Consumer Leasing
Federal RegisterApr 4, 1997
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FEDERAL RESERVE SYSTEM
12 CFR Part 213
[Regulation M; Docket No. R-0961]
Consumer Leasing
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff interpretation.
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SUMMARY: The Board is publishing revisions to the official staff
commentary to Regulation M, which
[[Page 16054]]
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. The revisions to the
commentary provide guidance on the final rule issued in September 1996,
as amended in April 1997.
DATES: This rule is effective April 1, 1997. Compliance is optional
until October 1, 1997.
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 Diane
Jenkins, 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 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 revises the advertising rules and implements
amendments to the CLA contained in the Riegle Community Development and
Regulatory Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160);
those amendments allow 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). The CLA's
advertising rules were further amended and streamlined on September 30,
1996, by 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). A final rule has
been issued with a mandatory compliance date of October 1, 1997.
The Board published an updated proposal to the commentary in
February 1997 (62 FR 7361, February 19, 1997). Comment letters were
received from representatives of the major lease trade associations,
state agencies, consumer representatives, and the Federal Trade
Commission, among others. The final revisions to the commentary include
guidance on material that was published for comment in September 1995,
incorporate guidance on the September 1996 final rule, and address
certain questions raised following public review of the final rule,
incorporating many suggestions made by the commenters.
II. Discussion of Final Revisions
The following discussion covers the revisions to the Regulation M
commentary section-by-section. Comments that have been revised for
further clarity, without substantive change, are not discussed. Most of
the discussion focuses on new comments and significant revisions to
existing comments.
Introduction
Comments I-3 and I-6 are deleted as obsolete or unnecessary.
Comments I-1, I-2, I-4, and I-5 are redesignated accordingly.
Section 213.1--Authority, Scope, Purpose, and Enforcement
------------------------------------------------------------------------
Former New
------------------------------------------------------------------------
1-1....................................... 1-1.
1-2....................................... Deleted as unnecessary (see
appendix C).
------------------------------------------------------------------------
Comment 1-1 is revised to clarify persons covered by the
regulation.
Section 213.2--Definitions
2(a) Definitions
------------------------------------------------------------------------
Former New
------------------------------------------------------------------------
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(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................................ 2(m)-1.
2(a)(14)-2................................ 2(m)-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.................................... 3(a)(3)-1.
------------------------------------------------------------------------
2(b) Advertisement
Comment 2(b)-1, former comment 2(a)(2)-1, is revised to include
examples
[[Page 16055]]
of advertisements formerly in Sec. 213.2(a)(2) and to indicate that the
term ``advertisement'' includes electronic messages.
2(d) Closed-End Lease
Comment 2(d)-1 provides general guidance on the definition of a
``closed-end lease.''
2(e) Consumer Lease
Comment 2(e)-2, former comment 2(a)(6)-2, is revised to clarify
that leases with penalties for not continuing beyond an initial four
months are covered under the regulation. Comment 2(e)-3 provides
guidance on the total contractual obligation for purposes of
determining whether a lease is covered under the regulation. 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,
former comment 2(a)(6)-6, includes an additional example of a lease
deemed incidental to a service, and thus not covered by the regulation.
2(f) Gross Capitalized Cost
Proposed comment 2(f)-1 has been deleted as unnecessary.
2(h) Lessor
Comment 2(h)-1, former comment 2(a)(4)-1, is 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)-1 has been revised for accuracy to add a reference to
the adjusted lease balance.
Based on comment, comment 2(m)-2 has been revised to add fair
market value to the second sentence so as not to exclude the use of
this method of determining the realized value, if appropriate, where
the leased property is sold.
Comment 2(m)-3 provides guidance for determining the realized
value, combining former comments 2(a)(14)-3 and -4. Based on comment,
to more closely track the language of the former comments, the comment
has been revised from the proposal. The second and third sentences of
former comment 2(a)(14)-4 are deleted as unnecessary.
2(o) Security Interest and Security
Comment 2(o)-2, former comment 2(a)(15)-2, is revised to include
examples of a security interest formerly in Sec. 213.2(a)(15).
Questions have arisen about whether interest that accrues on a
security deposit is a security interest for purposes of this regulation
and thus required to be disclosed under Sec. 213.4(r). Under Regulation
M, whether or not a security deposit is a security interest under state
or other applicable law, a deposit disclosed under Sec. 213.4(b) is not
disclosed under Sec. 213.4(r). Interest on a security deposit, however,
is disclosable under Sec. 213.4(r) if it is considered a security
interest under state or other applicable law.
Section 213.3--General Disclosure Requirements
3(a) General Requirements
------------------------------------------------------------------------
Former New
------------------------------------------------------------------------
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, former comment 4(a)-1, is revised to clarify that
leasing disclosures must reflect the terms of the legal obligation.
Comment 3(a)-4, former comment 4(a)-4, is revised to provide
guidance on disclosing a prior lease or credit balance added to a lease
transaction. Commenters also asked the Board to clarify that where a
prior lease or credit balance is rolled into a lease and the
transaction is disclosed as a single lease, Regulation M disclosures
(not Regulation Z) are required. Based on comment and further analysis,
language has been added to indicate that Regulation M disclosures are
required where a lease transaction includes incidental services or when
a prior lease or credit balance is part of a single lease transaction.
Accordingly, the illustrations have been revised.
3(a)(1) Form of Disclosures
Comment 3(a)(1)-3, which provides guidance on disclosing the
lessor's address, is adopted substantially as proposed. Some commenters
expressed concern that requiring the disclosure of the lessor's name
only would not adequately identify the lessor. A lessor may add an
address or other information such as a telephone number to the
identification.
Comment 3(a)(1)-5, former comment 4(a)(2)-5, is revised to provide
guidance on ways in which lessors may demonstrate compliance with the
requirement that lessees receive disclosures prior to becoming
obligated on the lease transaction.
3(a)(2) Segregation of Certain Disclosures
Comment 3(a)(2)-1 provides general guidance on the location of the
segregated disclosures referenced in Sec. 213.3(a)(2). Comment 3(a)(2)-
2 restates the general rule on including additional information among
the segregated disclosures referenced in Sec. 213.3(a)(2). 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, former comment 4(b)-1, on state law disclosures is
revised to add clarifying language; the second sentence has been
deleted as unnecessary.
3(d) Use of Estimates
Comment 3(d)(1)-4, former comment 4(d)-4, is revised to provide
that in disclosing the estimate of the value of leased property at
termination of an open-end lease, a lessor must indicate whether the
retail or wholesale value is used. This provision was previously
contained in Regulation M in the instructions to the model forms. In
addition, the reference to ``intention'' has been deleted as not
helpful.
3(e) Effect of Subsequent Occurrence
Comment 3(e)-3 incorporates the first sentence of footnote 1 of the
former regulation.
Section 213.4--Content of Disclosures
------------------------------------------------------------------------
Former New
------------------------------------------------------------------------
4(a)-1 new.
[[Page 16056]]
4(g)-1.................................... Deleted as unnecessary.
4(g)-2.................................... 3(a)(1)-2 and -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 (cross references
former comment 2(b)-2).
4(g)(2)-3................................. Deleted.
4(b)-2 new (incorporated
from the instructions to
the model form in former
appendix C-2).
4(b)-3 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................................. deleted.
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)(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(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)-4.
4(g)(12)-2................................ 4(g)(1)-5.
4(g)(12)-3................................ 4(g)(1)-1.
4(g)(1)-2 new.
4(g)(1)-3 new.
4(j)-1 new.
4(g)(14)-1 and -2......................... 4(l)-1 and -2.
4(l)-3 new.
4(g)(14)-3................................ 4(l)-4.
4(m)-1 and -2 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(n)-1 new.
4(s)-1 new.
------------------------------------------------------------------------
4(a) Description of Property
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 or Delivery
A number of commenters, including consumer and leasing
representatives, urged the Board to amend the transaction disclosures
to require amounts due at delivery, if delivery occurs after
consummation, to be included in the amount due at lease signing
disclosure. The Economic Growth and Regulatory Paperwork Reduction Act
of 1996 revised the advertising disclosure of the total amount due at
lease signing to add amounts due at delivery, if delivery occurs after
consummation. The regulation has been revised accordingly to parallel
the changes that the Congress made to the advertising disclosure.
Comment 4(b)-2 incorporates a definition of ``capitalized cost
reduction'' from the instructions in former appendix C-1 of the
regulation. Comment 4(b)-3 provides guidance on the disclosure of
negative net trade-in allowances where the amount owed on a prior
credit or lease balance exceeds an agreed-upon trade-in value. Comment
4(b)-4 clarifies that a rebate is included in the itemization under
this section only when it is used to reduce an amount due at lease
signing or delivery. Comment 4(b)-5 clarifies that where the balance
sheet method is required, in motor-vehicle leases, the totals in each
column must equal one another.
4(c) Payment Schedule and Total Amount of Periodic Payments
Comment 4(c)-1 provides guidance in disclosing periodic payments.
Commenters asked for guidance on whether all periodic payments required
to be paid under a lease, for example an annually assessed tax, must be
disclosed under Sec. 213.4(c). To facilitate compliance, only payments
made at regular intervals and generally derived from capitalized and
amortized amounts, rent, and amounts that are collected by the lessor
at the same interval(s) must be disclosed under Sec. 213.4(c). Based on
comment and further analysis, the comment has been revised to clarify
what payments should be included in the payment schedule and total
amount of periodic payments.
4(d) Other Charges
Comment 4(d)-1, former comment 4(g)(5)-1, is revised to provide
flexibility in making the ``other charges'' disclosure. Comment 4(d)-3
clarifies that third-party charges are not disclosed under
Sec. 213.4(d). Comment 4(d)-6 provides guidance on the disclosure of
optional ``disposition'' fees.
4(e) Total of Payments
Comment 4(e)-1 explains the additional statement in the total of
payments disclosure for open-end leases.
4(f) Payment Calculation
Comment 4(f)-1 clarifies that lessors should look to state or other
applicable law in determining whether the leased property is a motor
vehicle.
4(f)(1) Gross Capitalized Cost
Comment 4(f)(1)-1 provides guidance on disclosing the agreed-upon
value of a leased motor vehicle.
Comment 4(f)(1)-2 addresses the itemization of the gross
capitalized cost. A few commenters suggested that lessors that provide
an itemization as a matter of course be allowed to include the
itemization among the segregated disclosures. Given that some
itemizations may be lengthy, an itemization may not be included in the
segregated disclosures so as not to distract from other information.
4(f)(2) Capitalized Cost Reduction
Comment 4(f)(2)-1 provides guidance on the amounts not included in
the capitalized cost reduction disclosure.
4(f)(8) Lease Term
Comment 4(f)(8)-1 clarifies the meaning of the phrase ``lease
term'' referenced under Sec. 213.4(f)(8).
4(g) Early Termination
Comment 4(g)(1)-2 provides guidance on disclosing the method used
to determine the amount of an early termination charge. Comment
4(g)(1)-3 provides guidance on the timing for disclosing a written
explanation of the method used to calculate the adjusted lease balance.
4(h) Maintenance Responsibilities
Comment 4(h)-1 has been revised for clarity, based on comment.
Proposed comment 4(h)-2, regarding the disclosure of excess mileage
charges, is deleted as unnecessary.
4(i) Purchase Option
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,
former comment 4(g)(11)-3, are revised to allow lessors flexibility in
disclosing fees associated with a purchase-option
[[Page 16057]]
price. Further, with the September 1996 final rule regarding 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).
Comment 4(i)-5 provides guidance on disclosing the price of a
purchase option in a ``fair market value'' lease. Based on comment, the
comment has been revised to indicate that the independent source must
be readily available.
4(j) Statement Referencing Nonsegregated Disclosures
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, former comment 4(g)(14)-2, is revised to provide
that a lessor must indicate whether an appraisal will 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 Sec. 213.4(m), former Sec. 213.4(g)(15),
for clarity. The commentary has been similarly reformatted.
Comment 4(m)-2 clarifies that under section 183(a) of the CLA
lessors must pay the lessees' attorney's fees.
4(n) Fees and Taxes
Comment 4(n)-1 provides guidance on the treatment of certain taxes,
including taxes disclosed under Sec. 213.4(n) and elsewhere.
4(o) Insurance
Comment 4(o)-1 clarifies that Sec. 213.4(o) applies to voluntary
and required insurance provided in connection with a lease transaction.
Comment 4(o)-3, former comment 4(g)(6)-2, is revised to provide
additional guidance on the disclosure of mechanical breakdown
protection and, based on comments, other products, (such as guaranteed
automobile protection) as insurance under Sec. 213.4(o).
4(p) Warranties or Guarantees
Comment 4(p)-1, former comment 4(g)(7)-1, is revised to provide
further guidance on identifying warranties under Sec. 213.4(p) when a
lessor provides a list that includes warranties not available to the
lessee.
4(s) Limitation on Rate Information
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.
------------------------------------------------------------------------
Former New
------------------------------------------------------------------------
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, former comment 4(h)-5, is revised to clarify the
circumstances in which disclosures are required when a consumer lease
is extended on a month-to-month basis for more than six months. This
comment and comment 5(b)-2 incorporate into the commentary longstanding
Board interpretations that were originally issued when leasing
provisions were contained in Regulation Z (Truth in Lending) prior to
1982.
Section 213.7--Advertising
------------------------------------------------------------------------
Former New
------------------------------------------------------------------------
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.
7(b)(1)-1 and -2 new.
7(b)(2)-1 new.
5(c)-2.................................... 7(d)(1)-1.
7(d)(2)-1 new.
5(d)-1.................................... 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.
7(b) Clear and Conspicuous Standard
Comment 7(b)-1 provides guidance on the clear and conspicuous
standard. A comment in the September 1995 proposal provided that lease
disclosures must appear on a television screen for at least five
seconds. The comment was not meant to provide a safe harbor, as five
seconds is inadequate as a test for determining full compliance with
the clear and conspicuous standard. The comment has been deleted.
7(b)(1) Amount Due at Lease Signing or Delivery
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(d)(2).
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
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)(1) Triggering Terms
Comment 7(d)(1)-1, former comment 5(c)-2, is revised to provide
guidance for disclosing examples of a typical lease. The last sentence
of the proposed comment has been deleted as unnecessary.
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 disclosure of the total amount due at lease
signing or delivery under Sec. 213.7(d)(2)(ii). Comment 7(d)(2)-1
clarifies that lessors have flexibility in disclosing such fees.
7(e) Alternative Disclosures--Merchandise Tags
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
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. Comment 7(f)(1)-2 provides guidance on
establishing a number for consumers to call for
[[Page 16058]]
disclosure information. Comment 7(f)(1)-3 provides guidance on the use
of a multi-function toll-free number to provide disclosures. 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
------------------------------------------------------------------------
Former New
------------------------------------------------------------------------
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.
Comment 9-1 has been added to include the states that are exempt
from Regulation M--Maine and Oklahoma.
Appendix A Model Forms
------------------------------------------------------------------------
Former New
------------------------------------------------------------------------
C-1....................................... A-1, A-2.
C-2....................................... Deleted.
C-3....................................... A-3; closed-end definition
moved to Sec. 213.2(d)
C-4....................................... A-4.
------------------------------------------------------------------------
Under the final rule, the model forms are moved from appendix C to
appendix A. Former comment app. C-2 is deleted as unnecessary. Minor
revisions are made to other comments in this appendix. For example,
comment app. A-1, former comment C-1, is 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. C-3 is deleted because a definition has been
added in the regulation.
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
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 is revised to read as follows:
SUPPLEMENT I TO PART 213--OFFICIAL STAFF COMMENTARY TO REGULATION M
Introduction
1. Official status. The commentary in 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. 1640(f)). 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-4. An appendix
may be cited as comment app. A-1.
4. Illustrations. Lists that appear in the commentary may be
exhaustive or illustrative; the appropriate construction should be
clear from the context. Illustrative lists are introduced by phrases
such as ``including,'' ``such as,'' ``to illustrate,'' and ``for
example.''
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 of any
state (including foreign nationals) 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. On-line messages, such as those 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 is covered.
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 the primary use.
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 requirements of the regulation. However, a lease that
imposes a penalty for not continuing the lease beyond four months is
considered to have a term of more than four months. To illustrate:
i. A three-month lease extended on a month-to-month basis and
terminated after one year is not subject to the regulation.
ii. 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.
[[Page 16059]]
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, but excludes items such as:
i. Residual value amounts or purchase-option prices;
ii. Amounts collected by the lessor but paid to a third party,
such as taxes, licenses, 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 or other entity. 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 and in
some cases to provide fire protection.
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(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 for execution to the leasing company (to whom the
obligation is payable on its face) is ``arranging'' for the lease.
ii. An automobile dealer who, without receiving a 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 where the assignee has substantial
involvement in the lease transaction. See cf. Ford Motor Credit Co.
v. Cenance, 452 U.S. 155 (1981) (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.
2(m) Realized Value
1. General. Realized value refers to either the retail or
wholesale value of the leased property at early termination or at
the end of the lease term. It is not a required disclosure. Realized
value is relevant only to leases in which the lessee's liability at
early termination or at the end of the lease term typically is based
on the difference between the residual value (or the adjusted lease
balance) 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 the
determination about liability, the price received for the property
(or the fair market value) is the realized value. If the lessor does
not sell the property prior to making that determination, the
highest offer or the fair market value is the realized value.
3. Determination of realized value. Disposition charges are not
subtracted in determining the realized value but amounts
attributable to taxes may be subtracted.
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, disclosures are 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.
[[Page 16060]]
3. Multipurpose disclosure forms. A lessor may use a
multipurpose disclosure form provided the lessor is able 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: as a single lease transaction (in which case Regulation M, not
Regulation Z, disclosures are required) or as a lease transaction
and a credit transaction.
iii. When a lessor includes an outstanding lease or credit
balance in a lease transaction, the lessor may disclose the
outstanding balance as part of a single lease transaction (in which
case Regulation M, not Regulation Z, disclosures are required) or as
a lease transaction and a credit transaction.
3(a)(1) Form of Disclosures
1. Cross-references. Lessors may include in the nonsegregated
disclosures a cross-reference to items in the segregated disclosures
rather than repeat those items. A lessor may include in the
segregated disclosures numeric or alphabetic designations as cross-
references to related information so long as such references do not
obscure or detract from the segregated disclosures.
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 must be identified by name; an
address (and telephone number) may be provided.
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 provide evidence that disclosures are given before a lessee
becomes obligated on the lease transaction, the lessor may, for
example, 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 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. Alternatively,
all disclosures may be provided in a separate document or in the
lease contract.
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.
3. Substantially similar. See commentary to appendix A of this
part.
3(a)(3) Timing of Disclosures
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.
3(b) Additional Information; Nonsegregated Disclosures
1. State law disclosures. A lessor may include in the
nonsegregated disclosures any state law disclosures that are not
inconsistent with the act and regulation under Sec. 213.9 as long
as, in accordance with the standard set forth in Sec. 213.3(b) for
additional information, the state law disclosures are not used or
placed to mislead or confuse or detract from any disclosure required
by the regulation.
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, after making a
reasonable effort to obtain information, 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. 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. In an open-
end lease where 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 should generally use an
accepted trade publication listing estimated current or future
market prices for the leased property unless other information or a
reasonable belief based on its experience provides 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.
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 if the lessor
reasonably believes based on its experience that the values are
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 of an open-end lease provided the choice is
consistent with the lessor's general practice 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
[[Page 16061]]
included among the segregated disclosures, a lessor may choose to
place the description directly above the segregated disclosures.
4(b) Amount Due at Lease Signing or Delivery
1. Consummation. See commentary to Sec. 213.3(a)(3).
2. Capitalized cost reduction. A capitalized cost reduction is a
payment in the nature of a downpayment on the leased property that
reduces the amount 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 or delivery.
3. ``Negative'' equity trade-in allowance. If an amount owed on
a prior lease or credit balance exceeds the agreed upon value of a
trade-in, 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 or not applicable, or may leave a blank line.
4. Rebates. Only rebates applied toward an amount due at lease
signing or delivery are required to be disclosed under
Sec. 213.4(b).
5. Balance sheet approach. In motor-vehicle leases, the total
for the column labeled ``total amount due at lease signing or
delivery'' must equal the total for the column labeled ``how the
amount due at lease signing or delivery will be paid.''
6. Amounts to be paid in cash. The term cash is intended to
include payments by check or other payment methods in addition to
currency; however, a lessor may add a line item under the column
``how the amount due at lease signing or delivery will be paid'' for
non-currency payments such as credit cards.
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
that are made at regular intervals and generally derived from rent,
capitalized or amortized amounts such as depreciation, and other
amounts that are collected by the lessor at the same interval(s),
including for example taxes, maintenance, and insurance charges.
Other periodic payments may, but need not, be disclosed under
Sec. 213.4(c).
4(d) Other charges
1. Coverage. Section 213.4(d) requires the disclosure of charges
that are anticipated by the parties 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 some other provision of Sec. 213.4. To illustrate:
i. The price of a mechanical breakdown protection (MBP) contract
is sometimes disclosed as an ``other charge.'' Nevertheless, the
price of MBP is sometimes reflected in the periodic payment
disclosure under Sec. 213.4(c) or in states where MBP is regarded as
insurance, the cost is be disclosed in accordance with
Sec. 213.4(o).
5. Lessee's liabilities at the end of the lease term.
Liabilities that the lessor imposes upon the lessee at the end of
the scheduled lease term and that must be disclosed under
Sec. 213.4(d) include disposition and ``pick-up'' charges.
6. Optional ``disposition'' charges. Disposition 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 return of the leased property to a location outside the
lessor's service area as a default, the fee imposed 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. The additional statement is required under
Sec. 213.4(e) for open-end leases because, with some limitations, a
lessee is liable at the end of the lease term 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 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, licenses, and registration that are capitalized. Charges for
service or maintenance contracts, insurance products, guaranteed
automobile protection, or an outstanding balance on a prior lease or
credit transaction 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 only
on request or may provide the itemization as a matter of course. In
the latter case, the lessor need not provide a statement of the
lessee's option to receive an itemization. The gross capitalized
cost must be itemized by type and amount. The lessor may include in
the itemization an identification of the items and amounts of some
or all of the items contained in the agreed upon value of the
vehicle. The itemization must be provided at the same time as the
other disclosures required by Sec. 213.4, but it may not be included
among the segregated disclosures.
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. Section 213.4(g)(1) requires a
full description of the method of determining an early termination
charge. The lessor should attempt to provide consumers with clear
and understandable descriptions of its early termination charges.
Descriptions that are full, accurate, and not intended to be
misleading will comply with Sec. 213.4(g)(1), even if the
descriptions are 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. Timing of written explanation of a named method. While a
lessor may provide an address or telephone number for the consumer
to request a written explanation of the named method used to
calculate the adjusted leased balance, if at consummation a consumer
requests such an explanation, the lessor must provide a written
explanation at that time. If a consumer requests an explanation
after consummation, the lessor must provide a written explanation
within a reasonable time after the request is made.
4. Default. When default is 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).
5. 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 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 set
[[Page 16062]]
standards or impose charges for wear and use (such as excess
mileage).
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 a purchase option disclosure,
however, a lessor must disclose affirmatively that the lessee has no
option to purchase the leased property if the purchase option is
inapplicable.
2. Existence of purchase option. Whether a purchase option
exists under the lease 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 is 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. 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)
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 indicating that the purchase-option price does not include
fees for tags, taxes, and registration.
5. Purchase-option price. Lessors must disclose the purchase-
option price as a sum certain or as a sum certain to be determined
at a future date by reference to a readily available 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, the reference to a security interest may be
omitted.
4(l) Right of appraisal
1. Disclosure inapplicable. The lessee does not have the right
to an independent appraisal merely because the lessee is liable at
the end of the lease term or at early termination for unreasonable
wear or use. Thus, the disclosure under Sec. 213.4(l) does not
apply. For example:
i. The automobile lessor might expect a lessee to return an
undented car with four good tires at the end of the lease term. Even
though it may hold the lessee liable for the difference between a
dented car with bald tires and the value of a car in reasonably good
repair, the disclosure under Sec. 213.4(l) is not required.
2. Lessor's appraisal. If the lessor obtains an appraisal of the
leased property to determine its realized value, that appraisal does
not suffice for purposes of section 183(c) of the act; the lessor
must disclose the lessee's right to an independent appraisal under
Sec. 213.4(l).
3. Retail or wholesale. In providing the disclosures in
Sec. 213.4(l), a lessor must indicate whether the wholesale or
retail appraisal value will be used.
4. 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 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 (such as official fees and voluntary
insurance) are not included in the Sec. 213.4(m)(1) disclosure.
4(m)(2) Excess liability
1. Coverage. The disclosure limiting the lessee's liability for
the value of the leased property does not apply in the case of 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.
3. Charges not subject to rebuttable presumption. The limitation on
liability applies only to liability at the end of the lease term that
is based on the difference between the residual value of the leased
property and its realized value. 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. In simple-interest accounting leases, amount by which the
unamortized cost exceeds the residual value because the lessee has
not made timely payments.
4(n) Fees and taxes
1. Treatment of certain taxes. Taxes paid in connection with the
lease are generally disclosed under Sec. 213.4(n), but there are
exceptions. To illustrate:
i. Taxes paid by lease signing or delivery are disclosed under
Sec. 213.4(b) and Sec. 213.4(n).
ii. Taxes that are part of a regularly scheduled payments are
reflected in the disclosure under Sec. 213.4(c) and itemized under
Sec. 213.4(f)(10).
iii. A tax payable by the lessor that is passed on to the
consumer and is reflected in the lease documentation must be
disclosed under Sec. 213.4(n). A tax payable by the lessor and
absorbed as a cost of doing business need not be disclosed.
iv. Taxes charged in connection with the exercise of a purchase
option are disclosed under Sec. 213.4(i), not Sec. 213.4(n).
4(o) Insurance
1. Coverage. If insurance is obtained through the lessor,
information on the type and amount of insurance coverage (whether
voluntary or required) as well as the cost, must be disclosed.
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 and other products. Whether
products purchased in conjunction with a lease, such as mechanical
breakdown protection (MBP) or guaranteed automobile protection
(GAP), should be treated as insurance is determined by state or
other applicable law. In states that do not treat MBP or GAP as
insurance, Sec. 213.4(o) disclosures are not required. In such cases
the lessor may, however, disclose this 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, by indicating that 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
that may not all apply, to comply with Sec. 213.4(p) the lessor must
indicate which 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
[[Page 16063]]
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, but need not, be combined. Examples of combined
disclosures are provided in the model lease disclosure forms in
appendix A.
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. But 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, 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 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 the
cumulative extensions exceed six months, new disclosures are
required at the commencement of the seventh month and at the
commencement of each seventh month thereafter for as long as the
extensions continue. If a consumer lease is extended for terms of
varying durations, 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 in any media
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 hear, and
cannot comprehend, the information required to be disclosed.
7(b)(1) Amount due at Lease Signing or Delivery
1. Itemization not required. Only a total of amounts due at
lease signing or delivery is required to be disclosed, 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 placed in close
proximity to the rate without any other intervening language or
symbols. For example, a lessor may not place an asterisk next to the
rate and place the notice elsewhere 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.
12. 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 with the disclosures required
under Sec. 213.7(d)(2) (i) through (v). 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. Typical example. When any triggering term appears in a lease
advertisement, the additional terms enumerated in Sec. 213.7(d)(2)
(i) through (v) must also appear. In a multi-lease advertisement, an
example of one or more typical leases with a statement of all the
terms applicable to each may be used. The examples must be labeled
as such and must reflect representative lease terms that are made
available by the lessor to consumers.
7(d)(2) Additional Terms
1. Third-party fees that vary by state or locality. The
disclosure of the total amount due at lease signing or delivery may:
i. Exclude third-party fees, such as taxes, licenses, and
registration fees and disclose that fact; or
ii. Provide a total that includes third-party fees based on a
particular state or locality as long as that fact and the fact that
fees may vary by state or locality 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 reference 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
[[Page 16064]]
telephone number that allows a consumer to reverse the phone charges
when calling for information.
3. Multi-purpose number. When an advertised toll-free number
responds with a recording, lease disclosures must be provided early
in the sequence to ensure that the consumer receives the required
disclosures. For example, in providing 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 and television number indicating that
disclosures are available by calling the toll-free number, such as
``call 1-800-000-0000 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 in paper form, on
microfilm, microfiche, or computer, or by any other method designed
to reproduce records accurately. The lessor need retain only enough
information to reconstruct the required disclosures or other
records.
Section 213.9--Relation to State Laws
1. Exemptions granted. Effective October 1, 1982, the Board
granted the following exemptions from portions of the Consumer
Leasing Act:
i. Maine. Lease transactions subject to the Maine Consumer
Credit Code and its implementing regulations are exempt from
chapters 2, 4, and 5 of the federal act. (The exemption does not
apply to transactions in which a federally chartered institution is
a lessor.)
ii. Oklahoma. Lease transactions subject to the Oklahoma
Consumer Credit Code are exempt from chapters 2 and 5 of the federal
act. (The exemption does not apply to sections 132 through 135 of
the federal act, nor does it apply to transactions in which a
federally chartered institution is a lessor.)
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-
payment lease transactions or for quarterly 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 facilitate 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.
ix. Using icons and other graphics.
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
realized 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 realized value of the leased property. 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, March 31, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-8574 Filed 4-3-97; 8:45 am]
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.