When was the last time you changed your underlying lease or finance documents? If you did in the last 10 years, you probably focused on making the document shorter – such as a classic one-page lease. Perhaps you drafted it in plain English, using the virtues of a simple document as an incentive to the customer to get the deal done. Maybe you revised your document to ensure its terms and conditions conformed to your actual business practices. While all of these reasons generally make sense and warrant a revised document, most companies fail to think about document changes based upon changes in technology, "smart" equipment and the new laws.
Think about it: Virtually all the critical provisions of our traditional equipment leases were created before the internet, cell phones, facsimile machines and personal computers. In fact, there have been few to no changes in standard warranty disclaimers and the proverbial "hell or high water clause" – two of the pillars that support a funder's rights and remedies in our industry.
Just like technology, our documentation must evolve. This article will highlight a few areas that require attention.
Many types of equipment contain some method of recording data. Sometimes, this data is loaded onto the equipment or gathered by the equipment as part of its function, and other times the data is recorded without the knowledge of the user. In any event, the protection of that data and the prevention of unauthorized access to it are now the subject of many privacy laws on state, federal and international levels. Do your lease documents address the questions, "Who owns the data?" and "Who's responsible to protect the data?" If not, they should – as a funder may have an obligation to protect that data should it come into its possession and/or control. For example, if leased or financed equipment is retuned after the term, or is repossessed during the term, it is certainly possible, if not likely, that the equipment will contain certain data. Addressing the parties' obligations with regard to that data in your documents should be a high priority.
It feels like new cybersecurity and/or privacy laws are being enacted on a monthly basis. Your obligations to have reasonable safeguards in place to protect against a potential hack of your computer system appear to be growing with each and every new law that hits the books. Much of it started with the Federal Trade Commission Act (FTC Act), followed by the Gramm-Leach-Bliley Act, the New York State Department of Finance's Cybersecurity Regulations, the General Data Protection Regulations (GDPR) and now the California Consumer Protection Act (CCPA). Each of these laws imposes different requirements on companies and, in many respects, requires them to mandate that their vendors have certain cybersecurity safeguards as well. Should your lease or other finance documents speak to these issues? It is certainly something to consider. Furthermore, what about your originator, program and broker agreements? Not only is it a good business practice to have contract provisions that require compliance with cybersecurity laws, but in many circumstances you now have a legal obligation to require and/or perform certain due diligence practices to make sure your business vendors have cybersecurity protocols in place.
With the advent of cell phones and texting, many funders are now exploring the use of texting for both marketing and collection efforts. Some of those activities may be governed by the Telephone Consumer Protection Act (TCPA) and should be addressed in your documents as "consent" is required for certain types of communication by text and/or cell phones. Soliciting new business in new and alternative methods is becoming quite popular, and having your documents speak to those activities will broaden a company's ability to obtain increased market share and/or operate more efficiently.
Whether you are implementing an electronic signature program or just considering using a scanned and emailed signature as an original ink signature, provisions should be put in place to protect the integrity, validity and effectiveness of your agreement. Quite simply, originators, funding sources and, eventually customers, are or will be demanding the convenience, cost savings and/or speed of e-signatures. Perhaps most importantly, a document that is properly signed electronically offers enhanced security over one with a traditional ink signature. For all these reasons, the capability to handle a financial transaction electronically is now emerging as a significant marketing advantage for originators and funding sources. Signing electronically is the future, and your documentation must address doing business in that manner.
Over the past few years, much more attention has been focused on whether or not a company has a proper authorization to pull a credit report on a borrower and/or guarantor. Although many credit applications address these authorizations to some degree, they usually do not provide for additional "credit pulls" during the term of the transaction and/or for other transactions. Drafting provisions that provide a funder with broader authority and flexibility to pull the credit reports at appropriate times in the future for existing and/or new business makes good business sense.
The above examples are a few of the areas that now require attention in your documentation. At present, we have found that most documents used in our industry have not been tailored to these and other issues. Of course, companies should also be mindful of the traditional concerns such as the "look, size, and feel" of the document, whether the documents reflect their existing business practices, and creating documents that have all the required provisions as well as uniform rights and remedies. Many companies created their set of documents in an "a la carte" manner, and oftentimes they are not cohesive and/or have inconsistent terms and provisions. The use of these disconnected documents creates a higher risk of human error when "papering" a transaction. For example, a lease from one program may not work with an addendum and/or delivery and acceptance certificate from another because of, among other reasons, different defined terms and/or inconsistent provisions. Most of these risks can be avoided with the use of a comprehensive, consistent set of documents.
Companies that recognize their documents must evolve with changes in technology and actually take action to update them will have a competitive advantage and be better prepared to address future risks. It's time for your company and its documents to step into the Information Age.
Originally published by Equipment Finance Advisor
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.