Consumer Leasing
Federal RegisterFeb 19, 1997
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SUMMARY: The Board is publishing for comment a second proposal revising
the official staff commentary to Regulation M which implements the
Consumer Leasing Act. The act requires lessors to provide uniform cost
and other disclosures about consumer lease transactions. Regulation M
was revised in September 1996 under the Board's Regulatory Planning and
Review program which calls for the periodic review of Board
regulations. The commentary applies and interprets the requirements of
Regulation M. A proposal to revise the commentary was published in
September 1995. This proposal includes material that was published for
comment in September 1995, incorporates guidance on the final rule
issued in September 1996, and addresses certain questions raised
following public review of the final rule.
DATES: Comments must be received by March 13, 1997.
ADDRESSES: Comments should refer to Docket No. R-0961, and may be
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551. They may also be delivered to the Board's mail
room between 8:45 a.m. and 5:15 p.m. weekdays, and to the security
control room at all other times. The mail room and the security control
room are accessible from the courtyard entrance on 20th Street, NW.
(between Constitution Avenue and C Street). Comments will be available
for inspection and copying by members of the public in the Freedom of
Information Office, Room MP-500 of the Martin Building between 9:00
a.m. and 5:00 p.m. weekdays, except as provided in Section 261.8 of the
Board's rules regarding the availability of information.
FOR FURTHER INFORMATION CONTACT: Kyung H. Cho-Miller or Obrea Otey
Poindexter, Staff Attorneys, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, Washington,
DC 20551, at (202) 452-2412 or 452-3667. For users of
Telecommunications Devices for the Deaf (TDD) only, contact Dorothea
Thompson, at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The Consumer Leasing Act (CLA), 15 U.S.C. 1667-1667e, was enacted
into law in 1976 as an amendment to the Truth in Lending Act (TILA), 15
U.S.C. 1601 et seq. The CLA is implemented by the Board's Regulation M
(12 CFR part 213). An official staff commentary (Supplement I-CL-1 to
12 CFR part 213) provides guidance to lessors in applying the
regulation to specific transactions. The CLA requires lessors to
provide consumers with uniform cost and other disclosures about
consumer lease transactions. The act generally applies to consumer
leases of personal property in which the contractual obligation does
not exceed $25,000 and has a term of more than four months. An
automobile lease is the most common type of consumer lease covered by
the act.
In September 1996, the Board approved a final rule revising
Regulation M, after a review of the regulation and consumer leasing
generally. The review was conducted under the Board's Regulatory
Planning and Review Program which calls for the periodic review of
Board regulations with four goals in mind: To clarify and simplify
regulatory language; to determine whether regulatory amendments are
needed to address technological and other developments; to reduce undue
regulatory burden on the industry; and to delete obsolete provisions.
The Board began the review of Regulation M in November 1993, with
the publication of an advance notice of proposed rulemaking (58 FR
61035, November 19, 1993). In September 1995, the Board published a
proposal revising the regulation and the staff commentary (60 FR 48752,
September 20, 1995; comment period extended, 60 FR 62349 December 6,
1995). The proposal contained substantive revisions to the regulation,
including new disclosure requirements.
The September 1996 final rule includes new disclosures to
supplement the act's requirements (61 FR 52246, October 7, 1996). The
major changes primarily affect motor-vehicle leasing. They include a
mathematical progression on how scheduled payments are derived (using
figures such as the gross capitalized cost of a lease, the vehicle's
residual value, the amount of depreciation, and the rent charge) and a
warning statement about charges for terminating a lease early. General
changes in the format of the disclosures require that certain lease
disclosures be segregated from other information. A lessor is not
required to disclose the cost of a lease expressed as a percentage
rate; however, if a rate is disclosed or advertised, a special notice
must accompany the rate stating that it may not measure the overall
cost of financing the lease. Further, a rate in an advertisement cannot
be more prominent than any other Regulation M disclosure.
The final rule also implements amendments to the CLA contained in
the Riegle Community Development and Regulatory Improvement Act of 1994
(Pub. L. 103-325, 108 Stat. 2160), allowing a toll-free number or a
print advertisement to substitute for certain lease disclosures in
radio commercials (which was expanded in the final rule to television
commercials) and makes other changes to the advertising rules. The
CLA's advertising rules were amended and streamlined on September 30,
1996 when the Congress enacted the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (Pub. L. 104-208, 110 Stat. 3009). The
Board issued a proposal to implement those changes. (62 FR 62, January
2, 1997.)
The Board is now publishing an updated proposal to the commentary.
This proposal includes material that was published for comment in
September 1995, incorporates guidance on the September 1996 final rule,
and addresses certain questions raised following public review of the
final rule. It is contemplated that the proposed revisions to the
Regulation M commentary will be adopted in final form in April 1997.
[[Page 7364]]
II. Discussion of Proposed Revisions
The following discussion covers the proposed revisions to the
Regulation M commentary section-by-section. Most of the discussion
focuses on new comments and significant revisions to existing comments.
Introduction
Current comments I-3, I-4, and I-6 would be deleted as obsolete or
unnecessary. Comments I-1, I-2, and I-5 would be redesignated
accordingly.
Section 213.1--Authority, Scope, Purpose, and Enforcement
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
1-1....................................... 1-1.
1-2....................................... Deleted as unnecessary (see
Appendix C).
------------------------------------------------------------------------
Section 213.2--Definitions
2(a) Definitions
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
2(a)(2)-1................................. 2(b)-1 and -2; including
text from former Sec.
213.2(a)(2).
2(a)(2)-2................................. 2(b)-3.
2(d)-1 new.
2(a)(4)-1................................. 2(h)-1; includes text from
former Sec. 213.2(a)(4).
2(a)(4)-2................................. 2(h)-4.
2(a)(4)-3................................. 2(h)-2.
2(a)(6)-1................................. 2(e)-1.
2(a)(6)-2................................. 2(e)-2.
2(e)-3 new.
2(a)(6)-3................................. 2(e)-6.
2(a)(6)-4................................. 2(e)-4.
2(e)-5 new; includes text
from former Sec.
213.2(a)(3).
2(a)(6)-5................................. 2(e)-8.
2(a)(6)-6................................. 2(e)-7.
2(f)-1 new.
2(a)(7)-1................................. 2(g)-1.
2(a)(8)-1................................. 2(h)-3.
2(a)(9)-1................................. 2(j)-1.
2(a)(12)-1................................ 2(l)-1.
2(a)(14)-1 and -2......................... 2(m)-1 and -2.
2(a)(14)-3 and -4......................... 2(m)-3.
2(a)(14)-5................................ 2(m)-4.
2(a)(14)-6................................ 4(l)-2.
2(a)(15)-1................................ 2(o)-2.
2(a)(15)-2................................ 2(o)-1; includes text from
former Sec. 213.2(a)(15).
2(a)(15)-3................................ 2(o)-3.
2(a)(17)-1 through -5..................... Deleted as unnecessary.
2(a)(18)-1 through -3..................... Deleted as unnecessary.
2(b)-1.................................... Deleted as unnecessary.
2(b)-2.................................... 4(b)-1.
------------------------------------------------------------------------
2(b) Advertisement
Comment 2(b)-1, current comment 2(a)(2)-1, would be revised to
include examples of advertisements formerly in Sec. 213.2(a)(2) and to
indicate that the term ``advertisement'' includes electronic messages.
2(d) Closed-end Lease
Proposed comment 2(d)-1 provides general guidance on the definition
of a closed-end lease.
2(e) Consumer Lease
Comment 2(e)-2, current comment 2(a)(6)-2, would be revised to
clarify that leases with penalties for not continuing beyond an initial
four months are covered under the regulation.
Proposed comment 2(e)-3 provides guidance on the total contractual
obligation for purposes of determining whether a lease is covered under
the regulation, and indicates that the total contractual obligation may
be different from the total of payments disclosed under Sec. 213.4(e).
Proposed comment 2(e)-5 incorporates former Sec. 213.2(a)(3), the
statutory definition of agricultural purpose in section 103(s) of the
TILA.
Comment 2(e)-7, current comment 2(a)(6)-6, would be revised to add
another example of a lease deemed incidental to a service. The narrow
list of exceptions is exhaustive, rather than illustrative. Questions
have arisen about Regulation M coverage of cellular phones leased in
conjunction with obtaining cellular service. Cellular service providers
typically offer customers the opportunity to lease or purchase cellular
telephones when subscribing for cellular service. The leasing of a
cellular telephone is not incidental to obtaining cellular service and
is, thus, covered under the regulation.
2(f) Gross Capitalized Cost
Proposed comment 2(f)-1 provides guidance on what type of fees are
included or excluded from the gross capitalized cost disclosure in
Sec. 213.4(f)(1).
2(h) Lessor
Comment 2(h)-1, current comment 2(a)(4)-1, would be revised to
include the definition of the phrase ``arrange for leasing of personal
property'' in former Sec. 213.2(a)(4).
2(m) Realized Value
Comment 2(m)-3 provides guidance on what is included or what may be
excluded from the realized value, combining current comments 2(a)(14)-3
and -4. The second and third sentences of current comment 2(a)(14)-4
are deleted as unnecessary.
2(o) Security Interest and Security
Comment 2(o)-1, current comment 2(a)(15)-2, would be revised to
include examples of a security interest formerly in Sec. 213.2(a)(15).
Questions have arisen about whether interest on a security deposit
meets the definition of a security interest for purposes of this
regulation and thus required to be disclosed. Such interest is required
to be disclosed if it is considered a security interest under state or
other applicable law.
Section 213.3--General Disclosure Requirements
3(a) General Requirements
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Current Proposed
------------------------------------------------------------------------
4(a)-1.................................... 3(a)-1.
4(a)-2.................................... Moved to Sec. 213.3(f).
4(a)-3.................................... 3(a)(1)-1.
4(a)-4.................................... 3(a)-4.
4(a)-5.................................... Deleted as unnecessary.
4(a)(1)-1................................. 3(a)-2 and -3.
4(a)(1)-2................................. Deleted as unnecessary.
4(a)(2)-1................................. 4(b)-1.
4(a)(2)-2................................. 3(a)(1)-2.
3(a)(1)-3 new.
4(a)(2)-3................................. 3(a)(1)-4.
4(a)(2)-4................................. Deleted as unnecessary.
4(a)(2)-5................................. 3(a)(1)-5.
3(a)(2)-1 through -3 new.
4(a)(4)-1................................. Deleted as unnecessary, see
revised Sec. 213.3(a)(4).
4(a)(4)-2................................. Deleted as unnecessary, see
revised Sec. 213.3(a)(4).
4(b)-1.................................... 3(b)-1.
4(c)-1.................................... 3(c)-1.
4(d)-1 through -5......................... 3(d)(1)-1 through -5.
4(d)-6.................................... Deleted as unnecessary.
4(e)-1 and -2............................. 3(e)-1 and -2.
3(e)-3 new; text from
footnote 1 of former
regulation.
------------------------------------------------------------------------
3(a) General Requirements
Comment 3(a)-1, current comment 4(a)-1, would be revised to clarify
that leasing disclosures must reflect the terms of the legal
obligation.
Comment 3(a)-4, current comment 4(a)-4, would be revised to provide
guidance on disclosing a prior lease or loan balance added to a lease
transaction.
3(a)(1) Form of Disclosures
Proposed comment 3(a)(1)-3 provides guidance on disclosing the
lessor's address.
Comment 3(a)(1)-5, current comment 4(a)(2)-5, would be revised to
provide additional guidance on ways in which lessors may demonstrate
compliance with the requirement that lessees receive disclosures prior
to being obligated on the lease transaction.
[[Page 7365]]
3(a)(2) Segregation of Certain Disclosures
Proposed comment 3(a)(2)-1 provides general guidance on the
location of the segregated disclosures referenced in Sec. 213.3(a)(2).
Proposed comment 3(a)(2)-2 restates the general rule on including
additional information among the segregated disclosures referenced in
Sec. 213.3(a)(2).
Proposed comment 3(a)(2)-3 provides a cross-reference to the
commentary to appendix A which provides guidance on designing lease
forms that are substantially similar to the regulation's model forms.
3(b) Additional Information; Nonsegregated Disclosures
Comment 3(b)-1, current comment 4(b)-1, on state law disclosures
would be revised by adding clarifying language and by deleting the
second sentence.
3(d) Use of Estimates
Comment 3(d)(1)-4, current comment 4(d)-4, would be revised to
provide that in disclosing the estimate of the value of leased property
at termination a lessor should indicate whether the retail or wholesale
value is used. This provision was previously contained in Regulation M
in the instructions to the model forms.
3(e) Effect of Subsequent Occurrence
Proposed comment 3(e)-3 incorporates the first sentence of footnote
1 of the former regulation.
Section 213.4--Context of Disclosures
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
4(a)-1 new.
4(g)-1.................................... Deleted as unnecessary.
4(g)-2.................................... 3(a)(1)-3; date requirement
moved to Sec. 213.3(a)(1).
4(g)(1)-1................................. Deleted as unnecessary.
4(g)(2)-1................................. Deleted as unnecessary.
4(g)(2)-2................................. 4(b)-1 (incorporates current
comment 2(b)-2)).
4(g)(2)-3................................. 4(b)-2.
4(b)-3 new (incorporated
from the instructions to
the model form in former
appendix C-2).
4(b)-4 through -6 new.
4(g)(3)-1................................. Deleted as unnecessary.
4(g)(3)-2................................. 4(c)-1; reference to open-
end lease deleted.
4(g)(4)-1................................. 4(n)-1.
4(g)(5)-1................................. 4(d)-1 and -2.
4(g)(5)-2................................. Deleted as unnecessary; see
Sec. 213.3(a)(2).
4(d)-3 new.
4(g)(5)-3................................. 4(d)-4.
4(g)(5)-4................................. 4(d)-5.
4(d)-6 new.
4(e)-1 new.
4(f)-1 new.
4(f)(1)-1 and -2 new.
4(f)(2)-1 new.
4(f)(8)-1 new.
4(o)-1 new.
4(g)(6)-1................................. 4(o)-2.
4(g)(6)-2................................. 4(o)-3.
4(g)(7)-1 through -3...................... 4(p)-1 through -3.
4(g)(8)-1................................. 4(h)-1.
4(h)-2 new.
4(g)(9)-1................................. 4(r)-1.
4(g)(10)-1 through -5..................... 4(q)-1 through -5.
4(g)(11)-1 through -3..................... 4(i)-1 through -3.
4(i)-4 and -5 new.
4(g)(12)-1................................ 4(g)(1)-3; the word
``capitalized'' is deleted.
4(g)(12)-2................................ 4(g)(1)-4.
4(g)(12)-3................................ 4(g)(1)-1.
4(g)(1)-2 new.
4(j)-1 new.
4(g)(14)-1 through -3..................... 4(l)-1 through -3.
4(m)-1 new.
4(g)(15)-1................................ 4(m)(2)-1.
4(g)(15)-2................................ deleted.
4(m)(1)-1 new.
4(g)(15)-3................................ deleted.
4(g)(15)-4................................ 4(m)(2)-2.
4(g)(15)-5................................ deleted.
4(g)(15)-6................................ 4(m)(2)-3.
4(s)-1 new.
------------------------------------------------------------------------
4(a) Description of Property
Proposed comment 4(a)-1 clarifies that the description of leased
property cannot be among the segregated disclosures.
4(b) Total Amount Due at Lease Signing
Comment 4(b)-1 would incorporate the first sentence of current
comment 2(b)-2 on consummation.
Proposed comment 4(b)-3 incorporates a definition of ``capitalized
cost reduction'' from the instructions in former appendix C-1 of the
regulation.
Proposed comment 4(b)-4 provides guidance on negative net trade-in
allowances where the amount owed on a prior loan or lease exceeds an
agreed-upon trade-in value.
Proposed comment 4(b)-5 clarifies that a rebate would be included
in the itemization under this section only when used to reduce an
amount due at lease signing.
Proposed comment 4(b)-6 clarifies that where the balance sheet
method is required, in motor-vehicle leases, the totals in each column
must equal one another.
4(d) Other Charges
Comment 4(d)-1, current comment 4(g)(5)-1, would be revised to
provide flexibility in making the ``other charges'' disclosure.
Proposed comment 4(d)-3 clarifies that third-party charges are not
disclosed under Sec. 213.4(d).
Proposed comment 4(d)-6 provides guidance on the disclosure of
optional ``disposition'' fees.
4(e) Total of Payments
Proposed comment 4(e)-1 explains the additional statement in the
total of payments disclosure for open-end leases.
4(f) Payment Calculation
Proposed comment 4(f)-1 clarifies that lessors should defer to
state or other applicable law in determining whether the leased
property is a motor vehicle.
4(f)(1) Gross Capitalized Cost
Proposed comment 4(f)(1)-1 provides guidance on disclosing the
agreed upon value of a leased motor vehicle.
Proposed comment 4(f)(1)-2 provides guidance on providing the
itemization of the gross capitalized cost.
4(f)(2) Capitalized Cost Reduction
Proposed comment 4(f)(2)-1 provides guidance on the amounts not
included in the capitalized cost reduction disclosure.
4(f)(8) Lease Term
Proposed comment 4(f)(8)-1 clarifies the meaning of the phrase
``lease term'' referenced under Sec. 213.4(f)(8).
4(g) Early Termination
Proposed comment 4(g)-2 provides guidance on disclosing the method
used to determine the amount of an early termination charge.
4(h) Maintenance Responsibilities
Proposed comment 4(h)-2 clarifies that lessors may not disclose a
description of the method used for calculating excess mileage charges
if a specific amount for excess mileage is available.
4(i) Purchase Option
Proposed comment 4(i)-5 provides guidance on disclosing a ``fair
market value'' purchase-option price.
Several commenters on the September 1995 proposal requested
clarification on whether lessors are allowed to disclose a purchase-
option fee and other fees and taxes applicable to the purchase option
separately from the purchase-option price. Comments 4(i)-3 and -4,
current comment 4(g)(11)-3, would be revised to allow lessors
flexibility in disclosing fees associated with a purchase-option price.
Further, with the September 1996
[[Page 7366]]
revisions to the disclosure format and since a lessee is not obligated
to purchase the leased property, the purchase-option fee and any other
fee associated with exercising the purchase option must be disclosed
under Sec. 213.4(i) and not Sec. 213.4(d).
4(j) Statement Referencing Nonsegregated Disclosures
Proposed comment 4(j)-1 clarifies that inapplicable information may
be deleted from the Sec. 213.4(j) disclosure, which references and
alerts consumers to read CLA required disclosures not included among
the segregated disclosures.
4(l) Right of Appraisal
Comment 4(l)-2, current comment 4(g)(14)-2, would be revised to
provide that a lessor must indicate when an appraisal should be based
on the wholesale or retail value. This provision was contained in the
former regulation in the instructions to the model forms.
4(m) Liability at End of Lease Term Based on Estimated Value
The regulation reformats this section, former Sec. 213.4(g)(15),
for clarity. The commentary has been similarly reformatted.
Proposed comment 4(m)-1 states the intent of section 183(a) of the
CLA that lessors must pay the lessees' attorney's fees in all actions
brought by lessors under Sec. 213.4(m), even if those actions are
decided in favor of the lessor.
4(n) Fees and Taxes
Proposed comment 4(n)-1 provides guidance on what taxes are
disclosed under Sec. 213.4(n).
4(o) Insurance
Proposed comment 4(o)-1 provides that Sec. 213.4(o) applies to
voluntary and required insurance provided in connection with a lease
transaction.
Comment 4(o)-3, current comment 4(g)(6)-2, is revised to provide
additional guidance on the disclosure of mechanical breakdown
insurance.
4(p) Warranties or Guarantees
Comment 4(p)-1, current comment 4(g)(7)-1, would be revised to
provide further guidance on identifying warranties under Sec. 213.4(p),
when lessors provide a comprehensive list of warranties to lessees.
4(s) Limitation on Rate Information
Proposed comment 4(s)-1 clarifies that a lease rate may not be
included among the segregated disclosures referenced in
Sec. 213.3(a)(2).
Section 213.5--Renegotiations, Extensions, and Assumptions
Section 213.5, formerly Sec. 213.4(h), contains the disclosure
rules governing leases that are renegotiated, extended, or assumed.
Many of the commentary provisions have been moved to the regulation.
For example, the definitions of a renegotiation and an extension have
been included in the regulation. This change parallels the approach
under Regulation Z for refinancings and assumptions, 12 CFR 226.20.
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
4(h)-1.................................... 5-1.
4(h)-2.................................... First sentence moved to Sec.
213.5(a); second sentence
deleted; third sentence
moved to 5-1.
4(h)-3.................................... Moved to Sec. 213.5(d).
4(h)-4.................................... Moved to Sec. 213.5(b).
4(h)-5.................................... 5(b)-1.
5(b)-2 new.
4(h)-6.................................... Deleted as unnecessary.
4(h)-7.................................... Moved to Sec. 213.5(d)(6).
4(h)-8.................................... Moved to Sec. 213.5(d)(2).
4(h)-9.................................... Moved to Sec. 213.5(c).
------------------------------------------------------------------------
5(b) Extension
Comment 5(b)-1, current comment 4(h)-5, would be revised to clarify
that if a consumer lease is extended on a month-to-month basis for more
than six months, new disclosures are required at the beginning of the
seventh month, and also at the start of each seventh month thereafter.
This revision incorporates into the commentary a longstanding
interpretation originally issued under leasing provisions that were a
part of Regulation Z (Truth in Lending) prior to 1982.
Proposed comment 5(b)-2 also incorporates a longstanding
interpretation originally issued under the pre-1982 leasing provisions
in Regulation Z that disclosures for a consumer lease, originally
covered by the regulation and extended on a month-to-month basis for
more than six months, should reflect the month-to-month nature of the
transaction.
Section 213.7--Advertising
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
5(a)-1.................................... 7(a)-1.
5(a)-2.................................... 7(a)-2.
5(b)-1 and 2.............................. 7(c)-1 and 2.
5(c)-1.................................... 7(b)-1.
5(c)-2.................................... 7(d)(1)-1.
7(d)(2)-1 new.
5(d)-1.................................... Deleted.
7(e)-1 new.
7(f)(1)-1 through -4 new.
------------------------------------------------------------------------
The CLA advertising provisions were amended on September 30, 1996
by the Economic Growth and Regulatory Paperwork Reduction Act of 1996.
The final rule revising the commentary will reference the revised
provisions in the regulation that implement the statutory changes.
7(b) Clear and Conspicuous Standard
Proposed comment 7(b)-1 provides guidance on the clear and
conspicuous standard. A comment in the September 1995 proposal which
provided that lease disclosures must appear on a television screen for
at least five seconds has been deleted. The comment was intended as
guidance on the clear and conspicuous standard. It did not provide a
safe harbor, as the ``five second'' rule may be inadequate as a test
for determining full compliance with the clear and conspicuous
standard.
7(b)(1) Amount Due at Lease Signing
Proposed comment 7(b)(1)-1 clarifies that an itemization of the
amount due at lease signing or delivery is not required under
Sec. 213.7(b)(1).
Proposed comment 7(b)(1)-2 provides general guidance on the
prominence rule in Sec. 213.7(b)(1).
7(b)(2) Advertisement of a Lease Rate
Proposed comment 7(b)(2)-1 provides guidance on the location of the
statement that must accompany any percentage rate stated in an
advertisement.
7(d) Advertisement of Terms That Require Additional Disclosure
7(d)(2) Additional Terms
Commenters requested clarification on how third-party fees that
vary by jurisdiction such as taxes, licenses and registration fees
should be reflected in the total amount due at lease signing disclosure
under Sec. 213.7(d)(2)(ii). Comment 7(d)(2)-2 provides lessors
flexibility in disclosing such fees.
7(e) Alternative Disclosures--Merchandise Tags
Proposed comment 7(e)-1 provides general guidance on disclosing
multiple item leases with merchandise tags.
7(f) Alternative Disclosures--Television or Radio Advertisements
7(f)(1) Toll-Free Number or Print Advertisement
Proposed comment 7(f)(1)-1 clarifies that a newspaper circulated
nationally may qualify as a publication in general circulation in the
community served by the media station.
Proposed comment 7(f)(1)-2 provides guidance on establishing a
number for
[[Page 7367]]
consumers to call for disclosure information.
Proposed comment 7(f)(1)-3 provides guidance on the use of a multi-
function toll-free number to provide disclosures.
Proposed comment 7(f)(1)-4 provides general guidance on the
statement that must accompany a toll-free number instructing consumers
to call the number for details about costs and terms.
Section 213.8 Record Retention
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
6-1................................ 8-1
------------------------------------------------------------------------
Section 213.8 of the regulation was formerly Sec. 213.6.
Section 213.9 Relations to State Laws
Section 213.9 of the regulation combines and simplifies former
Secs. 213.7 and 213.8. The comments to these sections, as well as
references in former appendices A and B, have been deleted as
unnecessary.
Appendix A Model Forms
Under the final rule, the model forms are moved from appendix C to
appendix A. Comment app. A-2 would be deleted as unnecessary. Minor
revisions would be made to other comments in this appendix. For
example, comment app. A-1 would be revised to indicate that changes to
the headings, format, and the content of the segregated disclosures
should be minimal. Also the definition of a closed-end lease in comment
app. A-3 would be deleted because a definition has been added in the
regulation.
III. Form of Comment Letters
Comment letters should refer to Docket No. R-0961 and, when
possible, should use a standard courier typeface with a type size of 10
or 12 characters per inch. This will enable the Board to convert the
text to machine-readable form through electronic scanning, and will
facilitate automated retrieval of comments for review. Also, if
accompanied by an original document in paper form, comments may be
submitted on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any IBM-
compatible DOS-based format.
The comment period ends on March 13, 1997. Normally, the Board
provides a 60-day comment period, in keeping with the Board's policy
statement on rulemaking (44 FR 3957, January 19, 1979). The proposed
commentary revisions primarily include interpretations published for
comment in September 1995 and guidance included in the supplemental
information to the September 1996 final rule. The Board believes that
it is desirable to ensure that a commentary takes effect along with the
final rule as promptly as possible. Accordingly, the Board is providing
an abbreviated comment period.
List of Subjects in 12 CFR Part 213
Advertising, Federal Reserve System, Reporting and recordkeeping
requirements, Truth in lending.
For the reasons set forth in the preamble, 12 CFR part 213 is
proposed to be amended as follows:
PART 213--CONSUMER LEASING (REGULATION M)
1. The authority citation for part 213 continues to read as
follows:
Authority: 15 U.S.C. 1604.
2. Supplement I to Part 213--Official Staff Commentary to
Regulation M would be revised to read as follows:
Supplement I to Part 213--Official Staff Commentary to Regulation M
Introduction
1. Official status. The commentary in this supplement I is the
vehicle by which the Division of Consumer and Community Affairs of
the Federal Reserve Board issues official staff interpretations of
Regulation M (12 CFR part 213). Good faith compliance with this
commentary affords protection from liability under section 130(f) of
the Truth in Lending Act (15 U.S.C. 1640f). Section 130(f) protects
lessors from civil liability for any act done or omitted in good
faith in conformity with any interpretation issued by a duly
authorized official or employee of the Federal Reserve System.
2. Procedures for requesting interpretations. Under appendix C
of Regulation M, anyone may request an official staff
interpretation. Interpretations that are adopted will be
incorporated in this commentary following publication in the Federal
Register. No official staff interpretations are expected to be
issued other than by means of this commentary.
3. Comment designations. Each comment in the commentary is
identified by a number and the regulatory section or paragraph that
it interprets. The comments are designated with as much specificity
as possible according to the particular regulatory provision
addressed. For example, some of the comments to Sec. 213.4(f) are
further divided by subparagraph, such as comment 4(f)(1)-1 and
comment 4(f)(2)-1. In other cases, comments have more general
application and are designated, for example, as comment 4(a)-1. This
introduction may be cited as comments I--1 through I--3. An appendix
may be cited as comment app. A--1.
Section 213.1--Authority, Scope, Purpose, and Enforcement
1. Foreign applicability. Regulation M applies to all persons
(including branches of foreign banks or leasing companies located in
the United States) that offer consumer leases to residents
(including resident aliens) of any state as defined in
Sec. 213.2(p). The regulation does not apply to a foreign branch of
a U.S. bank or to a leasing company leasing to a U.S. citizen
residing or visiting abroad or to a foreign national abroad.
Section 213.2--Definitions
2(b) Advertisement.
1. Coverage. The term advertisement includes messages inviting,
offering, or otherwise generally announcing to prospective customers
the availability of consumer leases, whether in visual, oral, print
or electronic media. Examples include:
i. Messages in newspapers, magazines, leaflets, catalogs, and
fliers.
ii. Messages on radio, television, and public address systems.
iii. Direct mail literature.
iv. Printed material on any interior or exterior sign or
display, in any window display, in any point-of-transaction
literature or price tag that is delivered or made available to a
lessee or prospective lessee in any manner whatsoever.
v. Telephone solicitations.
vi. Messages on the Internet.
2. Exclusions. The term does not apply to the following:
i. Direct personal contacts, including follow-up letters, cost
estimates for individual lessees, or oral or written communications
relating to the negotiation of a specific transaction.
ii. Informational material distributed only to businesses.
iii. Notices required by federal or state law, if the law
mandates that specific information be displayed and only the
mandated information is included in the notice.
iv. News articles controlled by the news medium.
v. Market research or educational materials that do not solicit
business.
3. Persons covered. See the commentary to Sec. 213.7(a).
2(d) Closed-end lease.
1. General. In closed-end leases, sometimes referred to as
``walk-away'' leases, the lessee is not responsible for the residual
value of the leased property at the end of the lease term.
2(e) Consumer lease.
1. Primary purposes. A lessor must determine in each case if the
leased property will be used primarily for personal, family, or
household purposes. If a question exists as to the primary purpose
for a lease, the fact that a lessor gives disclosures is not
controlling on the question of whether the transaction was exempt.
The primary purpose of a lease is determined before or at
consummation and a lessor need not provide Regulation M disclosures
where there is a subsequent change in primary usage.
2. Period of time. To be a consumer lease, the initial term of
the lease must be more than four months. Thus, a lease of personal
property for four months, three months or on a month-to-month or
week-to-week basis (even though the lease actually extends beyond
four months) is not a consumer lease and is not subject to the
disclosure
[[Page 7368]]
requirements of the regulation. However, a lease that imposes a
penalty for not continuing a lease beyond four months is considered
to have a term of more than four months. To illustrate:
i. A month-to-month lease with a penalty, such as the forfeiture
of a security deposit for terminating before one year, is subject to
the regulation.
ii. A three-month lease extended on a month-to-month basis and
terminated after one year is not subject to the regulation.
3. Total contractual obligation. The total contractual
obligation is not necessarily the same as the total of payments
disclosed under Sec. 213.4(e). The total contractual obligation
includes nonrefundable amounts a lessee is contractually obligated
to pay to the lessor. The term excludes:
i. Residual value amounts or purchase-option prices;
ii. Amounts collected by the lessor but paid to a third party, such
as taxes, license and registration fees.
4. Credit sale. The regulation does not cover a lease that meets
the definition of a credit sale in Regulation Z, 12 CFR
226.2(a)(16), which is defined, in part, as ``a bailment or lease
(unless terminable without penalty at any time by the consumer)
under which the consumer:
i. Agrees to pay as compensation for use a sum substantially
equivalent to, or in excess of, the total value of the property and
services involved; and
ii. Will become (or has the option to become), for no additional
consideration or for nominal consideration, the owner of the
property upon compliance with the agreement.''
5. Agricultural purpose. Agricultural purpose means a purpose
related to the production, harvest, exhibition, marketing,
transportation, processing, or manufacture of agricultural products
by a natural person who cultivates, plants, propagates, or nurtures
those agricultural products, including but not limited to the
acquisition of personal property and services used primarily in
farming. Agricultural products include horticultural, viticultural,
and dairy products, livestock, wildlife, poultry, bees, forest
products, fish and shellfish, and any products thereof, including
processed and manufactured products, and any and all products raised
or produced on farms and any processed or manufactured products
thereof.
6. Organization. A consumer lease does not include a lease made
to an organization such as a corporation or a government agency or
instrumentality. Such a lease is not covered by the regulation even
if the leased property is used (by an employee, for example)
primarily for personal, family or household purposes, or is
guaranteed by or subsequently assigned to a natural person.
7. Leases of personal property incidental to a service. The
following leases of personal property are deemed incidental to a
service and thus are not subject to the regulation:
i. Home entertainment systems requiring the consumer to lease
equipment that enables a television to receive the transmitted
programming.
ii. Security alarm systems requiring the installation of leased
equipment intended to monitor unlawful entries into a home.
iii. Propane gas service where the consumer must lease a propane
tank to receive the service.
8. Safe deposit boxes. The lease of a safe deposit box is not a
consumer lease under Sec. 213.2(e).
2(f) Gross capitalized cost.
1. Charges paid at lease signing. The gross capitalized cost
figure includes only those fees, charges, and other items, such as a
prior unpaid lease balance, that are capitalized or amortized over
the lease term. Charges paid at lease signing, such as taxes, are
not included in the gross capitalized cost.
2(g) Lessee.
1. Guarantors. Guarantors are not lessees for purposes of the
regulation.
2(h) Lessor.
1. Arranger of a lease. To ``arrange'' for the lease of personal
property means to provide or offer to provide a lease that is or
will be extended by another person under a business or other
relationship pursuant to which the person arranging the lease (a)
receives or will receive a fee, compensation, or other consideration
for the service or (b) has knowledge of the lease terms and
participates in the preparation of the contract documents required
in connection with the lease. To illustrate:
i. An automobile dealer who, pursuant to a business
relationship, completes the necessary lease agreement before
forwarding it to the leasing company (to whom the obligation is
payable on its face) for execution is ``arranging'' for the lease.
ii. An automobile dealer who, receiving no fee for the service,
refers a customer to a leasing company that will prepare all
relevant contract documents is not ``arranging'' for the lease.
2. Consideration. The term ``other consideration'' as used in
comment 2(h)-1 refers to an actual payment corresponding to a fee or
similar compensation and not to intangible benefits, such as the
advantage of increased business, which may flow from the
relationship between the parties.
3. Assignees. An assignee may be a lessor for purposes of the
regulation in circumstances such as those described in Ford Motor
Credit Co. v. Cenance, 452 U.S. 155 (1981). In that case, the U.S.
Supreme Court held that an assignee was a creditor for purposes of
the pre-1980 Truth in Lending Act and Regulation Z because of its
substantial involvement in the credit transaction.
4. Multiple lessors. See the commentary to Sec. 213.3(c).
2(j) Organization.
1. Coverage. The term organization includes joint ventures and
persons operating under a business name.
2(l) Personal property.
1. Coverage. Whether property is personal property depends on
state or other applicable law. For example, a mobile home or
houseboat may be considered personal property in one state but real
property in another.
T32(m) Realized value.
1. General. Realized value refers to the value of the leased
property at early termination or at the end of the lease term. It is
not a required disclosure. It may be either the retail or wholesale
value. Realized value is relevant only to leases in which the
lessee's liability at early termination or at the end of the lease
term is the difference between the residual value of the leased
property and its realized value.
2. Options. Subject to the contract and to state or other
applicable law, the lessor may calculate the realized value in
determining the lessee's liability at the end of the lease term or
at early termination in one of the three ways stated in
Sec. 213.2(m). If the lessor sells the property prior to making that
determination, the price received for the property is the realized
value. If the lessor does not sell the property prior to making that
determination, the lessor may choose either the highest offer or the
fair market value as the realized value.
3. Determination of realized value. Disposition charges are
included in determining the realized value but amounts attributable
to taxes may be excluded.
4. Offers. In determining the highest offer for disposition, the
lessor may disregard offers that an offeror has withdrawn or is
unable or unwilling to perform.
5. Lessor's appraisal. See commentary to Sec. 213.4(l).
2(o) Security interest and security.
1. Disclosable interests. For purposes of disclosure, a security
interest is an interest taken by the lessor to secure performance of
the lessee's obligation. For example, if a bank that is not a lessor
makes a loan to a leasing company and takes assignments of consumer
leases generated by that company to secure the loan, the bank's
security interest in the lessor's receivables is not a security
interest for purposes of this regulation.
2. General coverage. An interest the lessor may have in leased
property must be disclosed only if it is considered a security
interest under state or other applicable law. The term includes, but
is not limited to, security interests under the Uniform Commercial
Code; real property mortgages, deeds of trust and other consensual
or confessed liens whether or not recorded; mechanic's,
materialman's, artisan's, and other similar liens; vendor's liens in
both real and personal property; liens on property arising by
operation of law; and any interest in a lease when used to secure
payment or performance of an obligation.
3. Insurance exception. The lessor's right to insurance proceeds
or unearned insurance premiums is not a security interest for
purposes of this regulation.
Section 213.3--General Disclosure Requirements
3(a) General requirements.
1. Basis of disclosures. Disclosures must reflect the terms of
the legal obligation between the parties. For example:
i. In a three-year lease with no penalty for termination after a
one-year minimum term,
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disclosures should be based on the full three-year term of the
lease. The one-year minimum term is only relevant to the early
termination provisions of Secs. 213.4(g)(1), (k) and (l).
2. Clear and conspicuous standard. The clear and conspicuous
standard requires that disclosures be reasonably understandable. For
example, the disclosures must be presented in a way that does not
obscure the relationship of the terms to each other. Appendix A of
this part contains model forms that meet this standard. In addition,
although no minimum typesize is required, the disclosures must be
legible, whether typewritten, handwritten, or printed by computer.
3. Multipurpose disclosure forms. A lessor may use a
multipurpose disclosure form that enables the lessor to designate
the specific disclosures applicable to a given transaction,
consistent with the requirement that disclosures be clearly and
conspicuously provided.
4. Number of transactions. Lessors have flexibility in handling
lease transactions that may be viewed as multiple transactions. For
example:
i. When a lessor leases two items to the same lessee on the same
day, the lessor may disclose the leases as either one or two lease
transactions.
ii. When a lessor sells insurance or other incidental services
in connection with a lease, the lessor may disclose in one of two
ways: a single lease transaction or a lease and a credit sale
transaction.
iii. When a lessor includes an outstanding lease or loan balance
in a lease transaction, the lessor may disclose the prior loan or
lease balance as part of a single lease transaction or may disclose
it as a separate credit transaction.
3(a)(1) Form of disclosures.
1. Cross-references. In making disclosures, lessors may include
in the nonsegregated disclosures a cross-reference to items
contained among the segregated disclosures rather than repeat the
items.
2. Identification of parties. While disclosures must be made
clearly and conspicuously, lessors are not required to use the word
``lessor'' and ``lessee'' to identify the parties to the lease
transaction.
3. Lessor's address. The lessor need only be identified by name;
an address may be provided but is not required.
4. Multiple lessors and lessees. In transactions involving
multiple lessors and multiple lessees, a single lessor may make all
the disclosures to a single lessee as long as the disclosure
statement identifies all the lessors and lessees.
5. Lessee's signature. The regulation does not require that the
lessee sign the disclosure statement, whether disclosures are
separately provided or are part of the lease contract. Nevertheless,
to ensure that disclosures are given before a lessee becomes
obligated on the lease transaction, the lessor may ask the lessee to
sign the disclosure statement or an acknowledgement of receipt, may
place disclosures that are included in the lease documents above the
lessee's signature, or may include instructions alerting a lessee to
read the disclosures prior to signing the lease.
3(a)(2) Segregation of certain disclosures.
1. Location. The segregated disclosures referred to in
Sec. 213.3(a)(2) may be provided on a separate document and the
other required disclosures may be provided in the lease contract, so
long as all disclosures are given at the same time.
2. Additional information among segregated disclosures. The
disclosures required to be segregated may contain only the
information required or permitted to be included among the
segregated disclosures (see comments to Sec. 213.4 for guidance on
additional information in the segregated disclosures).
3. Substantially similar. See commentary to appendix A of this
part.
3(b) Additional information; nonsegregated disclosures.
1. State law disclosures. A lessor may include among the
nonsegregated disclosures any state law disclosures that are not
inconsistent with the act and regulation under Sec. 213.9, as long
as they are not used or placed to mislead or confuse or detract from
any disclosure required by the regulation in accordance with the
standard set forth in Sec. 213.3(b) for additional information.
3(c) Multiple lessors or lessees.
1. Multiple lessors. If a single lessor provides disclosures to
a lessee on behalf of several lessors, all disclosures for the
transaction must be given, even if the lessor making the disclosures
would not otherwise have been obligated to make a particular
disclosure.
3(d) Use of estimates.
3(d)(1) Standard.
1. Time of estimated disclosure. The lessor may use estimates to
make disclosures if necessary information is unknown or unavailable
at the time the disclosures are made. For example:
i. Section 213.4(n) requires the lessor to disclose the total
amount payable by the lessee during the lease term for official and
license fees, registration, certificate of title fees, or taxes. If
these amounts are subject to increases or decreases over the course
of the lease, the lessor may estimate the disclosures based on the
rates or charges in effect at the time of the disclosure.
2. Basis of estimates. Estimates must be made on the basis of
the best information reasonably available at the time disclosures
are made. The ``reasonably available'' standard requires that the
lessor, acting in good faith, exercise due diligence in obtaining
information. The lessor may rely on the representations of other
parties in obtaining information. For example, the lessor might look
to the consumer to determine the purpose for which leased property
will be used, to insurance companies for the cost of insurance, or
to an automobile manufacturer or dealer for the date of delivery.
3. Residual value of leased property at termination. When the
lessee's liability at the end of the lease term is based on the
residual value of the leased property as determined at consummation,
the estimate of the residual value must be reasonable and based on
the best information reasonably available to the lessor (see
Sec. 213.4(m)). A lessor may use a generally accepted trade
publication listing estimated current or future market prices for
the leased property or may rely on other information, its
experience, or reasonable belief if those sources provide the better
information. For example:
i. An automobile lessor offering a three-year open-end lease
assigns a wholesale value to the vehicle at the end of the lease
term. The lessor may disclose as an estimate a wholesale value
derived from a generally accepted trade publication listing current
wholesale values, if the trade publication is the best information
available.
ii. Same facts as above, except that the lessor discloses an
estimated value derived by adjusting the residual value quoted in
the trade publication because, in its experience, the trade
publication values either understate or overstate the prices
actually received in local used-vehicle markets. The lessor may
adjust estimated values quoted in trade publications based on the
lessor's experience or reasonable belief that the values will be
understated or overstated.
4. Retail or wholesale value. The lessor may choose either a
retail or a wholesale value in estimating the value of leased
property at termination, provided the choice is consistent with the
lessor's general practice or intention when determining the value of
the property at the end of the lease term. The lessor should
indicate whether the value disclosed is a retail or wholesale value.
5. Labelling estimates. Generally, only the disclosure for which
the exact information is unknown is labelled as an estimate.
Nevertheless, when several disclosures are affected because of the
unknown information, the lessor has the option of labelling as an
estimate every affected disclosure or only the disclosure primarily
affected.
3(e) Effect of subsequent occurrence.
1. Subsequent occurrences. Examples of subsequent occurrences
include:
i. An agreement between the lessee and lessor to change from a
monthly to a weekly payment schedule.
ii. An increase in official fees or taxes.
iii. An increase in insurance premiums or coverage caused by a
change in the law.
iv. Late delivery of an automobile caused by a strike.
2. Redisclosure. When a disclosure becomes inaccurate because of
a subsequent occurrence, the lessor need not make new disclosures
unless new disclosures are required under Sec. 213.5.
3. Lessee's failure to perform. The lessor does not violate the
regulation if a previously given disclosure becomes inaccurate when
a lessee fails to perform obligations under the contract and a
lessor takes actions that are necessary and proper in such
circumstances to protect its interest. For example, the addition of
insurance or a security interest by the lessor because the lessee
has not performed obligations contracted for in the lease is not a
violation of the regulation.
Section 213.4--Content of Disclosures
4(a) Description of property.
1. Placement of description. Although the description of leased
property may not be included among the segregated disclosures, a
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lessor may choose to place the description directly above the
segregated disclosures.
4(b) Amount due at lease signing.
1. Consummation. When a contractual relationship is created
between the lessor and the lessee is a matter to be determined under
state or other applicable law.
2. Fees payable upon delivery. This paragraph does not apply to
fees paid at delivery, when delivery occurs after consummation. For
example, if the lessee agrees to pay registration fees, sales taxes,
and a delivery charge on the date the automobile is delivered
sometime after consummation, none of these charges is an initial
payment under Sec. 213.4(b). The registration fees and sales taxes
are disclosed under Sec. 213.4(n), and the delivery charge is
disclosed as an ``other charge'' under Sec. 213.4(d).
3. Capitalized cost reduction. A capitalized cost reduction is a
payment in the nature of a downpayment that reduces the amount of
the leased property to be capitalized over the term of the lease.
This amount does not include any amounts included in a periodic
payment paid at lease signing.
4. ``Negative'' equity trade-in allowance. If an amount owed on
a prior lease or loan exceeds an agreed upon trade-in value, the
difference is not reflected as a negative trade-in allowance under
Sec. 213.4(b). The lessor may disclose the trade-in allowance as
zero, not applicable, or leave a blank line.
5. Rebates. Only rebates applied toward an amount due at lease
signing are required to be disclosed under Sec. 213.4(b).
6. Balance sheet approach. In motor vehicle leases, the total
for the column labeled ``total amount due at lease signing'' must
equal the total for the column labeled ``how the amount due at lease
signing will be paid.''
4(c) Payment schedule and total amount of periodic payments.
1. Periodic payments. The phrase ``number, amount, and due dates
or periods of payments'' requires the disclosure of all payments
made periodically, including taxes, maintenance and insurance
charges. In addition, the lessor must disclose the total of the
periodic payments.
4(d) Other charges.
1. Coverage. Section 213.4(d) requires the disclosure of charges
that are anticipated by the parties as incident to the normal
operation of the lease agreement. If a lessor is unsure whether a
particular fee is an ``other charge,'' the lessor may disclose the
fee as such without violating Sec. 213.4(d) or the segregation rule
under Sec. 213.3(a)(2).
2. Excluded charges. This section does not require disclosure of
charges that are imposed when the lessee terminates early, fails to
abide by, or modifies the terms of the existing lease agreement,
such as charges for:
i. Late payment.
ii. Default.
iii. Early termination.
iv. Deferral of payments.
v. Extension of the lease.
3. Third-party fees and charges. Third-party fees or charges
collected by the lessor on behalf of third parties, such as taxes,
are not disclosed under Sec. 213.4(d).
4. Relationship to other provisions. The other charges mentioned
in this paragraph are charges that are not required to be disclosed
under another provision of Sec. 213.4. To illustrate:
i. A delivery charge that is paid after consummation is
disclosed as an ``other charge.'' A delivery charge that is paid at
consummation, however, is disclosed as part of the amount due at
lease signing under Sec. 213.4(b), not as an ``other charge.''
ii. Occasionally, the price of a mechanical breakdown protection
(MBP) contract is disclosed as an ``other charge.'' More often, the
price of MBP is reflected in the periodic payment disclosure under
Sec. 213.4(c), in which case it is not disclosed as an ``other
charge.'' In states where MBP is regarded as insurance, however, the
cost should be disclosed in accordance with Sec. 213.4(o), not as an
``other charge.''
5. Lessee's liabilities at the end of the lease term.
Liabilities that the lease imposes upon the lessee at the end of the
scheduled lease term and that must be disclosed under this section
include disposition and ``pick-up'' charges.
6. Optional ``disposition'' charges. Disposition charges (and
similar charges) that are anticipated by the parties as an incident
to the normal operation of the lease agreement must be disclosed
under Sec. 213.4(d). If under a lease agreement, a lessee may return
leased property to various locations, and the lessor charges a
disposition fee depending upon the location chosen, under
Sec. 213.4(d), the lessor must disclose the highest amount charged.
In such circumstances, the lessor may also include a brief
explanation of the fee structure in the segregated disclosure. For
example, if no fee or a lower fee is imposed for returning a leased
vehicle to the originating dealer as opposed to another location,
that fact may be disclosed. By contrast, if the terms of the lease
treat the leased property returned outside the lessor's service area
as a default, that fee is not disclosed as an ``other charge,''
although it may be required to be disclosed under Sec. 213.4(q).
4(e) Total of payments.
1. Open-end lease. An additional statement is required under
Sec. 213.4(e) for open-end leases because, with some limitations, a
lessee is liable for the difference between the residual and
realized values of the leased property.
4(f) Payment calculation.
1. Motor-vehicle lease. Whether leased property is a motor
vehicle is determined by state or other applicable law.
4(f)(1) Gross capitalized cost.
1. Agreed upon value of the vehicle. The agreed upon value of a
motor vehicle is the amount for the vehicle agreed upon by the
lessor and lessee for purposes of the lease. This includes the
amount of capitalized items such as charges for vehicle accessories
and options, and delivery or destination charges. The lessor may
also include taxes and fees for title, license, and registration.
Charges for service or maintenance contracts, insurance products,
guaranteed automobile protection, or an outstanding balance on a
prior lease or loan are not included in the agreed upon value.
2. Itemization of the gross capitalized cost. The lessor may
choose to provide the itemization of the gross capitalized cost as a
matter of course or only on request. In either case, the itemization
must be provided at the same time as the other disclosures required
by Sec. 213.4. The itemization may not be included among the
segregated disclosures.
4(f)(2) Capitalized cost reduction.
1. Amounts not included. The capitalized cost reduction does not
include periodic payments paid at lease signing.
4(f)(8) Lease term.
1. Definition. Under Sec. 213.4(f)(8) the ``lease term'' refers
to the number of periodic payments.
4(g) Early termination.
4(g)(1) Conditions and disclosure of charges.
1. Reasonableness of charges. See the commentary to
Sec. 213.4(q).
2. Description of the method. A full description of the method
of determining an early termination charge is required by the
regulation. Lessors should attempt to provide consumers with clear
and understandable descriptions of their early termination charges.
Descriptions that are full, accurate, and not intended to be
misleading will comply with the regulation, even if complex. In
providing a full description of an early termination method, a
lessor may use the name of a generally accepted method of computing
the unamortized cost portion (also known as the ``adjusted lease
balance'') of its early termination charges. For example, a lessor
may state that the ``constant yield'' method will be utilized in
obtaining the adjusted lease balance, but must specify how that
figure, and any other term or figure, is used in computing the total
early termination charge imposed upon the consumer. Additionally, if
a lessor refers to a named method in this manner, the lessor must
provide a written explanation of that method if requested by the
consumer. The lessor has the option of providing the explanation as
a matter of course in the lease documents or on a separate document.
3. Default. When default is also a condition for early
termination of a lease, default charges must be disclosed under
Sec. 213.4(g)(1). See the commentary to Sec. 213.4(q).
4. Lessee's liability at early termination. When the lessee is
liable for the difference between the unamortized cost and the
realized value at early termination, the amount or the method of
determining the amount of the difference must be disclosed under
Sec. 213.4(g)(1).
4(h) Maintenance responsibilities.
1. Standards for wear and use. No disclosure is required if a
lessor does not impose standards for wear and use (such as excess
mileage).
2. Amount or method of determining excess mileage charges. In a
motor vehicle lease, a description of the method for calculating
excess mileage charges may not be disclosed if a specific amount for
excess mileage has been established.
4(i) Purchase option.
1. Mandatory disclosure of no purchase option. Generally the
lessor need only make the specific required disclosures that apply
to a transaction. In the case of the purchase option disclosure,
however, a lessor must
[[Page 7371]]
disclose affirmatively that the lessee has no option to purchase the
leased property when the purchase option is inapplicable.
2. Existence of purchase option. Whether a purchase option
exists is determined by state or other applicable law. The lessee's
right to submit a bid to purchase property at termination of the
lease is not an option to purchase under Sec. 213.4(i) if the lessor
is not required to accept the lessee's bid and the lessee does not
receive preferential treatment.
3. Purchase-option fee. A purchase-option fee must be disclosed
under Sec. 213.4(i), not Sec. 213.4(d). The fee may be separately
itemized or disclosed as part of the purchase-option price.
4. Official fees and taxes. The existence of official fees such
as those for taxes, licenses, and registration charged in connection
with the exercise of a purchase option may be disclosed under
Sec. 213.4(i) in several ways. The fees may be disclosed as part of
the purchase-option price (with or without a reference to their
inclusion in that price) or may be separately disclosed and itemized
by category. Alternatively, a lessor may provide a statement such as
fees for tags, taxes, and registration are not included in the
purchase price.
5. Purchase-option price. Lessors must disclose the purchase-
option price as a sum certain or a sum certain to be determined at a
future date by reference to an independent source. The reference
should provide sufficient information so that the lessee will be
able to determine the actual price when the option becomes
available. Statements of a purchase price as the ``negotiated
price'' or the ``fair market value'' do not comply with the
requirements of Sec. 213.4(i).
4(j) Statement referencing nonsegregated disclosures.
1. Content. A lessor may delete inapplicable items from the
disclosure. For example, if a lease contract does not include a
security interest, that reference may be deleted.
4(l) Right of appraisal.
1. Disclosure inapplicable. When the lessee is liable at the end
of the lease term or at early termination for unreasonable wear or
use, but not for the residual value of the leased property, the
lessor need not disclose the lessee's right to an independent
appraisal. For example:
i. The automobile lessor may reasonably expect a lessee to
return an undented car with four good tires at the end of the lease
term. Even though it holds the lessee liable for the difference
between a dented car with bald tires and the value of a car in
reasonably good repair, the lessor is not required to disclose the
lessee's appraisal right.
2. Lessor's appraisal. The lessor may obtain an appraisal of the
leased property to determine its realized value. Such an appraisal,
however, is not the one addressed in section 183(c) of the act, and
the lessor still must disclose the lessee's independent right to an
appraisal under Sec. 213.4(l). In addition, a lessor must indicate
whether the wholesale or retail appraisal value will be used.
3. Time restriction on appraisal. The regulation does not
specify a time period in which the lessee must exercise the
appraisal right. The lessor may require a lessee to obtain the
appraisal within a reasonable time after termination of the lease.
4(m) Liability at end of lease term based on residual value.
1. Open-end leases. Section 213.4(m) applies only to open-end
leases.
2. Lessor's payment of attorney's fees. Section 183(a) of the
act requires that the lessor pay the lessee's attorney's fees in all
actions brought by the lessor under Sec. 213.4(m), whether
successful or not.
4(m)(1) Rent and other charges.
1. General. This disclosure is intended to represent the cost of
financing an open-end lease based on charges and fees that the
lessor requires the lessee to pay. Examples of disclosable charges,
in addition to the rent charge, include acquisition, disposition, or
assignment fees. Charges imposed by a third party whose services are
not required by the lessor are not included in the Sec. 213.4(m)(1)
disclosure such as official fees and voluntary insurance.
4(m)(2) Excess liability.
1. Coverage. The disclosure limiting the lessee's liability for
the value of the leased property does not apply at early
termination.
2. Leases with a minimum term. If a lease has an alternative
minimum term, the disclosures governing the liability limitation are
not applicable for the minimum term. See the commentary to
Sec. 213.3(a).
3. Charges not subject to rebuttable presumption. The limitation
on liability applies only to liability that is based on the residual
value of the property at the end of the lease term. The regulation
does not preclude a lessor from recovering other charges from the
lessee at the end of the lease term. Examples of such charges
include:
i. Disposition charges.
ii. Excess mileage charges.
iii. Late payment and default charges.
iv. Amounts by which the unamortized cost exceeds the residual
value that have accrued in simple interest accounting leases because
the lessee has not made timely payments.
4(n) Fees and taxes.
1. Taxes. If a tax payable by the lessor is passed on to the
consumer and is reflected in the lease documentation or a sticker or
tag affixed to the leased property, the tax must be disclosed under
Sec. 213.4(n). However, a tax payable by the lessor and absorbed as
a cost of doing business need not be disclosed.
4(o) Insurance.
1. Coverage. A lessor must disclose information on the type and
amount of insurance coverage, whether voluntary or required, as well
as the cost if the insurance is obtained through the lessor.
2. Lessor's insurance. Insurance purchased by the lessor
primarily for its own benefit, and absorbed as a business expense
and not separately charged to the lessee, need not be disclosed
under Sec. 213.4(o) even if it provides an incidental benefit to the
lessee.
3. Mechanical breakdown protection. Whether mechanical breakdown
protection (MBP) purchased in conjunction with a lease should be
treated as insurance is determined by state or other applicable law.
In states that do not treat MBP as insurance, the lessor need not
make Sec. 213.4(o) disclosures. In such cases the lessor may,
however, disclose the Sec. 213.4(o) information in accordance with
the additional information provision in Sec. 213.3(b). For MBP
insurance contracts not capped by a dollar amount, lessors may
describe coverage by referring to a limitation by mileage or time
period, for example, the mechanical breakdown contract insures parts
of the automobile for up to 100,000 miles.
4(p) Warranties or guarantees.
1. Brief identification. The statement identifying warranties
may be brief and need not describe or list all warranties applicable
to specific parts such as for air conditioning, radio, or tires in
an automobile. For example, manufacturer's warranties may be
identified simply by a reference to the standard manufacturer's
warranty. If a lessor provides a comprehensive list of warranties to
the lessee, the lessor must indicate which Sec. 213.4(p) warranties
apply or, alternatively, which warranties do not apply.
2. Warranty disclaimers. Although a disclaimer of warranties is
not required by the regulation, the lessor may give a disclaimer as
additional information in accordance with Sec. 213.3(b).
3. State law. Whether an express warranty or guaranty exists is
determined by state or other law.
4(q) Penalties and other charges for delinquency.
1. Collection costs. The automatic imposition of collection
costs or attorney fees upon default must be disclosed under
Sec. 213.4(q). Collection costs or attorney fees that are not
imposed automatically, but are contingent upon expenditures in
conjunction with a collection proceeding or upon the employment of
an attorney to effect collection, need not be disclosed.
2. Charges for early termination. When default is a condition
for early termination of a lease, default charges must also be
disclosed under Sec. 213.4(g)(1). The Sec. 213.4(q) and (g)(1)
disclosures may be combined. Examples of combined disclosures are
provided in the model lease disclosure forms in appendix A of this
part.
3. Simple-interest leases. In a simple-interest accounting
lease, the additional rent charge that accrues on the lease balance
when a periodic payment is made after the due date does not
constitute a penalty or other charge for late payment. Similarly,
continued accrual of the rent charge after termination of the lease
because the lessee fails to return the leased property does not
constitute a default charge. In either case, if the additional
charge accrues at a rate higher than the normal rent charge, the
lessor must disclose the amount of or the method of determining the
additional charge under Sec. 213.4(q).
4. Extension charges. Extension charges that exceed the rent
charge in a simple-interest accounting lease or that are added
separately are disclosed under Sec. 213.4(q).
5. Reasonableness of charges. Pursuant to section 183(b) of the
act, penalties or other charges for delinquency, default, or early
termination may be specified in the lease but only in an amount that
is reasonable in light of the anticipated or actual harm caused by
the delinquency, default, or early termination, the difficulties of
proof of loss,
[[Page 7372]]
and the inconvenience or nonfeasibility of otherwise obtaining an
adequate remedy.
4(r) Security interest.
1. Disclosable security interests. See Sec. 213.2(o) and
accompanying commentary to determine what security interests must be
disclosed.
4(s) Limitations on rate information.
1. Segregated disclosures. A lease rate may not be included
among the segregated disclosures referenced in Sec. 213.3(a)(2).
Section 213.5--Renegotiations, Extensions and Assumptions
1. Coverage. Section 213.5 applies only to existing leases that
are covered by the regulation. It therefore does not apply to the
renegotiation or extension of leases with an initial term of four
months or less, because such leases are not covered by the
definition of consumer lease in Sec. 213.2(e). Whether and when a
lease is satisfied and replaced by a new lease is determined by
state or other applicable law.
5(b) Extensions.
1. Time of extension disclosures. If a consumer lease is
extended for a specified term greater than six months, new
disclosures are required at the time the extension is agreed upon.
If the lease is extended on a month-to-month basis and exceeds six
months, new disclosures are required at the commencement of the
seventh month and at the commencement of each seventh month
thereafter. If a consumer lease is extended for several terms, one
of which will exceed six months beyond the originally scheduled
termination date of the lease, new disclosures are required at the
commencement of the term that will exceed six months beyond the
originally scheduled termination date.
2. Content of disclosures for month-to-month extensions. The
disclosures for a lease extended on a month-to-month basis for more
than six months should reflect the month-to-month nature of the
transaction.
Section 213.7--Advertising
7(a) General rule.
1. Persons covered. All ``persons'' must comply with the
advertising provisions in this section, not just those that meet the
definition of a lessor in Sec. 213.2(h). Thus, automobile dealers,
merchants, and others who are not themselves lessors must comply
with the advertising provisions of the regulation if they advertise
consumer lease transactions. Pursuant to section 184(b) of the act,
however, owners and personnel of the media in which an advertisement
appears or through which it is disseminated are not subject to civil
liability for violations under section 185(b) of the act.
2. ``Usually and customarily.'' Section 213.7(a) does not
prohibit the advertising of a single item or the promotion of a new
leasing program, but prohibits the advertising of terms that are not
and will not be available. Thus, an advertisement may state terms
that will be offered for only a limited period or terms that will
become available at a future date.
7(b) Clear and conspicuous standard.
1. Standard. The disclosures in an advertisement must be
reasonably understandable. For example, very fine print in a
television advertisement or detailed and very rapidly stated
information in a radio advertisement does not meet the clear and
conspicuous standard if consumers cannot see and read or comprehend
the information required to be disclosed.
7(b)(1) Amount due at lease signing.
1. Itemization not required. The regulation requires only a
total of amounts due at lease signing or delivery, not an
itemization of its component parts. Such an itemization is provided
in any transaction-specific disclosures provided under Sec. 213.4.
2. Prominence rule. Except for a periodic payment, oral or
written references to components of the total due at lease signing
or delivery (for example, a reference to a capitalized cost
reduction, where permitted) may not be more prominent than the
disclosure of the total amount due at lease signing or delivery.
7(b)(2) Advertisement of a lease rate.
1. Location of statement. The notice required to accompany a
percentage rate stated in an advertisement must be located in close
proximity to the rate without any other intervening language or
symbols. For example, a lessor may not state a rate with an asterisk
and make the disclosure in a different location in the
advertisement. In addition, with the exception of the notice
required by Sec. 213.4(s), the rate cannot be more prominent than
any Sec. 213.4 disclosure stated in the advertisement.
7(c) Catalogs and multi-page advertisements.
1. General rule. The multiple-page advertisements referred to in
Sec. 213.7(c) are advertisements consisting of a series of numbered
pages--for example, a supplement to a newspaper. A mailing
comprising several separate flyers or pieces of promotional material
in a single envelope is not a single multiple-page advertisement.
2. Cross-references. A multiple-page advertisement is a single
advertisement (requiring only one set of lease disclosures) if it
contains a table, chart, or schedule clearly stating sufficient
information for the reader to determine the disclosures required
under Sec. 213.7(d)(2) (i) through (vi). If one of the triggering
terms listed in Sec. 213.7(d)(1) appears in a catalog or other
multiple-page advertisement, the page on which the triggering term
is used must clearly refer to the specific page where the table,
chart, or schedule begins.
7(d)(1) Triggering terms.
1. Triggering terms. When any triggering term appears in a lease
advertisement, the additional terms enumerated in Sec. 213.7(d)(2)
(i) through (vi) must also appear. An example of one or more typical
leases with a statement of all the terms applicable to each may be
used. The additional terms must be disclosed even if the triggering
term is not stated explicitly, but is readily determinable from the
advertisement.
7(d)(2) Additional terms.
1. Third-party fees that vary by state. In disclosing the total
amount due at lease signing a lessor may:
i. Exclude third-party fees, such as taxes, license, and
registration fees and disclose that fact; or
ii. Provide a total that includes third-party fees based on a
particular state as long as that fact and that fees may vary by
state are disclosed.
7(e) Alternative disclosures--merchandise tags.
1. Multiple item leases. Multiple item leases that utilize
merchandise tags requiring additional disclosures may use the
alternate disclosure rule.
7(f) Alternative disclosures--television or radio
advertisements.
7(f)(1) Toll-free number or print advertisement.
1. Publication in general circulation. A referral to a written
advertisement appearing in a newspaper circulated nationally, for
example, USA Today or the Wall Street Journal, may satisfy the
general circulation requirement in Sec. 213.7(f)(1)(ii).
2. Toll-free number, local or collect calls. In complying with
the disclosure requirements of Sec. 213.7(f)(1)(i), a lessor must
provide a toll-free number for nonlocal calls made from an area code
other than the one used in the lessor's dialing area. Alternatively,
a lessor may provide any telephone number that allows a consumer to
call for information and reverse the phone charges.
3. Multi-purpose number. When calling an advertised toll-free
number, if a consumer obtains a recording that provides several
dialing options--such as providing directions to the lessor's place
of business--the option allowing the consumer to request lease
disclosures should be provided early in the telephone message to
ensure that the option to request disclosures is not obscured by
other information.
4. Statement accompanying toll free number. Language must
accompany a telephone number indicating that disclosures are
available by calling the toll-free number, such as ``call 1-800-000-
000 for details about costs and terms.''
Section 213. 8--Record Retention
1. Manner of retaining evidence. A lessor must retain evidence
of having performed required actions and of having made required
disclosures. Such records may be retained on microfilm, microfiche,
or computer, or by any other method designed to reproduce records
accurately, as well as paper form. The lessor need retain only
enough information to reconstruct the required disclosures or other
records.
Appendix A--Model Forms.
1. Permissible changes. Although use of the model forms is not
required, lessors using them properly will be deemed to be in
compliance with the regulation. Generally, lessors may make certain
changes in the format or content of the forms and may delete any
disclosures that are inapplicable to a transaction without losing
the act's protection from liability. For example, the model form
based on monthly periodic payments may be modified for single-
[[Page 7373]]
payment lease transactions or other periodic payments. The content,
format, and headings for the segregated disclosures must be
substantially similar to those contained in the model forms;
therefore, any changes should be minimal. The changes to the model
forms should not be so extensive as to affect the substance and the
clarity of the disclosures.
2. Examples of acceptable changes.
i. Using the first person, instead of the second person, in
referring to the lessee.
ii. Using ``lessee,'' ``lessor,'' or names instead of pronouns.
iii. Rearranging the sequence of the nonsegregated disclosures.
iv. Incorporating certain state ``plain English'' requirements.
v. Deleting inapplicable disclosures by blocking out, filling in
``N/A'' (not applicable) or ``0,'' crossing out, leaving blanks,
checking a box for applicable items, or circling applicable items.
(This should permit use of multi-purpose standard forms).
vi. Adding language or symbols to indicate estimates.
vii. Adding numeric or alphabetic designations.
viii. Rearranging the disclosures into vertical columns, except
for Sec. 213.4(b) through (e) disclosures.
3. Model closed-end or net vehicle lease disclosure. Model A-2
is designed for a closed-end or net vehicle lease. Under the ``Early
Termination and Default'' provision a reference to the lessee's
right to an independent appraisal of the leased vehicle under
Sec. 213.4(l) is included for those closed-end leases in which the
lessee's liability at early termination is based on the vehicle's
estimated value.
4. Model furniture lease disclosures. Model A-3 is a closed-end
lease disclosure statement designed for a typical furniture lease.
It does not include a disclosure of the appraisal right at early
termination required under Sec. 213.4(l) because few closed-end
furniture leases base the lessee's liability at early termination on
the estimated value of the leased property. Of course, the
disclosure should be added, if it is applicable.
By order of the Board of Governors of the Federal Reserve
System, acting through the Secretary of the Board under delegated
authority, February 12, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-3955 Filed 2-13-97; 2:20 pm]
BILLING CODE 6210-01-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.