Looks like California is now regulating flight schools

[Patrick]

Wow this is a hot topic. I'll take the side where I really don't see why people seem to think this industry is so special that the rules that apply to other industries shouldn't apply here. Most of the modern world operates under some form of regulation. Car dealers are required to be bonded and the loan industry has rules in place to handle same day lien payoffs to ensure that Joe's hypothetical situation cannot occur. Academic institutions are required to comply with regulation for the same reasons, which is why I can't start "Patrick's Photo University" and apply for and/or accept private or government issued student loans. Gun dealers have a plethora of paperwork and fees to comply with to be in business. And the list goes on and on and on.

Without FDIC (which costs bank's money to comply with), there would be millions of bankrupt Americans today. Without mortgage industry regulation (which, guess what, costs them money too), there would be people who lost their homes yet were still indebted to a financial institution.

While I am all for private business and entrepreneurship, in an industry as capital intensive and downright expensive as aviation is, a poorly backed company should not be allowed to operate, ESPECIALLY when doing it with other people's money in their bank accounts. This is the reason why I can't start a bank- I simply don't have enough money to put into the business and the regulators know this.

People who are screwed in any industry in this country have full legal rights. However, the way things work legally, and practically, is often VERY different. I've been in the shoes of the collector numerous times, and had the court system award me plenty of money- most of which I've never seen a dime of. In the flight training world, when someone gets scammed, the student is a loser. The bank may become a loser through court action. The scammer, however, typically takes the money and runs off to another country and will never be held accountable for his actions.

As an independent CFI, I am not a flight school. I cannot, in any way, accept student loans. My clients pay me with cash, check, or credit card- where they get that money is of no concern to me.

If you want to start a business, and you are not sufficiently backed, the risk of you going out of business (either through legitimate or fraudulent reasons) rises exponentially. This is one scenario for the ice cream shop, who perhaps has $50k in SBA loans which may go bad, and another $10k to creditors. It's an entirely different situation for a flight school, who may have $100's of thousands to millions of dollars in financed aircraft, $10k to $100k owed to creditors, and $100's of thousands of student money in their hands. If for no other reason than that of self preservation, this needs to be avoided (hmmm let's see, business is horrible, I owe $200k on this company that I need to get solvent in or my house is going to be taken from me, and let's see, I have $220k in student money here I can use... eh sorry for them, I'm putting myself first).

While I hate to see any business lose profitability and have to pay anything more than necessary to Uncle Sugar, the rules that apply to the rest of the world need to apply here as well. Unfortunately, it's simply a cost of doing business.

 

[mshunter]

"At my local FBO, they do a brisk business."

Great! You should get with the FBO's in California and show them how it's done because they are crying that business is so bad and they can't come up with $5000 and they are going to have to leave the state. You may have found the key to keeping the flight schools in business.

You bring up another good point. Yet another good reason why the state government is driving local buisness out of the state. Even if schools could pay the $5k, why should they if they can avoid it out of state. Like has been said before, more taxes drives people away. This simply is not what CA needs right now. We need ways to bring money into CA, not ways to drive it out. Just take a look at how many buisnesses went to AZ and NV over the last 10 years to get away from the recockulous taxes charged here. When I was in high school I lost one girlfriend and two friends to the tax laws. And now that I am an adult I get it. Looks like you just haven't had a chance to see the full impact.

FYI more people are leaving CA than are comming now because of things like this.

 

[Patrick]

You bring up another good point. Yet another good reason why the state government is driving local buisness out of the state. Even if schools could pay the $5k, why should they if they can avoid it out of state. Like has been said before, more taxes drives people away. This simply is not what CA needs right now. We need ways to bring money into CA, not ways to drive it out. Just take a look at how many buisnesses went to AZ and NV over the last 10 years to get away from the recockulous taxes charged here. When I was in high school I lost one girlfriend and two friends to the tax laws. And now that I am an adult I get it. Looks like you just haven't had a chance to see the full impact.

FYI more people are leaving CA than are comming now because of things like this.

This is true of CA, and many states in the northeast. They are paying the price of mis-managed governments for decades.

This is why I think that flight school regulation should be done on a national level, to keep the field level.

 

[mshunter]

If you want to start a business, and you are not sufficiently backed, the risk of you going out of business (either through legitimate or fraudulent reasons) rises exponentially. This is one scenario for the ice cream shop, who perhaps has $50k in SBA loans which may go bad, and another $10k to creditors. It's an entirely different situation for a flight school, who may have $100's of thousands to millions of dollars in financed aircraft, $10k to $100k owed to creditors, and $100's of thousands of student money in their hands. If for no other reason than that of self preservation, this needs to be avoided (hmmm let's see, business is horrible, I owe $200k on this company that I need to get solvent in or my house is going to be taken from me, and let's see, I have $220k in student money here I can use... eh sorry for them, I'm putting myself first).

Sorry, but again does not compute. Not to many banks are going to loan money to a person. They will be looking to loan to a corporation. So if the buisness goes belly up they won't be able to take your home from you, just your buisness assets.

 

[JOEFRIDAY2]

Sorry, but again does not compute. Not to many banks are going to loan money to a person. They will be looking to loan to a corporation. So if the buisness goes belly up they won't be able to take your home from you, just your buisness assets.

Where is the world did you come up with that myth?

Banks, the SBA and most companies that loan money or lease property to your corporation will require a PERSONAL GUARANTEE. That means you are PERSONALLY liable and responsible to pay if your corporation does not pay.

My friendly banker first told me years ago when he sat down, looked me straight in the eye and informed me that I would lose everything I have before the bank will lose the first dollar.

I went ahead and signed the personal guarantee. If I had not, the bank would not have loaned my company the money.

Banks don't like to lose. The SBA will tie up everything you own or think to own until their loan is paid off.

Joe

P.S. If you are married then the bank will often require your wife to sign the personal guarantee as well.

 

[Patrick]

Sorry, but again does not compute. Not to many banks are going to loan money to a person. They will be looking to loan to a corporation. So if the buisness goes belly up they won't be able to take your home from you, just your buisness assets.

Try and setup an LLC or S-Corp, apply for a loan, and have any bank approve that loan without you PERSONALLY GUARANTEEING it. None will. So yes, while it was corporate debt, you personally backed it, so when your company defaults, yes, they'll come take your house.

 

[JOEFRIDAY2]

Which is why you are insane to let them hold a dime of your money.



A. Why would you sign the title of your car to someone in exchange for their promise to pay for it in the future?

Anyway, that is called counterparty risk. One reason I wouldn't want to be party to such a transaction. (one where I have no control and assume almost all of the risk).

In any case, the bank has a lien on the car. It can't be sold until that lien is satisfied. Tell your bank to reposes the car, pay bank, get car, (optionally) sell car.

I guess you would be out the cash you were upside down in the car (if it sounds too good to be true, it is). You are probably out that cash twice over (the new loan you probably took out for the new car included the amount you were upside down in the last one).

If you were a smart consumer, you would see why this transaction is not good for you in the first place.

Well fortunately for the rest of us in Florida, most people don't think like you and laws are on the books to protect the good citizens of Florida from this type of scam.

In fact you will go to jail in Florida if you pull this stunt.

Here is what happened to the Chevy dealer in Lakeland, Florida (not far from you) that took in trades and did not pay off the banks:

http://www.theledger.com/article/20100409/news/100409730

Not only did he get 2 years in jail plus restitution, but he also got 43 YEARS probation. This guy is going to be checking in with his probation officer until he is 92 years old.

The total amount that he stole was about $555,000. That is a whole lot less than the flight schools stole from the students in Florida. He sure screwed up a bunch of peoples credit with his scam.

 

[Barty]

The students hired attorneys and the banks reduced the Silver State loan amounts outstanding. (not to zero)

All students are still on the hook for a minimum of 25% of the original loan even if they did not fly one single hour.

Most student are on the hook for at least 50% of the student loans. Some for more.

The bad guys still got the money. The banks took the reduction here.

This did not benefit those students that paid cash or borrowed money elsewhere (parents, home equity, etc) and paid Silver State. Those students received nothing.

The flight school scammer days are over in California. This type of Silver State scam can not happen again in California with these new regulations.

OK, so we've got a bunch of idiots with shiny jet syndrome who put up $100k for flight training ALL UP FRONT. So let's punish mom and pop because some people couldn't exercise some better personal judgement and signed on with these people in the first place.

The blame goes both ways here, that's why I'm not quick to run to the government when something like this happens. If the DA can prove fraud against the operators of these schools, then they should be prosecuted and go to jail. There are already laws on the books for that. However, we don't need to pass punitive measures that hurt small business (you know, the core of our economy) so the government can bail out people who didn't do their homework before handing over money or signing a note to one of these fly by night places.

 

[JOEFRIDAY2]

OK, so we've got a bunch of idiots with shiny jet syndrome who put up $100k for flight training ALL UP FRONT. So let's punish mom and pop because some people couldn't exercise some better personal judgement and signed on with these people in the first place.

The blame goes both ways here, that's why I'm not quick to run to the government when something like this happens. If the DA can prove fraud against the operators of these schools, then they should be prosecuted and go to jail. There are already laws on the books for that. However, we don't need to pass punitive measures that hurt small business (you know, the core of our economy) so the government can bail out people who didn't do their homework before handing over money or signing a note to one of these fly by night places.

No flight school has ever been prosecuted for criminal fraud because there are NOT laws, or regulations, already on the books for flight schools because they have been exempted from regulation in most states because the states believe the FAA regulates flight schools.

If you (or anyone else) can point out specific criminal laws on the books that have been overlooked, please feel free to do so.

Otherwise we will keep moving forward to get the regulations and laws in place so the bad guys can get prosecuted.

At the present time, in Florida, you can get out of jail in the morning, set up a flight school in the afternoon, put up a website, rent a space, get a phone, lease or borrow a plane, scam a CFI and start collecting large amounts of tuition, promise flight training, not provide that flight training, not pay the CFI, not pay for the plane and then run off to Vegas with the money and there is nothing that anyone can do about it. Sad but true.

Joe

 

[Barty]

No flight school has ever been prosecuted for criminal fraud because there are NOT laws, or regulations, already on the books for flight schools because they have been exempted from regulation in most states because the states believe the FAA regulates flight schools.

If you (or anyone else) can point out specific criminal laws on the books that have been overlooked, please feel free to do so.

Otherwise we will keep moving forward to get the regulations and laws in place so the bad guys can get prosecuted.

At the present time, in Florida, you can get out of jail in the morning, set up a flight school in the afternoon, put up a website, rent a space, get a phone, lease or borrow a plane, scam a CFI and start collecting large amounts of tuition, promise flight training, not provide that flight training, not pay the CFI, not pay for the plane and then run off to Vegas with the money and there is nothing that anyone can do about it. Sad but true.

Joe

Fraud is fraud. Theft is theft. You don't have to have a specific statute or regulation targeting a particular operation or mode of fraud to prosecute it.

What is usually lacking in these instances is public pressure on the prosecuting attorneys to go after these people. People who are victims of these people need to make it plain that it was not a matter of these companies failing due to the economy, but that they were fraudulently mis-managed from the get go. That their true purpose was to get people to pay an (excessive) amount of money for flight training, and much of that money was being diverted away from the operation of the school to line the pockets of the "owners".

That is a matter of weak leadership in the part of our elected officials to prosecute crime, not a matter of what laws are on the books.

 

[WacoFan]

I'm in the camp of "Don't pay the money up front" or "Don't pay the money up front without the place you are paying providing you a bond in case they go T.U.".

I'm glad the state of California can make up a bunch of onerous regulations to help make business more difficult to enter...just what California needs now. This will also help the larger, more dominant flight schools (what is it about democrats "helping the little guy"? Seems as if establishment, larger business make out better...)

When building a house you get the construction loan, and the bank escrows that money and pays upon completion of a set part of the house, or releases enough money to the subs to do whatever job they are going to do at a given time. Why can't flight schools do this and why do the lenders not insist on this? Why not have a lender simply insist on the escrow fund, deposit the entire amount of the loan into it, and release the funds via wire as it is used by the student/school? Sounds pretty simple to me - the flight school understands that they will get the entire amount (because it is escrowed and approved) as long as they keep the student happy and progressing. The bank knows that they will only be releasing funds as money is earned by the flight school. The student knows that their risk of loss is minimized if the school suddenly goes under. Seems pretty simple to me. Doesn't require a "slush fund" nor does it require added bureaucracy, added regulation, or onerous costs of compliance. Of course California would go this way instead of the more efficient way...finding the most complicated, least efficient answer is what they do there.

 

[Mike H]

No flight school has ever been prosecuted for criminal fraud because there are NOT laws, or regulations, already on the books for flight schools because they have been exempted from regulation in most states because the states believe the FAA regulates flight schools.

Oh, the FAA pre-empts local prosecution for fraud? That's novel- and by novel, I mean preposterous. Cut the crap, Joe. You're spouting nonsense.

If you (or anyone else) can point out specific criminal laws on the books that have been overlooked, please feel free to do so.

Well, clearly YOU think so. You claim that hundreds of millions of dollars have been STOLEN by flight schools over the years. The word "stolen" means a crime has been committed, right?

At the present time, in Florida, you can get out of jail in the morning, set up a flight school in the afternoon, put up a website, rent a space, get a phone, lease or borrow a plane, scam a CFI and start collecting large amounts of tuition, promise flight training, not provide that flight training, not pay the CFI, not pay for the plane and then run off to Vegas with the money and there is nothing that anyone can do about it. Sad but true.

What's sad about someone who hasn't been convicted of anything (we do still have the presumption of innocence in this country, don't we?) starting a business of any kind? Go back under your bridge, troll.

 

[mshunter]

Where is the world did you come up with that myth?

Banks, the SBA and most companies that loan money or lease property to your corporation will require a PERSONAL GUARANTEE. That means you are PERSONALLY liable and responsible to pay if your corporation does not pay.

My friendly banker first told me years ago when he sat down, looked me straight in the eye and informed me that I would lose everything I have before the bank will lose the first dollar.

I went ahead and signed the personal guarantee. If I had not, the bank would not have loaned my company the money.

Banks don't like to lose. The SBA will tie up everything you own or think to own until their loan is paid off.

Joe

P.S. If you are married then the bank will often require your wife to sign the personal guarantee as well.

Try and setup an LLC or S-Corp, apply for a loan, and have any bank approve that loan without you PERSONALLY GUARANTEEING it. None will. So yes, while it was corporate debt, you personally backed it, so when your company defaults, yes, they'll come take your house.

More on this to come later. I have a story to tell when I get home about how something like this went down that was in the family. Check back in a few hours. So I guess where it comes from is a personal experince. BTW, my brother still owns his house.

 

[Douglas]

At first I thought this was going to be a bad thing, then I was indifferent; but Mr. Friday has been making a good and valid case.

 

[drunkenbeagle]

Try and setup an LLC or S-Corp, apply for a loan, and have any bank approve that loan without you PERSONALLY GUARANTEEING it. None will. So yes, while it was corporate debt, you personally backed it, so when your company defaults, yes, they'll come take your house.

I never personally guaranteed any debt for any business that I owned. If the business has cash, has been in business for a few years, and has a clean D&B file, it is generally possible to get credit without personally guaranteeing it.

 

[JOEFRIDAY2]

I'm in the camp of "Don't pay the money up front" or "Don't pay the money up front without the place you are paying providing you a bond in case they go T.U.".

I'm in the same camp.

I'm glad the state of California can make up a bunch of onerous regulations to help make business more difficult to enter...just what California needs now. This will also help the larger, more dominant flight schools (what is it about democrats "helping the little guy"? Seems as if establishment, larger business make out better...).

These regulations have been on the books for many years. In the past Flight Schools have been exempt from state regulations because the regulators believed the FAA regulated the flight schools.

I don't believe there was ever an intent to not regulate flight schools. As the states are being made aware of this lack of regulation, which has now cost students hundreds of millions of dollars in lost tuition, the states are looking at putting in the regulation that they believed was there all along.

When building a house you get the construction loan, and the bank escrows that money and pays upon completion of a set part of the house, or releases enough money to the subs to do whatever job they are going to do at a given time. Why can't flight schools do this and why do the lenders not insist on this? Why not have a lender simply insist on the escrow fund, deposit the entire amount of the loan into it, and release the funds via wire as it is used by the student/school? Sounds pretty simple to me - the flight school understands that they will get the entire amount (because it is escrowed and approved) as long as they keep the student happy and progressing. The bank knows that they will only be releasing funds as money is earned by the flight school. The student knows that their risk of loss is minimized if the school suddenly goes under. Seems pretty simple to me. Doesn't require a "slush fund" nor does it require added bureaucracy, added regulation, or onerous costs of compliance. Of course California would go this way instead of the more efficient way...finding the most complicated, least efficient answer is what they do there.

I agree with you on this as well. Unfortunately it has not happened as of yet.

 

[WacoFan]

I agree with you on this as well. Unfortunately it has not happened as of yet.

It is amazing the stupidity of the lenders. Couple that with the stupidity of students and shady operators taking advantage of both and it is bad. I think the California rule shouldn't regulate flight schools so much as simply say "Don't be stupid".

 

[wheelsup]

.

Without FDIC (which costs bank's money to comply with), there would be millions of bankrupt Americans today. Without mortgage industry regulation (which, guess what, costs them money too), there would be people who lost their homes yet were still indebted to a financial institution.

Regulation is fine it's when government gets involved in the result that bothers me. A great example is the FDIC. All banks pay the same rates to this government agency which means banks are in effect punished for not being risky. They are insured either way so why not take more risk and make more money?

If private insurers took over the actual insuring they would be auditing banks individually and charging much more for insurance to the banks that were taking large risks.

You'd still get your insurance but would reduce the size of government, reduce inefficiency, and even strengthen the financial system because you'd have .

 

[Patrick]

Regulation is fine it's when government gets involved in the result that bothers me. A great example is the FDIC. All banks pay the same rates to this government agency which means banks are in effect punished for not being risky. They are insured either way so why not take more risk and make more money?

If private insurers took over the actual insuring they would be auditing banks individually and charging much more for insurance to the banks that were taking large risks.

You'd still get your insurance but would reduce the size of government, reduce inefficiency, and even strengthen the financial system because you'd have .

Absolutely true. You find a way to make that happen and I'll be all for it.

 

[Patrick]

I never personally guaranteed any debt for any business that I owned. If the business has cash, has been in business for a few years, and has a clean D&B file, it is generally possible to get credit without personally guaranteeing it.

All BIG if's. If the company has the above attributes, it's not a shady, fly-by-night operator, thus, conversely it is an en established, financially solvent company. Established, financially solvent companies tend to stay in business, can weather storms, don't rip off clients, and have no problem complying with government regulation. Explain to me how these are bad things for the consumer?

Try starting a NEW business, and see if you're going to get off the hook setting up shop and not personally guaranteeing those loans.