An association may engage in leasing activities that are the functional equivalent of lending, subject to the limitations of Sections 7701 to 7704, inclusive.
Investment OperationsFinance Leasing
Section § 7700.3
This law section allows an association to participate in leasing activities that operate similarly to lending money. However, this is only allowed within specific boundaries set by Sections 7701 to 7704.
leasing activities functional equivalent of lending association leasing
Section § 7701
This law allows an association to own property, such as equipment or real estate, for leasing purposes. The association can also take over a lessor’s position in a lease and handle related responsibilities, but only under certain conditions. First, the lease must be a net, full-payout lease, which is a lease where the lessee cannot cancel it, although it can end early. Second, once the lease ends, the association has to quickly liquidate or release its interest in the property.
An association may become the legal or beneficial owner of tangible personal property or real property for the purpose of leasing such property, may obtain an assignment of a lessor’s interest in a lease of such property, and may incur obligations incidental to its position as the legal or beneficial owner and lessor of the leased property, if:
(1)CA Financial Code § 7701(1) The lease is a net, full-payout lease representing a noncancelable obligation of the lessee, notwithstanding the possible early termination of the lease.
(2)CA Financial Code § 7701(2) At the expiration of the lease, the association’s interest in the property shall be liquidated or released on a net basis as soon as practicable.
property leasing beneficial owner tangible personal property
Section § 7702
This section of the law explains how different types of property leases are treated by financial associations in terms of investment limitations. If you lease personal property for personal, family, or household use, it has to follow the same rules as consumer loans. For leases related to business, corporate, or agricultural activities, the rules for commercial loans apply. Lastly, if you're leasing residential or nonresidential property, it is governed by the rules for real estate loans.
(a)CA Financial Code § 7702(a) A lease of tangible personal property made to a natural person for personal, family, or household purposes pursuant to this section shall be subject to all limitations applicable to the amount of an association’s investment in consumer loans.
(b)CA Financial Code § 7702(b) A lease made for commercial, corporate, business, or agricultural purposes pursuant to this section shall be subject to all limitations applicable to the amount of an association’s investment in commercial loans.
(c)CA Financial Code § 7702(c) A lease of
residential or nonresidential real property made pursuant to this section shall be subject to all limitations applicable to the amount of an association’s investment in real estate loans.
tangible personal property lease consumer loans investment limits commercial loan rules
Section § 7703
This law explains what is meant by 'net lease' and 'full-payout lease' in this context.
A 'net lease' is when the association leasing the property doesn't handle maintenance, parts, replacements, insurance (unless the lessee fails to do so), or renewals unless it needs to protect its own interests.
A 'full-payout lease' is when the lessor expects to get back their full investment through payments, tax benefits, and what the property will be worth at the end of the lease. No more than 20% of the return can come from the property's value at lease end. Such leases can last up to 40 years, focusing mainly on the lessee's ability to pay.
For the purposes of this article:
(a)CA Financial Code § 7703(a) A “net lease” is a lease under which the association will not, directly or indirectly, provide or be obligated to provide for:
(1)CA Financial Code § 7703(a)(1) The servicing, repair, or maintenance of the leased property during the lease term.
(2)CA Financial Code § 7703(a)(2) The purchasing of parts and accessories for the leased property; provided that improvements and additions to the leased property may be leased to the lessee upon its request in
accordance with the full pay-out requirement of this section.
(3)CA Financial Code § 7703(a)(3) The loan of replacement or substitute property while the leased property is being serviced.
(4)CA Financial Code § 7703(a)(4) The purchasing of insurance for a lessee, except where the lessee has failed to discharge a contractual obligation to purchase or maintain insurance.
(5)CA Financial Code § 7703(a)(5) The renewal of any license, registration, or filing for the property unless such action by the association is necessary to protect its interest as an owner or financer of the property.
(b)CA Financial Code § 7703(b) A “full-payout” lease is one from which the lessor 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 rentals, estimated tax benefits,
and the estimated residual value of the property at the expiration of the initial term of the lease; provided that no more than 20 percent of the return may be realized from the residual value of the property at the expiration of the initial term of the lease. 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 depends primarily on the creditworthiness of the lessee, and not on the residual market value of the leased property. The maximum term of a full-payout lease shall be 40 years.
net lease full-payout lease servicing obligations
Section § 7704
This law allows an association, if facing unexpected financial risks, to take necessary steps to protect its assets under a lease agreement. First, if the association is the owner and lessor of a fully paid-out lease, it can take measures to preserve the value of the property or its leasehold interest. Second, if the association is an assignee of the lessor's interest, it can become the owner and lessor if the contract allows and take actions to safeguard the property's value or interest. Lastly, the association can add lease provisions or make extra agreements to ensure its financial security in these situations.
If, in good faith, an association believes that there has been an unanticipated change in conditions that threatens its financial position by significantly increasing its exposure to loss, the provisions of Sections 7702 and 7703 of this article shall not prevent the association:
(a)CA Financial Code § 7704(a) As the owner and lessor under a net, full pay-out lease, from taking reasonable and appropriate action to salvage or protect the value of the property or its interest arising under the lease.
(b)CA Financial Code § 7704(b) As the assignee of a
lessor’s interest in a lease, from becoming the owner and lessor of the leased property pursuant to its contractual right, or from taking any reasonable and appropriate action to salvage or protect the value of the property or its interest arising under the lease.
(c)CA Financial Code § 7704(c) From 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 subdivisions (a) and (b) of this section.
unanticipated change in conditions financial position risk net full pay-out lease
