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September 5, 2001 Kit Menkin’s Leasing News www.leasingnews.org Tuesday, Sept 5,2001 --------------------------------------------------------------------------------------- Headlines--- Charlie Lester---So you want to be a “discounter?” U.S.Comerce Dept Reports Online Sales Dwindling Analysts dispute effect of H-P/Compaq merger in regard to Gateway British “The Banker'' Again Presents Nordea With Global Award for Best E-banking Strategy New Wachovia--Creates Nation’s Fourth Largest Bank and Premier East Coast Financial Service Company Heller Financial Acquires Golf Course Lending Portfolio
Leasing News List is Up-dated 118 Changes--- Sean Wheeler Drives 2001 BMW X-5 #### denotes press release _________________________________________________________ Mark III Credit Kit, Thanks for running the update. The email response and phone calls were overwhelming. My wife said it reminded her of Valentines Day at the flower shop we used to own. Your efforts to keep everyone in our industry" in the know" are greatly appreciated. Don <dshadel@markiiicredit.com __________________________________________________________________ Leasing News gets mail back from American Express, ATEL, Balboa and more and more “employers” are blocking the newsletter. I can’t reach them to let them know this. Some of blocking may be not against Leasing News, but e-mail in general such as this one:: AEGONUSA.COM's (or one of it's affiliates) e-mail content filtering software has blocked an e-mail from kitmenkin@leasingnews.org with the subject Leasing News---Textron, Charles Lester on AmX/BuyIt Software/. We're sorry, but content/files of this type are not allowed into our e-mail system - our e-mail system is for business use only. This is an automated response - please contact postmaster@aegonusa.com for more information. In our new Frequently Asked Question section to be finished soon, this will be on top as it is one of the most asked questions: I used to be on your mailing list, but I don’t receive it anymore---why? Leasing News is available on line, or we may suggest, you receive it at home. Many of our East Coast readers have told us they read us after dinner. editor --------------------------------------------------------------------------------- Online Sales Dwindling - Commerce Dept. -- By David McGuire, Newsbytes. In the first two fiscal quarters of 2001, business-to-consumer e-commerce sales dwindled, both as a whole and as a percentage of overall U.S. retail figures, according to a report published by the U.S. Commerce Department. Internet retailers reported total sales of $7.46 billion in the second quarter of 2001, down from an all-time quarterly high of $8.88 billion in the fourth quarter of 2000, according to the report. The $7.46 billion figure also marked a drop-off from the first quarter of this year, when retail sales topped $7.59 billion. Despite the e-commerce sales malaise, overall U.S. retail sales actually increased from roughly $729 billion in the first quarter of 2001 to more than $807 billion in the second quarter, according to the report. That means that e-commerce sales accounted for less than 1 percent of U.S. retail sales in the second quarter. E-commerce sales first passed the 1 percent threshold in the fourth quarter of 2000, when e-commerce sales accounted for 1.09 percent of nationwide retail revenues. Details of the Commerce Department report are online at http://www.census.gov/mrts/www/current.html . __________________________________________________________________ Sean Wheeler Drives 2001 BMW X-5 Long time no talk. Just wanted to touch base and the cars I drive. I have a 2001 BMW X-5 (just got it),but my treasure is a 2001 Dodge Viper Rt/10 I have had it for 5 months but have only put 400 miles on it. We will see you at the UAEL show in S.A. Sean Wheeler, CLP One Lease Franchise Group _______________________________________ _____________________________________________________________ United Association of Equipment Leasing Extends Early Bird Discount Update Update Update Registrations for the UAEL Annual Conference & Exposition, October 25-28 in San Antonio is ahead of schedule. To keep the momentum going and as many of you are just returning from holidays, we are extending the Early Bird registration time until September 15th. Register now and take advantage of these lower prices. Visit the UAEL website for complete information on this year's Annual Conference & Exposition at www.uael.org. While you are online you can: *Register for the conference *Set-up your one-on-one appointments with Funding Source & Service Providers *Visit the San Antonio Convention & Bureau website to get tourist information *Read Newsline Online! *Update your Online Member Profile! *Check-out the Bulletin Boards! *Post a Job! *Look for a Job! *Find out what is happening in YOUR association! See you in San Antonio! Joanie Dalton - Managing Director UAEL - United Association of Equipment Leasing 520 Third Street, #201 Oakland, CA 94607 (510) 444-9235 x27 (510) 444-1346 fax joanie@uael.org www.uael.org -------------------------------------------------------------------------- Charlie Lester American Express and Private Label Programs. GC: First you called me Charles. It is Charlie. Second, you called me Grandpa Charlie. Third, you said I handled the lease of equipment and tools for Noah to build his ark. If I did, you placed the funding. LN: To Rick Wilbur at Budget Finance. I also know you are a proud grandfather. GC: You’ve got that right. More seriously, the two people most responsible for making the Private Label Recourse Program successful were Bob Quinn and Peter Smith. After they were forced out, the program quickly deteriorated by top manager. The discounters bought by First Sierra and the Private Label Recourse Program were two separate and distinct programs at First Sierra. Although the discounters acquired continued to operate under their old names for a number of months, any recourse liability shifted to First Sierra on date of acquisition. The Private Label Recourse Program I was addressing is the one with large brokers like RW Professional who continued to fund deals under recourse into the year 2000. As I understand, this program has been cutback, but is still in operation today. LN: It sounds like the Private Label Recourse Program could be taken to a community bank or to any lender so interested, in a recourse or non recourse manner. The broker is a “discounter”. How does the recourse program work: GC. Private Label Recourse Programs—the recourse part is critical since American Express does have non-recourse private label and they are totally different. In a recourse program, the broker is given a credit window by the funding source that commits to buy the lease paper if deals fit the window. The broker does the entire credit workup, makes the credit decision and documents all leases in its name. The broker also pays all vendors and sub-brokers. Periodically, the broker forwards the leases to the funding source where an analyst verifies the deals do in fact fit the credit window and the broker is then paid. Part of the broker proceeds is usually withheld as a loss reserve. After the deal is booked, the monthly payments are billed in the name of the broker with payments going to a lock box. Normally, the broker also receives 50% of all late fees. LN. What are the major advantages and risks to brokers and funding sources in a recourse program? GC. The overriding advantage for everyone is higher volume and higher profits. In addition, the broker has more name recognition since the broker’s name is on everything received by the lessee with the funding source being the silent partner. The major risk for the broker is the possible failure of the funding source to provide timely delinquency reports so problem accounts can be spotted early and collection efforts stepped up. Another broker risk occurs if the funding source picks and chooses deals to buy instead of honoring the credit window provided. In this case, the broker has to find another funding source or fund the deal out of his own pocket. The funding source has a number of risks including the possibility that the broker will not have the financial strength to repurchase deals in default. Undisclosed split deals are another major risk. In addition, there is dependence on the broker not to manipulate the portfolio delinquencies. LN. How does the broker know when the funding source has failed to provide timely data? GC. Unfortunately, it can take 6-24 months before problems become apparent. The ATT fiasco in the mid-90’s is a classic example of a funding source that had so many computer platforms and data bases that reports were full of errors and corrections almost impossible to fix. In some cases, personal property taxes were not billed for a two-year period and when they were billed, the responsibility to collect them fell back on the recourse broker. In cases like the one with ATT, it is almost impossible to determine how many additional deals went into default as a result of poor quality delinquency reports, but common sense says the damage has to be high. LN. How does a funding source know when they have problems with a recourse broker and how do they verify them? GC. Again, it can take time and constant monitoring before problems surface. Most recourse brokers are strong financially and honest to a fault, but they do have a much larger window of opportunity to cheat the system. This window includes hidden early payoffs, sales taxes not paid, split deals and monthly payments made for lessees in default to prevent a repurchase. Once a funding source has serious questions about the honesty of a recourse broker, the normal procedure would be to “drop the corporate veil”. This is a drastic step since it means converting all monthly invoices to the name of the funding source instead of the recourse broker. The funding source then waits to see what if any complaints are received from the lessees. They also compare monthly invoices with checks received to see if there is a match. In addition, UCC filings may be audited to see if deals have been split or duplicated. Last, but not least, the deals and financial statements of the broker are audited to see if the required reserves have been maintained and contract terms have been honored. LN. To your fellow brokers, would you recommend they pursue recourse relationships? GC. No. In my opinion based on ten years experience as a recourse broker with ATT, CIT and First Sierra, the extra upfront profit and name recognition is not worth it. Being on recourse is like making love to a gorilla, you stop when the gorilla wants to, not when you want to. No matter how much you plan and reserve for losses, even the strongest broker will have a hard time meeting it repurchase obligations in a down economy. A poor economy with a few bad credit decisions can bankrupt any recourse broker unless they have a strong parent bank or just happen to be the favorite relative of Bill Gates. Being a non-recourse broker is three tranquilizers a day, but recourse is ten per day with a bottle of Tums for dessert. LN: Sounds like there are a lot of pitfalls. GC: Everything can go wrong at both the funding source and broker levels if either side is incompetent, dishonest or if either one does not live up to its commitments. The funding source must honor the credit window they assign and not pick and choose what they will buy on a subjective basis outside the window. The funding source must also have adequate computer systems that keep the recourse broker updated on almost a real time basis as to what is happening in his portfolio so problem accounts can be spotted early on and cured. The longer it takes to detect a problem account, the greater the odds that the broker will have to repurchase the entire contract and legal recoveries after the repurchase average less than 30% of the repurchase amount. Only the collection attorneys who charge 30-45% of the amounts recovered love a repurchase. To protect itself, the funding source must have high quality people to monitor the recourse brokers for financial strength, honesty and operating practices. Unfortunately, the relationship between the funding source and broker can get so warm and personal that reserves are reduced, PG's are released and company financial statements are not closely monitored on a timely basis to see if there are changes in financial strength. They also must have very competent analysts to assure that all deals bought are in the credit window and free of fraud. Everyone loves a good war story--so here is one I know first hand from 1991 when Lease Pro, Inc. signed the first recourse agreement with Denrich until August 30, 2001 when we received our check for late fees from CIT and closed the portfolio. Due to long recourse period, I have always compared recourse to making love to a gorilla--you stop when the gorilla wants to, not when you want to. The gorilla is now gone and I am slowly beginning to heal. A good example of a funding source failing to meet it commitments to its recourse brokers was the ATT fiasco in the mid-90's. A situation that did not get much better as the portfolio moved to Newcourt and then to CIT. With each move, fewer and fewer people knew how to manage the recourse relationships. A simple payoff request could take 3-5 days to receive. After ATT had purchased Denrich Leasing and the qualified portfolio managers like Bob Quinn and Pete Smith had resigned, recourse brokers had to live with delayed and incorrect reporting caused by inexperienced personnel hampered by the ATT data bases being on three different computer platforms. Misapplication of monthly payments was a common occurrence and getting corrections made was like trying to make the sun rise in the west. The real disaster came when the ATT system failed to bill for personal property taxes for as much as two years and the burden of collecting the back taxes was placed back on the broker. As you might guess, the broker paid most of these taxes without going back to the lessee. As you can see, funding sources have responsibilities that could bankrupt a good recourse broker if they do not live up to there part of the bargain. I did not go bankrupt due to the ATT problems, but I sure bled a lot. ( Tomorrow, Grandpa Charlie concludes the interview with more details and inside information. ) --------------------------------------------------------------------------------------------------- The full list is available on line in Alphabetical and Chronological order. http://www.leasingnews.org/list.htm Here are recent changes: Leasing News List Chronological 118 changes American Express/ SierraCities (8/2001) Discovers up to $20 million write-off with RW Leasing portfolio, other portfolio’s, alleged stock fraud, AmX declares they are investigating ( 7/2001 ) pretax write-down of $826 million that will pummel second-quarter profits. The company also unveiled plans to cut as many as 5,000 more jobs because of the weak economy. Rumors abound about portfolio performance and major problems in the woodpile/going the way Rockford Industries went. (5/2001) New Name: “ American Express Business Finance” (4/2001) Merger complete, Depping resigns as “gazelle” (3/31/2001) American Express completes purchase/merger (3/2001) Sierra Cities-Amex Merger Gets Green Light (2/2001) offer by American Express for $5.68 per share in cash. We predicted this last week, naming the company and floor price. American Express active in equipment leasing, likes what it sees, and Sierra Cities is the vehicle, not Advanta or others that it has viewed to purchase. (1/2001 VerticalNet Merger falls apart (1/16/01) Sells Off UK Assets, (7/2000_ 2nd quarter loss, see report http://www.leasingnews.org/articles.doc/newsletter3.htm Textron Financial (8/2001) First Corp, Portland, OR, announces Jim Merrilees will join on Sept. 4 as executive vice-president www.firstcorp.com, has left Textron. (7/2001) small ticket equipment financing functions will be moved to its Small Business Direct group that was acquired in early June and is based in Little Rock, Arkansas. As a result, Textron Financial will eliminate its Lake Oswego, OR and Providence, RI functions that previously handled small ticket equipment financing as support for these programs are migrated to the Small Business Direct operation over the next 30-60 days. The unofficial target date is August 1, 2001. Insider reports: “"Jim Merrilees of Colonial Pacific, Grayrock, Nations Credit fame, Randy Ernst, Denise Mann, and company have all departed TFC. Jim is on the payroll until the end of the year as he has a contract but I don't think he is working here anymore." ( 7/2001) reported to end broker business on August 1,2001 (5/2001) Textron announces a new division to serve the capital requirements of independent, middle-market lenders. (4/2001) complaints Textron doing repeat business with leases submitted to |