Wis. Admin. Code Department of Financial Institutions DFI-Bkg 3.05

Current through May 28, 2024

Section DFI-Bkg 3.05 - Leasing of personal property

(1) GENERAL AUTHORITY.

(a) A bank may engage in lease financing transactions by complying with this subsection and either sub. (2) relating to leases on a net lease basis or sub. (3) relating to leases on a net, full-payout lease basis.

(b) A bank may enter into a lease financing transaction only if it can reasonably expect to realize a return of its full investment in the leased property, plus the estimated cost of financing the property over the term of the lease from all of the following:

1. Rentals.

2. Estimated tax benefits.

3. The estimated residual value of the property, at the expiration of the term of the lease.

(c) "Net lease" means a lease under which the bank will not, directly or indirectly, provide or be obligated to provide for any of the following:

1. The servicing, repair or maintenance of the leased property during the lease term.

2. The purchasing of parts and accessories for the leased property. However, improvements and additions to the leased property may be leased to the lessee upon its request in accordance with any applicable requirements for maximum estimated residual value.

3. The loan of replacement or substitute property while the leased property is being serviced.

4. The purchasing of insurance for the lessee, except where the lessee has failed in its contractual obligation to purchase or maintain the required insurance.

5. The renewal of any license or registration for the property unless such action by the bank is necessary to protect its interest as owner or financier of the property.

(d) If, in good faith, a bank determines that there has been an unanticipated change in conditions which threatens its financial position by significantly increasing its exposure to loss, the bank may do any of the following:

1. As the owner and lessor under a net lease or a net, full-payout lease, take reasonable and appropriate action to salvage or protect the value of the property or its interests arising under the lease.

2. As the assignee of a lessor's interest in a lease, become the owner and lessor of the leased property pursuant to its contractual right, or take any reasonable and appropriate action to salvage or protect the value of the property or its interest arising under the lease.

(e) The limitations contained in par. (c) do not prohibit a bank from doing any of the following:

1. Including any provisions in a lease, or from making any additional agreements, to protect its financial position or investment in the circumstances set forth in par. (d).

2. Arranging for any of the services listed in par. (c) to be provided by a third party to a lessee, at the expense of the lessee, with respect to property leased by the lessee.

(f) A bank may acquire specific property to be leased only after the bank has entered into one of the following:

1. A legally binding written agreement which indemnifies the bank against loss in connection with its acquisition of the property.

2. A legally binding written commitment to lease the property on terms which comply with the provisions of this subsection and either sub. (2) or (3).

(g) At the expiration of a lease, including any renewal or extensions with the same lessee, or in the event of a default on a lease agreement prior to the expiration of the lease term, all of the bank's interest in the property shall either be liquidated or re-leased in conformance with this subsection and either sub. (2) or (3), as soon as practicable, but in no event later than 2 years from the expiration of the lease. Property which the bank retains in anticipation of re-lease must be revalued at the lower of current fair market value or book value prior to any subsequent lease.

(h) On the return of leased property at the expiration of a conforming lease term, or on the default of a lessee, a short-term bridge or interim lease is permissible if it otherwise conforms with the net lease requirements of par. (c). Such leases need not comply with sub. (2) or (3) and may be used pending the sale of off-lease property, or its re-lease as a conforming long-term financing transaction.

(i) Where a bank enters into leases pursuant to both subs. (2) and (3), the bank must segregate the records it maintains with respect to each type of lease.

(j) Nothing in this section shall be construed to be in conflict with the duties, liabilities and standards imposed by the Consumer Leasing Act of 1976, 15 USC 1667 et. seq., or the Wisconsin Consumer Act, chs. 421 to 427, Stats.

(k) Leases permissible under this section are subject to the limitations on obligations under s. 221.0320, Stats.

(2) AUTHORITY TO LEASE PERSONAL PROPERTY ON A NET LEASE BASIS.

(a) Subject to the limitations of this subsection and sub. (1), and provided that the aggregate book value of all tangible personal property held for lease under this subsection does not exceed 10% of the consolidated assets of the bank, a bank may do any of the following:

1. Invest in tangible personal property, including, without limitation, vehicles, manufactured homes, machinery, equipment or furniture for lease financing transactions on a net lease basis.

2. Become the owner and lessor of such tangible personal property by purchasing the property from another lessor in connection with its purchase of the related lease.

(b) Lease financing transactions entered into under this subsection shall have an initial lease term of not less than 90 days. However, such period shall not be applicable to the acquisition of property subject to an existing lease with a remaining maturity of less than 90 days, provided that at its inception such lease complied with the provisions of this subsection and sub. (1).

(3) AUTHORITY TO LEASE PERSONAL PROPERTY ON A NET, FULL-PAYOUT LEASE BASIS.

(a) Subject to the limitations of this subsection and sub. (1), and provided the lease is a net, full-payout lease representing a noncancelable obligation of the lessee, notwithstanding the possible early termination of that lease, a bank may do all of the following:

1. Become the legal or beneficial owner and lessor of specific personal property or otherwise acquire such property.

2. Become the owner and lessor of personal property by purchasing the property from another lessor in connection with its purchase of the related lease.

3. Incur obligations incidental to its position as the legal or beneficial owner and lessor of the leased property.

(b) Any unguaranteed portion of the estimated residual value relied upon by the bank to yield a full return on a net, full-payout lease may not exceed 25% of the original cost of the property to the lessor. The amount of any estimated value guaranteed by a manufacturer, lessee or a third party which is not an affiliate of the bank may exceed 25% of the original cost of the property where the bank has determined, and can provide, full supporting documentation that the guarantor has the resources to meet the guarantee.

(c) Calculations of estimated residual value of net, full-payout leases of personal property to federal, state or local government entities may be based on reasonably anticipated future transactions or renewals.

(d) In all net, full-payout leases, both the estimated residual value of the property and that portion of the estimated residual value relied upon by the lessor to satisfy the requirements of a full-payout lease must be reasonable in light of the nature of the leased property and all relevant circumstances so that realization of the lessor's full investment plus the cost of financing the property primarily depends on the creditworthiness of the lessee and any guarantor of the residual value, and not on the residual market value of the leased item.

Wis. Admin. Code Department of Financial Institutions DFI-Bkg 3.05

CR Register, July, 1983, No. 331, eff. 8-1-83; r. and re CR (1), (2) and (3), r. (4) and (5), Register, March, 1996, No. 483, eff. 4-1-96; correction in (1) (k) made under s. 13.93(2m) (b) 7, Stats., Register October 2001 No. 550.

Amended by, CR 23-039: am. (1) (b) (intro.), 1., 2., (c) (intro.), 1. to 4., (d) (intro.), 1., (e) (intro.), 1., (f) (intro.), 1., (g), (2) (a) (intro.), 1., (3) (a) (intro.), 1., 2., (b) Register February 2024 No. 819, eff. 4/1/2024

In operating under this rule it is anticipated that banks will estimate the total cost of financing the property over the term of the lease to reflect, among other factors, the term of the lease, the modes of financing available to the lessor, the credit rating of each lessor and lessee involved in the transaction and prevailing rates in the money and capital markets. Where the calculation of the cost of financing according to this formula is not reasonably determinable, a lease may be considered to have met the test for recovering the cost financing if the bank's yield from the lease is equivalent to what the yield would be on a similar loan. In all cases, both the estimated residual value of the property and that portion of the estimated residual value relied upon by the lessor to satisfy the requirements of a full-payout lease must be reasonable in light of the nature of the leased property and all relevant circumstances so that realization of the lessor's full investment plus the cost of financing the property primarily depends on the creditworthiness of the lessee and any guarantor of the residual value, and not on the residual market value of the leased item.