on the domestic
equipment finance industry in the previous calendar year, based on responses
from 100+ ELFA member companies.
The decline in sector growth rate and the extent of the
underlying factors behind the collapse in momentum
have been greater than expected

9. United States
Auto and Asset Finance
Country Survey 2016
9
The ELFA also publishes the Monthly Leasing and Finance Index (MLFI-25) which
gives information on the current market, covering key indicators with data from a
sample of 25 major member companies.
Given the size and diversity of the overall market, such data, from which selected
details appear below, should only be taken as a guideline to industry-wide activity
rather than an accurate representation. Figures do not include data on auto leasing
(including floorplan finance), real estate and ‘non-equipment finance operations’.
Details of the 2016 survey, which is based on responses from 116 ELFA member
companies, can be found at www.elfaonline.org/data/sefa-survey-of-equipment-
finance-activity.
Performance in 2015 and 2016
The 2016 SEFA shows equipment finance NBV increased significantly in 2015 over
the year before – by 12.4% to $123 billion – reversing a decline in year-on-year
growth for the previous three years.
However, the MLFI-25 figures for the first half of 2016 show that, despite a
welcome uptick in June, NBV in the period totalled $44.2 billion – a drop of 6.6%
compared with the same period a year earlier.
NBV growth rate
Source: ELFA (SEFA 2016, MLFI-25)
25.0%
15.0%
5.0%
-5.0%
-15.0%
-25.0%
-35.0%
2008 2009 2010 2011 2012 2013 2014 2015 H1 2016
-2.2%
-30.3%
3.9%
16.5% 16.4%
12.4%
9.3%
6.7%
-6.6%
Year-on-year growth

10. United States
Auto and Asset Finance
Country Survey 2016
10
The year-on-year increase in June was in fact the first positive figure since
July 2015, and the latest figure for July 2016 has slumped back into negative
territory with a near 17% decline on July 2015. The July total of $7 billion NBV also
represents a rather alarming 30% decline from the previous month’s spike of $10
billion.
MLFI-25 NBV and monthly comparison
Source: ELFA, Asset Finance International
On the first-half figures, ELFA president and CEO Ralph Petta remarked that the
performance “appears to reflect the trend toward continued slow economic growth
and volatile equity markets in the US, as well as troubling international events
that are causing business owners to approach capital investment decisions with a
wary eye. A decline in portfolio quality contributes to a narrative of an equipment
finance market trying to gain its footing in the face of a volatile economy amidst a
recent period of uncertain political and social unrest.”
Aug-14
O
ct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
O
ct-15
Dec-15
Feb-16
Apr-16
Jan-16
35.0 %
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
$bn 14.0
12.0
10.0
8.0
6.0
4.0
20
00
–
NBV (£ billion) Monthly y-o-y change (%)

11. United States
Auto and Asset Finance
Country Survey 2016
11
What the experts say – Market performance
Asset Finance International asked industry leaders in US equipment and auto finance
for their views on a number of current issues
The first topic for discussion concerned the fact
that the rate of growth of the US leasing industry
is proving to be slow in 2016. Is the downward
momentum set to continue, or will it pick up in the
coming 12 months?
A year ago, the industry outlook was reasonably
optimistic, at least that growth in leasing would
outstrip that of the overall economy. Now, there are
questions over the direction of the economy after
the forthcoming elections, and whether business
regulation will change.
Bill Stephenson of DLL, and current chairman of
the ELFA, provided an overview: “The downward
momentum we have seen can be attributed to a
number of factors, including slow growth in the
global economy, a contraction in trade, heightened
political uncertainty and continued low energy
and commodity prices. I expect this trend will
continue into 2017 until we have further clarity on
the outcome and effects of the US presidential
and congressional elections and a better
understanding of how aggressive the Federal
Reserve will be in pursuing rate hikes.”
For Bob Rinaldi of Commercial Industrial
Finance, it all depends on the election, with a
Democrat victory meaning “the hostile attitude
towards business and finance via regulations
and nationalizing of some corporate profits (via
fines and levies) will continue. The result will
be more of the same slow growth caused by a
real unwillingness of businesses to expand their
employee base or invest in plant and equipment
other than for replacement.” He concluded: “In
essence, the business community in the US has
been informally boycotting this administration from
the start.”
On the other hand, if there is a Republican
victory, he said, “then 2017 will continue the same
course until the business community starts to see
real evidence that there is a paring back of the
regulation factory and hostile attitude towards
anything not related to government.”
Other participants in the debate were cautious
about the outlook. Tom Partridge of Fifth Third
Equipment Finance commented: “There has been
an overall lack of growth year over year, which is
somewhat surprising given that bonus depreciation
remains in effect,” adding: “In my opinion there
continues to be a lack of new business investment.
I think this trend could continue until there is
more clarity on the direction of overall business
regulation. Many clients remain wary of the
direction of the US economy as well as regulatory
trends.”
And in the view of Adam Warner of Key Equipment
Finance, “In the US, it is starting to feel like the end
of a positive growth cycle. The forecast for industry
activity is down and I don’t believe there will be
a major turnaround in buying and financing in the
coming year. We are also starting to see a small
deterioration in portfolio quality largely driven by a
correlation to energy industries.”
In the US, it is
starting to feel
like the end of a
positive growth
cycle
Adam Warner,
Key Equipment Finance

12. United States
Auto and Asset Finance
Country Survey 2016
12
Sector involvement can affect a company’s
outlook. As Alan Sikora of First American
Equipment Finance (FAEF) said, “Declines in a
handful of sectors like agriculture, oil and gas have
been driving negative trends while other industries
like healthcare and alternative energy are robust.
In the industry segments that First American
serves, we are experiencing growth and expect it
to continue over the next 12 months.”
There remains optimism that things will pick
up, especially once the uncertainty around the
elections is resolved. Chris Enbom of Allegiant
Partners stated: “I am optimistic that once the
election is finished business investment will
pick up a bit next year compared with this year.
Class 8 truck purchases were so strong in 2014
and 2015 that when the oil boom faded and
transportation overall dipped a bit it caused a
slump in 2016, but I think we are starting to pull
out of the slump. Overall we still see businesses
being pretty conservative but we also see them
doing pretty well and needing to continue to
replace equipment.”
Dave Mirsky of Pacific Rim Capital concurred,
saying: “It is my opinion that the business
environment in the US will improve in the coming
months. We are already seeing an increase in
demand. The economists that we follow are
projecting mild growth in the year ahead and I
agree with them.”
A final positive spin came from Gary Amos of
Siemens Financial Services (SFS), who noted that
leasing and finance companies remain strong,
despite continuing political and fiscal uncertainty.
“There remains an opportunity for organizations
to play an important role in helping with economic
recovery and supporting necessary equipment
investments,” he said.
He concluded: “Although the rate of growth
is slower than 2015, equipment replacement
demand will continue to drive investments. As
businesses further recognize their capacity to meet
operational demands, their equipment investing
activities will be increasingly focused on replacing
ageing or outdated assets.”
Overall we still
see businesses
being pretty
conservative
but we also see
them needing to continue
to replace equipment
Chris Enbom,
Allegiant Partners

13. United States
Auto and Asset Finance
Country Survey 2016
13
Economic factors
It is certainly true that the world’s largest economy has suffered from a bout
of volatility, with conflicting data regularly coming out regarding growth and
employment, all of which has an unsettling influence on businesses’ investment
decisions.
Against expectations, the economy has been growing only slowly, at a rate
that has actually been trending downward. Meanwhile, data on the US labour
market has been much more positive with unemployment stable at a perfectly
manageable level of around 5% and employment levels generally strengthening.
US GDP growth rates
Source: U.S. Bureau of Economic Analysis
These contradictory signals have led to some confusion, particularly regarding
when the US Federal Reserve will raise interest rates again, as has been widely
anticipated to happen before the end of the year. It has been expected through
2016 that the economy will pick up in line with employment trends; however, there
is an alternate view. Data from the U.S. Bureau of Labor Statistics showing sluggish
growth in earnings and hours worked may in fact indicate that momentum in the
labour market could fall away and that the GDP trend is the more realistic.
Perhaps there is no need for an increase in interest rates so soon. Inflation has
been circling the 1% level throughout 2016 but remains far from the nominal
2% target. The real driver of economic growth in the first half of 2016 has been
consumer spending, and this may not be sustainable.
And while overall job numbers have increased, productivity growth is down if not
actually falling. A big problem is weak investment: business investment has fallen
for three consecutive quarters to mid-2016, and this may be because businesses
are not anticipating stronger economic growth and are therefore holding back on
investing.
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Y-o-Y change Change over previous quarter
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016

14. United States
Auto and Asset Finance
Country Survey 2016
14
What the experts say – Industry confidence
The next topic for consideration by the panel of industry experts concerned the
seeming crisis of confidence in the US concerning the political and economic
outlook, which is reflected in leasing industry confidence levels. Asset Finance
International asked their views on this lack of confidence, its origins, the main
constraints of leasing growth, and what might be the drivers going forward.
As in their earlier comments, the panel’s concerns
pivoted round the presidential election, regulation
and a low-growth economic scenario, both
domestic and global.
First off, Adam Warner of Key Equipment Finance
commented: “The level of political and legislative
uncertainty is always higher during an election
season. This presidential election, however, has
caused an even greater divide between and
within the political parties. This political fraction
causes concern about effective governance
and economic stimulus initiatives at the Federal
level. Those sentiments effectively translate into
decreasing confidence from both businesses
and consumers. A healthier global economy that
drives manufacturing, along with a more stable
geopolitical climate, would bolster the sale and
financing of US goods.”
Slower than expected economic growth is a
primary contributor to lack of confidence, in the
opinion of Fifth Third Equipment Finance’s Tom
Partridge. “A lot of change has been placed on
the business community over the past several
years, whether it is increased regulation, universal
health care, or unknowns around a changing
marketplace,” he said, adding: “Many clients want
to maintain strong balance sheets in case we
experience another downturn.”
Dave Mirsky of Pacific Rim Capital provided
a forthright opinion: “The lack of confidence
stems from our very divided government and
the differences in opinion running through our
population.” He continued: “The party that is most
likely to win the election is using hostile rhetoric in
reference to business and free trade. Therefore,
most thoughtful organizations are being cautious
until they can see the lay of the land and can get
a better understanding of what policies a new
administration will actually cause to happen.”
Gary Amos of SFS concurred, saying: “Economic
uncertainty and today’s regulatory environment are
causing customers to pull back and delay capital
expenditures from already modest equipment
acquisition budgets.”
A small uptick in the August MCI-EFI index is
an encouraging sign for DLL’s Bill Stephenson,
although he noted there remain various factors
weighing on business investment and asset
acquisitions.
One such factor is jobs. “Although we continue to
see employment growth, the pace slowed again
in August and continues to paint an inconsistent
The lack of
confidence
stems from our
very divided
government
and the differences in
opinion running through
our population
Dave Mirsky,
Pacific Rim Capital
14

15. United States
Auto and Asset Finance
Country Survey 2016
15
recovery picture,” Stephenson said, adding: “Oil
prices continue to hover at or below $50, which
has a pervasive effect on many industries, not just
the energy sector. Commodity prices are not yet
rebounding with price levels on wheat, corn and
dairy heavily impacting the US agricultural sector
and pushing farm debt to income ratios to levels
not seen since the mid-1980s.”
This was taken up by FAEF’s Alan Sikora,
who observed: “Underperforming sectors like
agriculture, oil and gas may be impacting the
confidence levels of some industry executives.”
However, he has hopes for the future: “As these
sectors improve and overall economic conditions
strengthen, the leasing industry will benefit.”
Bill Stephenson agreed, adding: “I think once we
get the elections behind us, and start to see some
rebound in oil and commodity prices, business
investment will follow.”
And Chris Enbom of Allegiant Partners sees signs
of a turnaround, stating: “I think some confidence
indicators have increased again. After the political
uncertainty is over, the biggest uncertainty will be
with regards to rates, but I think rate uncertainty
will affect the equity markets more than the
equipment finance markets.”
Further factors affecting leasing industry
confidence were suggested by Gary Amos: “An
oversupply of lenders is creating rate compression
and increasing challenges to maintain profitability
levels. The industry also faces a challenge to
recruit talent, so there are certainly opportunities
for companies, such as SFS, which can offer a
global reach and have demonstrated financial
strength throughout the recession.”
Finally, in his view, “The drivers going forward will
be the financial providers that can apply industry
expertise with market understanding to offer
tangible solutions for customers. Instilling trust in
our service offering and the return it can have for
end users will be critical for all lending institutions
moving forward.”
The drivers
going forward
will be the
financial
providers that
can apply industry expertise
with market understanding
to offer tangible solutions
for customers
Gary Amos, SFS

16. United States
Auto and Asset Finance
Country Survey 2016
16
Market share of NBV by type of lender (%)
Source: ELFA (SEFA 2016), Asset Finance International
Lending trends
According to the SEFA report, banks remained by far the largest type of lender
of equipment finance in 2015, increasing volume by 12% to $73 billion – a jump
that was aided by Wells Fargo’s acquisition of GE Capital portfolios which had
previously been categorized in the ‘independent’ segment. However, despite this
the banks’ share of total NBV slipped marginally compared to the year before.
Furthermore, independents increased lending by 60% year-on-year to nearly $13
billion, thereby increasing market share regardless of the Wells Fargo/GE Capital
deal. NBV provided by captives, however, only increased by 3% year-on-year to
$37 billion, leading to a slide in market share to under 30%.
In terms of NBV by deal size, by far the largest year-on-year growth was in the
large-ticket market segment which leapt by 34%, although the middle- and small-
ticket segments still have considerably higher total volumes, at $58 billion and $41
billion respectively in 2015.
100
90
80
70
60
50
40
30
20
10
0
20152014
Independents
Captives
Banks
10.4
29.932.5
59.8
60.2
7.2
%

17. United States
Auto and Asset Finance
Country Survey 2016
17
Businesses with growing vs declining NBV (%)
Source: ELFA (SEFA 2016)
NBV by market segment
Source: ELFA (SEFA 2016), Asset Finance International
It is noticeable that there has been a downward trend in recent years in the
percentage of finance providers whose NBV has grown, from nearly 80% in 2013
to 65% in 2015, although it’s still a positive factor that nearly two-thirds of finance
providers have experienced growth.
%
100
80
60
40
20
0
2011 2013 2014 2015
28.3
75.7
65.0
71.7
2012
35.0
69.0
31.0
78.6
21.4
24.3
Growing Declining
80
60
40
20
0
Large ticket Middle ticket Small ticket
4.0%
30.0%
20.0%
10.0%
0.0%
2014 ($bn) 2015 ($bn) Change (%)
$ bn
17.8
23.8
33.9%
12.4%
51.4
57.8
2.8%
39.9
41.0

18. United States
Auto and Asset Finance
Country Survey 2016
18
Market prospects
The Equipment Leasing & Finance Foundation (ELFF) publishes a
quarterly projection of likely equipment and software investment,
the Equipment Leasing & Finance U.S. Economic Outlook. It is
sobering to see how the outlook has changed since the end of
2015, at which point the outlook was for “around 4.4% growth in
2016”, similar to if not a little higher than the level in 2015.
However, by April 2016, in its Q2 Outlook, the ELFF had revised down its
projection: “We expect equipment and software investment to expand 2.7% this
year, somewhat slower than the 3.8% growth rate in 2015.”
And in the Q3 Outlook of July, the forecast was much bleaker: “Given recent
data and current momentum, we expect equipment and software investment to
increase by just 0.9% this year, significant slowdown from last year’s 3.8% growth.”
Regarding specific market segments, ELFA figures for 2015 show that the
equipment finance market was dominated by the transportation, IT, construction,
and agriculture segments – no change from previous years, although of all market
segments only transportation, IT and construction saw any growth over the
previous year, and the only significant growth was in transportation.
Agriculture witnessed a particularly steep fall, from over 12% of the total to just 9%,
and industrial & manufacturing equipment continued to slide and now has well
under 4% of the market.
Equipment finance by sector, 2015
Source: ELFA
Transportation
IT & related services
Construction
Agriculture
Medical equipment
Office machines
Industrial/Manufacturing equipment
Materials handling
Energy
2.5%2.8%
3.7%
4.2%
4.7%
9.1%
11.5%
29.7%
21.3%

19. United States
Auto and Asset Finance
Country Survey 2016
19
Industry projections for 2016 are for sluggish conditions for most segments, with
the best prospects for IT and medical equipment, whilst agriculture is predicted
to fall further. Growth in transportation and construction is expected to remain
subdued until the economy shows signs of real expansion, and energy will
continue to suffer from global pressures on oil prices.
Financial institutions have been tending to tighten credit standards, with the
MLFI-25 showing credit approval ratios to have eased from over 80% of decisions
submitted in December 2015 to below 76% in July 2016.
What the experts say – Industry initiatives
Asset Finance International sought the equipment leasing industry leaders’ views
on what initiatives or changes the new administration might introduce following the
election that would benefit their business and that of their clients.
Once again, the consensus was that over-
regulation has been a brake on progress and
relaxation of this would be seen as a positive signal
and definitely beneficial for business.
Such a change can’t come too soon for Bob
Rinaldi of Commercial Industrial Finance, who
said: “If there was evidence that government’s
grip on everything starts to loosen and the new
regulations implemented over the past eight years
start to be repealed then real economic progress
will take hold due to a more positive confidence.”
It was widely agreed that the outcome of the
elections will influence the future tone of a
regulatory environment that has, in the words of
DLL’s Bill Stephenson, “clearly been a challenge for
our industry in recent years.”
Naturally, anything that encourages investment in
capital equipment would be welcomed, and a lift in
confidence to make such investment commitments
would be helped by greater unity in government
following a divisive campaign.
The new administration could start with tax reform,
as proposed by Adam Warner of Key Equipment
Finance: “In addition to working to heal the wounds
from this election process, the US Congress needs
to unify on comprehensive tax reform that would
encourage capital formation.”
To this he added: “The continuation of tax
incentives for clean energy sources is paramount to
bolstering the sale and usage of solar panels, wind
energy, fuel cells and other clean energy products.”
On this topic, Allegiant Partners’ Chris Enbom
commented: “At the end of 2015 Congress passed
new Section 179 legislation and alternative energy
legislation that is good for five years, so we don’t
expect any major changes to these tax laws unless
there is sweeping tax reform – which is unlikely
next year.”
However, in his opinion, the biggest issue the
industry is facing is that of free trade. “Many
equipment manufacturers in the US rely on free
trade agreements for their supply chains and to

20. United States
Auto and Asset Finance
Country Survey 2016
20
Paul Gogolinski
CEO, Total Fleet Solutions, Poland
Bill Stephenson
CEO and chairman of the
executive board, DLL
sell their products around the world,” he said,
“and Trump talks about wanting to start trade
wars, which would be pretty disastrous for many
companies in the short term.”
Enbom continued: “In the longer run there is a lot
of talk in Congress about overhauling the tax code,
which I think would be harmful to the economy
in the short term due to the uncertainty created
around the new tax rules. The government cannot
lose tax dollars, but would change the system – so
new winners and losers would be created with the
new tax system.”
Trading conditions and tax policy were also at
the forefront for Dave Mirsky, who commented:
“Pacific Rim Capital operates internationally, so we
prefer anything that will make it easier to transact
business across borders. On the other hand, if
US manufacturers build more factories within the
country, we will probably benefit from the increased
purchases of material handling equipment. Tax
policy also has a large impact on leasing and lease
pricing, both to the good and the bad.”
He concluded: “As lessors, we will always prefer
those policies that promote business investment.
Entrepreneurial companies have to thrive under
any conditions, and as a result, we strive to remain
flexible and responsive.”
And for Fifth Third Equipment Finance’s Tom
Partridge, a period of stability after several years
of increasing regulatory burden would benefit
businesses. “We need a period of time where the
business community will not experience great
change so they can focus on the growth of their
business as well as focusing on productively
improvements through increased capital
spending,” he remarked.
We need
a period of
time where
the business
community
will not experience great
change so they can focus on
the growth of their business
Tom Partridge, Fifth Third
Equipment Finance

21. United States
Auto and Asset Finance
Country Survey 2016
21
Business confidence
A long-standing indicator of the equipment finance industry’s view of business
conditions and expectations for the future is the ELFF’s Monthly Confidence Index
for the Equipment Finance Industry (MCI-EFI).
The latest index for September 2016 stands at 53.8, a long way down from where it
stood 18 months earlier on 72.1, and marking a continuation of a general downward
trend that began back in March 2015.
MCI-EFI, Jan 2015-Aug 2016, with trendline
Source: ELFF MCI-EFI, http://www.leasefoundation.org/research/mci/; Asset Finance International
75
70
65
60
55
50
45
Jan-15
66.3
63.0
66.1
62.6
67.4
58.7
54.0
51.6
59.1
55.1 53.8
52.3 52.5
48.3
61.1 60.2 60.2
72.4 70.7
67.5
Jan-16
Feb-16
Mar-15
Apr-15
Oct-15
Nov-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Feb-15
Dec-15
Sep-16
Mar-16
Apr-16
May-16
Aug-16
Jul-16
Jun-16
54.8
Executives responding to the MCI-EFI question about how they see conditions for
their business over the coming four months were split evenly, with 19% believing
conditions will improve and 19% believing they will deteriorate, whilst the bulk of
62% are not expecting any change.
None of the executives expect more access to capital to fund equipment
acquisitions over the next four months, a decrease from 13.3% the month before.
Taking a six-month viewpoint into the start of 2017, just 6% of the respondents
at this stage believe that economic conditions in the US will improve, with 19%
believing conditions will worsen and the remaining three-quarters expecting no
change from the present.

22. United States
Auto and Asset Finance
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The collective wisdom of millions of small business
owners is to hold off on borrowing and investing in their
businesses
Small business hesitancy
A leading indicator of economic performance and business confidence among
small businesses is the Thomson Reuters/PayNet Small Business Lending Index
(SBLI). The July 2016 index figure of 121.5 represents a sharp drop from 139.2 in
June, and is 16% down on the same month a year earlier, the largest decrease
since October 2009. The general direction of the SBLI over recent months shows
small businesses taking a more bearish view of the economy.
The companion Thomson Reuters/PayNet Small Business Delinquency Index
(SBDI) for July 2016 shows the percentage of loans that are 31-90 days past due
was at its highest level since December 2012. Compared to one year earlier,
delinquency increased by 13 basis points, the largest year-on-year increase since
December 2009.
As William Phelan, president of PayNet, Inc. commented on the release of these
figures: “It’s too early to call a change in the business cycle, but the collective
wisdom of millions of small business owners is to hold off on borrowing and investing
in their businesses,” adding: “This all means greater risk for the underlying credits
and most likely rising defaults of private companies over the next 12 months.”
Caution certainly seems to be the watchword amongst small businesses. Results
from California-based direct lender Balboa Capital’s Q2 2016 small business owner
survey reveal a decline in revenues after a strong first quarter but optimism for
the future. “The slight downturn is somewhat consistent with what we are seeing
among the small business owners we work with. They are continuing to invest in
their companies, but are taking a more strategic and cautious approach,” says Jake
Dacillo, marketing director at Balboa Capital.
Elsewhere, a snapshot of Midwestern businesses’ attitude to equipment finance
comes from a September 2016 article in the Milwaukee BizTimes, which notes
that slow economic growth has tended to make firms rein in spending, and where
capital outlay has been necessary – primarily to replace equipment rather than
for expansion – companies have been using cash that has been accumulating.
Businesses have also been using excess cash to reduce their debt loads.

23. United States
Auto and Asset Finance
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23
However, while lending levels have been fairly static it may be the need to increase
efficiency that encourages investment, a view expounded by Tom Rude, first vice
president of Equipment Finance at First Business Bank-Milwaukee. “There’s a
cautiousness, there’s still uncertainty, but there comes a point when companies
need to make the investments in their business to stay current with technologies,
to stay current with productivity,” he says.
A considerable influence on this cautious outlook is the deadening effect of the
build-up to the presidential election, with businesses putting investment decisions
on hold as the result is too close to call. And in truth the result when known may
not ease the hesitancy.
The ELFA’s Ralph Petta summed up the sentiment that has been building in
the industry back in May when he said: “Erosion in business confidence due to
misgivings about the November presidential and congressional elections and
what they portend for the future direction of the nation, an unexpectedly negative
May unemployment report, an economy barely growing, and a series of violent
events both here and abroad provide a negative backdrop for business owners
considering making capital investment decisions.”
There’s a cautiousness, there’s still uncertainty, but
there comes a point when companies need to make
the investments in their business to stay current with
technologies, to stay current with productivity

24. United States
Auto and Asset Finance
Country Survey 2016
24
What the experts say – Small business awareness
of equipment finance
It seems that many smaller businesses still lack awareness of the benefits of
equipment finance and are reluctant to invest in relevant new technology. Asset
Finance International asked the panel of industry experts for their views on how the
industry can improve this situation.
Reactions to this were varied, with current ELFA
chairman Bill Stephenson and past chairman
Bob Rinaldi defending the association’s work,
particularly through the Guest Lecture Program.
Stephenson commented: “One of ELFA’s core
efforts this year was to continue to increase
awareness of the industry amongst both
prospective customers and employees. The Guest
Lecture Program, for example, not only serves to
educate young professionals about the career
opportunities that exist for them, but also informs
the future business leaders of America about the
enabling role the equipment finance industry plays
in the economy and business community.”
And Rinaldi observed: “Due to the weak economic
conditions, demand for borrowing is down
while the supply of funds is high. This may be
contributing to a lack of growth in the industry for
the small business sector. But having said that,
the industry can and is increasing its outreach to
the business community, more specifically the
emerging business people of tomorrow. The ELFA
is doing that by expanding the Guest Lecture
Program and having more of our members deliver
the GLP to finance, accounting and masters
and undergraduate students at universities and
colleges across the US.”
However, Tom Partridge thought that more could
be done: “The industry needs to do a better job of
educating the client on technology improvements
and how these improvements can lead to
increased productivity. The industry also needs
to do a better job of explaining the true cost of
leasing to the client.”
Others on the panel were strong advocates of the
importance of technology adoption. Adam Warner
stated: “The most effective way to educate small
businesses on how lease financing can enable
them to acquire needed technology is to ensure
that technology salespeople are discussing finance
options at the beginning of their sales process.
This means that lessors active in the technology
vendor finance arena need to continually provide
training on how to introduce financing as the
primary way for customers to acquire technology
solutions. With the movement to SaaS, cloud and
services financing, this training becomes even
more critical.”
Chris Enbom cited his own company as an example
that many small businesses are well aware of
technology, saying: “We are a small company and
we invest very heavily in technology.”
He elaborated on this: “I think there are many more
managed/cloud services that businesses use, and
companies are becoming more comfortable in
some situations with a bigger ‘managed services’
component to their businesses. I think it is creeping
into many small businesses (think of reservations
systems for restaurants like Open Table) that tech
companies take a big share of the new business.
Equipment finance companies need to be thinking
about this new model as well (we certainly are!).”
Gary Amos took this up, stating: “With the internet
of things changing the landscape of how we
do business, smaller organizations now find
themselves managing marketing automation and
customer relationship management tools by a
more virtual approach. Equipment financing can

25. United States
Auto and Asset Finance
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25
enable organizations to adopt the technology and
platforms required to more successfully conduct
business across a variety of industries.”
He continued: “Organizations need to be more
transparent about the benefits they can provide
to end users, and how they can help them
through the most cost-effective means. Through
transparency and properly educating our target
audiences we will find more willingness for smaller
businesses to adopt our offerings in the future.”
Technology specialists Brendan Gleeson and
Jonathan Dodds of White Clarke Group stressed
the importance for small businesses not only to
adopt innovation but to adopt the right innovation.
“Business owners know the world is shifting
increasingly online, and companies are scrambling
to keep up with the sudden dash for digital,” said
Gleeson. “What matters most is getting the best
fit for their requirements, and for small businesses
this means technology that adapts as conditions
change and the business grows.”
“In a situation where there is uncertainty regarding
economic growth, smaller businesses are
going to be extra cautious about capital outlay,”
added Dodds. “Lessors and vendors need to
demonstrate to the customer how efficient and
flexible their offerings are, and that financing can
accelerate business growth.”
As Alan Sikora said, “Equipment finance can be a
powerful strategy for small businesses to acquire
the technology they need,” adding that “Leasing
companies must engage with small businesses
to understand their needs and provide the tools
and resources necessary to ensure entrepreneurs
make informed decisions.”
Business owners
know the world
is shifting
increasingly
online, and
companies are scrambling
to keep up with the sudden
dash for digital
Brendan Gleeson,
White Clarke Group

26. United States
Auto and Asset Finance
Country Survey 2016
26
Auto sector finance trends
The US auto sector has been in robust health in terms of sales and
growth in finance in recent years, but even here the current year
has seen a plateau and a deceleration.
In fact, according to a monthly sales forecast by J.D. Power and LMC Automotive,
the seasonally adjusted annualized rate (SAAR) for new-vehicle retail sales for
August 2016 is expected to be down by 6.5% at 13.2 million units compared to 14.2
million units in August 2015.
Likewise, the SAAR for total sales of passenger cars and light commercial vehicles
is expected to fall by 5.2% to a projected 16.8 million units in August 2016, down
from 17.7 million units a year earlier.
This will be the fourth decline in sales in six months, which comes as a shock
following 66 straight months of growth.
However, fleet sales are expected to exceed 223,000 in August 2016, a 3%
increase year-on-year, thus accounting for 15.0% of total light-vehicle sales.
The above SAAR projections are broadly in line with predictions from the National
Automobile Dealers Association (NADA). According to NADA’s chief economist,
Steven Szakaly, trends that could slow down vehicle sales growth in the coming
years include: “The ageing vehicle fleet discourages long-term vehicle sales;
average loans terms for new vehicles have risen to 68 months; and new-vehicle
transaction prices are continuing to rise, up about 3% this year, while wages remain
stagnant.”
On the other hand, he highlights the main factors that will continue to grow and
drive sales as rising employment, low gasoline and diesel prices, and leasing,
adding: “Leases are increasing, which now accounts for more than 34% of the
market.”
Leasing bucks the downward trend
This assessment of the value of leasing equates with that provided by Experian’s
State of the Automotive Finance Market report for Q2 2016, which shows a year-
on-year increase in the percentage of new vehicles acquired with financing, from
85.8% in Q2 2015 to 86.5% in Q2 2016. The proportion of new vehicles financed
by leasing has grown more impressively, up from 26.9% in Q2 2015 to 31.4% in Q2
2016.

27. United States
Auto and Asset Finance
Country Survey 2016
27
Leasing – auto market share, with trendline
Source: Experian Automotive, Asset Finance International
Looking at the share of the market by lender type, the ‘finance’ segment, which
includes leasing, has fallen back from 13.4% in Q2 2015 to 11.6% in Q2 2016 of all
vehicle sales, and has slipped to below 5% of the market in new vehicle sales.
Meanwhile, the captive segment has increased share of all vehicle sales from
26.8% in Q2 2015 to 27.7% in Q2 2016, marking a gradual upward trend over recent
years. This segment has also increased share of new vehicle sales to well over half
the market total.
Auto finance market share by lender type, Q2 2016
New & used vehicles
Source: Experian Automotive
New vehicles
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016
%
Finance Bank Captive Credit Union BHPH (Buy Here, Pay Here)
34.8%
11.4%
27.7%
18.7%
7.1% 11.6%
31.7%
0.2%
4.6%
52.2%

28. United States
Auto and Asset Finance
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Leasing penetration by age group, Jan–Apr 2016
Source: Edmunds.com
In addition, Experian data reveal that 30-day delinquencies have increased across
all lenders apart from credit unions, with the total market rate for loans and leases
standing at 2.22% in Q2 2016 (2.19% in Q2 2015).
The Experian report notes that “leasing remains very prime as more consumers
across all risk tiers choose to lease”. The Q2 2016 figures show prime and super-
prime accounting for close to 75% of new leases, but there continues to be a
gradual increase in risk in auto leasing, with sub-prime lending rising to a recent
high of 7.4%.
Further industry information from online resource Edmunds.com shows that the
number of vehicles leased in the first half of 2016 totalled 2.2 million, double the
total for the first half of 2011 – an impressive rate of growth over five years.
The Edmunds.com research indicates non-traditional categories such as pick-up
trucks and compact cars are leading lease volume growth. The attractions that
leasing offers of low monthly payments and ease of ownership have been taken
up particularly by older buyers, with leasing penetration increasing by 74% over the
last five years among buyers aged 75 and above, although proportionately the age
group with the highest leasing level is the millennials.
The research also reveals that while new vehicle purchasers are much more likely
to be male than female (58% to 42% respectively), the pattern changes for vehicles
acquired through leasing with a higher percentage of lessees being female.
36.0
34.0
32.0
30.0
28.0
26.0
Millenials 35-44 45-54 55-64 65-74 75+
Ages
%
32.4%
31.7%
30.0% 29.9%
32.3%
34.2%

29. United States
Auto and Asset Finance
Country Survey 2016
29
Finally, there should be mention of the alternatively fuelled vehicle sector, which
includes electric vehicles and hybrids. As in many countries the concept is slow
to gain a footing in the US, particularly with fuel prices continuing to be low if not
actually falling in recent months.
It is initially encouraging then, to note that in the first half of 2016 sales of
alternatively fuelled passenger vehicles grew 18% on the same period the year
before – a striking rate of growth until the actual numbers reveal total H1 2016
sales to be fewer than 64,000 (Source: EV-Volumes).
So despite plug-in hybrid electric vehicle (PHEV) sales achieving a record market
share in June 2016, this was still just shy of 1%. Estimates are for 150,000 sales in
2016, a sector high and surely one that will continue to grow, if slowly.
What the experts say – Investment in technology
Asset Finance International asked the panel of equipment finance industry leaders
whether it is valid to assert that US lessors are themselves guilty of underinvesting in
technology. Should the industry be investing more in technology to deliver smarter
solutions for customers?
The panel did not see underinvestment as an
issue – certainly not in relation to their own
operations – but was appreciative of the risks of
not investing.
According to Bob Rinaldi, for some lenders lower
investment in technology may have been a
case of prioritizing other demands following the
financial crisis. “Many lessors have invested more
in compliance which has gobbled up most of their
budgets,” he said, adding: “Moreover, the very
low interest rate environment has compressed
net interest margins severely on equipment
loans while also making equipment leasing less
attractive due to these low borrowing costs. So,
in short, expense up, margins down, and a weak
economic growth climate leading to less demand
or willingness to spend on technology.”
Dave Mirsky stated: “Leasing is a low margin,
competitive business that should be driving all
lessors to become as efficient as possible. In
addition, the business customer is demanding
ever more rapid and mobile solutions to leasing
concerns which should provide an impetus for the
industry to invest more into technology. Pacific
Rim Capital has invested heavily into technology
in recent years and has focused on analyzing and
improving our systems with the goal of becoming
more efficient while maintaining and improving our
already excellent customer service. Every lessor
should be doing the same.”
For Adam Warner there are several trends that
warrant deeper investment in technology solutions
by US lessors. “First,” he said, “there has been
In short,
expense up,
margins down,
and a weak
economic
growth climate leading to
less demand or willingness
to spend on technology
Bob Rinaldi, Commercial
Industrial Finance
29

30. United States
Auto and Asset Finance
Country Survey 2016
30
a drive over the past few years to provide self-
service options for business clients. Second,
there is a clear movement to get data through
mobile devices, even for businesses. Finally, as
businesses look for more options to pay for usage
and access rather than equipment, lessors need
more robust variable financing options.”
In addition, he noted, “The need for a lessor to
increase its technology spend will depend largely
on the industries and clients the company serves.
For example, lessors that largely serve smaller
businesses will see a greater demand for mobile
solutions, as their clients’ behaviour is closer to
that of a consumer.”
There is also a small but growing challenge to
established lessors from alternative sources of
funding, provided by new, agile companies that
use cutting-edge technology. “This dynamic group
of finance providers,” said White Clarke Group’s
Jonathan Dodds, “such as peer-to-peer funders
and crowdfunders, are taking a lead in technology
use and development – partly because they are
already solely online platforms. They are making
it easier for start-ups and small companies to
raise capital through their flexibility. They are fast,
responsive and smart.”
And his White Clarke Group colleague Brendan
Gleeson added: “Company formations are on the
increase again – the Kauffman Index of Startup
Activity, which measures new business creation,
has registered its biggest upswing since before the
financial crisis in 2015 and 2016 from a 20-year low
in 2014. There are entrepreneurs who are looking
for equipment finance and they’re often going to
look to new, tech-savvy funding methods.”
For Alan Sikora the outlook is straightforward.
“Clients demand and deserve both personalized
service and convenient digital experiences. To
thrive in the years ahead, equipment lessors must
make technology investment a priority,” he said.
Bill Stephenson’s view is that, while overall
investment in technology has been high, the
industry has been slow to innovate when it
comes to creating new, more efficient ways of
doing business, but he sees that starting to turn
around. He said: “Our business models are being
challenged by alternative forms of financing,
and while it’s yet to be decided whether these
microfunders and fintechs have a viable business
model, the uncertainty is enough to cause concern.
This pressure is forcing lessors to pay attention to
where the industry is headed.”
He continued: “We also need to look at the
equipment supplier side of the equation because
technology will disrupt many of the traditional
distribution channels used today to sell equipment to
customers, and in turn, will disrupt how leasing and
finance solutions are introduced to these customers
at the point of sale. Our partners and customers
want to conduct business with us in new ways, and
we need to meet their requirements or risk losing
the relationships we’ve built. We no longer have an
option when it comes to investing in technology.”
Finally, Gary Amos observed that “acquiring new
technology is the right solution for business if
the return is greater than the initial investment.”
He continued: “The right investment opportunity,
coupled with the proper financial solution,
truly showcases the value that new technology
acquisitions can provide.”
He also pointed out that “equipment financing and
leasing companies will find greater success if they
more clearly educate their respective industry
stakeholders on the returns that investing in new
technology can have for their business.”
This dynamic
group of finance
providers are
making it easier
for start-ups
and small companies to
raise capital through their
flexibility
Jonathan Dodds,
White Clarke Group

31. United States
Auto and Asset Finance
Country Survey 2016
31
Technology – The top priorities for
auto financing sources
Auto finance specialist Marguerite Watanabe looks at
technology improvements in this sector
Ask any auto finance executive about their strategic
goals and technology improvements will be one of
them. In fact, for the American Financial Services
Association (AFSA) Vehicle Finance Advisory Board,
Technology Improvements (e.g. new systems and
software, eContracting, reporting tools) has been
selected as the number one opportunity for five
straight years. Technology improvements can be
further classified as replacing legacy hardware,
adding or replacing software, applying new tools
and analytics or introducing new plug-ins or,
more frequently, developing apps, all having a
consequential impact on the business.
The justification for technology improvements
The rationale as to why technology improvement is
identified as a top priority is very easy to understand.
Generally speaking, technology not only enhances
operational capabilities, but often workflow and cost
efficiencies can be gained. The reasons apply across
the industry regardless of corporate ownership
(public, private equity, privately owned), size (large
to small), geography (national, regional, local), credit
spectrum (prime, near prime, non-prime) or dealer
focus (franchised, independent).
All auto financing sources must replace their ageing
legacy systems at some point, though many try to put
off doing so for as long possible. This could involve a
replacement with a completely new platform from a
new service provider, an upgrade to a new platform
with the same provider or a move from in-house
to hosted platforms with a new or current provider.
Another case could be that the old platform can no
longer be supported by the provider or internally with
outdated programming or need for greater security. Or
it could be that change is necessitated as a result of a
merger and acquisition situation.
By and large, the expansion of functionality is the
most common reason for captives, banks and auto
financing companies to introduce new technology.
This could be to improve operational processes and
efficiencies or reduce costs, but it could also be to
maintain a competitive advantage, fulfil compliance
requirements or improve dealer or customer
satisfaction.
With all these solid arguments for investment, it
would seem a straightforward justification for new
and improved technologies. There are just as many
explanations, however, as to why technology projects
don’t get off the ground. The most common of these
is that getting proper prioritization on an IT project
list, especially in large companies, can seem like it
would take an Act of Congress or Parliament. There
are simply too many other things that always seem
to have priority for one reason or another. Another
is that the new technology may have too great of an
impact on legacy systems or it could interfere with a
larger ongoing technology project. And sometimes
it is merely too hard to justify the project because
it is a challenge to adequately show the return on
investment or to clearly demonstrate the need versus
the want.
Technology improvements most often evaluated
and implemented today
The functional view
In the area of risk management and account
acquisition or originations, there is a great amount of
activity. For all the reasons named above, there have
been multiple auto financing sources that have had
loan origination and servicing system updates and
replacements over recent years, many featuring more
flexibility and configurability.

32. United States
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Newer technology advancements are focused
more on greater workflow efficiencies, optimized
decisioning and pricing, deal structuring and
application and contract data verification.
eContracting, though not new, continues to grow and
evolve with a greater emphasis on validation. And,
more and more, auto financing sources are wrestling
with how to meet the needs of the online or digital
consumer seeking to apply for financing with either
instantaneous approvals, ‘pre-screens of one’, or pre-
qualifications, the key being that it shows up as a soft,
not hard, inquiry on the credit report.
With respect to account servicing and payment
processing, there have also been a number of
replacements and updates with legacy servicing
systems. Moreover, there have been many payment
processing providers seeking to allow their auto
financing clients to offer their customers ways to pay
anytime, anywhere, in any way desired – i.e. on the
customer’s terms. More recently, there have been
many auto financing sources also looking to improve
their communication channels with their customers,
including via text and social media. “Today’s customer
expects lenders to be always available. Customers
want active control and expect lenders to provide the
right science and technology to assist them in their
decision-making process and in communicating with
the lender.” says Ken Kertz, Director, Auto & Motorized
Segment at FICO.
Within the loss management domain, optimized
collections has always been a focus for auto financing
sources as well as workflow improvements with the
goal to be top of mind of the delinquent customer for
their share of wallet. Using technology and analytics
to accomplish this objective is a never-ending task,
but one that has become more refined over time with
the use of data, analytics and tools.
Finally, in the area of wholesale financing, a number
of dealer financing sources – captives, banks
and independent dealer financing lenders – have
been upgrading their core systems and looking at
ways to improve their audit processes. With dealer
financing proving to be a growing way to increase the
‘stickiness’ in the dealer-finance source relationship,
technology that focuses on building dealer
satisfaction becomes even more important. Auto
financing sources can provide insights and analysis
on dealer performance and customer management
opportunities. Technology enhancements can also
mean improved lead generation programs that take
into consideration the learning from a financing
source’s data analysis.
The enterprise view
Due to the pressure and demand for more
accountability and due diligence from regulators,
shareholders and funding sources, staying on top of
compliance reporting requirements and preparing
for exams and audits is crucial. This has led to
added emphasis on monitoring internal performance
metrics and external benchmarking measurements.
Anticipating the need for enhanced and automated
reports would be the next step. Being able to modify
and remedy processes quickly and seamlessly also
requires improved technologies. Other enterprise
compliance areas in which new technology is being
implemented include training of executives and
employees at all levels and managing third-party
service providers.
The need for greater fraud protection and cyber
security is another key area in which new technologies
are being considered. For defence against threats
which include ID theft, spam and phishing, hacking,
malicious software, malvertising, drive-by downloads,
ransomware, DDoS attacks and botnets, financing
sources, auto and other, are fortifying their systems
and data walls. It seems that this area, too, will soon
be regulated.
Finally, there is data, big and small. Auto financing
sources are looking to maximize the analysis and
use of their own valuable data such as applications,
bookings versus approvals, payment history and lease
returns. They are also looking to incorporate non-
traditional data (e.g. non-traditional credit reporting,
utilities, social media) along with the traditional (e.g.
traditional credit reporting, vehicle values) into more
effective decision-making by layering risk with more
sophisticated data analytics and tools. According to
Nikh Nath, CIO of Nationwide Acceptance, a non-
prime auto finance company operating in 24 states,
“The new generations of data tools and services that

33. United States
Auto and Asset Finance
Country Survey 2016
33
can mine the vast realms of public and corporate data
are ubiquitous. The application of predictive analytics
to the entire lifecycle of a loan from originations to
loss mitigation could have the largest impact on the
lender’s bottom line.”
The key to getting ahead with technology
If auto financing sources want to truly work toward
breakthrough improvements with technology for
the benefit of their companies as well as for their
customers, they will need to place more energy into
improving those technologies that can significantly
result in building transparency with the consumer,
reducing time to fulfil the financing offer and providing
enhanced options to the consumer.
For internal benefits, auto financing sources must
seek to enhance their business effectiveness without
compromising current production levels or dealer and
customer satisfaction. “At Toyota Financial Services,
we are exploring blockchain technologies and have
recently joined R3CEV LLC’s blockchain consortium.
We believe distributed and shared ledger technology
can greatly boost efficiencies and may have huge
potential applications in auto financing,” says Ann
Bybee, vice president, Corporate Strategy, Toyota
Financial Services.
Using technology to improve the customer experience
is still relatively untapped. While a number of auto
financing sources offer online and mobile payment
options today, future technology improvements will
focus on the loan origination process. New market
entrants with mobile financing platforms that offer
the consumer the desired transparency into the
financing process, greater consumer-facing options,
time savings and improved customer satisfaction are
being introduced. As it was back in 2001 when the
dealer financing platforms, DealerTrack and RouteOne
were introduced in the US, soon the introduction
for consumer financing platforms that engage the
customer without alienating the dealer will become
widespread.
While the debate between franchised and direct
vehicle sales channels will continue, it is likely that
dealers will remain a vital and valuable choice for
consumers. We know that ‘disruptive technologies’
(e.g. Amazon, Netflix and Airbnb) have impacted other
industries in remarkable ways. Though we have seen
the start of it in the automotive industry with ride
sharing, autonomous vehicles and connected cars,
auto finance hasn’t yet experienced its ‘disruptive’
episode. According to Serge Vartanov, CMO of
AutoGravity, a FinTech (financial technology) company
that enables customers to access auto finance offers
on their smartphones, “The potential of emerging
technology to reinvent the auto finance experience
is unprecedented. Digitally savvy customers
are seeking convenience, transparency and
empowerment – all in the palm of their hand. Rapid
migration to smartphone-based auto financing will be
transformational for lenders and dealers who embrace
the technology.”
There is much interesting and meaningful dialogue
to look forward to around technology in our industry.
What ‘disruption’ could bring to auto finance
organizations offers an exciting future.
Marguerite Watanabe is president of
independent consultant Connections Insights.
Connections Insights has worked since 2006
with international clients, including auto financing
sources, auto manufacturers, software and data
providers, business processing outsourcers,
consulting firms and trade associations.
+1 678-520-3385
marguerite@connectionsinsights.com

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Auto and Asset Finance
Country Survey 2016
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What the experts say – Lease accounting changes
Finally, Asset Finance International asked the panel of experts for their views on
the new lease accounting rules and their implications. Are lessors (and lessees) up
to speed with the changes after such a long period of deliberation from the lease
accounting Boards, and should more be done to ensure the changes are widely
understood and correctly put into practice?
First, it was generally acknowledged that the
ELFA has initiated a major educational drive
to ensure lessors are aware of the new rules.
However, opinion varied as to how widely they are
understood by lessees.
FAEF’s Alan Sikora commented: “We are finding
that lessees are aware that the accounting rules
are changing, but may be uncertain about the
impact on their specific organization. As lessors, it
is crucial that we educate our clients on the lease
accounting changes and the benefits of leasing
beyond accounting treatment.”
Adam Warner of Key Equipment Finance agreed,
saying: “I believe most lessors understand both
the impacts to them as a lessor and to their lessee
clients,” but added: “The understanding of the new
rules by lessees varies widely. Larger corporations
that lease millions of dollars of equipment seem
to be more up to speed on the changes, and a lot
of that education is coming from their accounting
firms. Smaller businesses may be a bit behind their
larger counterparts because the impact might not
be as significant to them.”
This last point was taken up by Chris Enbom of
Allegiant Partners: “Our company works mostly
with very small companies which mostly do loans. I
think larger companies are beginning to look at the
new rules, but there is a lot of education that needs
to be done.”
He added: “Companies like ours that do mostly
equipment finance agreements will move to using
primarily loan accounting so they can continue to
amortize up-front costs.”
And Bob Rinaldi of Commercial Industrial Finance
highlighted the fact that the new rules won’t apply
to all leases by any means. “As the convergence
date gets closer to reality, lessors will start to
pay closer attention,” he said. “The thing to
keep in mind, though, is that roughly only 10%
of total equipment financing is done in the form
of operating leases. So, many of those lessors
that are not in that business aren’t really paying
attention to it at all since it doesn’t apply to them.”
In the opinion of Fifth Third Equipment Finance’s
Tom Partridge, “Lessors are making progress on
understanding the new standards. That being said,
more work needs to be done. More organizations
are going to have to adapt their sales strategies
which will require a better understanding of the
accounting changes.”
It is crucial that
we educate
our clients
on the lease
accounting changes and the
benefits of leasing beyond
accounting treatment
Alan Sikora, FAEF

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As an executive committee member of the Board
of the ELFA, Dave Mirsky of Pacific Rim Capital
gave the association his full backing for the work
it has done in educating the leasing community,
adding: “I would hope that the details are well
understood by lessors. I think that the implications
for business are yet to be seen and will depend on
the reaction of lessees to the new accounting
rules and whether the increased administrative
burden will affect overall demand for leasing.”
And DLL’s Bill Stephenson, the current ELFA
chairman, concluded: “At this point, I believe
lessors are up to speed with what the changes
mean for our industry, but I expect we will be
continuing to educate and support our partners
and customers over the next couple of years.”
He continued: “The ELFA has developed a
multitude of documents and communications
materials to assist members in their preparations.
The most important thing to remember is that,
while the balance sheet treatment of some
financial structures may be changing, all other
benefits of leasing will continue to exist for
lessees (e.g. capital conservation, managing
obsolescence).”
I expect we will
be continuing
to educate and
support our
partners and
customers over the next
couple of years
Bill Stephenson, DLL

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Auto and Asset Finance
Country Survey 2016
36
Lease accounting rules issued
in 2016
Bill Bosco, advisor to the ELFA, provides an update on
the latest developments in the lease accounting project
The Lease Accounting Project has finally concluded as
the International Accounting Standards Board (IASB)
issued their version in January 2016 (IFRS 16) and the
Financial Accounting Standards Board (FASB) issued
their version in February 2016 (ASC Topic 842). This
paper focuses on the FASB version and points out
key differences from the IASB version. For US public
companies the transition will occur in 2019 in financial
statements for periods beginning after 15 December
2018. It should be noted that the SEC requires three
years of comparative income statements and two
years’ comparative balance sheets. This means that
for public companies 2017 is the start for capturing
data for reporting in 2019. For private companies the
transition year is one year later, or 2020.
The lease accounting change project began as a
joint project with an objective of converging on a
worldwide set of rules. The idea of convergence was
dropped when the FASB and IASB took different
views on whether all leases were the same for lessee
accounting. They did continue to meet jointly and the
rules are not too far apart in most other areas. The
major objective of capitalizing most operating leases
was achieved in both standards. The two standards
have major differences in lessee accounting but lessor
accounting is substantially converged as they adopted
existing GAAP for lessors with a few changes. One
difference in the versions of lessor accounting is the
FASB decided to incorporate concepts from the new
revenue recognition standard for determining when
a sale takes place in sales-type leases, whereas the
IASB did not.
Overview of the impact
Although for lessees there will be a dramatic change
in assets and liabilities, the resulting financial ratios
and measures and the work to account for leases,
there should not be a major change in the propensity
of US companies to lease. The business reasons for
leasing in the US remain strong. Also the accounting
presentation and cost recognition for operating
leases by US companies will be favourable as the
FASB recognized that operating leases should be
accounted for differently from finance leases. Only
the present value of the operating lease payments
goes on balance sheet – not the full cost – and the
liability is not classified as debt. The operating lease
cost remains as the straight line average of the lease
payments. US lessees will continue to want operating
lease classification but there will be an increased
emphasis on keeping the amount capitalized as
low as possible. The IASB version is not so true to
the substance of operating leases as the liability is
classified as debt and the cost pattern is front loaded
just like a financed purchase of the asset.
Preparing for the new standard
It is important for both lessors and lessees to plan
ahead for the new lease accounting standard. Lessors
will have only minor changes to systems since the
lessor models are retained with few changes. Lessors
may be motivated to tweak product offerings but there
is time to do that. Lessees should be more concerned
with transition due to the immensity of the project
and the added complexity in accounting for the
operating lease on balance sheet. They’ll need a lease
accounting system. They will also need to gather all
their existing lease documents and begin extracting
key data on rent payments, variable lease payments,
separating elements of gross lease payments, and
renewal and purchase options. They also should
be thinking of changing their leasing strategies to
minimize the capitalized value of future leases and
sale leasebacks that they are working on. This is a
large project for big companies and merits a project
team and plan.
Lessees will also have to develop a process for
accounting for new leases with internal controls.
Since operating lease obligations were only reported
in the footnotes, existing processes are inadequate.

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More information will be required regarding the
determination of the lease term and lease payments.
Lessees will need to evaluate renewal and purchase
options to determine if any are reasonably assured of
exercise. They will need to determine if any payment
is likely under residual guarantees it is providing to
lessors. They will need to track variable rents based
on an index (such as CPI) or a rate (such as LIBOR)
and possible payments under residual guarantees.
There are concerns regarding how preparers and
their audit firms will deal with judgment areas under
the new rules. Because operating lease payments
will be capitalized there will be more scrutiny on lease
payments and the lease term. Examples of areas of
concern are: defining the lease term where renewal
options exist (especially synthetic leases); and
estimating the lease and non-lease portions of gross
billed leases with services (full service leases).
Lessor issues
As for lessor classification, both Boards agreed to
retain their respective lessor models. IASB lessors
will look to the IAS 17 model for classification while
the FASB will retain their FAS 13 model with minor
changes. The FASB dropped the 75% useful life
and 90% present value bright lines from the actual
classification tests, but formally stated that those
values could continue to be used as guidance.
Overall, the decision to maintain the basic lessor
models is viewed as good news because it means
lessors can continue to use their current lessor
accounting systems with minor changes.
The new rules changed the definition of initial direct
costs (IDC) to be incremental costs of a lease that
would not have been incurred if the lease had not
been obtained. This excludes most legal costs and all
internal allocations of overhead. Sales commissions
are still included. This is a major change for those
lessors that allocated overhead associated with
originating leases under the existing rules for IDC.
Also, the IDC is included in the implicit rate to amortize
lease revenue making it clearer as to how IDC is
amortized.
The FASB included Investment Tax Credits (ITC) in the
definition of the implicit rate. This is good news as ITC,
although only allowed for alternate energy assets, can
now be included in lease revenue and amortized.
The FASB decided to conform certain issues to the
new Revenue Recognition concept of control to define
whether a sale has occurred. As a result, sales-type
classification is only allowed under the FASB version
where the terms of the lease alone transfer control
to the lessee. This approach ignores any third party
involvement such as a residual guarantee or residual
insurance to increase the cash flows considered in the
present value (PV) test. Third party involvement would
still be a consideration in determining if a lease is a
finance or operating lease. The difference is if third
party involvement is needed to increase the PV to
qualify as a finance lease, it is not a sales-type lease
and the ‘gross profit’ is deferred and amortized as
lease/interest revenue. Said another way, the implicit
rate used to recognize lease revenue is very high as
it considers the asset cost as the investment amount
in the implicit rate calculation. This change impacts
US vendors and dealers who have used residual
insurance to achieve sales-type lease treatment. They
will have to evaluate their options under the new rules
as the timing and presentation of revenue will change
dramatically. To preserve gross profit presentation
they may have to sell their leases to a third party or a
non-consolidated partnership.
Sale leasebacks with purchase options will need
careful review and structuring to avoid loss of sale
treatment and operating lease treatment for lessee
customers. The FASB does provide additional guidance
versus the IASB to determine if a sale has taken place
in a sale leaseback when a purchase option is included
in the lease terms. The FASB allows sale treatment
where the purchase option is at fair market value and
the asset is not specialized and is readily available in
the marketplace. Both the FASB and IASB do not allow
sale treatment if there is a fixed purchase option in the
leaseback even if they are non-bargain options.
Leveraged leases will be grandfathered for US
lessors but leveraged lease accounting will not
be allowed for new leases commencing after
the transition date. This impacts only large ticket
transactions and the market will adjust to other
structures like partnerships to achieve almost the
same benefits as in a leveraged lease.
Lessee issues
The FASB and IASB versions differ as to when a
lessee must adjust a lease for changes in variable

38. United States
Auto and Asset Finance
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38
payments due to a change in an index or a rate. The
IASB requires lessees to adjust lease accounting
when the contractual rents change. To simplify
compliance, the FASB requires recording a change
only when an action by the lessee modifies the
lease, changes the lease terms, elects an option or
does something in its control to change whether it is
reasonably certain to exercise an option.
Bank and securities regulators have not opined on
the regulatory capital treatment of the new capitalized
operating leases. There is a concern as their policy
generally is to follow GAAP. It is not the intent of the
FASB to drive economic activity so it will be up to
the leasing industry and regulated lessees to fight to
retain the same ‘no capital needed’ treatment afforded
operating leases as they are executory contracts that
have no impact on a liquidation.
US investment grade lessees will not see much
change on the ratios and measures as their
analysts and lenders are sophisticated and ‘get
into the numbers’ in detail. Small and medium-sized
companies many have to assist their lenders, which
often are smaller banks and finance companies
(possibly not as sophisticated as those that deal in the
investment grade market) with calculations, especially
in treating the operating lease liability as a non-debt
liability. Return on assets (ROA) will be the most
important measure lessees will focus on and try to
improve through lease structuring.
The IASB one lease model will cause most ratios and
measures to change for the worse. IFRS companies
will see the ratios and measures deteriorate for three
reasons: more assets on balance sheet (reduced
ROA, quick ratio); accelerated costs (reduced ROA);
and permanent lost equity (increased debt to equity).
Strangely, EBITDA increases as above-the-line rent
expense is replaced by below-the-line interest and
amortization.
It is likely the market will adjust to the new rules as
an accounting change like capitalizing leases should
not change the financial strength of a company. In
addition, the change in lease accounting will impact
all companies. One concern is that there will be more
significant changes to the financial statement of those
companies that have longer-term leases and/or lease
more assets than their peers.
A look ahead
The US market should see little impact when the rules
take effect because of the FASB’s decision to retain
the two lease model where capitalized operating
leases are separately reported in ways that reflect their
substance. The business reasons for leasing remain
strong as lessees lease for reasons of preserving bank
lines and capital, low-cost 100% financing/liquidity,
managing tax benefits, managing assets (need, use and
obsolescence), outsourcing service, and convenience
of point of sale financing. The accounting reason for
leasing will remain to the extent that only the present
value of the asset is on balance sheet, the liability is not
debt and the lease expense matches the use benefit
(straight line). The regulatory benefits should remain if
we successfully advocate with the regulators.
Impact to lessee ratios and measures
Key Ratios/Measures FASB version IASB version
EBITDA No change Better: rent replaced by amort/interest
Gross Margin No change No change
Operating Efficiency Ratio No change Better: rent replaced by amortization
Current Ratio* Worse: asset not current/additional liability Worse: asset not current/additional liability
Quick Ratio* Worse: additional liability Worse: additional liability
Net Worth No change No change
Liabilities to Net Worth* Worse: additional liability Worse: additional liability
Debt/Equity Ratio No change Worse: additional liability + eroded equity
Return on Assets (ROA) Worse: additional asset Worse: additional asset + front-ended costs
Return on Equity (ROE) No change Worse: front-ended costs
*It can be argued that including operating lease liabilities that disappear in a liquidation is not correct
Bill Bosco is the Principal of Leasing 101, a member
of the ELFA Financial Accounting Committee since
1988, and a member of the FASB/IASB Leases
Project working group.
Note: For the latest updates, visit the ELFA
lease-accounting web page at http://www.elfaonline.
org/industry-topics/lease-accounting
38

39. United States
Auto and Asset Finance
Country Survey 2016
39
The legal and regulatory
environment
Stephen Whelan assesses recent developments in the
US equipment and auto finance market
The year 2016 has witnessed several noteworthy
developments in equipment and auto finance from
various courtrooms. This article will discuss some
notable decisions.
True sale
In In re Dryden Advisory Group, LLC, a bankruptcy
court in Pennsylvania considered whether a
factoring agreement functioned as a true sale
of accounts receivable or constituted a secured
financing agreement. The court upheld the purchase
contract and security agreement as a nonrecourse
sale of accounts, concluding that the arrangement
constituted a true sale because, even though the
seller continued to bill and collect for receivables
(as agent for the buyer), the receivables were not
commingled with the seller’s general operating
funds but rather were to be held in trust for, and to
be immediately turned over to, the buyer whenever
payment on any account was received. The court
cited the buyer’s ability to demand payment directly
from account debtors, as well as the absence of
recourse against the seller (except in very limited
circumstances), as support for its finding that the
transaction was a sale. This decision bolsters the
desired result for structuring securitization and
portfolio sales of pools of equipment leases and auto
loans.
Hell or high water
In AEL Financial, LLC v. Sheppard, the lessor sued
the lessee of a medical treatment table for failure to
pay rent. The lessee argued that the equipment was
never delivered and that he had mistakenly signed
a certificate of acceptance for the table. He further
argued that under his mistaken expectation of future
delivery, he made $30,000 worth of payments to the
lessor under the lease, for which he argued that the
equipment supplier should be liable.
An Illinois circuit court awarded summary judgment
in favour of the lessor, holding that (1) the lease was
a ‘finance lease’ under the U.C.C., (2) the lessee’s
execution of the certificate of acceptance constituted
‘acceptance’ of the decompression table, regardless
of whether the table had been delivered, (3) the
lessee’s acceptance of the table made his obligations
under the lease ‘irrevocable and independent’ under
U.C.C. section 2A-407(1), and (4) the lessee’s failure to
make required payments under the lease agreement
constituted a default, entitling the lessor to recover
damages. The appellate court affirmed summary
judgment in favour of the lessor and supplier,
concluding that because the defendant’s obligations
under the lease were ‘irrevocable and independent’,
he was liable to the lessor without regard to whether
the supplier delivered the decompression table.
Bankruptcy remote?
In re Lake Michigan Beach Pottawattamie Resort
LLC, decided in April 2016 by a bankruptcy court in
Chicago, upheld the filing of a bankruptcy petition
despite the refusal of a lender to the LLC, as a
‘Special Member’ of the LLC, to authorize such a
‘Material Action’, as required by an amendment to the
operating agreement of the LLC. The amendment
had been demanded by the lender (whose loan was
collateralized by a mortgage on the resort property
of the LLC) as a condition to its forbearance from
pursuing remedies following the LLC’s default on the
loan.
When the LLC again defaulted on the loan, the lender
commenced foreclosure on the resort property. On
the day before the foreclosure sale was to have
occurred, the LLC petitioned for relief under the
Bankruptcy Code, thereby blocking the sale and any
other action which the lender might take to enforce its
rights against the LLC or its property. All of the

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Auto and Asset Finance
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LLC members, except the lender (as Special Member)
consented to filing of the petition. The lender sued to
dismiss the bankruptcy case on the grounds that the
LLC had not complied with its operating agreement
requirement for all members to approve such a
Material Action.
The court conceded that the law of the state
where the LLC was organized permits an operating
agreement to require a supermajority vote for
certain actions, but then interpreted that local law
as requiring LLC members to “consider the interests
of the entity and not only their own interests.” The
court construed the Special Member section of the
operating agreement (“written for the express benefit
of the Lender”) as lacking the “essential playbook for
a successful blocking director structure…the director
must be subject to normal director fiduciary duties”
and able to “vote in favor of a bankruptcy filing, even
if it is not in the best interests of the creditor that they
were chosen by.” Instead, the operating agreement
language provided that “the Special Member shall be
entitled to consider only such interests and factors
as it desires [and] shall have no duty or obligation
to give any consideration to any interests or factors
affecting the Company or the Members.” The court
observed that Illinois law requires an LLC manager
to discharge its duties “in a manner the manager
reasonably believes to be in the best interests of the
limited liability company”, and ruled that the Special
Member provision was void. The bankruptcy petition
hence was duly authorized and the lender’s motion to
dismiss was denied.
Tarnished ‘golden share’
In In re Intervention Energy Holdings, LLC, the LLC
defaulted on its $200 million of notes issued to a
lender. In exchange for its forbearance, the lender
demanded an amendment to the LLC operating
agreement under which a) it would be issued one
common unit in the LLC and b) the approval of all
common unit holders would be required “prior to
any voluntary filing for bankruptcy protection for the
Parent of the Company.” The LLC previously had
issued 22 million common units to various individual
and corporate investors. Noting the disparity
between the amount of units previously issued and
outstanding, and the single ‘golden share’ issued to
the lender for a cash price of $1, the bankruptcy judge
in Delaware concluded that the blocking arrangement
constituted nothing less than “an absolute waiver by
the LLC of its right to seek federal bankruptcy relief”,
observed that “Federal courts have consistently
refused to enforce waivers of federal bankruptcy
rights” and ruled that the bankruptcy proceedings
were validly authorized by the LLC, notwithstanding
the refusal of the lender to vote its common unit in
favour of that action.
The Lake Michigan and Intervention Energy decisions
demonstrate the need for experienced counsel to
prepare documents intended to enable creditors to
exert a restraining hand on a borrower’s ability to seek
Bankruptcy Code protection. Otherwise, a lender
found guilty of over-reaching will be disappointed and
will have wasted time and money.
An unenforceable covenant?
A well-structured asset-backed securities (ABS)
financing will try to limit the possibility of an
involuntary petition against the special purpose entity
(SPE) issuer of the ABS, by writing the transaction
documents so that the SPE only deals with a limited
universe of counterparties, consisting of the seller
and servicer of the assets, plus the indenture trustee
and purchasers of the ABS. Each of those entities will
be required, in the transaction documents which it
signs, to agree to a so-called ‘non-petition’ covenant,
under which the parties agree not to join in the filing
of an involuntary petition against the SPE, for at least
one year after the ABS have been repaid. Investors
and rating agencies insist upon these non-petition
clauses.
Late in 2015, an SPE issuer, Zohar CDO 2003-1, Ltd.,
defaulted on principal and interest payments due to
its ABS noteholders. Bond insurer MBIA, pursuant to
its financial guaranty insurance agreement with Zohar,
paid principal and interest to senior noteholders at the
November 20, 2015 maturity of the notes, and hence
became the controlling creditor of Zohar, entitled to
sell the assets of that SPE by reason of Zohar’s default

41. United States
Auto and Asset Finance
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in payment of the notes. On November 22, 2015,
Patriarch Partners XV, LLC, as the largest holder of the
remaining, subordinated notes, filed an involuntary
petition against Zohar, alleging that protection under
the Bankruptcy Code was necessary to prevent
MBIA from foreclosing on Zohar’s collateral (much of
which consisted of loans to companies which were
controlled by an affiliate of Patriarch).
Patriarch argued that there is no support in the
Bankruptcy Code for non-petition clauses. At a
January 2016 hearing on Zohar’s motion to dismiss
the involuntary petition, the bankruptcy court
concluded that a further hearing was needed to
determine whether Patriarch’s non-petition covenant
could be enforced specifically or whether its breach
simply would subject Patriarch to an action for
damages. Ultimately, Patriarch withdrew its petition
against Zohar before the court could issue a definitive
ruling on enforceability of the covenant, thereby
leaving the question unanswered.
Stephen T. Whelan is a partner in the New York
City office of law firm Blank Rome LLP
(swhelan@blankrome.com) and a member of the
ELFA Board of Directors.

42. The dash
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