Thursday, January 18, the third meeting of the Federal Motor Carrier Safety Administration's Truck Leasing Task Force kicked off with a reminder from task force Chairman Steve Rush, retired founder of fleet Carbon Express, of the panel's mission. In his words: to "prevent predatory people of taking advantage of the drivers, through lease-purchase."
To that end, the group focused in on maintenance covenants in inequitable lease-purchase contracts carriers/affiliated leasing companies and operators. Though the new task presented to the group asked specifically about how terms in lease agreements might impact maintenance of the vehicle itself, much of the conversation around the topic focused on how inequitable contracts in practice can disadvantage the operator leasing the truck, in various ways.
"Often the problem is not necessarily the language of the leasing agreements themselves," said Paul Cullen Jr., task force member attorney with the Cullen Law Firm. "Problems that occur are with the motor carrier or the leasing company’s failure to abide by the agreements, or actions that are apart from the agreement."
Maintenance escrows nickel-and-dimed by a motor carrier or leasing company near end of the operator's time with the company, for instance, to zero them out before severing ties. Another problematic practice can be terms that limit use of service facilities to those owned by or in the preferred network of the carrier itself, with fees charged for taking the truck out of network for service.
Illustrating the latter, some contracts "will say the lease-purchase-ee is responsible for all the maintenance and service," said Owner-Operator Independent Drivers Association Supervisor Jim Jefferson, another task force member. "In some cases you’ll see they have a maintenance fee collected out of the settlements," often building in an escrow account, "but the lessor gets to pick where the truck is fixed. And they charge you for taking it elsewhere."
Greater freedom of choice around maintenance in lease-purchase contracts would allow the free market for services to work like it should, several panel members suggested, and mitigate issues that stem from the lessor carrier's control of both revenue opportunity and, with respect to maintenance, cost of operation for the operator lessee in the worst deals.
In lease-purchase contracts that are inequitable to start with, equipment failures can tend to have a cascading effect, Jefferson and others added. "What’s more important, putting food on the table or getting the oil changed? Because the lease isn’t fair and equitable, [operators] don’t have the funds to maintain the truck and keep them safe the way they should be."
In addition to Rush, Cullen and Jefferson, four other of the nine empaneled task force members contributed to the discussion last week:
- Brock Logistics owner-operator Tamara Brock
- Joshua Krause, COO of OTR Leasing
- Lesley Tse, attorney with Getman, Sweeney and Dunn
- Steve Viscelli, University of Pennsylvania economic sociologist
The task force is charged with issuing recommendations to FMCSA’s Administrator in a comprehensive report later this year. The agency will review the final report and submit it to the Secretaries of Transportation and Labor, as well as to the appropriate congressional committees. The third meeting continued discussion toward that end, and also launched a new effort to potential host a meeting and public forum alongside the Mid-America Trucking Show in March.
Used-truck lease-purchases can saddle lessee with 'mechanical debt'
Tamara Brock, one of a couple working owner-operators among task force membership, has shared her own story of getting into business ownership via a lease-purchase program in her early years in business. That story was referenced by task force members numerous times throughout last week's discussion as underpinning a desire among some to combat predatory lease-purchase practices without driving a veritable stake in the heart of the carrier lease-purchase model itself.
Brock offered a distinction between outcomes of various lease-purchases depending on whether the truck leased is brand-new or a used, sometimes even previously leased vehicle.
"If you do not get a brand-new truck that is fully under warranty and everything is taken care of other than tires and PMs," Brock said, a lease-purchase operator holds a "much greater risk to lose everything you invested in that truck. It's not if but when it’s going to break down."
For an operator who runs into a repair so expensive that it exhausts funds in the maintenance escrow many deals come equipped with, furthermore, carriers might front the money to fix the truck, then turn that into a loan with various terms the operator's now committed to in addition. "Now you’ve got an extra expense," she said. The "main reason" most lease operators aren’t able to complete the lease payments and ultimately purchase the truck, she added, had all to do with maintenance.
"Once you get to about 500,000 miles, a lot of expensive issues begin to pop up," she said, and as a truck operator "you’re going to do whatever it takes to get the truck back on the road," even if it means going into further debt to the lessor. The lessor carrier then could be expected to well know that "something else is going to happen."
When it does, she said, speaking from the point of view of the lessor carrier, "Bam, I've got a truck that the owner-operator had previously paid off" to put a company driver in or lease to yet another operator.
Josh Krause of OTR Leasing called maintenance dynamics in used-truck lease-purchases "mechanical debt," of a fashion, an unsuspecting operator inherits the minute they enter into a contract. "Mechanical failure is a significant reason for an owner to fail in their contractual agreement," he said. "Yet it’s the inconsistency of the mechanical failure matched with the inconsistency of the relative compensation to the individual" that then creates the cascading effects that lead to the failure -- with the lessee without reserves enough to "handle the significant downtime," even short-term downtime in the worst cases.
Cullen and others pointed toward federal Truth in Leasing regulations for a potential model for used lease-purchases when it comes to disclosure of maintenance records. In those regulations, rules related to the establishment of escrows by the carrier require disclosure of "how much will be deducted" and "what things deductions will be made for. In many instances, it’s for maintenance," Cullen noted.
Thinking about a potential recommendation for regulation around carrier lease-purchases, Cullen offered the notion of a requirement of disclosure of maintenance, yet "not after the fact," he said. Rather: on the front end before the operator enters into the contract on a used truck in the first place.
Steve Viscelli agreed. "That would at least help drivers assess what they’re getting," Viscelli said. "Carriers should at least have the responsibility of disclosing what they know about that vehicle."
Lease-purchase contract examples, experiences sought
Throughout the task force's meeting, a variation on a theme emerged -- the need for a better tranche of lease-purchase contract examples than what the task force had seen to date. Here's how Ryan Kelly, representative from the federal Consumer Financial Protection Bureau sitting in on the meeting, put it:
"It would be very helpful to know what’s in the contracts, though it’s not the full story. We need to see contract language and financial data that’s richer than what we have."
For that, and for getting closer to the "full story" when it comes to predatory practices around lease-purchases, task force members began to prep for a potential session at the Mid-America Trucking Show in March, which would be the task force's official fourth meeting but also a chance to engage with those in the public who've administered and/or participated in lease-purchase programs.
A draft series of questions/requests for information the task force considered putting forward to the public included the following, presented in partial form/summary. (If the task force moves forward with the MATS meeting, expect a notice with more detail in the Federal Register and/or notification on the Truck Leasing Task Force website.)
- Examples from operators of lease-purchase contracts, with all terms specified
- Underwriting of lease-purchases: Are consumer credit scores used or simply cash flow?
- Carrier examples of new- v. used-truck leases and how operators end up with one or the other
Potential questions/discussion topics
- Biggest challenge/challenges about relationship with the carrier? What's worth changing?
- Before signing lease-purchase contract, was enough time given/taken for considering/understanding terms?
- Lessee opportunity to inspect the leased equipment? History of damage to the vehicle supplied?
- Criteria used by lessee in choosing truck?
- Lease-purchase generally: Why, versus other options that exist to get in business and/or gain driving employment?
- Maintenance/repair responsibilities: Is the picture clear?
- Freight downturn issues: How does the lessor prioritize (or not) independent contractors for freight movement?