The Globe and Mail Report on Business for April 11, 2011 reported that GM was expanding the availability of lease financing for its vehicles. With developments such as this, it may be that securitizations of automotive leases will return in some volume to the securitization marketplace. Each automotive lease securitization presents the issue of how to deal with the vehicle permits for the vehicles subject to the transaction. Because practice differs between Canada and the United States, there is usually cause to revisit and explain the Canadian approach.
In the United States, there is a government issued "title" document for each vehicle which records the owner of the vehicle and liens affecting the vehicle. The similar concept in Ontario is a "vehicle permit." While a vehicle permit is commonly relied upon as evidence of ownership, it is not a "title" document and liens are not recorded against it. Rather, a lien against a vehicle is recorded against the vehicle identification number ("VIN") of the vehicle or the name of the owner in the personal property security system used for registering liens against all types of personal property. Unlike in the U.S., a lien cannot be perfected by taking possession of the vehicle permit.
Current automotive lease securitizations in Canada typically require the transfer of the leased vehicles from the originator to a special purpose entity ("SPE"). The payment streams under the related leases are also transferred to the SPE. The administrative reality is that it is not economically practicable to re-register the vehicle permits for each vehicle in the name of the SPE. As a compromise, the practice has developed in Canada to have the originator (which is typically the servicer) sell its beneficial interest in the vehicles to the SPE and then agree to hold the vehicle permits in trust in its name as bare trustee for the benefit of the SPE. In specified circumstances, generally a servicer termination event, the servicer is required to transfer the vehicle permits into the name of the SPE or another person selected by the holders of the relevant asset backed securities. This obligation of the servicer is supported by appropriate powers of attorney in the event the servicer fails or refuses to complete such transfers.
Peter Milligan is Chair of the Banking & Financial Services Practice Group. His practice focuses on securitization and structured finance with an emphasis on creditor's rights.
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