[Federal Register Volume 60, Number 182 (Wednesday, September 20, 1995)]
[Proposed Rules]
[Pages 48769-48778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23049]



=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 213

[Regulation M; Docket No. R-0893]


Consumer Leasing

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed official staff interpretation.

-----------------------------------------------------------------------

SUMMARY: The Board is publishing for comment proposed revisions to the 
official staff commentary to Regulation M which implements the Consumer 
Leasing Act. The Consumer Leasing Act requires lessors to provide 
uniform cost and other disclosures about consumer lease transactions. 
The Board is issuing this proposal to revise the commentary that 
applies and interprets the requirements of Regulation M pursuant to the 
Board's policy of periodically reviewing its regulations and official 
interpretations. A proposal to revise Regulation M is published 
elsewhere in today's issue of the Federal Register.

DATES: Comments must be received by November 17, 1995.

ADDRESSES: Comments should refer to Docket No. R-0893, and 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. Comments also may be delivered to Room B-2222 of the Eccles 
Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard 
station in the Eccles Building courtyard on 20th Street, NW (between 
Constitution Avenue and C Street) any time. Comments may be inspected 
in Room MP-500 of the Martin Building between 9 a.m. and 5 p.m. 
weekdays, except as provided in 12 CFR section 261.8 of the Board's 
rules regarding the availability of information.

FOR FURTHER INFORMATION CONTACT: Kyung Cho-Miller, Obrea O. Poindexter, 
or W. Kurt Schumacher, 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 the hearing 
impaired only, contact Dorothea Thompson, Telecommunications Device for 
the Deaf, at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. General

    The Consumer Leasing Act (CLA), 15 U.S.C. 1667-1667e, governs 
consumer leasing transactions and is implemented by the Board's 
Regulation M (12 CFR part 213). Effective May 13, 1982, an official 
staff commentary (Supplement I-CL-1 to 12 CFR part 213) was published 
to interpret the regulation. The commentary is designed to provide 
guidance to lessors in applying the regulation to specific transactions 
and is intended to be updated periodically to address significant 
questions that arise. It is anticipated that the proposed revisions to 
the Regulation M commentary will be adopted in final form in the Spring 
of 1996 with compliance optional until October 1, 1996, the uniform 
effective date for mandatory compliance.

II. The Review of Regulation M

    The Board's Regulatory Planning and Review Program calls for the 
periodic review of a regulation and its official interpretations 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 official staff 
commentary has never been

[[Page 48770]]

substantially revised or reviewed. The Board initially began a review 
of Regulation M according to the goals of its review program in 
November 1993, when it published an advance notice of proposed 
rulemaking on Regulation M (58 FR 61035, November 19, 1993). In its 
advance notice, the Board solicited comments generally on the 
provisions of Regulation M and the CLA, including coverage, exempt 
transactions, and general format and disclosure requirements. In 
addition, the Board identified specific issues about disclosures of 
early termination charges, broadcast media advertising of leases, and 
segregation of leasing disclosures from other information. Most of the 
seventy comment letters on the advanced notice addressed those issues. 
The proposed revisions to the regulation are published elsewhere in 
today's issue of the Federal Register.

III. 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

    Comments I-3, I-4, and I-6 are deleted as obsolete or unnecessary.

Section 213.1--Authority, Scope, Purpose, and Enforcement

------------------------------------------------------------------------
  Current                             Proposed                          
------------------------------------------------------------------------
1-2.......  Deleted as unnecessary.                                     
------------------------------------------------------------------------

Section 213.2--Definitions

2(a)  Definitions

------------------------------------------------------------------------
              Current                              Proposed             
------------------------------------------------------------------------
2(a)(2)-1..........................  2(a)(2)-1 and -2.                  
2(a)(2)-2..........................  2(a)(2)-3.                         
                                     2(a)(3)-1 new.                     
2(a)(4)-1..........................  2(a)(10)-1.                        
2(a)(4)-2..........................  2(a)(10)-4.                        
2(a)(4)-3..........................  2(a)(10)-2.                        
                                     2(a)(6)-3 new.                     
2(a)(6)-3 through -6...............  2(a)(6)-4 through 7.               
2(a)(7)-1..........................  2(a)(9)-1.                         
2(a)(8)-1..........................  2(a)(10)-3.                        
2(a)(9)-1..........................  2(a)(12)-1.                        
2(a)(12)-1.........................  2(a)(14)-1.                        
2(a)(14)-1 through -6..............  2(a)(15)-1 through -6.             
                                     2(a)(17)-1 incorporates list from  
                                      the regulatory definition of      
                                      security interest.                
2(a)(15)-1 through -3..............  2(a)(17)-2 through -4.             
2(a)(17)-1 through -3..............  2(a)(19)-1 through -4.             
2(a)(17)-4 and -5..................  2(a)(19)-5 and -6.                 
2(a)(18)-1 through -3..............  2(a)(20)-1 through -3.             
2(b)-1 and -2......................  Deleted.                           
------------------------------------------------------------------------

2(a)(2)  Advertisement

    Comment 2(a)(2)-1 would be revised to incorporate examples of 
advertisements, currently in Sec. 213.2(a)(2).

2(a)(3)  Agricultural Purpose

    Proposed comment 2(a)(3)-1 incorporates the portion of current 
Sec. 213.2(a)(3) and the statutory definition in section 103(s) of the 
Truth in Lending Act which describes agricultural products.

2(a)(6)   Consumer Lease

    Comment 2(a)(6)-2 would be revised to provide additional guidance 
on when a lease is deemed to exceed four months and, therefore, covered 
under the act and regulation. An example has been added to clarify that 
a month-to-month lease with a penalty for cancelling within the first 
year is deemed to be a consumer lease subject to the act and 
regulation.
    Proposed comment 2(a)(6)-3 provides guidance on the total 
contractual obligation for purposes of determining whether a lease is 
covered under the regulation, and clarifies that the total contractual 
obligation may be different from the total lease obligation which 
applies only to open-end leases.
    Comment 2(a)(6)-7, currently 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 in the existing commentary of leases 
incidental to a service 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(a)(7)  Estimated Lease Charge

    Proposed comment 2(a)(7)-1 clarifies that a monthly or other 
periodic payment paid at or before consummation is not included in the 
calculation of the estimated lease charge, as it is reflected in the 
total periodic payment disclosure. Any refundable charge such as a 
security deposit would also not be included in the calculation.

2(a)(8)  Gross Cost

    Proposed comment 2(a)(8)-1 provides guidance in making the proposed 
disclosure in Sec. 213.5(p). Amounts consisting of fees and other 
charges paid out of pocket at consummation by the lessee are included 
in the gross cost figure.

2(a)(10)  Lessor

    Proposed comment 2(a)(10)-1 incorporates the existing regulatory 
definition of ``arrange for leasing of personal property'' (in 
Sec. 213.2(a)(4) and provisions in the current commentary) into the 
proposed commentary under the definition of lessor.

Section 213.4--General Disclosure Requirements

4(a)  General requirements

------------------------------------------------------------------------
    Current                              Proposed                       
------------------------------------------------------------------------
4(a)-1.........  Revised to adopt ``legal obligation'' terminology of   
                  Regulation Z.                                         
4(a)-2.........  Moved to proposed Sec. 213.4(f) of the regulation on   
                  minor variations that may be disregarded in making    
                  disclosures.                                          
4(a)-3.........  4(a)(1)-1.                                             
4(a)-5.........  Deleted as no longer applicable.                       
4(a)(1)-1......  4(a)-2 (deleted the word ``or format''); 4(a)-3.       
4(a)(1)-2......  Deleted as no longer applicable.                       
4(a)(2)-1......  Deleted.                                               
4(a)(2)-2......  4(a)(1)-2.                                             
4(a)(2)-3......  4(a)(1)-3.                                             
4(a)(2)-4......  4(a)(1)-4.                                             
4(a)(2)-5......  4(a)(1)-5.                                             
                 4(a)(2)-1 new.                                         
4(a)(4)-1......  Deleted as unnecessary because of revised position in  
                  proposed Sec. 213.4(a)(5).                            
4(a)(4)-2......  Deleted as unnecessary because of revised position in  
                  proposed Sec. 213.4(a)(5).                            
------------------------------------------------------------------------

4(a)(2)  Segregation of Certain Disclosures

    Proposed comment 4(a)(2)-1 provides guidance in making the 
segregated disclosures required by Sec. 213.4(a)(2).

4(b)  Additional Information

    Comment 4(b)-1 would be revised by deleting the second sentence.

4(d)(2)  Open-End Purchase Option Lease

    Comment 4(d)(2)-1, currently comment 4(d)-6, would be revised to 
clarify that this paragraph only applies to open-end leases. No 
substantive change is intended. 

[[Page 48771]]


4(e)  Effect of Subsequent Occurrence

    Proposed comment 4(e)-3 incorporates the first sentence of footnote 
1 of the regulation.

Section 213.5--Content of Disclosures

    All of the comments in Sec. 213.4(g) would be redesignated 
according to a new proposed Sec. 213.5.

------------------------------------------------------------------------
              Current                              Proposed             
------------------------------------------------------------------------
4(g)-1.............................  Deleted as unnecessary.            
4(g)-2.............................  5-1.                               
4(g)(1)-1..........................  Deleted as unnecessary.            
4(g)(2)-1..........................  Deleted as unnecessary 5(b)-1 new  
                                      (incorporated from the            
                                      instructions to the model form in 
                                      the current appendix C-2).        
4(g)(2)-2..........................  5(b)-2 (incorporates current       
                                      comment 2(b)-2).                  
4(g)(2)-3..........................  5(b)-3.                            
4(g)(3)-1 and -2...................  5(c)-1 and -2.                     
4(g)(4)-1..........................  5(d)-1.                            
4(g)(5)-1..........................  5(e)-1 and -2.                     
4(g)(5)-2..........................  Deleted as unnecessary.            
4(g)(5)-3..........................  5(e)-3 and -4.                     
4(g)(5)-4..........................  5(e)-5.                            
4(g)(6)-1 and -2...................  5(f)-1 and -2.                     
                                     5(f)-3 new.                        
4(g)(7)-1 through -3...............  5(g)-1 through -3.                 
4(g)(8)-1..........................  5(h)-1.                            
4(g)(9)-1..........................  5(i)-1.                            
4(g)(10)-1 through -5..............  5(j)-1 through -5.                 
4(g)(11)-1 through -3..............  5(k)-1 through -3.                 
4(g)(12)-1 through -3..............  5(l)-1 through -3; the word        
                                      ``capitalized'' in comment 2 is   
                                      deleted.                          
                                     5(l)-4 new.                        
                                     5(l)-5 new.                        
4(g)(14)-1 through -3..............  5(n)-1 through -3.                 
4(g)(15)-1.........................  5(o)-1.                            
4(g)(15)-2.........................  5(o)(1)-1.                         
4(g)(15)-3.........................  5(o)(1)-2.                         
4(g)(15)-4.........................  5(o)-2.                            
4(g)(15)-5.........................  5(o)(2)-1.                         
4(g)(15)-6.........................  5(o)(2)-2; the word ``capitalized''
                                      is deleted.                       
                                     5(o)(2)-3 new.                     
                                     5(p)-1 new.                        
------------------------------------------------------------------------

5(b)  Total Amount Due at Lease Signing

    Proposed comment 5(b)-1 incorporates a definition of ``capitalized 
cost reduction'' from the instructions in current appendix C-1.
    Comment 5(b)-2 would incorporate the first sentence of current 
comment 2(b)-2.

5(d)  Fees and Taxes

    Comment 5(d)-1 is revised to provide guidance on taxes that should 
be disclosed pursuant to this paragraph. If the tax is payable by the 
lessor (such as a gas guzzler tax), but the tax is passed on to the 
consumer and the existence of the tax is indicated in the consumer's 
lease documents--for example on the lease agreement--or the sticker or 
tag affixed to the personal property--then the tax should be disclosed 
pursuant to this paragraph. However, if the existence of the tax is not 
indicated, and the tax is absorbed by the lessor as a cost of doing 
business, then the tax should not be disclosed under this section.

5(f)  Insurance

    Proposed comment 5(f)-3 is added to indicate that this paragraph 
applies to voluntary and required insurance provided in connection with 
a lease transaction.

5(l)  Early Termination

    Proposed comment 5(l)-4 provides guidance in disclosing a full 
description of the method used to determine the amount of an early 
termination charge. A full description of the complete early 
termination method must be disclosed by lessors outside of the 
segregated disclosures. However, given the complexity of the methods 
involved, a lessor is permitted--in giving the ``full description'' of 
its early termination method--to include a reference to the name of a 
generally accepted method of computing the unamortized gross or 
capitalized cost portion of its early termination charge. For example, 
a lessor may state that the ``constant yield'' method would be utilized 
in obtaining the unamortized portion of the gross cost, but the lessor 
would also have to specify how that figure--and any other term or 
figure--is used in computing the total early termination charge that 
would be imposed upon the consumer. A lessor referring to a named 
method in this manner must provide a written explanation of that method 
if requested by the consumer.
    Proposed comment 5(l)-5 provides guidance on what value such as the 
fair market value or the wholesale value should be used when 
calculating the required example of an early termination charge based 
on termination at the end of the first year.

5(o)  Liability at End of Lease Term Based on Estimated Value

    The proposed regulation reformats this section, currently section 
213.4(g)(15), for clarity. The commentary has been similarly 
reformatted.
    Proposed comment 5(o)(2)-3 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 this subsection, even if those actions 
are decided in favor of the lessee.

5(s)  Statement Referencing Nonsegregated Disclosures

    Proposed comment 5(s)-1 provides guidance in making the proposed 
new disclosure referencing and alerting consumers to read CLA required 
disclosures not included among the segregated disclosures. It is only 
necessary to refer to the applicable items, thus, the lessor may delete 
inapplicable items from the disclosure.

Section 213.6--Renegotiations, Extensions, and Assumptions

------------------------------------------------------------------------
   Current                             Proposed                         
------------------------------------------------------------------------
4(h)-1......  6-1.                                                      
4(h)-2......  First sentence moved to regulation; second sentence moved 
               to 6-1.                                                  
4(h)-3......  Moved to the regulation.                                  
4(h)-4......  Moved to the regulation.                                  
4(h)-5......  6(b)-1.                                                   
              6(b)-2 new.                                               
4(h)-6......  6-2.                                                      
4(h)-7......  Moved to the regulation.                                  
4(h)-8......  Moved to the regulation.                                  
4(h)-9......  Moved to the regulation.                                  
------------------------------------------------------------------------

    Section 213.6 of the proposed regulations contain the disclosure 
rules governing leases that are renegotiated, extended or assumed 
(currently in section 213.4(h) and the commentary). Many of the 
commentary provisions have been moved to the regulation. For example, 
the definitions of a renegotiation and an extension would be included 
in the regulation. (This change parallels the approach under Regulation 
Z for refinancings and assumptions, section 226.20.) Other commentary 
provisions have been reformatted to conform to the proposed regulatory 
changes.
    Comment 6(b)-1, currently comment 4(h)-5, would be revised to 
clarify that where a consumer lease is extended on a month-to-month 
basis for more than 6 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 6(b)-2 also incorporates a longstanding 
interpretation originally issued under the pre-1982 leasing provisions 
in Regulation Z that disclosures for a consumer lease, as defined by 
the 

[[Page 48772]]
regulation, extended on a month-to-month basis for more than 6 months 
should reflect the month-to-month nature of the transaction.

Section 213.8--Advertising

------------------------------------------------------------------------
              Current                              Proposed             
------------------------------------------------------------------------
5(a)-1.............................  8(a)-1.                            
5(a)-2.............................  8(a)-2.                            
5(b)-1.............................  8(c)-1.                            
5(b)-2.............................  8(c)-2.                            
5(c)-1.............................  8(b)-1.                            
                                     8(b)-2 new.                        
5(c)-2.............................  8(d)(1)-1.                         
                                     8(d)(2)-1 new.                     
5(d)-1.............................  8(e)-1.                            
                                     8(e)-2 new.                        
                                     8(f)-1 new.                        
                                     8(f)(1)-2 new.                     
------------------------------------------------------------------------

8(b)  Clear and Conspicuous Standard

    Proposed 8(b)-2 provides that lease disclosures must appear on a 
television screen for at least five seconds, which parallels the ``five 
second rule'' adopted by the Federal Trade Commission.

8(e)  Alternative Disclosures--Merchandise Tags

    Proposed comment 8(e)-2 clarifies that merchandise tags are 
generally considered a multiple item lease.

8(f)  Alternative Disclosures--Television or Radio Advertisements

8(f)(1)  Toll-Free Number or Print Advertisement

    Proposed comment 8(f)(1)-1 clarifies that a newspaper circulated 
nationally qualifies as a publication in general circulation.

Section 213.10  Relations to State Laws

    Section 213.10 in the proposed regulation combines and simplifies 
current Secs. 213.7 and 213.8. The comments to these sections have been 
deleted as unnecessary.

Appendix A  Model Forms

    Under the proposed rule, the model forms are moved to appendix A. 
Comment app. A-2 would be deleted. 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 would be added in the regulation.

IV. Form of Comment Letters

    As discussed above, comment letters should refer to Docket No. R-
0893. The Board requests that, when possible, comments be prepared 
using a standard courier type-face with a type-size of 10 or 12 
characters per inch. This will enable the Board to convert the text 
into machine-readable form through electronic scanning, and will 
facilitate automated retrieval of comments for review. Comments may 
also be submitted on 3\1/2\ inch or 5 \1/4\ inch computer diskettes in 
any IBM-compatible DOS-based format, but must be accompanied by an 
original document in paper form.

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, as 
proposed to be amended by a document published elsewhere in today's 
issue of the Federal Register, is further 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-CL-1 to Part 213--Official Staff Commentary to 
Regulation M would be revised to read as follows:

Supplement I-CL-1 to Part 213--Official Staff Commentary to Regulation 
M

Introduction

    1. Official status. This commentary is the vehicle by which the 
staff of 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). 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(a) are 
further divided by subparagraph, such as comment 4(a)(1)-1 and 
comment 4(a)(1)-2. 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 comments 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(a)(18). The regulation does not apply to a foreign branch 
of a U.S. bank or leasing company leasing to a U.S. citizen residing 
or visiting abroad or to a foreign national abroad.

Section 213.2--Definitions

2(a)  Definitions

2(a)(2)  Advertisement

    1. Coverage. Only commercial messages that promote consumer 
lease transactions requiring disclosures are advertisements. 
Messages inviting, offering, or otherwise announcing generally to 
prospective customers the availability of consumer leases, whether 
in visual, oral, or print media, are covered by the definition. The 
term includes the following:
    i. Print media.
    ii. Broadcast media, including radio and television messages.
    iii. Catalogs and fliers.
    iv. Direct mail literature.
    v. Printed material on any interior or exterior sign or display, 
in any window display, in any point-of-transaction literature or 
price tag which is delivered or made available to a lessee or 
prospective lessee in any manner whatsoever.
    vi. Telephone solicitations.
    2. Exceptions. The term does not include the following:
    i. Direct personal contacts, such as 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 
information so mandated is included in the notice.
    iv. News articles, the use of which is controlled by the news 
medium.
    v. Market research or educational materials that do not solicit 
business.
    3. Persons covered. See the commentary to Sec. 213.8(a).

2(a)(3)  Agricultural purpose

    1. Agricultural products. 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. 

[[Page 48773]]


2(a)(6)  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 some question exists as to the primary 
purpose for a lease, the lessor is, of course, free to make the 
disclosures, and the fact that disclosures are made in such 
circumstances is not controlling on the question of whether the 
transaction was exempt. The primary purpose of a lease is generally 
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 requirements of the regulation. A lease with a penalty 
for cancelling during the first four months is considered to have a 
term of more than four months. A month-to-month or week-to-week 
extension of a lease that was originally for four months or less is 
not a consumer lease, even if the extension actually lasts for more 
than four months. See the comments on Sec. 213.6(b) for guidance on 
extensions of covered leases. To illustrate:
    i. A month-to-month lease with a penalty for terminating before 
one year, such as the forfeiture of a security deposit, is a 
consumer lease covered by this definition.
    ii. A three-month lease extended on a month-to-month basis and 
terminated after one year is not a consumer lease covered by this 
definition.
    3. Total contractual obligation. The term total contractual 
obligation includes all nonrefundable amounts a lessee is 
contractually obligated to pay under a lease for the purpose of 
determining whether the lease is covered by this regulation. The 
total contractual obligation is not necessarily the same as the 
total lease obligation defined in Sec. 213.2(a)(19).
    4. Organization. A consumer lease does not include a lease made 
to an organization, such as a corporation or a government agency or 
instrumentality. A lease to an organization is outside the 
requirements of the regulation even if the property is used (by an 
employee, for example) primarily for personal, family or household 
purposes. Likewise, a lease made to an organization is not a 
consumer lease even if it is guaranteed by or subsequently assigned 
to a natural person.
    5. Credit sale. A lease that meets the definition of a credit 
sale in Regulation Z, 12 CFR 226.2(a)(16), is not a consumer lease. 
Regulation Z defines a credit sale, 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.''
    6. Safe deposit boxes. A lease of a safe deposit box is not a 
consumer lease for purposes of this regulation.
    7. Leases of personal property incidental to a service. The 
following leases of personal property are deemed incidental to a 
service and are not consumer leases subject to the requirements of 
the regulation:
    i. Home entertainment systems requiring the consumer to lease 
equipment that enables a television to receive the transmitted 
programming.
    ii. Burglar alarm systems requiring the installation of leased 
equipment that triggers a telephone call when a home is burglarized.
    iii. Propane gas service where the consumer is required to lease 
a propane tank to receive the service.

2(a)(7)  Estimated lease charge

    1. Advance periodic payment and refundable charges. A first 
monthly (or other periodic payment) paid at or before consummation 
which is included in the total periodic payment disclosure and 
refundable charges are not included in the calculation of the 
estimated lease charge.

2(a)(8)  Gross cost

    1. Fees and other charges paid at lease signing. This figure 
includes all nonrefundable fees and charges required to be paid 
before or at lease signing as well as those fees and charges which 
are capitalized over the lease term.

2(a)(9)  Lessee

    1. Guarantors. Guarantors are not lessees for purposes of the 
regulation.

2(a)(10)  Lessor

    1. Arranger of a lease. To ``arrange'' for the lease of personal 
property means to provide or offer to provide a lease which 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'' used in the 
definition of arranger in comment 2(a)(10)-1 refers to an actual 
payment corresponding to a fee or similar compensation. It does not 
refer 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 
previous Regulation Z because of its substantial involvement in the 
credit transaction.
    4. Multiple lessors. See the commentary to Sec. 213.4(c).

2(a)(12)  Organization

    1. Coverage. The term includes joint ventures and persons 
operating under a business name.

2(a)(14)  Personal property

    1. Coverage. Whether property is considered 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(a)(15)  Realized value

    1. General. Realized value is not a required disclosure. It 
refers to the value of the property at early termination or at the 
end of the lease term. 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 estimated value of the property 
and its realized value.
    2. Options. Subject to the contract and to state or other 
applicable law, the lessor may choose any of the three methods for 
calculating the realized value in determining the lessee's liability 
at the end of the lease term or at early termination. 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. Exclusions. The realized value may exclude any amount 
attributable to taxes.
    4. Disposition charges. Disposition charges may not be 
subtracted in determining the realized value. If the lessor charges 
the lessee a fee to cover the disposition expenses, the fee must be 
disclosed at consummation under Sec. 213.5(e). Disposition charges 
may be estimated in accordance with Sec. 213.4(d), and this does not 
prevent the lessor from collecting the actual disposition costs 
incurred.
    5. Offers. In determining the highest offer for disposition, the 
lessor need not consider offers that an offeror has withdrawn or is 
unable or unwilling to perform.
    6. Appraisals. 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 
Sec. 213.5(n); those provisions refer to the lessee's right to an 
independent professional appraisal.

2(a)(17)  Security interest and security

    1. Coverage. The terms include, but are 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, any 

[[Page 48774]]
lien on property arising by operation of law, and any interest in a 
lease when used to secure payment or performance of an obligation.
    2. State or other applicable law. Other than those listed, only 
interests that are security interests under state or other 
applicable law are encompassed by the definition. For example, any 
interest the lessor may have in the leased property falls within 
this definition only if it is considered a security interest under 
state or other applicable law.
    3. Disclosable interests. For purposes of the regulation, 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.
    4. Insurance. The lessor's right to insurance proceeds or 
unearned insurance premiums is not a security interest for purposes 
of this regulation.

2(a)(19)  Total lease obligation

    1. Disclosure. The total lease obligation is disclosed under 
Sec. 213.5(o)(1). It is relevant only to open-end leases.
    2. Periodic payments; disclosure distinguished. Certain items 
that may be paid periodically are not part of the lessee's total 
lease obligation. Therefore, the amount of the scheduled periodic 
payments for purposes of calculating the total lease obligation may 
be less than the amount of the periodic payments disclosed under 
Sec. 213.5(c).
    3. Periodic payments; inclusions. The total of scheduled 
periodic payments under the lease for purposes of calculating the 
total lease obligation is composed of the following items:
    i. Any portion of the periodic payments attributable to 
depreciation, cost of money, and profit.
    ii. Taxes in some cases. See the commentary to Sec. 213.5(o)(1).
    iii. The cost of mechanical breakdown protection contracts.
    4. Periodic payments; exclusions. The total of scheduled 
periodic payments under the lease for purposes of calculating the 
total lease obligation does not include the following:
    i. Any amount not paid periodically.
    ii. Any portion of periodic payments attributable to official 
fees, registration, certificate of title, or license fees.
    iii. Taxes in some cases. See the commentary to 
Sec. 213.5(o)(1).
    iv. At the lessor's option, the capitalized cost of service 
contracts and insurance premiums may be either included or excluded 
from this calculation.
    5. Initial payments. The following amounts are not included 
among the payments at consummation when calculating the total lease 
obligation:
    i. Refundable security deposits.
    ii. Official fees and charges disclosable under Sec. 213.5(d).
    iii. Other charges disclosable under Sec. 213.5(e).
    iv. The cost of a mechanical breakdown protection contract 
purchased at consummation.
    6. Estimated value. See the commentary to Sec. 213.4(d) 
regarding the use of estimates and section 183(a) of the act 
regarding the criteria for estimating the value of the leased 
property at the end of the lease term.

2(a)(20)  Value at consummation

    1. Disclosure. The value at consummation is relevant only to 
open-end leases and is disclosed and subtracted from the total lease 
obligation under Sec. 213.5(o)(1).
    2. Taxes. The value at consummation includes taxes paid by the 
lessor in connection with the acquisition of leased property and 
amortized over the lease term. See the commentary to 
Sec. 213.5(o)(1).
    3. Other amounts. The definition of the value at consummation 
explicitly permits the lessor to include a profit or markup (without 
separate itemization). The lessor may include costs of doing 
business, such as insurance that the lessor purchases on its own 
behalf. See the commentary to Sec. 213.5(f). The lessor may not 
include in this amount other items (such as maintenance or extended 
warranty insurance) that are purchased by the lessee.

Section 213.4--General Disclosure Requirements

4(a)  General requirements

    1. Basis of disclosures. The disclosures must reflect the terms 
of the legal obligation between the parties. For example:
    i. In a three-year lease with a one-year minimum term after 
which there is no penalty for termination, 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. 213.5(l), (m) and (n).
    2. Clear and conspicuous standard. The clear and conspicuous 
standard requires that disclosures be in a reasonably understandable 
form. For example, while the regulation requires no mathematical 
progression, the disclosures must be presented in a way that does 
not obscure the relationship of the terms to each other. Appendix A 
contains model forms that meet this standard, although lessors are 
not required to use the forms. In addition, although no minimum 
typesize is mandated, the disclosures must be legible, whether 
typewritten, handwritten, or printed by computer.
    3. Multipurpose disclosure forms. Lessors are not precluded from 
using a multipurpose disclosure form that enables a 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.

4(a)(1)  Form of disclosures

    1. Form of disclosures. In making disclosures lessors may cross-
reference rather than repeat items that are disclosed among the 
segregated disclosures. In addition, when a required disclosure 
consists of a total amount only, lessors need not separately itemize 
each component part of the total charge. Similarly, if a required 
disclosure must be separately itemized, a total amount is not 
required.
    2. Identification of parties. While disclosures must always be 
made clearly and conspicuously, lessors are not required to use the 
word ``lessor'' and ``lessee'' when identifying those parties.
    3. Multiple lessors and multiple lessees. In transactions 
involving multiple lessors and lessees, the disclosure statement 
must identify all the lessors and lessees; however, Sec. 213.4(c) 
permits a single lessor to make all the disclosures for a single 
lessee.
    4. Lease disclosures integrated in lease contract. Contract 
terms or disclosures that are not required by the regulation may be 
added to the disclosure statement so long as the required 
disclosures are made together and the lessor adheres to the limits 
of Sec. 213.4(b) governing the inclusion of additional information.
    5. Lessee's signature. The regulation does not require the 
lessee to sign the disclosure statement, whether disclosures are 
separately provided or are part of the lease contract.
    Nevertheless, for contract or evidentiary purposes, the lessor 
may want a lessee to sign the disclosure statement or an 
acknowledgement of receipt.

4(a)(2)  Segregation of certain disclosures

    1. Permissible related or additional information among 
segregated disclosures. The disclosures required to be segregated 
under this paragraph must contain only the information required or 
permitted to be included among the segregated disclosures (see 
Sec. 213.5 and its commentary for guidance on information required 
or permitted in the segregated disclosures.) The segregated 
disclosures in Sec. 213.4(a)(2) may be provided on a separate 
document and other CLA disclosures provided in the lease contract, 
so long as all disclosures are given at the same time.

4(b)  Additional information

    1. State law disclosures. If state law disclosures are not 
inconsistent with the act and regulation under Sec. 213.10, in 
accordance with the standard set forth in Sec. 213.4(b) for 
providing additional information, the lessor may make those 
disclosures along with the nonsegregated disclosures required under 
the regulation.

4(c)  Multiple lessors or lessees

    1. Multiple lessors. If a lease transaction involves more than 
one lessor, the lessors may choose which of them will make the 
disclosures. 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. 

[[Page 48775]]


4(d)  Use of estimates

4(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 213.5(d) 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 indeterminable increases or decreases 
over the course of the lease, the lessor may estimate its 
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 normally 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. Estimated value of leased property at termination. When the 
lessee's liability at the end of the lease term is based on the 
estimated value of the leased property (see Sec. 213.5(o)), the 
estimate must be reasonable and based on the best information 
reasonably available to the lessor. That standard permits a lessor 
to use a generally accepted trade publication listing estimated 
current or future market prices for the leased property, rather than 
investing in the most sophisticated computer equipment to determine 
the estimated value at the end of the lease term. The lessor should 
rely on other information, its experience, or reasonable belief, if 
those sources provide the best information. For example:
    i. An automobile lessor offering a three-year open-end lease 
intends to assign 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 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 that 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.
    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 either every affected disclosure or only the disclosure 
primarily affected.

4(d)(2)  Open-end purchase option lease

    1. Understating the estimated value. In non-purchase-option 
open-end leases, the lessor must not use a value lower than that 
indicated by the best information available when disclosing the 
estimated value of leased property at the end of the lease term 
under Sec. 213.5(o).

4(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. The addition of insurance or a security interest by the 
lessor because the lessee has not performed obligations contracted 
for in the lease.
    iii. An increase in official fees or taxes.
    iv. An increase in insurance premiums or coverage caused by a 
change in the law.
    v. 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. 213.6.
    3. Lessee's failure to perform. The act is not violated 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.

Section 213.5--Content of Disclosures

    1. Other required disclosures. The disclosure statement must 
include the date and identify the lessor and the lessee. See the 
commentary to Sec. 213.4(a)(1). The lessor need only be identified 
by name; an address may be provided but is not required.

5(b)  Total amount due at lease signing

    1. Capitalized cost reduction. Capitalized cost reduction is a 
payment in the nature of a downpayment which reduces the amount of 
the leased property to be amortized over the term of the lease.
    2. 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; the regulation does not make that 
determination.
    3. Fees payable upon delivery. This provision does not apply to 
fees paid at delivery, when delivery occurs after consummation. For 
example, the lessee agrees to pay registration fees, sales taxes, 
and a delivery charge in one lump sum on the date the automobile is 
delivered, sometime after consummation. None of these charges is an 
initial payment under Sec. 213.5(b) because they are paid after 
consummation of the lease. The registration fees and sales taxes are 
disclosed under Sec. 213.5(d), and the delivery charge is disclosed 
as an ``other charge'' under Sec. 213.5(e).

5(c)  Payment schedule

    1. Itemization not required. Although the model forms in 
appendix A itemize the components of the periodic payments, a lessor 
may but is not required to do so. Some of the components must be 
disclosed separately if their disclosure is required by other 
provisions of the regulation, such as official fees and lessee's 
insurance.
    2. Periodic payments. The phrase ``number, amount, and due dates 
or periods of payments'' requires the disclosure of all payments 
made periodically. The disclosed payments must include all amounts, 
such as maintenance and insurance charges, that are paid 
periodically. In addition, the lessor must disclose the total of the 
periodic payments. In an open-end lease, however, the lessor may 
disclose as the total of periodic payments the sum of the scheduled 
periodic payments referred to in Sec. 213.2(a)(19). See the 
commentary to Sec. 213.2(a)(19).

5(d)  Fees and taxes

    1. Taxes. Taxes that are included in the value at consummation 
are not disclosed pursuant to this paragraph. See the commentary to 
Sec. 213.2(a)(20). Taxes payable by the lessor that are separately 
imposed on the consumer and thus noted in the lease documentation 
must be disclosed under this paragraph. However, taxes payable by 
the lessor and absorbed as a cost of doing business are not 
disclosed under this paragraph.

5(e)  Other charges

    1. Coverage. Section 213.5(e) requires the disclosure of charges 
that are anticipated by the parties as incident to the normal 
operation of the lease agreement.
    2. Excluded charges. This section does not require disclosure of 
charges that are imposed when the lessee terminates early or fails 
to abide by the lease agreement, such as charges for:
    i. Late payment.
    ii. Default.
    iii. Early termination.
    iv. Deferral of payments.
    v. Extension of the lease.
    3. Relationship to other provisions. The other charges mentioned 
in Sec. 213.5(e) are charges that are not required to be disclosed 
under another provision of Sec. 213.5.
    4. Other charges. Examples of charges not disclosed under this 
section include:
    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 total initial 
charges under Sec. 213.5(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. 213.5(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. 213.5(f), not as an 
``other charge.'' See the commentary to Sec. 213.5(f). 

[[Page 48776]]

    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, but are not limited to, disposition and ``pick-up'' 
charges.

5(f)  Insurance

    1. Lessor's insurance. Insurance that is purchased by the lessor 
primarily for its own benefit, and that is absorbed as a business 
expense and not separately charged to the lessee, need not be 
disclosed under this section even if it provides an incidental 
benefit to the lessee.
    2. 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. 213.5(f) disclosures. The lessor may, however, disclose 
the Sec. 213.5(f) information in such cases in accordance with the 
additional information provision in Sec. 213.4(b).
    3. Voluntary Insurance. Insurance not required but provided by 
the lessor must be disclosed under this section.

5(g)  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.
    2. Warranty disclaimers. A disclaimer of warranties is not 
required by the regulation, but the lessor may give a disclaimer as 
additional information in accordance with Sec. 213.4(b).
    3. State law. Whether an express warranty or guaranty exists is 
determined by state or other law.

5(h)  Maintenance responsibilities

    1. Standards for wear and use. No disclosure is required for 
lessors that do not set standards for wear and use (such as excess 
mileage.) See the commentary to Sec. 213.5(o).

5(i)  Security interest

    1. Disclosable security interests. See Sec. 213.2(a)(17) and 
accompanying commentary to determine what security interests must be 
disclosed.

5(j)  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. 213.5(j). Collection costs or attorney fees that are not 
imposed automatically, but are contingent upon expenditure of 
amounts 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. 213.5(l). The Sec. 213.5 (j) and (l) 
disclosures may 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 lease 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 lease 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 lease charge, the 
lessor must disclose the amount of or the method of determining the 
additional charge under Sec. 213.5(j).
    4. Extension charges. Extension charges that exceed the lease 
charge in a simple-interest accounting lease or that are added 
separately are disclosed under Sec. 213.5(j).
    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.

5(k)  Purchase option

    1. Mandatory disclosure of no purchase option. Although 
generally the lessor need only make the specific required 
disclosures that apply to a transaction, it must 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. 213.5(k) if the lessor 
is not required to accept the lessee's bid and the lessee does not 
receive preferential treatment.
    3. Purchase option fees. A purchase option fee must be disclosed 
under this paragraph unless the lessor discloses the fee under 
Sec. 213.5(e) as an ``other charge.''

5(l)  Early termination

    1. Default. When default is also a condition for early 
termination of a lease, default charges must be disclosed under this 
paragraph. See the commentary to Sec. 213.5(j).
    2. 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 
this paragraph.
    3. Reasonableness of charges. See the commentary to 
Sec. 213.5(j).
    4. Description of the method. A full description of the method 
of determining any early termination charge is required by the act 
and this regulation. Lessors should attempt to provide clear and 
understandable descriptions to consumers of their early termination 
charges. Descriptions that are full, accurate, and not intended to 
be misleading are in compliance with the act and this regulation, 
even if complex. (And, of course, the statute requires that the 
early termination charges themselves be reasonable.) 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 (also known as the ``adjusted lease balance'') portion of its 
early termination charges. For example, a lessor may state that the 
``constant yield'' method would be utilized in obtaining the 
adjusted lease balance, but the lessor would have to 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 would have to provide a written explanation of that 
method if requested by the consumer.
    5. Example. The figure used to calculate the early termination 
example must be calculated in the same manner the residual value is 
calculated for purposes of Sec. 213.5(r). Therefore, if a lessor 
uses the fair market value to estimate the value of the property at 
the end of the lease, the example must also be calculated using the 
fair market value.

5(n)  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 estimated 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 
in Sec. 213.5(o) of the regulation, and the lessor still must 
disclose the lessee's independent right to an appraisal under 
Sec. 213.5(n).
    3. Time restriction on appraisal. Neither the act nor the 
regulation specifies any 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. The regulation does not define what is a ``reasonable 
time.''

5(o)  Liability at end of lease term based on estimated value

    1. Coverage. The disclosure under Sec. 213.5(o) 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 Sec. 213.5(o) disclosures governing the liability 
limitation are not applicable for the minimum term. See the 
commentary to Sec. 213.4(a).

5(o)(1)  Value at consummation and total lease obligation

    1. Total lease obligation. The requirement that the total lease 
obligation be itemized is satisfied by disclosing the three 
components 

[[Page 48777]]
in the definition of total lease obligation in Sec. 213.2(a)(19) with 
their corresponding amounts. The lessor may cross-reference the 
individual components disclosed in the segregated disclosures, as 
done in the model forms in appendix A-1.
    2. Taxes. Taxes included in the value at consummation are 
included in the total lease obligation. Taxes not included in the 
value at consummation may, but need not, be included in the total 
lease obligation at the lessor's option. See the commentary to 
Sec. 213.2(a)(20).

5(o)(2)  Excess liability

    1. Average payment allocable to a monthly period. The phrase 
``average payment allocable to a monthly period'' is based on the 
periodic payment used to compute the total lease obligation. See the 
commentary to Sec. 213.2(a)(19).
    2. Charges not subject to rebuttable presumption. The limitation 
on liability applies only to liability that is based on the 
estimated value of the property at the end of the lease term. The 
lessor also may recover additional charges from the lessee at the 
end of the lease term. Examples of such additional charges include:
    i. Disposition charges.
    ii. Excess mileage charges.
    iii. Late payment and default charges.
    iv. Amounts by which the unamortized cost exceeds the estimated 
residual value that have accrued in simple interest accounting 
leases because the lessee has made late payments.
    3. 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 this paragraph, whether 
successful or not.

5(p)  Gross cost

    1. Basis. The gross cost is the amount that the periodic and 
other payments and terms of the lease are based upon, and is 
intended to be used by consumers to compare a lease with similar 
lease and non-lease transactions.

5(s)  Statement referencing nonsegregated disclosures

    1. Content. A lessor may delete inapplicable items, for example, 
when the contract documents contain no information regarding a 
purchase option.

Section 213.6--Renegotiations, Extensions and Assumptions

    1. Coverage. Section 213.6 applies only to existing leases that 
are covered by the requirements of 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(a)(6). 
Whether and when a lease is satisfied and replaced by a new lease is 
determined by state or other applicable law.
    2. Inapplicable disclosures. Disclosures that are inapplicable 
to the terms of a renegotiation or extension need not be given. For 
example:
    i. If the term for which extension disclosures are given is one 
month and the lessee will pay no official fees and taxes during that 
month, no disclosure of those amounts is necessary.
    ii. If a renegotiation involves no initial charges, no 
disclosure of initial charges is necessary.

6(b)  Extensions

    1. Time of extension disclosures. If a consumer lease is 
extended for a specified term greater than six months, at the time 
the extension is agreed to, new disclosures are required. 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 6 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 213.8--Advertising

8(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 lessor in Sec. 213.2(a)(10). 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(c) of the act, 
the owner and personnel of the medium in which an advertisement 
appears or through which it is disseminated, however, are not 
subject to civil liability for violations under section 185(b) of 
the act.
    2. ``Usually and customarily.'' This paragraph does not prohibit 
the advertising of a single item or the promotion of new leasing 
programs, 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.

8(b)  Clear and conspicuous standard

    1. Standard. Section 213.8 prescribes no specific rules for the 
format of the necessary disclosures. The terms need not be printed 
in a certain type size and need not appear in any particular place 
in the advertisement.
    2. Television advertisements. In lease television 
advertisements, the lease disclosures required under paragraph 8(d) 
or the alternate disclosures under paragraph 8(f)(1) must be visible 
for at least five seconds to satisfy the requirements of this 
paragraph.

8(c)  Catalogs and multi-page advertisements

    1. General rule. The multiple-page advertisements referred to in 
this paragraph are advertisements consisting of a numbered series of 
pages--for example, a supplement to a newspaper. A mailing comprised 
of 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. 213.8(d)(2) (i) through (vi). If one of the triggering 
terms listed in Sec. 213.8(d)(1) appears on another page of the 
catalog or other multiple-page advertisement, that page must clearly 
refer to the specific page where the table, chart, or schedule 
begins.

8(d)(1)  Triggering terms

    1. Triggering terms. When triggering terms appear in lease 
advertisements, the additional terms enumerated in Sec. 213.8(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. For example, if an advertisement states a five-year 
lease term with monthly payments, the number of required payments--a 
triggering term--is readily apparent.

8(d)(2)  Additional terms

    1. Lease transaction. An advertisement must clearly and 
conspicuously disclose that the transaction is a lease.

8(e)  Alternative disclosures--merchandise tags

    1. Alternative disclosure rule. This section provides a method 
for using merchandise tags without including all the required 
disclosures on the tags. As an alternative to this disclosure 
method, a merchandise tag may state all the necessary terms on one 
or both sides of the tag. If the terms are on both sides of the tag, 
both sides must be accessible to the consumer.
    2. Multiple item leases. Multiple item leases which utilize 
merchandise tags requiring additional disclosures may use the 
alternate disclosure rule.

8(f)  Alternative disclosures--television or radio advertisements

8(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, The Wall Street Journal, meets the general circulation 
requirement in Sec. 213.8(f)(1)(ii).
    2. Toll-free number, local or collect calls. In complying with 
the disclosure requirement of this paragraph, generally 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.

Section 213.9--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, 
computer, or by any 

[[Page 48778]]
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. The content, format, and headings 
for the segregated disclosures must be substantially similar to 
those contained in the model forms, therefore, any changes in the 
segregated disclosures should be minimal. 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. The changes to 
the model forms may not be so extensive as to affect the substance 
and the clarity of the forms.
    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 whiting out, 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.
    3. Model closed-end or net vehicle lease disclosure. Model A-2 
is designed for a closed-end or net lease of a vehicle. Item 9(c) is 
included for those closed-end leases in which the lessee's liability 
at early termination is based on the vehicle's estimated value. (See 
section 213.5(n))
    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 that is required under Sec. 213.5(n) 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.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-23049 Filed 9-19-95; 8:45 am]
BILLING CODE 6210-01-P