Fitch: Recent Legislation May Positively Influence U.S. Auto Lease ABS & Rental Car Sectors

NEW YORK--March 23, 2005--A bill passed by the House of Representatives just a few days ago could be beneficial to the U.S. consumer vehicle leasing and daily rental car sectors if it becomes law, according to Fitch Ratings. The bill is Bill 6862, which may repeal existing vicarious tort liability laws where the owner (lessor) of a vehicle may be held liable for damages or injury cause by the vehicle operator (lessee).

"This could help lessors and rental car companies by reducing or eliminating vicarious tort insurance and settlement costs, as well as spur activity as savings are passed on to consumers," said Chris Mrazek, Managing Director, Fitch Ratings. "Existing auto lease securitizations would also benefit from tort relief -- though no direct rating implications are anticipated -- as structures are now exposed to a limited degree of claims paying uncertainty and timing risk." While most rental car ABS ratings are tied to surety bond enhancement, the bill could reduce the cost of doing business in certain states.

Current vicarious tort liability laws have led major consumer vehicle lessors such as General Motors Acceptance Corp., Ford and American Honda Finance to either curtail their activity, or suspend it altogether, in states that have no ceilings on tort liability. In New York, for example, it is estimated over $6 billion in claims were paid out from 2000-2003. Other large states such as California, Michigan and Florida, cap potential claims though the amounts may vary. Mostly, lessors and rental agencies have mitigated the risk through the purchase of various layers of insurance. In the case of the daily rental business, the cost is passed through to consumers in the form of higher rates in applicable states.

In ABS lease structures, to avoid the process of re-registering and re-titling leased vehicles, the lease contracts and underlying vehicles are originated and titled in the name of a special purpose entity, the titling trust. Under vicarious liability laws, although the lessee is the operator of the vehicle, anyone suffering injury as a result of the operation of the leased vehicle could, if applicable state laws permit, file a liability suit against the owner, in this case the titling trust. To overcome the risk, the titling trust is the named beneficiary of all insurance payments, including claims on physical damage, credit/life disability, and vicarious tort liability claims.

With interest rates on the rise, contract rate incentives are becoming more expensive and with some stability in the wholesale vehicle market, lenders and consumers may look a little closer at leasing. "Passage of Bill 6862 through the Senate could alleviate the need for expensive vicarious liability insurance for issuers and securitizations, bringing down overall lease costs and potentially leading to higher volume," said Mrazek. "For the rental car companies, the repeal could result in an expansion of service in those jurisdictions which previously had substantive vicarious liability laws," said Philip S. Walker, Senior Director, Fitch Ratings.