[Federal Register Volume 61, Number 195 (Monday, October 7, 1996)]
[Rules and Regulations]
[Pages 52246-52281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25273]


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

FEDERAL RESERVE SYSTEM

12 CFR Part 213

[Regulation M; Docket No. R-0892]


Consumer Leasing

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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

SUMMARY: The Board is publishing a final rule to amend Regulation M, 
which implements the Consumer Leasing Act. The Act requires lessors to 
provide uniform cost and other disclosures about consumer lease 
transactions. The Board has reviewed Regulation M, pursuant to its 
policy of periodically reviewing its regulations, and has revised the 
regulation to carry out more effectively the purposes of the Act. The 
final rule adds disclosures, primarily in connection with motor vehicle 
leasing, including, for example, disclosures about early termination 
charges and how scheduled payments are derived (which requires 
disclosure of such items as the gross capitalized cost of a lease, the 
vehicle's residual value, the rent charge, and depreciation). General 
changes in the format of the disclosures require that certain leasing 
disclosures be segregated from other information. Revisions to the 
advertising provisions implement a statutory amendment, allowing a 
toll-free number to substitute for certain disclosures in radio and 
television advertisements, and make other changes to the advertising 
rules. 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. Further, a rate 
in an advertisement cannot be more prominent than any other Regulation 
M disclosure.

DATES: Effective date. October 31, 1996. Compliance date. Compliance is 
optional until October 1, 1997.

FOR FURTHER INFORMATION CONTACT: Kyung H. 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 matters concerning the Regulatory Flexibility Analysis, in appendix 
I, contact Thomas A. Durkin, Office of the Secretary, Board of 
Governors of the Federal Reserve System, Washington, DC 20551, at (202) 
452-2326. Users of Telecommunications Device for the Deaf only may 
contact Dorothea Thompson, at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background on the Consumer Leasing Act and Regulation M

    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 Board was given rulewriting authority, and its 
Regulation M (12 CFR Part 213) implements the CLA. An official staff 
commentary interprets the regulation. (Supplement I to 12 CFR 213).
    The CLA 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. Leases accounted for about 
one-third of all passenger car deliveries to consumers in 1995. Leasing 
in the luxury-car market is estimated to account for more than 70 
percent for some models. Used cars are also now being leased, although 
to date they account for a relatively small segment of the market.
    Under the statute, prior to entering into a lease agreement, 
lessors must give consumers 15 to 20 disclosures, including the amount 
of initial, end-of-lease, and other charges to be paid by the consumer 
(such as security deposits, insurance premiums, disposition fees, and 
taxes); an identification of the leased property; a payment schedule; 
the responsibilities for maintaining the leased property; and the 
liability for terminating a lease early. Special provisions apply to 
open-end leases. These provisions regulate balloon payments by limiting 
liability at the end of a lease term to no more than three times the 
monthly payment, and also require several disclosures unique to open-
end leases (in Secs. 213.4 (k) and (m)).
    Open-end leases are a very small segment of the consumer leasing 
market. In open-end leases, the consumer's liability at the end of the 
lease term is based on the difference between the residual value of the 
leased property and its realized value. The consumer--not the lessor--
assumes the risk that the realized value may be less than what was 
initially estimated. Closed-end leases are the most common type of 
lease covered under the CLA and Regulation M. These leases are 
sometimes referred to as ``walk-away'' leases because the consumer is 
not liable for the difference between the residual and the realized 
values at the end of the lease term.

[[Page 52247]]

II. The Review of Regulation M

    The Board's Regulatory Planning and Review Program calls for the 
periodic review of a regulation 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.
    Advance Notice of Proposed Rulemaking. The Board began its review 
of Regulation M--the first substantial review of the regulation since 
it was issued in 1976--by publishing an advance notice of proposed 
rulemaking on November 19, 1993 (58 FR 61035). Although comment was 
solicited generally on all provisions of the regulation, the Board 
specifically sought comment on three issues: disclosure of early 
termination charges, broadcast media advertising of leases, and 
segregation of leasing disclosures from other information. Most of the 
70 comment letters that were received commented only on the three 
issues addressed in the advance notice. The comment letters were 
received mostly from automobile lessors or their representatives, but 
also from federal and state government agencies and from consumer 
representatives. Most of the commenters supported revisions to the 
disclosures about early termination charges either to better alert 
consumers about such charges or to address concerns about lender 
liability associated with providing extremely complex disclosures about 
these charges. Some commenters supported more flexibility in the 
advertising rules, while others expressed concern about the manner in 
which leases are advertised. Many supported segregation of leasing 
disclosures from other information. In addition, many commenters urged 
the Board to mandate the disclosure of the ``capitalized cost'' of a 
lease, meaning the value of the leased vehicle and other items that are 
capitalized by agreement between the lessor and lessee.
    The Proposed Rule to Revise Regulation M. The Board published a 
proposed rule to substantially revise Regulation M on September 20, 
1995 (60 FR 48752) and an extension of comment period notice was 
published on December 6, 1995 (60 FR 62349). The proposal offered a new 
disclosure format for model forms and some substantive changes to the 
regulation. New disclosures were proposed pursuant to the Board's 
authority under Sec. 105(a) of the TILA. Section 105(a) of the TILA 
provides that the Board's regulations ``may contain such 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for any class of transactions, as 
in the judgment of the Board are necessary or proper to effectuate the 
purposes of [the CLA], to prevent circumvention or evasion thereof, or 
to facilitate compliance therewith.''
    The proposal contained the following proposed amendments to 
Regulation M:
    Segregation of certain leasing disclosures. (Leasing disclosures 
were dispersed throughout a leasing contract.) Additionally, a 
statement would remind consumers to read their contracts for other 
important consumer leasing disclosures not included in the segregated 
disclosures.
    Revision of the disclosure of upfront fees to make it easier for a 
consumer to understand the amounts to be paid and how they are 
allocated, including the amount of any trade-in allowance.
    Disclosure of the ``gross cost'' (the agreed upon acquisition value 
of leased property) and the ``residual value'' (the estimated value at 
the end of the lease term).
    Disclosure of an ``estimated lease charge,'' a figure similar in 
purpose to the finance charge in a credit transaction.
    Disclosures about early termination charges--including a 
transaction-specific example of such a charge at an assumed termination 
point after one year--and about charges for excessive wear of leased 
property.
    Changes to the advertising rules to implement a statutory 
amendment, simplify disclosure requirements, and deter misleading 
advertising.
    About 150 comment letters were received on the Board's proposed 
rule, from consumer representatives involved in leasing issues and a 
large segment of the consumer leasing industry. A majority of the 
commenters generally supported the requirement that certain disclosures 
be segregated from the remaining disclosures and other information. 
Major industry representatives expressed concern, however, about the 
overall disclosure format and offered an alternative that presented 
some disclosures in a mathematical progression. Commenters generally 
supported additional disclosures but many of them suggested 
modifications to the Board's proposed definition of the estimated lease 
charge and the gross cost. While many commenters favored an early 
termination warning about charges for terminating a lease early, a 
large majority of them opposed the requirement of a transaction-
specific numerical example for early termination.
    To get direct feedback from individual consumers, in January 1996 
the Board conducted four focus groups, two in the Washington, D.C. area 
and two in Los Angeles, California. Participants gave their opinions on 
various disclosure formats, including the Board's proposed model form, 
an alternative form showing a mathematical progression of how periodic 
payments are derived, and a format in which a few disclosures would be 
highlighted in boxes. There were a total of 32 participants (evenly 
representing men and women), about a quarter of whom had previously 
leased automobiles.
    While focus group participants had some concerns about the layout 
and language in the disclosure statements presented, they responded 
more favorably to the mathematical progression format than to the 
Board's proposal. Some participants liked the payment calculation 
disclosure because it ``walked you through the process.'' Many of them 
were generally familiar with the highlighting of certain disclosures in 
credit transactions. For lease transactions, they expressed an interest 
in seeing the value of the car, the total due at lease signing, and the 
monthly payments highlighted.
    The Final Rule Amending Regulation M. The final rule includes most 
of the disclosures to supplement the act that were contained in the 
proposed rule. The major changes primarily affect motor vehicle 
leasing. They include a mathematical progression on how the periodic 
payment is derived (using figures such as the gross capitalized cost, 
residual value, amount of depreciation and amortized amounts) and a 
warning statement about charges for terminating a lease early. Certain 
leasing disclosures must be segregated from other information.
    The final rule contains revisions to the advertising provisions, 
including the implementation of a statutory amendment. The statute 
allows a toll-free number or a print advertisement to substitute for 
certain lease disclosures in radio commercials, and the final rule 
expands the application of this provision to television.
    The Board had expressly solicited comment in the proposal about 
whether the regulation should require the disclosure of a lease rate. 
Under the final rule, a lessor is not required to disclose the cost of 
a lease expressed as a percentage rate. If a rate is disclosed or 
advertised, a notice must accompany the rate stating that the 
percentage may not measure the overall cost of financing the lease 
transaction. Also, in the case

[[Page 52248]]

of advertising, a rate cannot be more prominent than any other 
Regulation M disclosure.
    Other changes have been made to clarify and update the regulation. 
Obsolete provisions have been deleted, and generally footnotes have 
been moved to the regulatory text or to the Official Staff Commentary 
to Regulation M.
    The final rule contains the following major amendments to 
Regulation M:
    A revised disclosure format.
    A total of payments disclosure.
    An itemization that shows the mathematical progression used to 
derive the periodic payment.
    A strong narrative warning about the possibility of substantial 
charges for early termination.
    A notice to accompany any percentage rate (to indicate the 
limitations of rate information).
    Implementation of a statutory amendment for certain broadcast 
advertisements and other changes to the advertising rules.
    Official Staff Commentary. When the Board published the proposed 
revisions to Regulation M for public comment, it also published 
proposed revisions to the Official Staff Commentary on September 20, 
1995 (60 FR 48769). The Board will publish an updated proposal to the 
commentary in mid-November 1996. The proposal will include material 
that was published for comment in September 1995, incorporate guidance 
contained in the section-by-section discussion that accompanies this 
final rule, and address other questions that may be brought to the 
Board's attention following the public's review of the final rule.

III. Recommendations for Legislative Changes

    In addition to seeking comment on the proposed regulatory changes, 
the Board's September 1995 notice solicited views on whether specific 
legislative revisions to the CLA may also be warranted. A few 
commenters suggested that CLA coverage be expanded to cover leases that 
exceed the current $25,000 cap, given the higher cost of automobiles.

IV. Effective Date

    This final rule is effective October 31, 1996, but compliance is 
optional until October 1, 1997. The mandatory effective date is 
designated by section 105(d) of the act, which states that any 
regulation promulgated by the Board is effective October 1 of a given 
year, provided the rule was published at least six months in advance.

V. Section-by-Section Discussion of the Final Rule

    The following discussion covers the revisions section-by-section. 
Changes that are self-evident, and text that has been simplified or 
clarified without substantive change, are generally not discussed. 
Captions have been added to each paragraph, to conform with current 
Board style; the addition or wording of captions alone is not meant as 
a substantive change in the meaning of the paragraph itself.

Section 213.1  Authority, Scope, Purpose, and Enforcement

    Former paragraph 1(d) on the issuance of staff interpretations has 
been moved to appendix C.
1(b) Scope and Purpose
    An introductory sentence has been added to state the scope of the 
law. This paragraph has been revised to more closely parallel the 
purpose clauses in Sec. 102 of the TILA.

Section 213.2  Definitions

    Certain definitions are redesignated or added as indicated below. 
Former section 213.2(b)--the rules of construction--has been deleted 
except that former paragraph 2(b)(1) has been moved to paragraph 
2(e)(1) of this section. Former Sec. 213.3--exempt transactions--has 
been moved to paragraph 2(e)(3) of this section.

------------------------------------------------------------------------
                Definition                           Final rule         
------------------------------------------------------------------------
``Act'' in former 213.2(a)(1).............  213.2(a).                   
``Advertisement'' in former 213.2(a)(2)...  213.2(b); examples moved to 
                                             commentary.                
``Agricultural purpose'' in former          Moved to commentary.        
 213.2(a)(3).                                                           
``Arrange for lease of personal             Moved to commentary.        
 property''. in former 213.2(a)(4).                                     
``Board'' in former 213.2(a)(5)...........  213.2(c).                   
``Closed-end lease''......................  213.2(d) new.               
``Consumer lease'' in former 213.2(a)(6)..  213.2(e).                   
``Gross capitalized cost''................  213.2(f) new.               
``Lessee'' in former 213.2(a)(7)..........  213.2(g).                   
``Lessor'' in former 213.2(a)(8)..........  213.2(h).                   
``Open-end lease''........................  213.2(i) new.               
``Organization'' in former 213.2(a)(9)....  213.2(j).                   
``Period'' in former 213.2(a)(10).........  Deleted as unnecessary.     
``Person'' in former 213.2(a)(11).........  213.2(k).                   
``Personal property'' in former             213.2(l).                   
 213.2(a)(12).                                                          
``Real property'' in former 213.2(a)(13)..  Deleted as unnecessary.     
``Realized value'' in former 213.2(a)(14).  213.2(m).                   
``Residual value''........................  213.2(n) new.               
``Security interest'' in former             213.2(o); examples of       
 213.2(a)(15).                               security interests moved to
                                             the commentary.            
``State'' in former 213.2(a)(16)..........  213.2(p).                   
``Total lease obligation'' in former        Deleted as unnecessary; open-
 213.2(a)(17).                               end and closed-end         
                                             terminology conformed.     
``Value at consummation'' in former         Deleted as unnecessary; open-
 213.2(a)(18).                               end and closed-end         
                                             terminology conformed.     
------------------------------------------------------------------------

2(b) Advertisement.
    The definition of advertisement is simplified and the examples have 
been moved to the commentary. The definition of advertisement is broad, 
covering commercial messages in any medium, including electronic media 
such as the Internet, that directly or indirectly promote a lease 
transaction.
2(d) Closed-end lease.
    A definition of a closed-end lease has been added, modeled after 
the definition of closed-end credit in Regulation Z (12 CFR 
Sec. 226.2(a)(10)). The term covers any lease that does not fall within 
the definition of an open-end lease. Commenters generally favored 
having definitions of open- and closed-end leases.
2(e) Consumer lease.
    The paragraph has been reorganized. The rule of construction in 
former Sec. 213.2(b)(1) has been moved to paragraph (e)(1). 
Transactions not included in the definition of consumer lease are now 
in paragraph (e)(2). Former section Sec. 213.3 on exempt transactions 
is now paragraph (e)(3). The term contractual obligation excludes 
refundable and ``pass-through'' amounts a lessee is obligated to pay. 
For example, the total contractual obligation does not include license 
and registration fees and taxes. It also does not include the residual 
value.
2(f) Gross capitalized cost.
    A definition of gross capitalized cost has been added to this 
section. Only items capitalized or amortized by the lessor are included 
in this figure. The Board's proposal had contained a broader definition 
using the term gross cost. Commenters favored a narrower definition. 
Definitions of the related terms capitalized cost reduction and

[[Page 52249]]

adjusted capitalized cost have also been added to this section. The 
supplementary information to Sec. 213.4(f)(1) provides a discussion of 
these terms and further discussion about the gross capitalized cost, 
including the disclosure of the agreed upon value.
2(h) Lessor.
    The definition of lessor incorporates a numerical test similar to 
the test in Regulation Z for defining a creditor (see footnote 3 to 12 
CFR 226.2(a)(17)). Commenters generally supported the revision. The 
phrase ``in the ordinary course of business'' has been omitted as 
unnecessary.
2(i) Open-end lease.
    A definition of an open-end lease has been added. Disclosures in 
Secs. 213.4(k) and (m) and Sec. 213.7(d)(2)(vi) are only relevant to 
open-end leases.
2(n) Residual value.
    A definition of residual value has been added. Many commenters 
urged the Board to clarify that the residual value is the lessor's 
assigned value of the vehicle used to calculate the lessee's monthly 
payments, and not necessarily a projection of the value of the car. 
Several lessors noted that often a value is assigned to accommodate 
promotional campaigns of a manufacturer. The final rule has a revised 
definition in accordance with these comments.

Section 213.3  General disclosure requirements.

    The following sections are redesignated or added as indicated 
below:

------------------------------------------------------------------------
                  Former                             Final rule         
------------------------------------------------------------------------
213.4(a)(1)...............................  213.3(a)(1).                
213.4(a)(2)...............................  213.3(a)(1); 3(a)(3).       
                                            213.3(a)(2) new.            
213.4(a)(3)...............................  213.3(a)(1).                
213.4(a)(4)...............................  213.3(a)(4).                
213.4(b)..................................  213.3(b).                   
213.4(c)..................................  213.3(c).                   
213.4(d)..................................  213.3(d).                   
213.4(e)..................................  213.3(e).                   
213.4(f)..................................  213.3(f).                   
------------------------------------------------------------------------

    Paragraph 3(a) contains general rules about the disclosures 
required under Sec. 213.4, including the form, content, and timing of 
disclosures. Paragraph 3(f) on minor variations includes former comment 
4(a)-2. The major revision to this section, discussed under paragraph 
3(a)(2), is the requirement to segregate certain disclosures from other 
information. Clear and conspicuous lease disclosures must be given 
prior to consummation of a lease on a dated written statement that 
identifies the lessor and lessee.
3(a) General requirements.
    Based on comments and to provide a standard consistent with that of 
other consumer regulations, the Board has added language requiring that 
disclosures be given in a form the consumer may keep.
3(a)(1) Form of disclosures.
    Former Secs. 213.4(a)(1) and 4(a)(2) required that all disclosures 
be made together on a separate statement or in the lease contract 
``above the place for the lessee's signature.'' The Board has deleted 
this requirement along with the meaningful sequence, same-page, and 
type-size disclosure requirements, replacing them with the requirement 
that disclosures be segregated. Most commenters generally supported the 
proposed segregation requirement, although some commenters opposed the 
deletion of the other requirements. They believed that the signature 
requirement ensured that lessors would give disclosures before the 
consumer becomes obligated on the lease and discouraged lessors from 
putting important information on the back of a lease document. The 
Board believes that a segregation requirement and the clear and 
conspicuous standard provide the same level of protection as the 
previous rules.
    The segregated disclosures and other CLA disclosures must be given 
to a consumer at the same time. Lessors must continue to ensure that 
the disclosures are given to lessees before the lessee becomes 
obligated on the lease transaction. For example, by placing disclosures 
that are included in the lease documents above the lessee's signature, 
or by including instructions alerting a lessee to read the disclosures 
prior to signing the lease.
    Nonsegregated disclosures need not all be on the same page, but 
should be presented in a way that does not obscure the relationship of 
the terms to each other.
3(a)(2) Segregation of certain disclosures.
    Most commenters--representing both the industry and consumer 
groups--generally supported some form of segregation of leasing 
disclosures. Many commenters believed that consumers would be more 
likely to read and understand the disclosures if key items were 
segregated from other disclosures and contract terms. Pursuant to its 
authority under section 105(a) of the TILA, the Board has adopted the 
requirement that certain consumer leasing disclosures be segregated 
from other required disclosures and from general contract terms to 
assure clear, conspicuous, and meaningful disclosure of lease terms.
    Some commenters, including trade groups that represent a large 
portion of the motor vehicle leasing industry, suggested that the more 
important disclosures be further highlighted in a manner similar to the 
Board's Regulation Z. The Board believes that the segregation 
requirement and the requirement that disclosures be in a form 
substantially similar to the applicable model form in appendix A 
adequately focuses the consumer's attention on key information.
    Lessors may provide the segregated disclosures on a separate 
document or may include them in their lease contracts, apart from other 
information. The general content, format, and headings for these 
disclosures should be substantially similar to those contained in the 
model forms in appendix A. Lessors may continue to provide the 
remaining disclosures required by Regulation M and the CLA in a 
nonsegregated format.
    The model forms in Appendix A for open-end leases, closed-end 
leases, and furniture leases have been revised.
3(a)(4) Language of disclosures.
    Under former Sec. 213.4(a)(4), lease disclosures had to be provided 
in English, except in the Commonwealth of Puerto Rico, where they could 
be given in Spanish. The final rule revises this position. Lessors are 
permitted to give disclosures in another language as long as 
disclosures in English are given upon request. The Board believes that 
a more permissive rule promotes a more meaningful delivery of 
disclosures to consumers.
3(b) Additional information; nonsegregated disclosures.
    Former Sec. 213.4(b) permitted additional information to be 
included with any disclosures required by the regulation. The Board 
proposed to permit additional information only with the nonsegregated 
disclosures. Some commenters believed that the Board should permit the 
inclusion of state-required disclosures among the federally-required 
segregated disclosures. The Board believes that the purpose of 
segregating disclosures could be diluted if additional information is 
permitted among them. The final rule permits additional information 
only with the nonsegregated CLA leasing disclosures.
    Former Secs. 213.4(b)(1) and 4(b)(2) on inconsistent disclosures 
have been

[[Page 52250]]

deleted. Pursuant to Sec. 186(a) of the CLA, Sec. 213.9 addresses the 
preemption of state law if information required by state law is 
inconsistent with the requirements of the act or regulation.
3(c) Multiple lessors or lessees.
    Paragraph 3(c) provides that when a transaction involves multiple 
lessors, one lessor may make the disclosures on behalf of all of them. 
The phrase ``and the one that discloses shall be the one chosen by the 
lessors'' has been deleted as unnecessary. No substantive change is 
intended.
3(d) Use of estimates.
    Former Sec. 213.4(d) on the use of estimated disclosures has been 
redesignated and simplified as paragraph 3(d). The last sentence of the 
former paragraph has been deleted as unnecessary.
3(e) Effect of subsequent occurrence.
    The rule in paragraph 3(e), previously stated in former 
Sec. 213.4(e), has been revised to add a reference to consummation, to 
clarify that this rule is limited to events occurring after 
consummation of a lease. Footnote 1 of the former regulation, 
containing a specific example of a subsequent occurrence, has been 
moved to the commentary except for the second sentence, which has been 
deleted as unnecessary.
3(f) Minor variations.
    Paragraph 3(f) incorporates into the regulation the rules on minor 
variations that may be disregarded in making disclosures, including 
provisions formerly contained in comment 4(a)-2 of the staff 
commentary.

Section 213.4  Content of disclosures.

    Although the regulation applies to leases of all types of personal 
property such as furniture, much of the focus of the Board's review 
under the Regulatory Planning and Review Program has been on motor 
vehicle leasing. Because the regulatory issues have arisen in this 
context, the final rule limits some of the new disclosure, formatting, 
and advertising requirements to leases for motor vehicles. This section 
has been reorganized essentially to follow the progression of 
disclosures in the model forms as follows:

------------------------------------------------------------------------
                  Former                             Final rule         
------------------------------------------------------------------------
213.4(g)(1)...............................  213.4(a).                   
213.4(g)(2)...............................  213.4(b).                   
213.4(g)(3)...............................  213.4(c).                   
213.4(g)(4)...............................  213.4(n).                   
213.4(g)(5)...............................  213.4(d).                   
213.4(g)(6)...............................  213.4(o).                   
213.4(g)(7)...............................  213.4(p).                   
213.4(g)(8)...............................  213.4(h); 4(h)(3) new.      
213.4(g)(9)...............................  213.4(r).                   
213.4(g)(10)..............................  213.4(q).                   
213.4(g)(11)..............................  213.4(i).                   
213.4(g)(12)..............................  213.4(g); 4(g)(2) new.      
213.4(g)(13)..............................  213.4(k).                   
213.4(g)(14)..............................  213.4(l).                   
213.4(g)(15)..............................  213.4(m).                   
                                            213.4(e) new.               
                                            213.4(f) new.               
                                            213.4(j) new.               
                                            213.4(s) new.               
------------------------------------------------------------------------

4(b) Amount due at lease signing.
    Paragraph 4(b) requires lessors to disclose to consumers the total 
amount of any payment due at lease signing (consummation of the lease). 
The Board has adopted several revisions to this paragraph. The revised 
language provides that the total amount of payments due at lease 
signing must be itemized by amount as well as by type and included 
among the segregated disclosures under the heading ``amount due at 
lease signing.'' Previously, the lessor was required to itemize these 
charges by type but not by amount. Also, to enhance consumer 
understanding of the transaction, the lessor is required to itemize by 
type and amount ``how the amount due at lease signing will be paid,'' 
which typically includes any net trade-in allowance, rebate, noncash 
credits, and payments in cash. (See the model forms in appendix A for 
format.) The Board believes that the standardization of terminology and 
the full itemization of the amounts due and means of payment provide 
consumer benefit without imposing substantial compliance costs on 
lessors.
    Commenters supported the proposal in substance. Most of the 
commenters supporting the proposal believed that the proposed side-by-
side format would discourage unscrupulous lessors from failing to 
credit a lessee's downpayment or trade-in. Some industry 
representatives offered an alternative format using only one column to 
present the disclosure, in place of the ``balance sheet'' approach. 
Upon further analysis, the Board believes that the balance sheet 
approach, in which the two columns equal one another, is appropriate to 
ensure that the amounts of trade-ins, rebates, and cash payments are 
used to reduce the total amount due at lease signing.
    Some commenters asked whether a rebate that is subtracted from the 
value of the vehicle in arriving at the gross capitalized cost needs to 
be disclosed and itemized under this paragraph. They also inquired 
about ``negative trade-ins.'' A rebate would be included in the 
itemization under this section only when it is applied against the 
amount due at lease signing. Also, where the amount owed on a prior 
loan or lease exceeds an agreed-upon trade-in value, the difference is 
reflected in the gross capitalized cost, and no trade in allowance 
would be reflected under the column ``how the amount due at lease 
signing is paid.''
4(d) Other Charges
    In addition to the periodic payment, the regulation requires 
disclosure of a total of other charges and an itemization by type and 
amount, payable during and at the end of the lease term. The model 
forms include examples of such fees--for example, an annual tax and a 
disposition fee at the end of the lease term.
4(e) Total of payments
    The Board adopted this disclosure to serve as a tool for comparing 
leases that involve the same or similar types of leased properties for 
the same lease duration. As the disclosure includes all payments the 
consumer is obligated to make under the lease, it is not meant to 
reflect the cost of financing the lease transaction.
    This disclosure, accompanied by the statement ``the amount you will 
have paid by the end of the lease,'' is the net sum of the amount due 
at lease signing (excluding refundable amounts such as the security 
deposit), the total of periodic payments (excluding the first periodic 
payment, if paid at lease signing), and other charges are not part of 
the periodic payments (such as a disposition fee). An additional 
disclosure is required for open-end leases because, with some 
limitations, consumers are liable for the difference between the 
residual and realized values of the leased property.
4(f) Payment calculation
    Many commenters on the Board's proposed rule expressed concern that 
the revised format of the Board's model disclosure form did not present 
information in a manner that would allow consumers to understand the 
relationship of lease terms such as the ``gross cost'' and the 
``residual value'' of a lease. Representatives of major automobile 
leasing companies offered an alternative format, one that shows how the 
periodic payments are derived. They said that such a disclosure scheme 
would result in better consumer understanding of a lease transaction 
and would enable consumers to verify their periodic payment. These 
commenters

[[Page 52251]]

also noted that the disclosure would impose little additional 
compliance burden as lessors make this calculation in setting up a 
lease transaction.
    The Board believes that a mathematical progression itemizing the 
components of the periodic payment is valuable to consumers. It enables 
consumers to see several of the newly required disclosures in the 
context of the calculation, thereby enhancing the consumer's 
understanding of the particular disclosures. Also, it allows consumers 
to verify their periodic payment amount.
    The CLA does not call for a payment calculation, but based on the 
comments and on further analysis, the Board is exercising its 
rulemaking authority under Sec. 105(a) of the TILA to require the 
disclosure of the amounts comprising the periodic payment, in motor 
vehicle leases, in a manner substantially similar to the model leasing 
forms in appendix A. The payment calculation utilizes several 
disclosures from the proposal; it requires the modification of others 
that were proposed, and adds new ones, as discussed below.
4(f)(1) Gross capitalized cost
    In the past, federal law has not required disclosure of information 
on the base price of the leased property in closed-end leases. Because 
this figure has not typically been given, consumers often have assumed 
that the lease is based on the manufacturer's suggested retail price 
(MSRP), or on a sales price negotiated by the consumer (who might have 
initially contemplated financing or paying cash for the vehicle). If 
the lessor uses a different starting price in the lease payment 
computation, one that is higher than either the MSRP or the negotiated 
figure, the consumer would be unaware of that fact, and thus would not 
be aware that perhaps the periodic payment could be lower.
    The Board's proposal would have required disclosure of the ``gross 
cost'' among the segregated disclosures. This disclosure would have 
been applicable only to closed-end leases, given that the regulation 
already required the disclosure of a comparable term--the ``value at 
consummation (the initial value)''--in open-end leases. Under the 
proposal, the Board would have defined the gross cost as ``the total 
dollar amount of all items included in the value of a lease at 
consummation.''
    A large majority of the commenters supported the disclosure of the 
base price of the leased property in closed-end leases, in one form or 
another. However, many of the industry commenters strongly objected to 
using the term ``gross cost'' and objected also to the items that would 
be included in the definition. Most of these commenters recommended 
that the term be changed from ``gross cost'' to either ``gross 
capitalized cost'' or ``capitalized cost'' to conform with state law 
(as several states now require the disclosure of this figure) and also 
to conform with industry practice. Trade associations that represent a 
large segment of the industry have encouraged their members to 
voluntarily disclose the ``capitalized cost,'' and some lessors have 
been doing so. Industry commenters suggested that the term 
``capitalized cost'' has gained a certain amount of acceptance from 
consumers. Finally, both leasing representatives and consumer interest 
groups believed that the disclosed figure should reflect only the 
amounts that are capitalized by the lessor (such as the price of the 
leased property on which the lease is based); and, in particular, 
believed that it should not include amounts that are paid at lease 
signing by the consumer.
    In response to the comments and upon further analysis, the Board 
has modified the final rule to require the disclosure of the ``gross 
capitalized cost,'' using that term, in both closed-end and open-end 
motor vehicle leases. Only items capitalized or amortized by the lessor 
are to be included. The gross capitalized cost is readily available to 
lessors from worksheets they use in setting the terms and conditions of 
the lease, and hence the Board believes that this disclosure 
requirement will not be unduly burdensome for lessors.
    Some commenters representing consumer interests asked that the 
capitalized cost figure be itemized to give the consumer a clear 
picture of the base price of the leased automobile and other amounts 
being financed, such as an outstanding balance from a prior loan or 
lease. They suggested that without a breakdown, consumers could easily 
misunderstand what is included or excluded from the capitalized cost 
disclosure. A few industry commenters believed that disclosing an 
itemization would be burdensome for lessors; they also believed an 
itemization would have to be quite detailed to provide adequate 
guidance to lessees concerning the treatment of specific costs.
    The final rule requires a disclosure of the gross capitalized cost 
with a description such as ``the agreed upon value of the vehicle 
[state the amount] and any items you pay over the lease term (such as 
service contracts, insurance, and any outstanding prior loan or lease 
balance).'' The ``agreed upon value'' of the motor vehicle means the 
amount for the vehicle agreed upon by the lessor and the lessee for 
purposes of the lease. This would include capitalized items such as the 
following: charges for vehicle accessories and options, delivery or 
destination charges, and rustproofing. The lessor could also include 
taxes and fees for license, title, and registration. The ``value'' 
would not include charges for service or maintenance contracts, 
insurance products, gap waivers, or an outstanding balance on a prior 
lease or loan.
    Based on comments and upon further analysis, the Board believes 
that disclosure of the gross capitalized cost (including the agreed 
upon value) may aid consumers in better understanding lease pricing. 
The final rule also allows the consumer to obtain an itemization of the 
gross capitalized cost upon request. (See the model form in appendix 
A.) As in the case of Regulation Z, the itemization must be given 
separately, not within the segregated disclosures.
    The Board solicited comment on whether the gross cost--the first 
item on the proposed model form--should be de-emphasized or removed 
from the required disclosures to avoid potential manipulation of the 
figure by lessors to mislead consumers. The few commenters that 
addressed the issue thought that the potential risk is negligible.
4(f)(2) Capitalized cost reduction.
    The Board's proposed rule required the disclosure of any 
``capitalized cost reduction'' in the disclosure of the total amount 
due at lease signing. Like a downpayment in the case of a credit 
transaction, the capitalized cost reduction reduces the capitalized 
cost and thus the periodic payments. In response to comments, the final 
rule requires that any capitalized cost reduction be reflected both in 
the disclosure of the amount due at lease signing and in the 
mathematical progression of the periodic payment amount.
4(f)(3) Adjusted capitalized cost.
    In response to the comments, the final rule requires the disclosure 
of the ``adjusted capitalized cost,'' which equals the gross 
capitalized cost less any capitalized cost reduction. This net figure 
is the starting point for determining the periodic payment of the 
lease.
4(f)(4) Residual value.
    The Board proposed to make the residual value of the leased 
property a required disclosure in closed-end leases. (A disclosure 
called the ``estimated value of the vehicle at the end of the lease'' 
was already required by Regulation M in an open-end lease.)

[[Page 52252]]

Many commenters, including both industry and consumer representatives, 
favored the disclosure of this term. The residual value is the amount 
estimated or assigned at consummation as the value of the lease 
property at the end of the lease term. In motor vehicle leases, this 
figure is frequently but not always obtained by reference to accepted 
guides used by lessors, such as the ``ALG Residual Percentage Guide.'' 
In the payment calculation, the residual value is accompanied by the 
statement: ``the value of the vehicle at the end of the lease used in 
calculating your base [periodic] payment.''
4(f)(5) Depreciation and any amortized amounts.
    The disclosure of the ``depreciation and any amortized amounts'' 
was not included in the Board's proposed rule but is a necessary part 
of the payment calculation. The depreciation represents the difference 
between the adjusted capitalized cost and the residual value. This is 
the amount that the lessee pays for the vehicle's decline in value 
attributable to normal use and for other items paid over the lease 
term.
4(f)(6) Rent charge.
    This figure, added in the final rule in response to comments, 
represents the lessor's ``rent'' or ``interest.'' The rent charge is an 
essential component in the payment calculation.
4(f) (7)-(10) Total of base periodic payments, lease term, base 
periodic payment, itemization of other charges, and total periodic 
payment.
    Several other items are used in the payment calculation. The 
``lease term'' and the ``total periodic payment'' are already required 
disclosures under the CLA, and appear both in the payment calculation 
and in the payment schedule disclosures. The ``total of base periodic 
payments'' is not required by the CLA, but was used in open-end lease 
disclosures and is necessary in the payment calculation. Itemization of 
the periodic payment (the base monthly payment and other charges that 
are part of the periodic payment) is also not currently required, 
although over the years many lessors have routinely provided an 
itemization. The periodic payment typically consists of an amount for 
depreciation and a rent charge; there may also be state tax and other 
fees.
4(g) Early termination.
    The CLA requires lessors to disclose the conditions under which the 
lessee or lessor may terminate the lease before the end of the lease 
term and the amount or method of determining a penalty or other charge 
for early termination. Lessors typically disclose the method of 
determining an early termination charge, a disclosure which is often 
complex.
    The proposed rule noted that a U.S. Court of Appeals case, 
Lundquist v. Security Pacific Automotive Financial Services Corp., 993 
F.2d 11 (2d Cir.), cert. denied, 510 U.S. 959 (1993), caused lessors 
concern in determining the requirements for disclosing their early 
termination provisions. In that case, the court held a lessor liable 
for violating the ``reasonably understandable'' standard for disclosure 
under Regulation M; the lessor had an early termination formula that 
the court found to be overly complex and beyond the understanding of 
the average consumer. Many lessors believe that, given the complexity 
of modern automobile lease transactions, it is difficult to describe 
every part of an early termination formula in terms clearly 
understandable to consumers. In particular, lessors believe that the 
various methods used to determine the ``unamortized capitalized cost'' 
portion of their early termination formulas are inherently complex and 
cannot be reduced to a disclosure that is easily understandable.
    In response to the Board's proposal, many commenters (mostly those 
representing the leasing industry) favored allowing a reference to the 
name of the method employed to determine the unamortized capitalized 
cost portion of the early termination formula instead of requiring a 
detailed description of that method. Opponents believed that merely 
providing the name of the method would not be useful and would make it 
difficult or impossible for consumers to compute the amount of an early 
termination charge. Some consumer advocates believed that in using 
complex methods and highly complicated descriptions for determining 
early termination charges, lessors preclude consumers from determining 
whether the charges themselves are reasonable. (The CLA specifies that 
charges for early termination must be ``reasonable.'') Other 
commenters, including some lessors and many consumer representatives, 
favored a full description of all aspects of a lessor's early 
termination method, along with an example of how that method would 
work.
    Based on the comments and upon further analysis, the Board 
continues to believe that the CLA mandates full disclosure of a 
lessor's method of determining an early termination charge, even if it 
is complex. Therefore, a full description of the complete early 
termination method must be disclosed. Given the complexity of the 
methods involved, however, a lessor is permitted--in giving the full 
description of its early termination method--to refer by name to a 
generally accepted method of computing the adjusted lease balance (also 
known as the unamortized capitalized cost) for purposes of the early 
termination charge. For example, a lessor may state that the ``constant 
yield'' method will be utilized in determining the unamortized portion 
of the gross capitalized cost, 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 that would be imposed upon the consumer. 
Additionally, if a lessor refers to a named method in this manner, the 
lessor will have to provide a written explanation of that method if 
requested by the consumer. Lessors should provide clear and 
understandable explanations of their early termination provisions to 
consumers. Explanations that are full, accurate, and not intended to be 
misleading are in compliance with CLA and Regulation M disclosure 
requirements even if such explanations are complex.
    The Board proposed new disclosure requirements in addition to 
requiring this basic statutory information about charges for 
terminating a lease early. The proposed rule added a statement alerting 
consumers about charges for terminating a lease early, and also would 
have required an example of an early termination charge based on an 
assumed termination of the lease at the end of the first year. In 
general, most commenters supported the Board's requiring a general 
statement warning the consumer of the possibility of substantial 
charges for early termination.
    Many of the commenters representing the leasing industry objected 
to the Board's proposed requirement of an early termination example. 
They believed that a transaction-specific example would substantially 
increase compliance burdens. They said the figure would be difficult to 
calculate because published residual values at the end of one year are 
not available; the tables typically start at 24 months. Also, the 
figure would be imprecise, since charges for early termination are 
typically determined based on the realized, not the residual, value of 
the leased property at the time of early termination. The realized 
value, these commenters pointed out, can vary widely from the residual 
value based on factors such as the demand for a

[[Page 52253]]

particular model and the condition of the vehicle at the time of early 
termination. Moreover, the example would not be representative of an 
actual charge because few leases terminate at the end of the first 
year. It is more typical for termination to occur nearer to the end of 
the lease.
    Industry commenters expressed concern about the compliance burden 
attached to a transaction-specific mathematical calculation, as well as 
concern about possible consumer misunderstanding of a numerical example 
that might be out of line with the amount a consumer would have to pay 
if, in fact, the lease is terminated early. Some commenters suggested, 
as an alternative, an enhanced general warning to the effect that 
charges for early termination could be substantial and ``may be several 
thousand dollars.'' They also suggested adding a statement that the 
actual charge will depend on when the lease is terminated, and the 
earlier the consumer ends the lease, the greater this amount is likely 
to be.
    Commenters representing consumer interests believed that an example 
is needed to give consumers a concrete idea of just how substantial an 
early termination charge could be. Some of these commenters suggested 
that the early termination example could be rephrased to make clear 
that the early termination charge shown in any example is contingent 
upon the realized value of the property at the time of termination. 
They suggested using language such as ``if you terminate this lease at 
the end of the first year, you may owe the lessor the difference 
between your adjusted lease balance of [stated amount] and the realized 
value at that time.''
    While there have been very few consumer complaints about consumer 
leasing at the federal level, one of the more frequent issues raised 
involves early termination charges. At the state level, authorities 
report that early terminations are a major source of consumer 
complaints about leasing. Lessees often are surprised that an early 
termination charge can be several thousand dollars. Many consumers 
apparently think that as long as they are current in their monthly 
payments, upon early termination they can merely return the car owing 
nothing more or at most a nominal termination fee. The transaction-
specific example proposed by the Board was intended to show just how 
substantial a charge could be. Based on the comments and further 
analysis, the Board has dropped the requirement of an example and has 
instead strengthened the warning to consumers. The final rule requires 
the following revised statement among the segregated disclosures:
    Early Termination. You may have to pay a substantial charge if you 
end this lease early. The charge may be up to several thousand dollars. 
The actual charge will depend on when the lease is terminated. The 
earlier you end the lease, the greater this charge is likely to be.
    The Board believes that a strong narrative statement, even without 
the proposed example, will serve to apprise consumers that charges for 
early termination may indeed be quite substantial.
4(h) Maintenance responsibilities.
    To heighten a consumer's awareness about maintenance 
responsibilities without imposing substantial compliance costs on 
lessors, the Board proposed to add a disclosure requirement, among the 
segregated disclosures, that ``you may be charged for excessive wear 
and use based on the lessor's standard for normal use.'' Any applicable 
charge for excessive mileage must also be included. In the final rule, 
this requirement is limited to motor vehicle leases.
    Several commenters requested guidance on disclosing the notice in 
paragraph 4(h)(3) when a specific figure for excess mileage is not 
available. They suggested that a description of the method for 
assessing charges for excess mileage should be allowed in place of a 
specific amount. The final rule allows a lessor to disclose a 
description of the method used for calculating excess mileage charges 
in place of a specific amount, when disclosing an amount is not 
feasible.
4(i) Purchase option.
    An association representing automobile lessors sought clarification 
on whether reference to the fair market value based on an automobile 
publication such as N.A.D.A. (published by the National Automobile 
Dealers Association) could be disclosed in place of a sum certain, as 
the purchase-option price. The Board clarifies that lessors may commit 
to a sum certain as the purchase-option price at a future date by 
reference to an independent source. The reference should provide 
sufficient information so that the lessee will be able to determine the 
actual price at the time the option becomes available. Statements of a 
lease end price such as ``negotiated price'' or ``fair market value'' 
do not comply with the requirement of this paragraph. For a purchase 
option during the lease term, the Board recognizes that the price may 
vary depending on when the lessee exercises this option, and therefore 
under the final rule, lessors are allowed to describe a method for 
determining the price as an alternative to providing the price.
4(j) Statement referencing nonsegregated disclosures.
    To alert consumers to the nonsegregated CLA disclosures, the final 
rule requires a statement among the segregated disclosures to direct 
consumers to other CLA-required disclosures in the lease documents. The 
nonsegregated disclosures include information on early termination, 
purchase options and maintenance responsibilities, warranties, late and 
default charges, insurance, and any security interest.
4(k) Liability between residual and realized values.
    This provision is substantially unchanged from the provision found 
under former Sec. 213.5(g)(13); minor edits have been made.
4(l) Right of appraisal.
    Paragraph 4(l) requires disclosure of the right to an appraisal of 
leased property. This language has been adopted as proposed, with a few 
changes for clarity and accuracy; for example, the term ``realized 
value'' replaces ``estimated value.'' No substantive change is 
intended. This provision is applicable both to open-end and to closed-
end leases.
4(m) Liability at end of lease term based on residual value.
    Except as discussed below, editorial changes have been made to this 
section without substantive change.
4(m)(1) Rent and other charges.
    Former Secs. 213.2(a)(17) and 2(a)(18) defined the terms ``total 
lease obligation'' and ``value at consummation,'' that were applicable 
to open-end leases. The Congressional intent regarding these 
definitions, as set forth in a committee report, was that the lessee 
would have a readily understandable method for comparing the cost of 
one lease with another or with the cost of buying the same property for 
cash or on credit (Senate Committee on Banking, Housing and Urban 
Affairs, Consumer Leasing Act of 1976, S. Rep. No. 94-590 (1976)). The 
report stated, in pertinent part:

    Under subsection 182[(10)][of the CLA], in addition the lessor 
must calculate and disclose the difference between the total lease 
obligation and the market value of the goods at the inception of the 
lease. These figures then will provide an easy comparison

[[Page 52254]]

between the cost of the lease and the cost of an outright cash 
purchase, and the differential figure provides a rough comparison to 
the amount of finance charge which would be involved in a credit 
purchase. The consumer lessee therefore will have at hand the 
essential data to compare leases, and to evaluate alternatives to 
leasing.

    Commenters noted that the value at consummation, defined as ``the 
cost to the lessor of the leased property including, if applicable, any 
increase or markup by the lessor prior to consummation,'' is 
essentially the same as the capitalized cost.
    The Board believes that the purpose of the disclosure of the total 
lease obligation, the value at consummation, and the differential 
between these two figures is served by requiring lessors in open-end 
leases to disclose the ``rent and other charges'' described as ``the 
total amount of rent and other charges imposed in connection with your 
lease [state the amount].'' Because of the new comprehensive disclosure 
scheme, including a required disclosure of the gross capitalized cost 
(including the agreed upon value) of leased property, the ``total lease 
obligation'' disclosure (as defined in former Sec. 213.2(a)(17)), and 
the ``value at consummation'' disclosure (as defined in former 
Sec. 213.2(a)(18)) have been deleted as unnecessary. The final rule has 
been revised accordingly.
4(o) Insurance.
    Along with the amount paid to the lessor, this disclosure provides 
information on the type and amount of coverage of insurance, whether 
voluntary or required, as well as the cost. Several commenters pointed 
out that unlike collision and comprehensive liability policies, the 
lessor could not furnish the amount of coverage for mechanical 
breakdown protection contracts (in states where these contracts are 
treated as insurance). For mechanical breakdown protection insurance 
contracts not capped by a dollar amount, lessors may describe coverage 
by referring to a limitation by mileage or time period. For example, 
the mechanical breakdown contract insures parts of the automobile for 
up to 100,000 miles.
4(p) Warranties or guarantees.
    The Board was asked to clarify whether warranties were limited to 
maintenance warranties, or included UCC warranties such as warranty of 
title, and whether disclosure is required if certain warranties do not 
apply to the lessee. Whether warranties under the UCC should be treated 
as warranties under this section is to be determined by state or other 
applicable law. If a lessor provides a comprehensive list of warranties 
to a consumer, the lessor must indicate which warranties apply or, 
alternatively, which do not apply.
4(q) Penalties and other charges for delinquency
    As proposed, the final rule adds that any penalty or charge shall 
be reasonable, to reflect the requirement found in Sec. 183(b) of the 
CLA. No substantive change is intended.
4(r) Security interest
    This section has been adopted as proposed without substantive 
change. The phrase ``in connection with the lease'' has been deleted as 
unnecessary.
4(s) Limitation on rate information
    Until recently, lessors did not disclose rate information to 
consumers, although they have commonly used an implicit interest rate 
for internal purposes. Now some automobile lessors disclose rate 
information in contracts, or advertise lease rates, or orally provide 
rate information to consumers who lease or express an interest in 
leasing. Typically these rates are based on the lessor's ``money 
factor''--representing only the ``rent'' or the ``interest'' charge--
and are sometimes labelled as an ``annual percentage rate.''
    In the proposed rule, the Board solicited comment on whether 
Regulation M should require a rate disclosure, and whether (and how) 
the rate should be made comparable to the annual percentage rate (APR) 
in a credit transaction. Many commenters addressed this issue. For the 
most part, commenters representing consumer constituencies advocated 
the disclosure of a uniformly calculated lease rate. Those representing 
industry interests generally opposed a lease rate disclosure, although 
some supported further consideration of the issue.
    Those commenters who supported a rate disclosure believed that a 
federally-mandated annual lease rate is needed to assure uniform 
disclosure of lease-cost information. They expressed particular concern 
that rates currently disclosed by some lessors in advertisements and in 
contracts may mislead consumers about lease costs, given the lack of 
any calculation standards. Commenters also argued that if the 
capitalized cost, the residual value of leased property, and other 
lease terms are disclosed to a consumer, the lease rate is the only 
missing component necessary to fully demonstrate the cost of the lease. 
They generally believed that a rate disclosure would be an effective 
tool for comparison shopping.
    Those commenters opposed to a rate disclosure requirement believed 
that such a disclosure would be meaningless and perhaps even misleading 
to consumers. They argued that there is no effective way to calculate a 
lease rate that will be meaningful to consumers, absent rules 
constraining lease terms. Many expressed concern that consumers would 
inappropriately compare credit and lease transactions by comparing the 
APR with the lease rate. A few commenters, mostly representing 
independent lessors, suggested that the Board would be exceeding its 
rulemaking authority under the CLA if it were to mandate a rate 
disclosure, given that the statute does not impose this requirement. 
Commenters also suggested that a rate disclosure presents the 
opportunity for unscrupulous lessors to purposely manipulate the lease 
rate (to make it look more attractive) by adjusting the residual value. 
These commenters suggested that, to quote a low lease rate, such 
lessors might use a residual value lower than the figure the lessor 
actually expects to realize from the sale of the vehicle at the 
scheduled termination of the lease. Reducing the residual value 
increases the portion of the periodic payment attributable to 
depreciation, thus lowering the amount imputed to the rent charge in 
each payment. Indeed, for lease transactions in which the adjusted 
capitalized cost, lease term, and periodic payments remain constant, 
adjustments in the residual value can produce significantly different 
lease rates.
    Consideration of alternative approaches. The Board considered 
several approaches to address the lease rate issue: it considered 
requiring, permitting, or prohibiting a disclosure. In principle, the 
disclosure of a lease cost expressed as an annual rate, rather than 
solely as a dollar amount, could have value to consumers in negotiating 
lease terms and in comparing one lease to another. In practice, 
however, there are problems associated both with the computation of the 
lease rate and with what the figure represents.
    The major problem with a rate computation is that it is subject to 
variations in the residual value, whether the variation is narrow or 
wide and whether it results from unscrupulous manipulation or from 
legitimate, good-faith differences about estimates of value. As to some 
of the comparisons that consumers might attempt to make, it is arguable 
that comparing the costs incurred in leasing and in financing based 
primarily on rate information may never be totally appropriate because 
the comparison overlooks legal and

[[Page 52255]]

economic distinctions between the two transactions--in a lease the 
consumer accumulates no equity in the property. Given these 
limitations, and the fact that the legislative history provides little 
support for requiring a lease rate disclosure, the Board decided not to 
mandate a lease rate disclosure.
    The Board considered prescribing a method for calculating a rate so 
that consumers could be assured of uniformity in any rate disclosures 
they received. The calculation could use an ``actuarial method'' 
formula similar to that used for the APR under the Board's Regulation 
Z. This formula would analyze the present value of all advances made to 
the lessee or on the lessee's behalf against the present value of all 
payments received by the lessor.
    To address rate manipulation, the Board considered placing certain 
general constraints on the use of the residual value, such as requiring 
that the residual value used to calculate the rate be the same one on 
which the periodic payments are based, and requiring also that the 
residual value be a reasonable approximation of the value of the leased 
property at the end of the lease term. While this approach would 
promote more uniformity in rate disclosure than currently exists, it 
would not make the rates quoted to a consumer completely reliable given 
the legitimate range of residual values. Alternatively, the Board 
considered requiring that lessors use the purchase-option price instead 
of the residual value in calculating a rate when the option price is 
higher. However, basing a lease rate on a purchase-option price 
assumes, often incorrectly, that the consumer will purchase the leased 
property at the end of the lease term. Moreover, because only about 60 
percent of leases have an option price, this restraint on possible 
manipulation would not be available in all instances.
    Given the limitations under any of these approaches, the Board 
believes that in specifying a rate calculation method, it would be 
endorsing the use of an imperfect tool--one whose accurate use for 
comparison shopping is questionable in many cases.
    As an alternative, the Board considered whether to prohibit the 
disclosure of lease rates. However, a regulatory prohibition would 
essentially require a determination by the Board that a rate disclosure 
is inherently deceptive or misleading to consumers. In light of the 
wide support for a uniform lease rate disclosure among consumer 
advocates and others, the Board believes it would be difficult to 
support such a determination in all cases.
    Still, the Board believes that the concerns about variations in 
lease rates cannot be ignored. These concerns exist whether variations 
result from a lessor's manipulation of the residual value to show a 
lower lease rate, or occur despite a lessor's use of different good-
faith estimates of the residual value. Accordingly, the final rule 
imposes constraints on the disclosure of rate information to deter--as 
much as possible--inappropriate comparisons of leases by consumers 
based on rate information offered by different lessors, and mistaken 
comparisons between the distinct transactions of financing and leasing. 
The final rule requires that where rate information is provided in an 
advertisement or in lease documents, a notice must accompany the rate 
disclosure stating that ``this percentage may not measure the overall 
cost of financing this lease.''
    Under the final rule, a lessor advertising or disclosing a lease 
rate is also precluded from calling the rate an ``annual percentage 
rate'' or any equivalent term to avoid the inference that the rate is 
directly comparable to the APR. Moreover, the rate may not be placed 
among Regulation M's segregated disclosures. The final rule in 
Sec. 213.7(b)(2) also provides that the disclosure of a lease rate in 
an advertisement cannot be more prominent than disclosures in the 
advertisement required by Regulation M, except for the disclosure that 
must accompany the rate.
    The estimated lease charge. In its proposed rule, the Board 
solicited comment on a new disclosure, called the estimated lease 
charge, to show the total ``financing'' costs that would be charged to 
the consumer over the lease term, including ``rent'' or ``interest.'' 
In name, the proposed figure was similar to the finance charge 
disclosed in credit transactions subject to the TILA. In concept, 
however, it was quite different in that it included fees that the 
consumer would pay in a comparable cash transaction and fees paid to 
third parties (such as automobile registration fees, insurance 
premiums, and state taxes). These are items that in the credit context 
would be excluded from the finance charge in most cases.
    Commenters representing consumer interests, who generally supported 
the proposed ``all-inclusive'' definition of the estimated lease 
charge, believed that such a disclosure meets the goal of the CLA to 
provide meaningful and full disclosure to consumers of the ``true'' 
cost of leasing. They thought it could facilitate shopping among 
comparable lease transactions, and would not be burdensome for lessors 
to disclose. A majority of commenters--all representing the leasing 
industry--either opposed the estimated lease charge disclosure in 
general or as it was defined in the proposal. They believed that any 
lease charge should ideally reflect only that portion of each lease 
payment representing the ``rent'' or ``interest'' charged by the 
lessor. Also, they believed an all-inclusive lease charge disclosure 
could mislead consumers to view leasing as more expensive in comparison 
with financing, when that may not be the case. Most of these commenters 
believed that if a lease charge were to be disclosed, the rules should 
at least be more comparable to Regulation Z regarding the type of fees 
included, based on their concern that consumers might attempt to 
compare a lease charge to the finance charge in a credit transaction.
    Although virtually all costs associated with a lease transaction 
are itemized and disclosed under the final rule, there could be some 
value in bringing together in one figure the various interest and 
noninterest charges that may be split among those due at lease signing, 
in the periodic payments, and at lease end. The Board considered that a 
lease charge, redefined to more closely parallel the finance charge 
disclosed in a credit transaction, could have utility in some 
instances. For example, it might assist a consumer in comparing the 
cost of leasing a vehicle offered by different lessors, such as when 
shopping to lease a particular make and model with the same lease 
duration. It would not be very useful in comparing the leasing of cars 
with different values or different lease durations, or in comparing a 
lease transaction to a credit transaction. For purposes of Regulation 
M, a lease charge disclosure is related primarily to the calculation of 
a lease rate (as lessors would need to know what fees to include in the 
calculation) and to verify compliance with the prescribed formula. 
Given that there is no federally-mandated lease rate disclosure, there 
is little need for a lease charge disclosure (in a closed-end lease). 
Based on the comments and upon further analysis, the final rule does 
not require the disclosure of a lease charge.

Section 213.5  Renegotiations, extensions, and assumptions.

    Section 213.5 is adopted as proposed with some editorial changes. 
No substantive change is intended. This section contains all the 
redisclosure rules governing leases that are renegotiated, extended, or 
assumed, which were generally contained in

[[Page 52256]]

former Sec. 213.4(h). Paragraphs have been rearranged and revised for 
clarity. Rules on assumptions have been moved from the commentary. 
Section 213.5(d) retains the substance of the exceptions found in the 
former regulation as well as the exceptions previously located in the 
commentary for renegotiations, court proceedings, and deferrals under 
former comments 4(h)-3, 7, and 8, respectively.

Section 213.6  [Reserved]

Section 213.7  Advertising.

    Former Sec. 213.5 is redesignated as indicated below:

------------------------------------------------------------------------
                  Former                             Final rule         
------------------------------------------------------------------------
213.5(a)..................................  213.7(a).                   
                                            213.7(b) new, incorporating 
                                             standard in one place.     
                                            213.7(b)(1) new.            
                                            213.7(b)(2) new.            
213.5(b)..................................  213.7(c).                   
213.5(c)..................................  213.7(d).                   
213.5(d)..................................  213.7(e).                   
                                            213.7(f) new.               
------------------------------------------------------------------------

    The final rule contains several substantive additions to the 
advertising rules as discussed below. Some of the language of existing 
provisions has been revised for simplicity.
7(b) Clear and conspicuous standard.
    In response to commenters' request for guidance on the clear and 
conspicuous standard for advertisements, the Board clarifies that an 
advertisement must be understandable and readable. For example, very 
fine print in a television advertisement or detailed and rapidly stated 
information in a radio advertisement does not meet the clear and 
conspicuous requirement if consumers cannot see and read or comprehend 
all of the information required to be disclosed. Further, in the 
official commentary, the Board proposed to require that lease 
disclosures appear on a television screen at a minimum of five seconds 
to meet the clear and conspicuous standard. Upon further analysis, the 
Board believes that this ``five second'' rule, which was referred to in 
a case by the Federal Trade Commission, is inadequate as a test for the 
clear and conspicuous standard. Therefore, the Board is withdrawing the 
``five second'' rule as a standard to be used for television 
advertisements.
7(b)(1) Amount due at lease signing.
    The proposal sought to address misleading advertisements primarily 
in which a lessor refers to a low or no capitalized cost reduction 
(downpayment) and, in small print lists other upfront charges such as 
an acquisition fee, a security deposit, the first monthly lease 
payment. The Board proposed that a reference in an advertisement to any 
component of the total amount due at lease signing may not be more 
prominently displayed than the required disclosure of the total amount 
of payments due at lease signing.
    The majority of commenters supported the proposed requirement, 
stating that it would minimize deceptive practices and that it provided 
clarity to the clear and conspicuous standard. However, a number of 
commenters opposed the adoption of an equal prominence rule. They 
believed the proposed rule was overbroad, and suggested that the final 
rule should ensure that the prominence rule is not triggered when the 
only payment due at lease inception is the first scheduled periodic 
payment. Several commenters sought further clarification on the clear 
and conspicuous standard.
    The final rule provides an exception to the prominence test for the 
periodic payment. Stating the amount of any periodic payment will not 
trigger the prominence rule. The rule is triggered by oral or written 
references (which includes electronic media such as the Internet) to 
any other component of the total amount due at lease signing. The Board 
believes the final rule addresses some of the concerns about lease 
advertisements without adding significant burden on lessors or 
interfering with the effective marketing of their products. The final 
rule does not specify what terms are to be advertised, but only that 
components of the total amount due at lease signing cannot be 
emphasized without giving equal prominence to the disclosure of the 
total amount due itself. Lessors can advertise lease transactions 
without including any CLA disclosures. Disclosures are only required 
when certain ``trigger'' terms are included in the advertisement. The 
CLA requires only disclosure of the total due, not an itemization of 
its component parts, in advertisements. Such an itemization is provided 
in the transaction-specific disclosures.
7(b)(2) Advertisement of a lease rate.
    As discussed in the supplementary information to Sec. 213.4(s), if 
a percentage rate is stated in an advertisement, a notice must 
accompany the rate. The notice must be placed next to the rate without 
any other intervening language or symbols. For example, a lessor may 
not state a rate with an asterisk and make the disclosure in a 
different location in the advertisement or lease document. The notice 
states that this percentage may not measure the overall cost of 
financing the lease. In addition, with the exception of the notice 
required by Sec. 213.4(s), the rate cannot be more prominent than the 
disclosures in the advertisement required by Sec. 213.4.
7(c) Catalogs and multi-page advertisements.
    Section 7(c) is adopted as substantially proposed, with no 
substantive change from the former rule.
7(d) Advertisement of terms that require additional disclosure.
    In paragraph 7(d)(2)(iii), the word ``such'' prior to ``payments 
under the lease,'' inadvertently omitted in the proposal, is inserted 
back in the paragraph.
    In complying with paragraph 7(d)(2)(iv), lessors are required to 
provide a sum certain if the purchase option is available at the end of 
the term. Referring to a source for determining a sum certain in the 
future complies with this requirement. Statements of a lease-end price 
such as ``negotiated price'' or ``fair market value'' do not comply 
with the requirement of this paragraph.
7(e) Alternative disclosures--merchandise tags.
    The substance of this section is unchanged from the former 
provision in Sec. 213.5(d); editorial changes have been made.
7(f) Alternative disclosures--telephone or radio advertisements.
    Section 336 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) amends 
Sec. 184 of the CLA to provide an alternative disclosure scheme for 
radio lease advertisements. In radio advertisements, lessors are 
permitted to substitute a reference to a toll-free telephone number or 
to a print advertisement for the disclosures about the purchase option 
and the end-of-term liability. When calling an advertised toll-free 
number, if a consumer obtains a recording that provides several dialing 
options--such as providing directions to the lessor's place of 
business--the option allowing the consumer to request lease disclosures 
should be provided early in the phone message to ensure that disclosure 
information is not obscured by other information.
    In keeping with the purpose of the statutory amendment, the final 
rule requires language to accompany the telephone number indicating 
that all required disclosures are available by

[[Page 52257]]

calling the toll-free number. Without language such as, ``call 1-800-
000-0000 for details about costs and terms,'' consumers are not put on 
notice that disclosures may be obtained by calling the toll-free 
number. A specific reference to disclosures in print advertisements is 
also required.
    The Board proposed to extend the alternate disclosure provision to 
television advertisements. The majority of commenters supported this 
proposal. They agreed that television has the same time and space 
constraints as radio and that the alternate disclosure provision allows 
consumers the opportunity to obtain lease information in a format that 
can be retained and studied at a convenient time.
    The Board also solicited comment on whether constraints similar to 
those for television and radio advertisements exist for print 
advertisements. Although some commenters encouraged imposing the same 
standard for both broadcast and print media, the majority of commenters 
did not support the application of the alternative disclosure rules to 
print media. Much of the oral and written disclosure information in a 
broadcast is difficult for lessors to provide and for consumers to 
comprehend or retain. The Board believes that lessors have the ability 
to more efficiently provide the required disclosures in print format. 
And generally, print advertisements are easier to retain for use by 
consumers who are shopping for a lease. Therefore, the Board has 
extended the alternate disclosure provision to television but not to 
print media.

Appendices

    To simplify the regulation, the written information contained in 
former appendices A and B about the procedures and criteria for 
preemption and exemption determinations have been removed. Such 
information is available from the Board upon request. The model forms 
are in appendix A. The list of federal agencies that enforce the CLA 
for particular classes of businesses is moved from former appendix D to 
appendix B. Appendix C incorporates former Sec. 213.1(d).

Appendix A--Model Forms

    The model forms illustrate the new segregated disclosure scheme 
required by Sec. 213.3(a)(2). Instructions have been deleted as 
unnecessary.
A-1--Model Open-End or Finance Vehicle Lease Disclosures
A-2--Model Closed-End or Net Vehicle Lease Disclosures
A-3--Model Furniture Lease Disclosures

VI. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C 603), the Board's Office of the Secretary has reviewed the 
amendments to Regulation M. The text of a detailed analysis appears at 
the end of this document as appendix I. The changes to Regulation M 
will require a substantial revision to the disclosure format currently 
required of lessors. In issuing the final rule, the Board has attempted 
to minimize the burden of changing to the new disclosure format by 
requiring, wherever possible, disclosures that can be preprinted. 
Further, the Board has provided model disclosure forms to facilitate 
compliance. Section 105 of the Truth in Lending Act provides that a 
lessor that uses the appropriate model forms published by the Board 
``shall be deemed to be in compliance with the disclosure provisions of 
this title with respect to other than numerical disclosures....'' Thus, 
using the model forms properly provides lessors with a safe harbor from 
civil liability. Required disclosures will be the same for large and 
small lessors, but the Board does not expect that the changes to 
Regulation M will have a substantial adverse economic impact on a large 
number of small entities. The automobile leasing industry, at which 
most of the changes are directed, is highly concentrated in a small 
number of large firms. Actual preparation of lease documents will 
typically take place in the offices of numerous automobile dealers, 
many of which are small entities. However, preparation will take place 
through computer terminals and computer programs provided by the 
lessors. Because the new forms are provided through the lessors' 
computer systems, they will be clearer and easier for dealer personnel 
to understand. Explanations and necessary training of personnel should 
actually be enhanced and made easier for dealers.

VII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Ch. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final rule 
under the authority delegated to the Board by the Office of Management 
and Budget.
    The respondents are individuals or businesses that regularly lease, 
offer to lease, or arrange for the lease of personal property under a 
consumer lease. The purpose of the disclosures associated with 
Regulation M is to ensure that lessees of personal property receive 
meaningful information that enables them to compare lease terms with 
other leases and, where appropriate, with credit transactions. Records, 
required in order to evidence compliance with the regulation, must be 
retained for twenty-four months. The revisions to the disclosure 
requirements in this regulation are found in Secs. 213.3, 213.4, and 
213.7.
    Regulation M applies to all types of financial institutions, not 
just state member banks. Under the Paperwork Reduction Act, however, 
the Federal Reserve accounts for the paperwork burden associated with 
Regulation M only for state member banks. Any estimate of paperwork 
burden for institutions other than state member banks affected by the 
amendments is provided by the federal agency or agencies that supervise 
those lessors. The Federal Reserve has found that few state member 
banks engage in consumer leasing and that while the prevalence of 
leasing has increased in recent years, it has not increased 
substantially among state member banks. It also has found that among 
state member banks that engage in consumer leasing, only a very few 
advertise consumer leases.
    The estimated burden per response for the disclosures is eighteen 
minutes, three minutes more than the estimate of the burden for the 
disclosures under the former rule. Under the Board's September 1995 
proposal, the estimate was seventeen minutes. The final rule adds two 
particular items: an itemized mathematical progression of the periodic 
payment and, if an annual lease rate is included, a statement that the 
rate may not measure the overall cost of financing the lease. The 
estimated burden for advertisement disclosures, twenty-five minutes (a 
decrease of five minutes from the former rule), is unchanged since the 
proposal. It is estimated that there will be 310 respondents and an 
average frequency of 120 responses per respondent each year. The 
combined amount of annual burden is estimated to increase from 9,322 
hours to 11,179 hours. In addition, start-up costs are estimated to be 
$12,000 per respondent, amounting to a total of $3,720,000 for state 
member banks.
    The Board received no comments that specifically addressed the 
burden estimate.
    The disclosures made by lessors to consumers under Regulation M are 
mandatory (15 USC 1667 et seq.). Because the Federal Reserve does not 
collect any information, no issue of confidentiality under the Freedom 
of Information Act arises. Consumer lease information in advertisements 
is available to the public. Disclosures of the costs, liabilities, and 
terms of

[[Page 52258]]

consumer lease transactions relating to specific leases are not 
publicly available.
    An agency may not conduct or sponsor, and an organization or 
individual is not required to respond to, an information collection 
unless it displays a currently valid OMB control number. The OMB 
control number for Regulation M is 7100-0202.
    Comments regarding the burden estimate, or any other aspect of this 
collection of information, including suggestions for reducing the 
burden, may be sent to: Secretary, Board of Governors of the Federal 
Reserve System, 20th and C Streets, N.W., Washington, DC 20551; and to 
the Office of Management and Budget, Paperwork Reduction Project (7100-
0202), Washington, DC 20503.

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, the Board amends 12 CFR 
Part 213 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. The table of contents to part 213 is revised to read as follows:

Sec.
213.1  Authority, scope, purpose, and enforcement.
213.2  Definitions.
213.3  General disclosure requirements.
213.4  Content of disclosures.
213.5  Renegotiations, extensions, and assumptions.
213.6  [Reserved]
213.7  Advertising.
213.8  Record retention.
213.9  Relation to state laws.
Appendix A to Part 213--Model Forms
Appendix B to Part 213--Federal Enforcement Agencies
Appendix C to Part 213--Issuance of Staff Interpretations
Supplement I to Part 213--Official Staff Commentary to Regulation M

    3. Part 213 is amended as follows:

    a. Sections 213.1 through 213.5 are revised;
    b. Section 213.6 is removed and reserved;
    c. Sections 213.7 and 213.8 are revised;
    d. Section 213.9 is added;
    e. Appendices A through C are revised; and
    f. Appendix D is removed.

    The revisions and additions read as follows:


Sec. 213.1  Authority, scope, purpose, and enforcement.

    (a) Authority. The regulation in this part, known as Regulation M, 
is issued by the Board of Governors of the Federal Reserve System to 
implement the consumer leasing provisions of the Truth in Lending Act, 
which is Title I of the Consumer Credit Protection Act, as amended (15 
U.S.C. 1601 et seq.).
    (b) Scope and purpose. This part applies to all persons that are 
lessors of personal property under consumer leases as those terms are 
defined in Sec. 213.2(e)(1) and (h). The purpose of this part is:
    (1) To ensure that lessees of personal property receive meaningful 
disclosures that enable them to compare lease terms with other leases 
and, where appropriate, with credit transactions;
    (2) To limit the amount of balloon payments in consumer lease 
transactions; and
    (3) To provide for the accurate disclosure of lease terms in 
advertising.
    (c) Enforcement and liability. Section 108 of the act contains the 
administrative enforcement provisions. Sections 112, 130, 131, and 185 
of the act contain the liability provisions for failing to comply with 
the requirements of the act and this part.


Sec. 213.2  Definitions.

    For the purposes of this part the following definitions apply:
    (a) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.) and 
the Consumer Leasing Act is chapter 5 of the Truth in Lending Act.
    (b) Advertisement means a commercial message in any medium that 
directly or indirectly promotes a consumer lease transaction.
    (c) Board refers to the Board of Governors of the Federal Reserve 
System.
    (d) Closed-end lease means a consumer lease other than an open-end 
lease as defined in this section.
    (e)(1) Consumer lease means a contract in the form of a bailment or 
lease for the use of personal property by a natural person primarily 
for personal, family, or household purposes, for a period exceeding 
four months and for a total contractual obligation not exceeding 
$25,000, whether or not the lessee has the option to purchase or 
otherwise become the owner of the property at the expiration of the 
lease. Unless the context indicates otherwise, in this part ``lease'' 
means ``consumer lease.''
    (2) The term does not include a lease that meets the definition of 
a credit sale in Regulation Z (12 CFR 226.2(a)). It also does not 
include a lease for agricultural, business, or commercial purposes or a 
lease made to an organization.
    (3) This part does not apply to a lease transaction of personal 
property which is incident to the lease of real property and which 
provides that:
    (i) The lessee has no liability for the value of the personal 
property at the end of the lease term except for abnormal wear and 
tear; and
    (ii) The lessee has no option to purchase the leased property.
    (f) Gross capitalized cost means the amount agreed upon by the 
lessor and the lessee as the value of the leased property and any items 
that are capitalized or amortized during the lease term, including but 
not limited to taxes, insurance, service agreements, and any 
outstanding balance from a prior loan or lease. Capitalized cost 
reduction means the total amount of any rebate, cash payment, net 
trade-in allowance, and noncash credit that reduces the gross 
capitalized cost. The adjusted capitalized cost equals the gross 
capitalized cost less the capitalized cost reduction, and is the amount 
used by the lessor in calculating the base periodic payment.
    (g) Lessee means a natural person who enters into or is offered a 
consumer lease.
    (h) Lessor means a person who regularly leases, offers to lease, or 
arranges for the lease of personal property under a consumer lease. A 
person who has leased, offered, or arranged to lease personal property 
more than five times in the preceding calendar year or more than five 
times in the current calendar year is subject to the act and this part.
    (i) Open-end lease means a consumer lease in which the lessee's 
liability at the end of the lease term is based on the difference 
between the residual value of the leased property and its realized 
value.
    (j) Organization means a corporation, trust, estate, partnership, 
cooperative, association, or government entity or instrumentality.
    (k) Person means a natural person or an organization.
    (l) Personal property means any property that is not real property 
under the law of the state where the property is located at the time it 
is offered or made available for lease.
    (m) Realized value means:
    (1) The price received by the lessor for the leased property at 
disposition;
    (2) The highest offer for disposition of the leased property; or
    (3) The fair market value of the leased property at the end of the 
lease term.
    (n) Residual value means the value of the leased property at the 
end of the

[[Page 52259]]

lease term, as estimated or assigned at consummation by the lessor, 
used in calculating the base periodic payment.
    (o) Security interest and security mean any interest in property 
that secures the payment or performance of an obligation.
    (p) State means any state, the District of Columbia, the 
Commonwealth of Puerto Rico, and any territory or possession of the 
United States.


Sec. 213.3  General disclosure requirements.

    (a) General requirements. A lessor shall make the disclosures 
required by Sec. 213.4, as applicable. The disclosures shall be made 
clearly and conspicuously in writing in a form the consumer may keep, 
in accordance with this section.
    (1) Form of disclosures. The disclosures required by Sec. 213.4 
shall be given to the lessee together in a dated statement that 
identifies the lessor and the lessee; the disclosures may be made 
either in a separate statement that identifies the consumer lease 
transaction or in the contract or other document evidencing the lease. 
Alternatively, the disclosures required to be segregated from other 
information under paragraph (a)(2) of this section may be provided in a 
separate dated statement that identifies the lease, and the other 
required disclosures may be provided in the lease contract or other 
document evidencing the lease. In a lease of multiple items, the 
property description required by Sec. 213.4(a) may be given in a 
separate statement that is incorporated by reference in the disclosure 
statement required by this paragraph.
    (2) Segregation of certain disclosures. The following disclosures 
shall be segregated from other information and shall contain only 
directly related information: Secs. 213.4(b) through (f), (g)(2), 
(h)(3), (i)(1), (j), and (m)(1). The headings, content, and format for 
the disclosures referred to in this paragraph (a)(2) shall be provided 
in a manner substantially similar to the applicable model form in 
appendix A of this part.
    (3) Timing of disclosures. A lessor shall provide the disclosures 
to the lessee prior to the consummation of a consumer lease.
    (4) Language of disclosures. The disclosures required by Sec. 213.4 
may be made in a language other than English provided that they are 
made available in English upon the lessee's request.
    (b) Additional information; nonsegregated disclosures. Additional 
information may be provided with any disclosure not listed in paragraph 
(a)(2) of this section, but it shall not be stated, used, or placed so 
as to mislead or confuse the lessee or contradict, obscure, or detract 
attention from any disclosure required by this part.
    (c) Multiple lessors or lessees. When a transaction involves more 
than one lessor, the disclosures required by this part may be made by 
one lessor on behalf of all the lessors. When a lease involves more 
than one lessee, the lessor may provide the disclosures to any lessee 
who is primarily liable on the lease.
    (d) Use of estimates. If an amount or other item needed to comply 
with a required disclosure is unknown or unavailable after reasonable 
efforts have been made to ascertain the information, the lessor may use 
a reasonable estimate that is based on the best information available 
to the lessor, is clearly identified as an estimate, and is not used to 
circumvent or evade any disclosures required by this part.
    (e) Effect of subsequent occurrence. If a required disclosure 
becomes inaccurate because of an event occurring after consummation, 
the inaccuracy is not a violation of this part.
    (f) Minor variations. A lessor may disregard the effects of the 
following in making disclosures:
    (1) That payments must be collected in whole cents;
    (2) That dates of scheduled payments may be different because a 
scheduled date is not a business day;
    (3) That months have different numbers of days; and
    (4) That February 29 occurs in a leap year.


Sec. 213.4  Content of disclosures.

    For any consumer lease subject to this part, the lessor shall 
disclose the following information, as applicable:
    (a) Description of property. A brief description of the leased 
property sufficient to identify the property to the lessee and lessor.
    (b) Amount due at lease signing. The total amount to be paid prior 
to or at consummation, using the term ``amount due at lease signing.'' 
The lessor shall itemize each component by type and amount, including 
any refundable security deposit, advance monthly or other periodic 
payment, and capitalized cost reduction; and in motor-vehicle leases, 
shall itemize how the amount due will be paid, by type and amount, 
including any net trade-in allowance, rebates, noncash credits, and 
cash payments in a format substantially similar to the model forms in 
appendix A of this part.
    (c) Payment schedule and total amount of periodic payments. The 
number, amount, and due dates or periods of payments scheduled under 
the lease, and the total amount of the periodic payments.
    (d) Other charges. The total amount of other charges payable to the 
lessor, itemized by type and amount, that are not included in the 
periodic payments. Such charges include the amount of any liability the 
lease imposes upon the lessee at the end of the lease term; the 
potential difference between the residual and realized values referred 
to in paragraph (k) of this section is excluded.
    (e) Total of payments. The total of payments, with a description 
such as ``the amount you will have paid by the end of the lease.'' This 
amount is the sum of the amount due at lease signing (less any 
refundable amounts), the total amount of periodic payments (less any 
portion of the periodic payment paid at lease signing), and other 
charges under paragraphs (b), (c), and (d) of this section. In an open-
end lease, a description such as ``you will owe an additional amount if 
the actual value of the vehicle is less than the residual value'' shall 
accompany the disclosure.
    (f) Payment calculation. In a motor-vehicle lease, a mathematical 
progression of how the scheduled periodic payment is derived, in a 
format substantially similar to the applicable model form in appendix A 
of this part, which shall contain the following:
    (1) Gross capitalized cost. The gross capitalized cost, including a 
disclosure of the agreed upon value of the vehicle, a description such 
as ``the agreed upon value of the vehicle [state the amount] and any 
items you pay for over the lease term (such as service contracts, 
insurance, and any outstanding prior loan or lease balance),'' and a 
statement of the lessee's option to receive a separate written 
itemization of the gross capitalized cost. If requested by the lessee, 
the itemization shall be provided before consummation.
    (2) Capitalized cost reduction. The capitalized cost reduction, 
with a description such as ``the amount of any net trade-in allowance, 
rebate, noncash credit, or cash you pay that reduces the gross 
capitalized cost.''
    (3) Adjusted capitalized cost. The adjusted capitalized cost, with 
a description such as ``the amount used in calculating your base 
[periodic] payment.''
    (4) Residual value. The residual value, with a description such as 
``the value of the vehicle at the end of the lease used in calculating 
your base [periodic] payment.''
    (5) Depreciation and any amortized amounts. The depreciation and 
any amortized amounts, which is the difference between the adjusted

[[Page 52260]]

capitalized cost and the residual value, with a description such as 
``the amount charged for the vehicle's decline in value through normal 
use and for any other items paid over the lease term.''
    (6) Rent charge. The rent charge, with a description such as ``the 
amount charged in addition to the depreciation and any amortized 
amounts.'' This amount is the difference between the total of the base 
periodic payments over the lease term minus the depreciation and any 
amortized amounts.
    (7) Total of base periodic payments. The total of base periodic 
payments with a description such as ``depreciation and any amortized 
amounts plus the rent charge.''
    (8) Lease term. The lease term with a description such as ``the 
number of [periods of repayment] in your lease.''
    (9) Base periodic payment. The total of the base periodic payments 
divided by the number of payment periods in the lease.
    (10) Itemization of other charges. An itemization of any other 
charges that are part of the periodic payment.
    (11) Total periodic payment. The sum of the base periodic payment 
and any other charges that are part of the periodic payment.
    (g) Early termination--(1) Conditions and disclosure of charges. A 
statement of the conditions under which the lessee or lessor may 
terminate the lease prior to the end of the lease term; and the amount 
or a description of the method for determining the amount of any 
penalty or other charge for early termination, which must be 
reasonable.
    (2) Early-termination notice. In a motor-vehicle lease, a notice 
substantially similar to the following: ``Early Termination. You may 
have to pay a substantial charge if you end this lease early. The 
charge may be up to several thousand dollars. The actual charge will 
depend on when the lease is terminated. The earlier you end the lease, 
the greater this charge is likely to be.''
    (h) Maintenance responsibilities. The following provisions are 
required:
    (1) Statement of responsibilities. A statement specifying whether 
the lessor or the lessee is responsible for maintaining or servicing 
the leased property, together with a brief description of the 
responsibility;
    (2) Wear and use standard. A statement of the lessor's standards 
for wear and use (if any), which must be reasonable; and
    (3) Notice of wear and use standard. In a motor-vehicle lease, a 
notice regarding wear and use substantially similar to the following: 
``Excessive Wear and Use. You may be charged for excessive wear based 
on our standards for normal use.'' The notice shall also specify the 
amount or method for determining any charge for excess mileage.
    (i) Purchase option. A statement of whether or not the lessee has 
the option to purchase the leased property, and:
    (1) End of lease term. If at the end of the lease term, the 
purchase price; and
    (2) During lease term. If prior to the end of the lease term, the 
purchase price or the method for determining the price and when the 
lessee may exercise this option.
    (j) Statement referencing nonsegregated disclosures. A statement 
that the lessee should refer to the lease documents for additional 
information on early termination, purchase options and maintenance 
responsibilities, warranties, late and default charges, insurance, and 
any security interests, if applicable.
    (k) Liability between residual and realized values. A statement of 
the lessee's liability, if any, at early termination or at the end of 
the lease term for the difference between the residual value of the 
leased property and its realized value.
    (l) Right of appraisal. If the lessee's liability at early 
termination or at the end of the lease term is based on the realized 
value of the leased property, a statement that the lessee may obtain, 
at the lessee's expense, a professional appraisal by an independent 
third party (agreed to by the lessee and the lessor) of the value that 
could be realized at sale of the leased property. The appraisal shall 
be final and binding on the parties.
    (m) Liability at end of lease term based on residual value. If the 
lessee is liable at the end of the lease term for the difference 
between the residual value of the leased property and its realized 
value:
    (1) Rent and other charges. The rent and other charges, paid by the 
lessee and required by the lessor as an incident to the lease 
transaction, with a description such as ``the total amount of rent and 
other charges imposed in connection with your lease [state the 
amount].''
    (2) Excess liability. A statement about a rebuttable presumption 
that, at the end of the lease term, the residual value of the leased 
property is unreasonable and not in good faith to the extent that the 
residual value exceeds the realized value by more than three times the 
base monthly payment (or more than three times the average payment 
allocable to a monthly period, if the lease calls for periodic payments 
other than monthly); and that the lessor cannot collect the excess 
amount unless the lessor brings a successful court action and pays the 
lessee's reasonable attorney's fees, or unless the excess of the 
residual value over the realized value is due to unreasonable or 
excessive wear or use of the leased property (in which case the 
rebuttable presumption does not apply).
    (3) Mutually agreeable final adjustment. A statement that the 
lessee and lessor are permitted, after termination of the lease, to 
make any mutually agreeable final adjustment regarding excess 
liability.
    (n) Fees and taxes. The total dollar amount for all official and 
license fees, registration, title, or taxes required to be paid to the 
lessor in connection with the lease.
    (o) Insurance. A brief identification of insurance in connection 
with the lease including:
    (1) Voluntary insurance. If the insurance is provided by or paid 
through the lessor, the types and amounts of coverage and the cost to 
the lessee; or
    (2) Required insurance. If the lessee must obtain the insurance, 
the types and amounts of coverage required of the lessee.
    (p) Warranties or guarantees. A statement identifying all express 
warranties and guarantees from the manufacturer or lessor with respect 
to the leased property that apply to the lessee.
    (q) Penalties and other charges for delinquency. The amount or the 
method of determining the amount of any penalty or other charge for 
delinquency, default, or late payments, which must be reasonable.
    (r) Security interest. A description of any security interest, 
other than a security deposit disclosed under paragraph (b) of this 
section, held or to be retained by the lessor; and a clear 
identification of the property to which the security interest relates.
    (s) Limitations on rate information. If a lessor provides a 
percentage rate in an advertisement or in documents evidencing the 
lease transaction, a notice stating that ``this percentage may not 
measure the overall cost of financing this lease'' shall accompany the 
rate disclosure. The lessor shall not use the term ``annual percentage 
rate,'' ``annual lease rate,'' or any equivalent term.


Sec. 213.5  Renegotiations, extensions, and assumptions.

    (a) Renegotiation. A renegotiation occurs when a consumer lease 
subject to this part is satisfied and replaced by a new lease 
undertaken by the same consumer. A renegotiation requires new

[[Page 52261]]

disclosures, except as provided in paragraph (d) of this section.
    (b) Extension. An extension is a continuation, agreed to by the 
lessor and the lessee, of an existing consumer lease beyond the 
originally scheduled end of the lease term, except when the 
continuation is the result of a renegotiation. An extension that 
exceeds six months requires new disclosures, except as provided in 
paragraph (d) of this section.
    (c) Assumption. New disclosures are not required when a consumer 
lease is assumed by another person, whether or not the lessor charges 
an assumption fee.
    (d) Exceptions. New disclosures are not required for the following, 
even if they meet the definition of a renegotiation or an extension:
    (1) A reduction in the lease charge;
    (2) The deferment of one or more payments, whether or not a fee is 
charged;
    (3) The extension of a lease for not more than six months on a 
month-to-month basis or otherwise;
    (4) A substitution of leased property with property that has a 
substantially equivalent or greater economic value, provided no other 
lease terms are changed;
    (5) The addition, deletion, or substitution of leased property in a 
multiple-item lease, provided the average periodic payment does not 
change by more than 25 percent; or
    (6) An agreement resulting from a court proceeding.


Sec. 213.6  [Reserved]


Sec. 213.7  Advertising.

    (a) General rule. An advertisement for a consumer lease may state 
that a specific lease of property at specific amounts or terms is 
available only if the lessor usually and customarily leases or will 
lease the property at those amounts or terms.
    (b) Clear and conspicuous standard. Disclosures required by this 
section shall be made clearly and conspicuously.
    (1) Amount due at lease signing. Except for the statement of a 
periodic payment, any affirmative or negative reference to a charge 
that is a part of the total amount due at lease signing under paragraph 
(d)(2)(ii) of this section, such as the amount of any capitalized cost 
reduction (or no capitalized cost reduction is required), shall not be 
more prominent than the disclosure of the total amount due at lease 
signing.
    (2) Advertisement of a lease rate. If a lessor provides a 
percentage rate in an advertisement, the rate shall not be more 
prominent than any of the disclosures in Sec. 213.4, with the exception 
of the notice in Sec. 213.4(s) required to accompany the rate; and the 
lessor shall not use the term ``annual percentage rate,'' ``annual 
lease rate,'' or equivalent term.
    (c) Catalogs and multipage advertisements. A catalog or other 
multipage advertisement that provides a table or schedule of the 
required disclosures shall be considered a single advertisement if, for 
lease terms that appear without all the required disclosures, the 
advertisement refers to the page or pages on which the table or 
schedule appears.
    (d) Advertisement of terms that require additional disclosure.--(1) 
Triggering terms. An advertisement that states any of the following 
items shall contain the disclosures required by paragraph (d)(2) of 
this section, except as provided in paragraphs (e) and (f) of this 
section:
    (i) The amount of any payment;
    (ii) The number of required payments; or
    (iii) A statement of any capitalized cost reduction or other 
payment required prior to or at consummation, or that no payment is 
required.
    (2) Additional terms. An advertisement stating any item listed in 
paragraph (d)(1) of this section shall also state the following items:
    (i) That the transaction advertised is a lease;
    (ii) The total amount due at lease signing, or that no payment is 
required;
    (iii) The number, amounts, due dates or periods of scheduled 
payments, and total of such payments under the lease;
    (iv) A statement of whether or not the lessee has the option to 
purchase the leased property, and where the lessee has the option to 
purchase at the end of the lease term, the purchase-option price. The 
method of determining the purchase-option price may be substituted in 
disclosing the lessee's option to purchase the leased property prior to 
the end of the lease term;
    (v) A statement of the amount, or the method for determining the 
amount, of the lessee's liability (if any) at the end of the lease 
term; and
    (vi) A statement of the lessee's liability (if any) for the 
difference between the residual value of the leased property and its 
realized value at the end of the lease term.
    (e) Alternative disclosures--merchandise tags. A merchandise tag 
stating any item listed in paragraph (d)(1) of this section may comply 
with paragraph (d)(2) of this section by referring to a sign or display 
prominently posted in the lessor's place of business that contains a 
table or schedule of the required disclosures.
    (f) Alternative disclosures--television or radio advertisements.--
(1) Toll-free number or print advertisement. An advertisement made 
through television or radio stating any item listed in paragraph (d)(1) 
of this section complies with paragraph (d)(2) of this section if the 
advertisement states the items listed in paragraphs (d)(2)(i) through 
(iii) of this section, and:
    (i) Lists a toll-free telephone number along with a reference that 
such number may be used by consumers to obtain the information required 
by paragraph (d)(2) of this section; or
    (ii) Directs the consumer to a written advertisement in a 
publication of general circulation in the community served by the media 
station, including the name and the date of the publication, with a 
statement that information required by paragraph (d)(2) of this section 
is included in the advertisement. The written advertisement shall be 
published beginning at least three days before and ending at least ten 
days after the broadcast.
    (2) Establishment of toll-free number. (i) The toll-free telephone 
number shall be available for no fewer than ten days, beginning on the 
date of the broadcast.
    (ii) The lessor shall provide the information required by paragraph 
(d)(2) of this section orally, or in writing upon request.


Sec. 213.8  Record retention.

    A lessor shall retain evidence of compliance with the requirements 
imposed by this part, other than the advertising requirements under 
Sec. 213.7, for a period of not less than two years after the date the 
disclosures are required to be made or an action is required to be 
taken.


Sec. 213.9  Relation to state laws.

    (a) Inconsistent state law. A state law that is inconsistent with 
the requirements of the act and this part is preempted to the extent of 
the inconsistency. If a lessor cannot comply with a state law without 
violating a provision of this part, the state law is inconsistent 
within the meaning of section 186(a) of the act and is preempted, 
unless the state law gives greater protection and benefit to the 
consumer. A state, through an official having primary enforcement or 
interpretative responsibilities for the state consumer leasing law, may 
apply to the Board for a preemption determination.
    (b) Exemptions.--(1) Application. A state may apply to the Board 
for an

[[Page 52262]]

exemption from the requirements of the act and this part for any class 
of lease transactions within the state. The Board will grant such an 
exemption if the Board determines that:
    (i) The class of leasing transactions is subject to state law 
requirements substantially similar to the act and this part or that 
lessees are afforded greater protection under state law; and
    (ii) There is adequate provision for state enforcement.
    (2) Enforcement and liability. After an exemption has been granted, 
the requirements of the applicable state law (except for additional 
requirements not imposed by federal law) will constitute the 
requirements of the act and this part. No exemption will extend to the 
civil liability provisions of sections 130, 131, and 185 of the act.

Appendix A to Part 213--Model Forms

A-1  Model Open-End or Finance Vehicle Lease Disclosures
A-2  Model Closed-End or Net Vehicle Lease Disclosures
A-3  Model Furniture Lease Disclosures

BILLING CODE 6210-01-P

[[Page 52263]]

[GRAPHIC] [TIFF OMITTED] TR07OC96.006



[[Page 52264]]

[GRAPHIC] [TIFF OMITTED] TR07OC96.007



[[Page 52265]]

[GRAPHIC] [TIFF OMITTED] TR07OC96.008



[[Page 52266]]

[GRAPHIC] [TIFF OMITTED] TR07OC96.009



[[Page 52267]]

[GRAPHIC] [TIFF OMITTED] TR07OC96.010



[[Page 52268]]

[GRAPHIC] [TIFF OMITTED] TR07OC96.011



BILLING CODE 6210-01-C

[[Page 52269]]

Appendix B to Part 213--Federal Enforcement Agencies

    The following list indicates which federal agency enforces 
Regulation M (12 CFR Part 213) for particular classes of business. 
Any questions concerning compliance by a particular business should 
be directed to the appropriate enforcement agency. Terms that are 
not defined in the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) 
shall have the meaning given to them in the International Banking 
Act of 1978 (12 U.S.C. 3101).

1. National banks and federal branches and federal agencies of 
foreign banks
    District office of the Office of the Comptroller of the Currency 
for the district in which the institution is located.
2. State member banks, branches and agencies of foreign banks (other 
than federal branches, federal agencies, and insured state branches 
of foreign banks), commercial lending companies owned or controlled 
by foreign banks, and organizations operating under section 25 or 
25A of the Federal Reserve Act
    Federal Reserve Bank serving the District in which the 
institution is located.
3. Nonmember insured banks and insured state branches of foreign 
banks
    Federal Deposit Insurance Corporation Regional Director for the 
region in which the institution is located.
4. Savings institutions insured under the Savings Association 
Insurance Fund of the FDIC and federally chartered savings banks 
insured under the Bank Insurance Fund of the FDIC (but not including 
state-chartered savings banks insured under the Bank Insurance Fund)
    Office of Thrift Supervision regional director for the region in 
which the institution is located.
5. Federal credit unions
    Regional office of the National Credit Union Administration 
serving the area in which the federal credit union is located.
6. Air carriers
    Assistant General Counsel for Aviation Enforcement and 
Proceedings, Department of Transportation, 400 Seventh Street, S.W., 
Washington, DC 20590
7. Those subject to Packers and Stockyards Act
    Nearest Packers and Stockyards Administration area supervisor.
8. Federal Land Banks, Federal Land Bank Associations, Federal 
Intermediate Credit Banks, and Production Credit Associations
    Farm Credit Administration, 490 L'Enfant Plaza, S.W., 
Washington, DC 20578
9. All other lessors (lessors operating on a local or regional basis 
should use the address of the FTC regional office in which they 
operate)
    Division of Credit Practices, Bureau of Consumer Protection, 
Federal Trade Commission, Washington, DC 20580

Appendix C to Part 213--Issuance of Staff Interpretations

    Officials in the Board's Division of Consumer and Community 
Affairs are authorized to issue official staff interpretations of 
this Regulation M (12 CFR Part 213). These interpretations provide 
the formal protection afforded under section 130(f) of the act. 
Except in unusual circumstances, interpretations will not be issued 
separately but will be incorporated in an official commentary to 
Regulation M (Supplement I of this part), which will be amended 
periodically. No staff interpretations will be issued approving 
lessor's forms, statements, or calculation tools or methods.

Supplement I to Part 213--[Amended]

    4. The Supplement to part 213 is amended by revising the heading to 
read as follows:

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

    Note: Appendix I will not appear in the Code of Federal 
Regulations.

Appendix I to the Preamble--Regulatory Flexibility Analysis

I. Introduction

    Acquiring and financing a substantial asset through purchase credit 
or a lease contract ranks among the most complicated financial 
transactions a typical consumer undertakes. In fundamental economic 
terms, however, a consumer's decision whether to lease rather than use 
more traditional forms of credit is relatively straightforward. Stating 
the problem in its simplest form, a consumer should lease an asset 
rather than purchase it on credit if the discounted present cost of all 
the lease payments and outflows (including down payments and any 
deferred payment for a residual value where relevant) is less than the 
present cost of all outflows for the credit purchase over a comparable 
period of leasing or ownership.
    Unfortunately, difficulties arise that make this criterion less 
than straightforward for many consumers. One problem is properly 
accounting for the streams of outflows--including acquisition charges, 
down payments, periodic payments, disposal charges, taxes, insurance 
premiums, and other outflows--that can differ in both timing and 
amounts under the two financing alternatives. A more basic concern is 
that consumers do not typically think in terms of present values, 
discount rates, and other elements of financial economics that are 
second nature to the financial analyst, even though present value is 
the index that brings asset acquisitions under different financing 
schemes into the same framework.
    To help satisfy concerns that individuals did not have the 
necessary information available to make lease versus purchase decisions 
wisely, Congress in 1976 mandated consumer disclosures for leases by 
passing the Consumer Leasing Act. Structurally, the Consumer Leasing 
Act is an amendment to the Truth-in-Lending Act, which Congress 
established as a basic consumer protection in 1968. A recurring 
question since then is whether the Truth-in-Lending Act generally, 
including the Consumer Leasing Act component (which is unchanged since 
passage), meets the needs of consumers in today's marketplace.1
---------------------------------------------------------------------------

    \1\ Congress itself is reviewing this question in the 1995-6 
session as members in each house have introduced bills to amend both 
Truth in Lending and the Consumer Leasing Act.
---------------------------------------------------------------------------

    This paper examines current and proposed disclosure requirements 
for vehicle leasing, the largest segment of the leasing industry 
subject to consumer disclosure requirements, in light of consumers' 
information needs--including what is necessary to calculate present 
values, the method of comparison that places all financing methods on 
the same footing. First, Section II looks briefly at types of 
automobile leases commonly available in today's marketplace and notes 
some important characteristics. Section III then reviews the cash flows 
that arise under the most common form of consumer automobile-leasing 
arrangement, the closed-end operating lease, and specifies a present 
value equation that consumers might use to analyze their leasing 
decisions. Finally, Section IV examines staff proposals to revise the 
disclosure requirements in Regulation M, the regulation that implements 
the Consumer Leasing Act, in view of consumers' information needs and 
the regulatory burdens that the proposed changes would entail.

II. Kinds of Leases

    As the leasing market has evolved over the years, the closed-end 
operating lease has become typical in consumer transactions, at least 
in the big market for automobiles and light trucks. An ``operating 
lease'' covers a period of time shorter than the whole economic life of 
an asset. There is an expectation that an asset will still have an 
economic value (usually called its ``residual value'') at the end of an 
operating lease. With an operating lease, an asset user (lessee) agrees 
to pay for the expected depreciation of an asset during the lease 
period, plus a financing or lease charge to compensate the owner 
(lessor) for the use of the lessor's capital, including a

[[Page 52270]]

profit. Common car rentals or apartment leases are examples of short-
term operating leases.
    Also increasingly familiar today are longer-term operating leases 
(possibly up to 4-5 years) that auto dealers offer consumers through 
leasing companies and banks. These operating leases have become 
important substitutes for purchase financing for consumers and are 
widely advertised by both automobile manufacturers and dealers. Like a 
car renter or apartment lessee, a vehicle lessee under these plans uses 
the asset for a term but must return it to the lessor at the end of the 
lease period (unless the parties make some other arrangement for 
disposition). An operating lease always assumes the asset will have 
some remaining economic life and value at lease end. Consequently, 
transfer of ownership at lease end (to the lessee or another party) 
requires additional payment for the residual value.2
---------------------------------------------------------------------------

    \2\ The alternative to an operating lease is a ``full-payout'' 
or ``financial'' lease, which finances the whole economic life of an 
asset by fully paying for (amortizing) the asset's capitalized cost, 
plus financing charges. Financial leases are not common in consumer 
leasing; they are more common in commercial leases and sale-
leaseback transactions involving industrial buildings and equipment.
---------------------------------------------------------------------------

    Among operating leases for consumers, the ``closed-end'' operating 
lease, sometimes referred to as a ``walk-away'' lease, has become the 
most common form of automobile lease agreement. On a closed-end 
operating lease the lessee has no obligation concerning the market 
value of the lessor's asset at lease end. The agreement merely requires 
the consumer to return the asset at lease end and to pay then for any 
excess damage above normal expected wear and tear.3 Common, long-
term, closed-end lease agreements for automobiles and trucks typically 
contain an option for consumers to purchase their vehicles at lease end 
at a price agreed upon at the outset, but there is no obligation to 
purchase.
---------------------------------------------------------------------------

    \3\ There may be a refundable security deposit to guarantee 
payment for damages. For automobiles there may also be a small 
``disposition'' or ``drop off'' charge specified in the contract. 
The typical automobile lease contract also specifies a yearly 
average mileage limit to avoid having charges for excess usage 
collected at lease end.
---------------------------------------------------------------------------

    The closed-end operating lease contrasts with the less common 
``open-end'' operating lease where the lessee still does not have a 
requirement to purchase but where there is an obligation at lease end 
to make up to the lessor any shortfall in the actual market value of 
the asset from expectations. In effect, the open-end lessee guarantees 
the residual value of the lessor's asset. Under typical open-end 
automobile lease contracts, consumer lessees also may purchase their 
vehicles at lease end for a purchase price guaranteed at the outset, 
but open-end lessees cannot walk away. Rather, if they return their 
vehicles, they are liable for any differences between assumed residual 
values and actual, realized market values at lease end.4
---------------------------------------------------------------------------

    \4\ The Consumer Leasing Act limits a consumer's liability for 
the difference between expected and actual market value on an open-
end vehicle lease to no more than three times the amount of the 
monthly payment. This provision likely has encouraged the use of 
closed-end leases by making open-end leases less useful to lessors 
as a way of shifting risks to their customers.
---------------------------------------------------------------------------

    From this description it is easy to see that the embedded fixed-
price purchase options in common, closed-end operating leases for 
vehicles present consumers with different risk characteristics on their 
transaction than purchase financing. Closed-end lessees do not bear any 
risk of decline in the residual value of used assets below expectations 
over the lease period, but open-end lessees and purchasers do. If at 
lease end the value of the asset is below the deferred purchase price 
set at the outset, the closed-end lessee may return the asset and walk 
away. If, in contrast, the market value at lease end is greater than 
expected, the lessee may keep the asset by paying the deferred purchase 
price agreed upon at the signing of the lease and can retain it or sell 
it. For the closed-end lessee this amounts to a ``heads I win, tails 
you lose'' proposition, at least with respect to the residual value of 
the asset. It seems reasonable to suppose that lessors will charge 
closed-end lessees for the purchase option feature that transfers the 
residual-value risk to the lessor. Purchasers and open-end lessees bear 
this risk themselves. Ultimately, it is this difference in risk 
bearing, together with differences in the size and timing of cash flows 
(discussed in the next section), that characterizes the distinction for 
consumers between leasing and purchase financing.

III. Cash Flows

    Before examining proposals for disclosures on consumer vehicle 
leases, there is some usefulness in examining the cash flows that arise 
from lease and purchase-financing contracts. Ultimately, it is 
comparison of the present values of the outflows that arise under the 
different financing schemes that resolves the question of best choice.
    In the long run in a competitive, perfect capital market with full 
information and without transaction costs or taxes, the type of 
financing arrangement for retail purchase of automobiles by consumers 
would be a matter of indifference to both consumers and creditors/
lessors: both costs to consumers and yields to creditors and lessors 
would be the same under the two financing alternatives. Clearly, 
capital markets are not perfect, however. First of all, there are 
transaction costs that may differ between leasing and debt financing. 
Also, taxes may differ between consumers and lessors, as well as 
between financing schemes, and there may be risk differences among 
consumers and among types of transactions. On occasion there also may 
be marketing promotions that encourage one transaction form over the 
other. Consequently, at different times leasing may be more or less 
advantageous than purchase financing to either consumers or creditors/
lessors, and both consumers and creditors/lessors have an interest in 
evaluating the alternatives.
    Fundamentally, consumers should choose a closed-end operating lease 
instead of debt financing only if the present value of all the costs 
(outflows) arising from the lease (including any down payment) is less 
than the present value of outflows resulting from the credit purchase 
over a comparable period of leasing or ownership.5 The present 
value of the purchase option embedded in a closed-end operating lease, 
which the consumer also pays for as part of the lease payments, must be 
subtracted from the present value of the lease payments in order to 
maintain comparability between the packages of transportation-related 
services purchased. This presents the following decision criterion:
---------------------------------------------------------------------------

    \5\ Although the discussion here concerns comparing a lease with 
a purchase, comparing two leases or two purchases would proceed in 
fundamentally the same way.
---------------------------------------------------------------------------

    If Sum PV (LP)-PV (Option) < Sum PV (FP), then lease, where PV (  ) 
= Present Value (of quantity in brackets),

LP = all payments on a lease,
FP = all payments on a financed purchase, and
Option = Value to lessee of purchase option.

    That is, if Sum PV (FP) + PV (Option)-Sum PV (LP) > 0, then lease. 
(1)
    To analyze the decision, a consumer should discount the leasing 
flows at the annual percentage rate available on the credit purchase or 
loan. If the discounted present value of the credit flows (which equals 
the purchase price) plus the present value of the option is greater 
than the discounted present

[[Page 52271]]

value of the leasing flows, then leasing is the better choice and vice 
versa.6
---------------------------------------------------------------------------

    \6\ Because discounting the flows from a financed purchase at 
the annual percentage rate paid for the credit equals the price of 
the asset, substituting the price of the asset for the discounted 
present value of the finance flows produces a standard net advantage 
of leasing (NAL) equation (see Myers, Dill, and Bautista [1976]). 
Substituting into equation 1 produces the decision criterion:
    If NAL = Purchase Price (FP) + PV (Option) - Sum PV (LP) > 0, 
then lease.
---------------------------------------------------------------------------

    Leaving aside the question whether consumers understand present 
values and the discounting process, the difficult matter in analyzing 
the decision is to specify the flows properly for the two kinds of 
arrangements. Typically, they will differ in form, timing, and amount. 
Also, valuing the purchase option available on a closed-end lease might 
become an important aspect of the decision.7
---------------------------------------------------------------------------

    \7\ As a practical matter, the value of this option may not be 
very great to the extent that lessors are reasonably competent in 
predicting values of used assets in the future and set residual 
values and optional purchase prices at lease end accordingly.
---------------------------------------------------------------------------

    Table 1 provides a listing of the four possible patterns of cash 
outflows arising from (1) a closed-end lease and (2) a purchase 
agreement for an automobile. For the lessee there are two possibilities 
at lease end: the lessee may return the vehicle to the dealer or may 
exercise the purchase option and buy it. For the credit purchaser there 
are also two possibilities at the end of the payment period: the owner 
can keep the vehicle or sell it. The table adopts the convention that 
outflows are positive and inflows negative; thus, the table expresses 
net costs of the transactions.
    Initial Flows. Under this convention, the consumer receives from a 
lease or a financed purchase an inflow (negative cost) of 
transportation and other services from the vehicle during the period 
covered by the agreement.8 Over comparable time periods the 
transportation services are assumed to be independent of the financing 
method (line 1 of Table 1).9
---------------------------------------------------------------------------

    \8\ Services provided by the vehicle may also include 
psychological services such as pride of ownership or opportunity to 
drive a new or stylish automobile or truck, and in the past these 
psychological services may have varied depending on whether the 
transaction was a purchase with financing or was a lease. For 
example, it is possible that at least some drivers felt better 
thinking they ``owned'' a vehicle rather than they merely leased its 
services. Leasing has recently become such a common financing 
alternative, however, that it seems reasonable to assume that these 
psychological services are similar for purchase financing and 
leasing today and that they are of comparable value. Differences 
that may have existed formerly may be ignored today.
    \9\ Transportation services may differ between the leasing and 
the purchase financing cases if the amount of yearly mileage 
permitted under a lease without an additional mileage charge 
(typically 12,000 or 15,000 miles per year, but with variations) 
constrains the potential purchaser. For illustrative purposes this 
limitation is assumed not to be binding so that transportation 
services provided by the leased and financed vehicles are the same 
for this example. If the constraint were binding because the 
potential lessee intends to drive more than the yearly maximum, then 
another term for the present value of the expected deferred excess 
mileage charge due at lease end would be added to column 2 of the 
table.
---------------------------------------------------------------------------

    Some of the initial outflows arising from the two alternative 
financing methods will also be the same between the alternatives, but 
some will differ. For both types of financing the consumer agrees to a 
series of outflows to satisfy the payment obligation. Frequently, the 
first of these is a trade-in of a vehicle already owned by the consumer 
(line 2 in the table). With the assumption that the consumer trades in 
the same vehicle under both financing schemes, the trade-in is the same 
under the two alternatives; this is denoted in the table by equal signs 
between columns.
    Often the trade in is accompanied by a cash down payment (line 3). 
(On a lease the down payment and the trade in are often called the 
``capitalized cost reduction.'' In Table 1 this term applies to the 
cash component.) A lessee typically must also provide a security 
deposit, which often approximates one monthly payment on the lease 
obligation (line 4). Upon satisfaction of the lease agreement this 
security deposit is refunded at lease end (line 5).
    Periodic Flows. In addition to these initial outflows, the consumer 
is also obligated for a series of further cash payments over the 
agreement period, usually monthly (line 6). On a lease the first 
payment typically is due at signing, while a credit-purchase agreement 
normally defers the first payment for a month. In many jurisdictions 
vehicle owners are also subject to personal property taxes on their 
vehicles owned or ``garaged'' within tax districts such as counties or 
states (line 7). On a lease in some jurisdictions the lessor may be 
responsible for these taxes, which it recoups by upping the necessary 
periodic payments. Consequently, for lessees the flows for personal 
property taxes may not appear as a separate, explicit outflow on a 
lease in many tax jurisdictions, even if personal property taxes are 
explicit for financed purchases. For comparability with a credit 
purchase, therefore, either the taxes in these jurisdictions must be 
subtracted from the lease payments or added to the finance 
payments.10
---------------------------------------------------------------------------

    \10\ Identifiable personal property taxes may be deductible from 
adjusted gross income for federal and state income tax purposes for 
some consumers, which also should be properly taken into account by 
those eligible for the deduction. There also may be sales taxes 
associated with both the credit purchase and the lease. For 
comparing a purchase to a lease, both must be accounted for properly 
to avoid erroneous conclusions. For example, on a purchase sales 
taxes may be financed as part of the gross purchase price and paid 
for through the down payment and periodic payment flows. On a lease 
they may be collected monthly as part of the monthly payment, either 
explicitly or not. Each of these possibilities requires an 
adjustment in the table to account properly for the facts of 
individual situations.
---------------------------------------------------------------------------

    End-of-Term Flows. End-of-term outflows also differ between 
purchasing and leasing. In the credit purchase case the consumer owns 
the vehicle at the end of the financing period and holds the right to 
continued transportation services over the additional expected life of 
the vehicle; with a lease the consumer does not have this right. To 
compare a lease with purchase financing, it is necessary to account for 
the remaining transportation services at lease end.
    One possibility, of course, is that the consumer purchases the 
leased vehicle at the end of the lease period, thereby obtaining the 
remaining transportation services. On a typical closed-end lease the 
consumer obtains the vehicle and its remaining services by purchasing 
it at the optional purchase price disclosed in the original lease 
agreement, or at some other price negotiated between the parties. This 
price becomes another outflow (line 8), this one deferred until the end 
of the lease period.11
---------------------------------------------------------------------------

    \11\ This purchase price may also be financed, in which case the 
price becomes another stream of outflows. The lessor and lessee may 
also agree to another lease or to a continuation of the old lease 
agreement. The examples in the table do not reflect these 
possibilities.
---------------------------------------------------------------------------

    Because the lessee does not have to make the decision whether or 
not to retain the vehicle until the end of the lease period, at the 
outset the deferred decision amounts to a call option for the lessee, 
and, as noted previously, this option has value because it transfers 
risks of residual price fluctuations to the lessor. In effect, when 
lessees contract for the services of vehicles, they obtain options to 
call the residual values of their vehicles at the end of the leases by 
paying at lease end a deferred optional purchase price agreed at the 
outset. This differentiates the lessee from the credit purchaser who 
owns the vehicle and bears all of the residual price risk. To maintain 
comparability with a purchase, the present value of this option must be 
subtracted from the present value of the lease costs or added to the 
present value of the purchase-finance costs (see equation 1, above).
    The other possibility is that the consumer returns the vehicle to 
the lessor at lease end, thereby giving up any claim to transportation 
services

[[Page 52272]]

remaining in the vehicle. In this case the lessee returns the vehicle 
and pays any drop-off or disposition charge in the contract (line 9), 
but not any optional purchase price (line 8 is zero in this 
case).12
---------------------------------------------------------------------------

    \12\ The lessee still acquires the purchase option, even if the 
ultimate decision is to return the vehicle at lease end, and so the 
present value of the option remains a term in equation 1, above.
---------------------------------------------------------------------------

    Purchasers who sell their vehicles receive a wholesale selling 
price upon sale (line 10 in the table). Those who sell them privately 
and not to a dealer may receive an amount closer to the retail price 
(if the cars are in good condition), less, of course, their costs of 
selling, including advertising expenses and the costs of personal time 
spent on the sale process (and subjective personal costs of any 
accompanying aggravations).
    Contingencies. Two contingencies might lead to additional outflows. 
First, there is a chance that a vehicle may be worth more or less at 
the time of eventual disposition than the consumer expects at the 
outset, which may be important to the consumer in some cases. If the 
consumer expects to purchase the vehicle at lease end or plans to 
retain the vehicle at the end of the purchase finance period, however, 
planned disposition likely will take place long enough into the future 
that the consumer may well not have at the outset any expectation about 
the value many years hence. If so, this contingency probably need not 
enter into the present value calculations at the outset of the 
transaction (or into columns 1 or 3 of Table 1).13
---------------------------------------------------------------------------

    \13\ Even if there is a recognized prior probability of deferred 
gain or loss, there is no reason to expect a difference if original 
acquisition is through a lease or purchase contract. If loss 
expectations are equal at the outset, they can be ignored in the 
calculations (and the table) when making comparisons.
---------------------------------------------------------------------------

    In the other situation, that is, if the consumer does not intend to 
retain the vehicle at lease end or plans to sell the purchased auto, 
the time before expected disposition is shorter and unexpected loss may 
become a factor in decision making. For the closed-end lessee the 
lessor bears this risk; the value to the consumer of avoiding the loss 
is subsumed into the value of the call option on the vehicle's residual 
value. Thus, of the four cases only the purchaser who plans to sell the 
vehicle upon completion of the payments is subject to this potential 
risk (column 4 on line 11 in the table).14
---------------------------------------------------------------------------

    \14\ For such a purchaser who plans to sell there is the real 
possibility of an unexpected loss upon disposition of the vehicle, 
but there may also be an unexpected gain. If the likelihood of the 
loss or gain is unknown at the outset of the lease arrangement, it 
might be argued that the expected value of the distribution of 
possibilities may well be zero, arguing for its dismissal from the 
calculations and the table. Because the risk of loss exists, 
however, an expected value of loss upon disposition is a potential 
outflow for a purchaser (column 4, line 11).
---------------------------------------------------------------------------

    A second contingency is the chance of a loss upon an early 
termination of the lease or upon a sale of the vehicle before the end 
of the credit-purchase agreement period. A loss on early termination 
might occur following theft or an accident not fully covered by 
insurance, or because the consumer desires to change vehicles before 
the end of the lease or purchase financing agreement. For both lessees 
and purchasers this risk is independent of plans to retain the vehicle 
or not at the end of the payment period and can be assumed equal for 
all lessors or all purchasers (indicated by equal signs on line 12 of 
Table 1). Since a loss (outflow) is more likely than an unexpected gain 
under these circumstances, however, the expected value is probably 
positive. To minimize the size of such losses for lessees in the cases 
of accident or theft (and the financial and legal difficulties that 
might arise) ``gap insurance'' often is available from lessors, 
typically included as part of the leasing transaction and charge. For 
most consumers, though, either the prior probability of unexpected 
early termination (and, consequently, the expected value of any 
associated loss) is probably small enough in the consumer's mind at the 
outset of the transaction, or the expectation of a difference in loss 
size in this area between leasing and purchase financing is probably 
small enough, that expectation of a loss on early termination is 
probably not much of a factor in the choice between leasing and 
financing.15
---------------------------------------------------------------------------

    \15\ This is not an argument against required disclosure of the 
existence of such a risk, however.
---------------------------------------------------------------------------

    Now, the quantities in Table 1 can be substituted into equation 1 
to derive the net advantage of leasing, first, for the case where the 
consumer keeps the vehicle at lease end (equation 2); and, second, for 
the situation where the consumer does not retain the vehicle (equation 
3).
    To ease solution, a few simplifications of the equations are 
possible. First, because Transportation Services (line 1 of Table 1) 
are assumed to be the same for comparable periods of ownership and 
lease holding, they may be ignored and omitted from the equations. 
Likewise, since the trade in is the same (line 2), it may also be 
dismissed. Third, if the expected value of the loss from an early 
termination (line 12) either is not very large or does not differ much 
between a financed purchase and a lease, it also can drop from the 
equation, since it is the difference between these quantities for a 
financed purchase and a lease which would enter the equation anyway. 
Thus, with these assumptions and recalling that leases but not 
purchases commonly require one monthly payment in advance, this leaves 
the following specifications for equations 2 and 3 for finance and 
lease periods of N months:
    (2), (3): See Equations (2) and (3) at the End of the Analysis
    These equations exhibit some features that should receive special 
mention. First, as discount rates move higher but other things are 
equal, leasing becomes relatively more attractive. Specifically, in the 
case where the vehicle is retained (equation 2), higher discount rates 
make leasing more attractive because higher discount rates relatively 
reduce the discounted future purchase price of the leased vehicle. This 
decreases the second (subtracted) term in equation 2 (the term in 
square brackets), tending the equation toward a positive value favoring 
leasing. In contrast, where the vehicle is not retained at contract end 
(equation 3), higher discount rates favor leasing for a different 
reason. In this case as the discount rate rises, it relatively 
decreases the present value of the sale price of the vehicle in the 
future. Since this is a subtracted item in the first part of the 
equation, higher discount rates again increase the likelihood that the 
equation will be positive, again tending to favor leasing relatively.
    Second, the non-retention case (equation 3) requires a term, the 
future sale price of the vehicle, that is not known at the outset of 
the transaction. Even if an expected used car price some time in the 
future is available from some guidebook, there is no certainty 
concerning this price, and there is no certainty about advertising, 
sales and aggravation costs that properly should reduce the final sales 
price. Consequently, equation 3 requires some estimating and cannot 
serve as a definitive guide.
    Third, both equations 2 and 3 contain a term for the discounted 
value of the purchase option available on a closed-end operating lease. 
Estimating the value of this option is not a simple matter, although 
its value may not be very great to the extent that experienced 
automobile dealers are reasonably proficient at estimating the values 
of used vehicles some time into the future.
    In sum, a consumer's informed choice whether to lease or purchase 
an asset like a vehicle depends on the amount and pattern of the stream 
of outflows

[[Page 52273]]

and on the discount rate that converts the stream of outflows to 
present values. Unfortunately, presence in a closed-end lease of a 
purchase option with unknown value and consumer uncertainty about 
future used-car prices mean that the single-equation optimal decision 
criterion will always contain multiple unknowns and be insoluble 
mathematically, even if the discount rate is known. Consequently, the 
search is not for the perfect set of disclosures, but rather for the 
set that enables most consumers to make good decisions most of the 
time.

IV. Required Disclosures

    Staff proposals to revise Regulation M would make substantial 
changes to the format and content of required disclosures on consumer 
leases. In analyzing this (or any) disclosure regime, a few general 
principles seem useful:
    (1) The goal of a disclosure scheme should be to make available 
sufficient information that consumers can make good decisions, not to 
require every disclosure that might possibly be useful to someone, 
sometime, for some purpose. No disclosure scheme, it seems, will ever 
be able to insure that all consumers understand everything or that they 
never have to read contracts or make any calculations for themselves. 
Required disclosures can be used to compare features of transactions, 
but cannot reasonably be specific to individuals whose situations will 
differ.
    (2) Whenever possible, disclosures should discourage obvious 
opportunities for abuses.
    (3) Regulatory requirements (and changes in requirements) should 
maintain a reasonable balance between costs and benefits.
    (4) Transaction-specific disclosures are the most costly and should 
demonstrate clear benefits.
    Avoiding the issue whether the Consumer Leasing Act itself 
satisfies these requirements, it appears that the proposed redrafted 
Regulation M does so, within the constraints of the law. The redrafted 
regulation mandates that lessors make substantial changes in the format 
and content of required disclosures, but it seems that the new approach 
will improve the quality and accessibility of useful information to 
consumers. Furthermore, much of the leasing industry supports the bulk 
of the proposed changes.
    It does not seem, however, that any leasing-disclosure scheme can 
provide all of the information required for consumers to solve 
equations 2 or 3 for the theoretically correct choice between a lease 
and a financed purchase. First of all, leasing disclosures cannot 
reasonably be expected to provide information about the purchase-
financing alternative to a lease, which is necessary to solve either 
equation. Consumers would have to obtain this information themselves by 
shopping, even if this merely means obtaining the necessary information 
from the same dealer. Second, some information like personal property 
taxes and an individual's personal tax situation are idiosyncratic to 
each shopper and must be factored into the purchase or lease decision 
by that person. Third, as already mentioned, both equations 2 and 3 
require some information, such as future prices of used vehicles and 
the present value of the purchase option, that is not readily available 
to either party to the transaction except by crude estimation.
    For these reasons, it does not seem reasonable to expect that any 
disclosure scheme will provide all the information that a consumer 
might find useful; it simply is not possible. Nonetheless, most of the 
information that consumers might need to characterize a lease is 
available from the required disclosures. Moreover, the new disclosure 
scheme should make this information easier for consumers to comprehend 
and use.
    The proposed regulation redraft does require disclosures of some 
transaction-specific numerical quantities beyond those mandated by the 
statute, which is quite detailed. In those cases where the proposed 
redraft extends the law it appears, for the most part, to respond to 
consensus of both industry and consumerist comments that such 
requirements would be useful. Except for the quantity called the 
``total of payments,'' all of the new numeric disclosures are amounts 
that lessors already calculate and have readily available. For this 
reason disclosing most of these additional quantities, even though not 
required by statute, may not by itself cause substantial marginal cost 
as part of a complete revamping of the disclosure regime. Proposed 
major changes to the regulation include the following:
    (1) Formatting Changes. The new disclosure plan will require 
substantial changes in disclosure format for all lessors. Especially 
notable are first, the requirements for segregation of a group of key 
disclosures in a highlighted ``federal box''; and second, disclosure of 
elements that comprise the monthly payment in a mathematical 
progression. Although a segregated ``federal box'' of disclosures and a 
mathematical progression are not required by the statute, they follow 
the general approach for credit disclosures that became part of 
Regulation Z under the Truth-in-Lending Act amendments of 1980. Third, 
staff also proposes requiring a new format for itemization of the 
amount due from the consumer at inception of the lease, disclosures 
already required. Under the proposed format in this area, itemization 
of amounts due at signing would be in two columns, one listing amounts 
due at signing and the other designating means of paying the itemized 
costs.
    It appears that the proposed new requirements for formatting in all 
three areas could help consumers become aware of important terms 
without searching through the contract, as is sometimes necessary 
today. At present, Regulation M contains no placement requirement for 
the key disclosures except that they be clear, conspicuous, in 
meaningful sequence, and that they be on the same page and above the 
lessee's signature. Otherwise, lessors may spread the disclosures 
through the contract document. For disclosing monthly payments, the 
current requirement is disclosure of the total amount required plus 
identification of the components; the regulation does not currently 
require disclosure of the amounts of the individual components, 
although some lessors have disclosed amounts of components and there 
has been some confusion concerning exactly what is required. 
Presentation of a mathematical progression should help interested 
consumers understand the intricacies of their transactions. The new 
requirement for placement of disclosures of amounts due at lease 
signing should help clarify questions consumers may have about any of 
these quantities.
    Even though the proposed format of the segregated key disclosures, 
the mathematical progression, and the amounts due at lease signing are 
not required by the Consumer Leasing Act, comments from the automobile 
leasing industry largely support such requirements. The automobile 
leasing industry originally proposed both the segregated key 
disclosures and the mathematical progression to the monthly payment, 
and industry comment letters have strongly favored them since. The new 
requirement for a two-column disclosure of amounts due at lease signing 
merely calls for a reorganization of current disclosures.
    In all three areas the new disclosure placement requirements would 
replace the current mandates concerning type size, sequencing, and 
placement on the same page as the lessee's signature. In the past these 
requirements have, on occasion, caused lessors some difficulties in 
form design anyway.

[[Page 52274]]

Sufficient lead time before a mandatory compliance date could minimize 
any disruptions caused by the necessity of redesigning and reprinting 
disclosure forms and of reprogramming computer systems to print the new 
forms. In addition, staff has proposed new model disclosure forms with 
segregated disclosures and mathematical progression. Use of these model 
forms ensures compliance and provides a safe harbor from liability if 
the form is used properly.
    (2) New Disclosures Associated with the Mathematical Progression 
Leading to the Monthly Payment. As indicated above, the revised 
regulation also requires some new disclosures. They include disclosure 
of gross capitalized cost, adjusted capitalized cost, residual value, 
rent charge, and total of payments. Except for total of payments, these 
new disclosures arise as components of a mathematical progression 
leading to the monthly payment. There are also requirements for 
calculating and disclosing certain subtotals. Gross capitalized cost is 
analogous to gross purchase price including lease acquisition charges, 
carried-over balances on any previous transactions, initial taxes owed, 
registration fees, delivery charges, and any after-market products such 
as extended warranties. Adjusted capitalized cost is gross capitalized 
cost less ``capitalized cost reductions'' including trade-in 
allowances, cash down payments, rebates, and any other reductions. The 
residual value of the lease is the estimated value of the asset at 
lease end. The rent charge is the lessor's added-on charge to cover 
transaction costs and the charge for capital use, including any profit 
from financing.
    Lessors determine periodic payments by subtracting the capitalized 
cost reductions and lease residual from the gross capitalized cost and 
adding the rent charge. They then divide the resulting quantity by the 
number of periods to determine the size of the base periodic payments, 
excluding any added amounts for taxes and insurance. Thus, each of 
these new disclosures (gross capitalized cost, adjusted capitalized 
cost, rent charge, and lease residual) are amounts that lessors must 
have readily available to make their calculations, although there has 
previously been no requirement for their disclosure. Likewise, newly 
required subtotals like total capitalized cost reduction (including 
cash component, trade in, and rebate or other noncash component) and 
amount to be depreciated and amortized (adjusted capitalized cost less 
lease residual) are directly derived from amounts already calculated 
and do not represent departures into a new disclosure scheme.
    As noted above, the automobile leasing industry has supported 
requiring these additional disclosures as part of the development of a 
mathematical progression leading to the monthly payment. Apparently, 
some of the industry commentary favoring these disclosures arises from 
a concern reported from time to time in the press that some dealers 
may, on occasion, take advantage of potential lessees by raising the 
capitalized cost of a vehicle and then not disclosing the amount. 
Because both monthly lease payments and early termination penalties are 
based on this term, the concern has been that nondisclosure has the 
potential to permit abuses. Although all of these disclosures are 
transaction-specific, they are already calculated by the lessor for 
each transaction and are, therefore, readily available.
    One additional new disclosure, the total of payments, is not part 
of the progression leading to the monthly payment, but it is merely 
another calculation based on quantities already disclosed or readily 
available, Thus, it should not be especially costly for lessors to 
produce as part of a revised disclosure scheme. It consists of the sum 
of the amounts due at lease signing plus the total of the periodic 
payments (payment amount times number of payments) plus other charges 
(likely to consist largely of disposition fees and taxes).
    Although disclosure of the total of payments may be useful to 
consumers on some occasions, it may not be especially useful for 
shopping purposes on others because the total will vary directly with 
the value of the vehicle and maturity of the lease, other things equal. 
Consequently, even if it is useful in some cases for comparing amounts 
on competing leases with similar terms, it will be less useful for 
comparing leases on different vehicles or on the same vehicle for 
different lease maturities. Also, it is not a present value, and the 
present value of any particular amount can vary substantially with 
different timing patterns of outflows.
    Even if these new disclosures have the potential to improve 
consumer protection and most appear to be favored by at least most of 
the automobile leasing industry, they will undoubtedly entail some 
additional cost. They may also be somewhat controversial among dealers, 
as opposed to lessors, because the new disclosures may limit their 
flexibility and will cause them to have to learn about new disclosures 
and forms. If the effective date of any final rule in this area is 
sufficiently deferred, however, it will minimize the difficulties of 
transition. Also, the cost of reprinting forms and reprogramming 
systems will largely be borne by lessors, who appear to be favorably 
inclined to the proposal, rather than by dealers.16
---------------------------------------------------------------------------

    \16\ Interestingly, although these new disclosures might help 
prevent abuses and are, consequently, consistent with general 
principles outlined above for reasonable disclosure requirements, 
they are not needed for calculating the present value of a stream of 
outflows arising from a lease, since they are not cash outflows. 
(Therefore, they do not appear in Table 1.)
---------------------------------------------------------------------------

    (3) Other New Disclosures. Staff also proposes some additional new 
disclosures that would appear below the monthly payment calculation on 
the model form. These include a warning to consumers that they may be 
liable for excess wear and use (including the amount of any excessive 
mileage charge), disclosures concerning any purchase option at lease 
end, and a direction that consumers refer to the rest of the disclosure 
statement or the contract for a list of other Consumer Leasing Act 
disclosures. Since all but the purchase-option price, if any, these are 
not transaction-specific disclosures and lessors can pre-print them on 
disclosure documents, these changes to the regulation should not be 
especially costly either, since lessors will be reprinting forms anyway 
as part of the change to the new disclosure scheme. The purchase-option 
information can be preprinted (except for the price itself, which may 
even be hand written).
    Another preprinted disclosure requires special mention. The 
Consumer Leasing Act and Regulation M require lessors to disclose the 
``amount or method'' of determining any charge for early termination of 
a lease and that the amount be ``reasonable.'' Most lessors have 
disclosed the method of determining the charge, but this approach has 
generated litigation and a finding by a United States Court of Appeals 
that a common disclosure violates the Regulation M standard ``that 
disclosures be in a reasonably understandable form.'' 17
---------------------------------------------------------------------------

    \17\ Official Staff Commentary on Regulation M, Paragraph 
4(a)(1)(1). See Lundquist vs. Security Pacific Automotive Financial 
Services Corp., 993 F.2d 11, 14-15 (2nd Circuit, 1993).
---------------------------------------------------------------------------

    Lessors contend that calculation of prepayment penalties is 
inherently complicated and, therefore, difficult to describe because of 
requirements of the accounting principles involved. Consequently, they 
have requested a determination that disclosure of the name of the 
method of determining the charge be sufficient, possibly with

[[Page 52275]]

approved model descriptive clauses as part of the regulation. Instead, 
staff has recommended requiring in the segregated disclosures a printed 
warning of the potential for a substantial charge for early 
termination, plus a full description in the disclosures outside of the 
segregated grouping of the method of calculating the penalty. This 
description would comply with the Consumer Leasing Act and Regulation M 
even if complex, as long as it is full, accurate, not intended to be 
misleading, and (as the statute requires) it is reasonable.
    These generic disclosures, including the printed warning and full 
description of the methodology for calculating an early termination 
penalty, should not entail much additional cost because they could be 
preprinted on disclosure and contract forms. The alternative, proposed 
last year, of requiring a numerical example of the penalty for early 
termination likely would entail more substantial cost because it is 
specific to each individual transaction and could not be preprinted. 
Unlike gross capitalized cost and most of the other newly required 
disclosures, this amount is not currently calculated for each 
transaction by current calculating systems and would, therefore, 
require substantial system alterations. It entails estimating the 
market value of used assets at a second point in time for each 
transaction, one year into the lease as well as at lease end. 
Furthermore, relatively few actual prepayments would closely fit the 
timing of the example, since most accounts do not prepay precisely at 
that time. Thus, there could exist the possibility of good-faith 
mistakes to which civil liability would apply with only limited 
correspondence to actual transactions. The current proposal minimizes 
this possibility.
    (4) Advertising Disclosures. Under the current regulation, 
advertised lease transactions that state certain terms trigger the 
requirement that there be other disclosures as well. Staff believes 
that there has been some ambiguity concerning disclosures of amounts 
due at the outset of leasing agreements and that the proposal would 
clarify the requirements. The proposal would not require itemization of 
amounts due at the outset, but it would require disclosure of the total 
with no component being more prominent in the advertisement than the 
total. Although the proposal will require all advertisers to become 
aware of the changed regulation and may be costly to some who must 
change their procedures, it should also make advertisements more 
readily comparable for consumers.
    The ``trigger-term'' feature of the Consumer Leasing Act appears to 
have reduced the number of radio advertisements, since time often is 
very limited and advertisers desire to use the time for their preferred 
messages. In television advertisements it has produced the widely-
discussed phenomenon of minute and/or scrolling type, which appears 
briefly at the bottom of the advertisement. A variety of observers, 
including attorneys general of some states, has questioned whether the 
use of such small type complies with the regulation or provides any 
useful consumer information.
    As discussed in the staff memorandum, legislation in 1994 amended 
the Consumer Leasing Act to resolve some of these concerns for radio 
advertising. The statutory amendments reduce the number of disclosures 
that advertisements with trigger terms must contain, and they permit 
reference to a toll-free telephone number or to print advertisements 
for the full listing. Relying on the legislative history of this 
statutory change, staff has proposed extending this approach to 
television advertising as well as to radio. For radio advertisements 
this amendment to the regulation should somewhat reduce regulatory 
burden arising from the advertising provisions of the current 
regulation by permitting advertisers to shorten the time requirements 
of their broadcast advertisements. Those consumers subjected to either 
radio or television advertisements and who are actually interested in 
learning more about the product can obtain additional information 
without visiting either sellers or financing sources. This sort of 
regulatory change may become increasingly important in the future as 
advertisers begin to use technological innovations in advertising, such 
as electronic ``interactive'' advertising prepared specifically for 
selected audiences through new media.
    (5) The Lease Charge. In the draft final rule staff did not include 
the new transaction-specific disclosure called the ``Lease Charge'' 
that was part of the proposal for public comment last year. This 
potential new disclosure was an attempt to calculate and supply 
consumers with a measure of the cost of lease financing analogous to 
the finance charge on a credit purchase. A version of this disclosure 
considered by the staff would have derived this measure essentially by 
adding to the amount of the lease rental charge 1) amounts like 
administrative fees that would qualify as prepaid finance charges, 2) 
any fees associated either with including a purchase option in the 
contract or associated with disposition expenses at lease end, and 3) 
the amount by which any optional purchase price exceeded the lease 
residual. The assumption behind this last addition is that if the 
offered optional purchase price exceeds the lease residual, then the 
difference must be a cost of financing. (The reasonableness of this 
assumption is examined further below in the following subsection, which 
discusses the lease rate, another disclosure considered by the staff 
but not included in the draft final proposal.)
    The requirement for disclosure of a lease charge likely would have 
caused more administrative difficulties and regulatory burden than the 
other newly required transaction-specific disclosures. Experience with 
Regulation Z shows that the issue of proper inclusions and exclusions 
from the finance charge (and the amount financed) on credit 
transactions has been subject to extensive litigation in the past. 
Requiring a similar disclosure for leases may have led to increased 
litigation in the leasing area as well. Also, some questions about how 
to include in the lease charge fees for exercising a purchase option or 
for return of the asset to the lessor at end of the contract, which 
would never both occur on the same contract and would always occur long 
after contract signing and delivery of the disclosures, would have to 
have been answered in the Official Staff Commentary or elsewhere before 
the regulatory change became effective.
    Apart from the likely burden of this disclosure and the potential 
for litigation, the lease charge in dollars would have only limited 
utility as a shopping tool for consumers anyway. While there may be 
some usefulness to disclosing the dollar cost of leasing in order to 
view the absolute magnitude of the agreed amount, this amount is 
dependent on the size of the transaction and it varies directly with 
maturity. Consequently, the lease charge is not especially useful for 
shopping among leases on different vehicles or of different maturities. 
Furthermore, it is merely a totalling of charges paid and payable 
regardless of timing; it is not a present value of these amounts. 
Disclosure of the method of calculating monthly payment through a 
mathematical progression likely will be of greater usefulness in 
educating consumers about the intricacies of the leasing transaction.
    (6) The Annual Percentage Lease Rate (ALR). Many commentators 
discussed the usefulness of requiring disclosure of lease charges in 
the form of an Annual Percentage Lease Rate (ALR) analogous to the 
Annual Percentage Rate (APR)

[[Page 52276]]

required by Truth in Lending for a credit transaction. The staff 
memorandum discusses this issue, although the memorandum does not 
recommend requiring this disclosure in Regulation M. Ultimately, the 
difficulties with calculating and disclosing an annual lease rate arise 
from the necessity of assuming for a lease the value of one or more 
unknowns to permit solution of the discounting equation.
    The mathematical formula for calculating a percentage rate from a 
series of cash flows is well known and straightforward: the internal 
rate of return formula commonly used to discount cash flows. For 
consumer credit, Appendix J to Regulation Z extensively describes the 
internal rate of return formula for ``unit period'' lengths of time, 
with many examples. Even an area as long established as calculating 
annual percentage rates on closed-end credit under Regulation Z can be 
subject to controversy and litigation, however, although it seems that 
turmoil rarely, if ever, arises from the mathematical formulas 
themselves. Instead, litigation comes from questions over items 
included or not in the formulas.18
---------------------------------------------------------------------------

    \18\ This has recently been evident in the controversy 
surrounding the 1994 ``Rodash'' decision, Rodash v. AIB Mortgage 
Co., 16 F. 3d 1142 (11th Cir. 1994). This case was controversial 
enough that it prompted Congress to make some changes in the Truth-
in-Lending Act itself to settle disputes over what properly is 
included in the components of the calculation.
---------------------------------------------------------------------------

    If anything, leasing is more complicated on this basis than closed-
end installment credit. The difficulties associated with leasing 
disclosures come about because on a lease a consumer does not contract 
for ownership of the whole economic life of the asset, but rather for 
only a portion of it. This fact raises questions about how to account 
properly for economic depreciation in the various parts of the asset's 
life, offers more opportunities for differing interpretations and 
conclusions, and even presents opportunities for manipulation.
    Calculating an internal rate of return from a series of cash flows 
requires knowing the amount of the credit and the pattern of the cash 
flows (see Appendix J of Regulation Z). For installment credit like 
automobile financing, if assumptions are made that the contract runs to 
maturity and that all payments arrive as scheduled, then all of these 
figures are known at the outset of the transaction. On a lease they are 
not.
    On a lease the lessee contracts only to purchase a portion of the 
economic depreciation of the asset and merely holds an option on the 
rest. For this reason, it is not possible at the outset to know the 
complete pattern of the flows. Some lessees will either pay or finance 
a balloon payment at the end of the lease term, as they acquire the 
vehicle by exercising their purchase option and paying the agreed-upon 
amount or refinancing it. Others will not purchase the vehicle and may 
have no intention at any time of exercising this option, and so the 
size of the balloon payment is irrelevant to them. Still other 
consumers will negotiate a continuation of the lease. To calculate a 
percentage rate at the outset of the lease, some assumption about the 
events at lease end is necessary.
    Although no assumption properly describes the lease-end event for 
all cases, probably the most reasonable and defensible approach is to 
assume that the percentage rate calculation for a lease depends only on 
events of the lease term. This means that the calculation should not 
consider purchase of the vehicle or negotiated continuation of the 
lease. Rather, the most reasonable assumption probably is that the 
consumer returns the vehicle to the dealer at lease end under the terms 
of the lease contract. In this case the cash flows used in the 
calculation include only those for which the consumer is contractually 
liable. Other, hypothetical, possibilities do not become part of the 
calculation.
    Under this assumption, specifying the stream of outflows during the 
period of the lease is relatively simple, except for the issue of 
valuing the purchase option. As is the case in calculating the net 
advantage of leasing over purchase financing (Equations 1-3, above), 
the present value of the purchase option embedded in a typical closed-
end operating lease that permits a lessee to call the residual value of 
the asset at a prearranged strike price must be subtracted from the 
present value of the rest of the cash flows to compare the internal 
rate of return on a lease with purchase financing. The rest of the cash 
flows are straightforward. They were described in column 2 of Table 1 
(see Section III, above).
    Equation 4 employs these flows and using the methodology of 
Appendix J to Regulation Z calculates an annualized internal rate of 
return for a lease with these cash flows by solving for i.19
---------------------------------------------------------------------------

    \19\ The term for the present value of the expected loss from 
early termination, which appears in Table 1, does not appear in 
equation 4 because it is a contingency and not predictable. 
Therefore, it cannot be a part of the calculation for a disclosed 
percentage rate.
---------------------------------------------------------------------------

    (4): See Equation (4) at the End of the Analysis
    This is not the end of the story, though. There is still the 
question of lease amount, the top line of equation 4, which is 
necessary to solve for the ALR. On a credit transaction the amount 
financed is known at the outset. What is the corresponding amount of 
the lease?
    As mentioned, a lease finances the economic depreciation of the 
asset during the lease period. In present value terms this is the 
difference between the asset price after all initial payments (called 
in the staff draft the ``adjusted capitalized cost'') and the present 
value of the residual value. Using economic depreciation as the lease 
amount in Equation 4 and adding the present value of the residual value 
to both sides of the equation produces Equation 5. Solving Equation 5 
for i calculates the ALR:
    (5): See Equation (5) at the End of the Analysis
    Conceptually, a lessor knows all of the variables in Equation 5 at 
the outset of the transaction, except the value of the purchase option. 
Consequently, some commentators have argued, in effect, that the option 
be valued at zero, which is not a correct assumption, and that lessors 
solve equation 5 for i and disclose the result, calling it an ALR. But 
equation 5 has a difficulty of its own, even disregarding the 
inappropriateness of valuing the purchase option at zero. The remaining 
important problem is that the residual value used by the lessor for the 
purposes of making the calculations can never be better than an 
estimate. No one really knows what the value of the asset will be at 
the end of the lease, and different lessors may in good faith estimate 
depreciation over the lease period (and corresponding lease residual) 
differently. This means that in good faith they can estimate different 
ALR's for otherwise identical transactions. Beyond good faith 
differences, there is also the possibility that some market 
participants may want to manipulate the lease residual to alter a 
disclosed lease rate.
    Table 2 provides an example of an automobile leasing transaction, 
using a disclosure format that, like the staff proposal, follows a 
mathematical progression illustrating the components of the 
calculation. Column 1 describes a hypothetical simplified example of a 
24 month lease.
    Assume a consumer leases a vehicle with a gross capitalized cost 
after all negotiations and extras of $20,000 (line 1). This consumer 
receives a trade-in allowance of $1000 and provides $1000 down payment 
in cash for a total capitalized cost reduction of $2000 (line 2). This 
produces an adjusted

[[Page 52277]]

capitalized cost of $18,000 (line 3). Subtracting a residual value for 
the car after 24 months of $12,000 (line 4) means depreciation of $6000 
(line 5). Adding a rent charge of $1500 (line 6) results in a total of 
periodic payments of $7500 (line 7). A term of 24 months (line 8) means 
that the monthly payment amount is $312.50 (line 9). The cash flows 
over the course of the lease consist of the stream of 24 monthly 
payments of $312.50 in column 1 of the table totaling to $7500.20
---------------------------------------------------------------------------

    \20\ For illustrative simplicity Table 2 ignores the 
complicating factors of the security deposit, refund of the deposit, 
disposition charge, and value of the purchase option. All except the 
option value could easily be added to the table.
---------------------------------------------------------------------------

    Column 2 of Table 2 illustrates the problem of different estimates 
of depreciation (and corresponding lease residuals). Suppose in the 
example in Table 2 that another dealer/lessor estimates a higher rate 
of depreciation and, therefore, a lower residual value for the same 
vehicle. But, also suppose this dealer offers the same monthly payment 
by charging a lower rental fee. From a consumer's standpoint the 
transaction illustrated in column 2 is exactly the same as the one in 
column 1: the vehicle leased in the column 2 transaction is the same, 
the trade in allowance and cash down payment are the same (each $1000), 
and the pattern and total of the payments are exactly the same (24 
monthly payments of $312.50 for a total of $7500). The calculated 
percentage rates are different, however, with column 2 leading to a 
lower ALR. This illustrates how different assumptions about 
depreciation and residuals can change the annual lease rate for the 
same payment stream, even apart from any issue of manipulation by 
dealer/lessors. If a dealer/lessor subject to a disclosure regime 
decides to minimize the disclosed percentage rate by lowering the 
expected residual for this reason, it would compound the problem.
    Table 3 illustrates the difficulty of requiring disclosure of a 
percentage rate as the dealer/lessor engages in different marketing 
strategies. The three columns illustrate common marketing strategies 
that dealer/lessors often employ, each leading to price reductions for 
the consumer. The examples are constructed so that in the absence of a 
requirement for an ALR disclosure the dealer/lessor is financially 
indifferent among the strategies. Also the example is constructed so 
that the timing and amount of outlays is the same for consumers. Which 
strategy lessors choose would seem to depend on their perceptions of 
which strategies consumers are most likely to notice and respond to. 
This may vary among dealer clienteles and for any dealer over time.
    Column 1 of Table 3 illustrates the common marketing strategy of 
raising the anticipated residual on the vehicle, thereby lowering 
depreciation and the size of the monthly payments, a common marketing 
strategy known as ``subventing'' the residual. Column 2 shows the 
impact of offering a ``subvented rebate'' on the lease. This has the 
effect of lowering the adjusted capitalized cost and the recaptured 
depreciation. The third choice, column 3, contains the example of a 
``subvented'' rental charge. In the example this lowers the monthly 
payments by the same amount as the other strategies, although this time 
not by lowering the accounted-for depreciation but instead by lowering 
the rental charge component of the monthly payment. The consumer pays 
the same amount at the same pace in each case. Thus, from the 
consumer's standpoint apart from the ALR disclosure these transactions 
are exactly the same, but their ALR's are much different, 4.79 percent, 
5.31 percent, and 0.0 percent, respectively.
    To try to minimize the possibility of manipulation of residuals by 
lessors as a way of lowering ALR's, one alternative considered by the 
staff would have required that lessors not use the lease residual in 
their calculation of the lease charge or the Annual Lease Rate if the 
residual diverges from the optional purchase price. If there is a 
divergence, then the lessor would use the optional purchase price in 
the calculation under the argument that the optional purchase price 
represents a better estimate of the true residual value of the asset, 
since it is the price at which the lessor really would be wiling to 
sell the asset. While this approach might appear to help to minimize 
absolute manipulations of the residual value by lessees, it has a 
number of problems of its own.
    One problem is that many lease contracts do not state an optional 
purchase price for the asset. It is possible, of course, even if 
perhaps not likely, that the proportion of leases without an optional 
purchase price could change as a result of the new disclosure 
regulation. Regardless of the frequency, because such leases do not 
contain an optional purchase price, only the residual could be used for 
calculations and disclosures on these leases. This would negate any 
purported advantage from requiring that the optional purchase price be 
used in place of the residual value, at least for these leases. More 
importantly, it would introduce a source of inconsistency into the 
methodology of calculations and disclosures: some disclosures would be 
based on lease residuals while disclosures on other leases would be 
dependent on optional purchase prices. It is not clear that this would 
solve the problem of potential for manipulation.
    A second problem is that use of the optional purchase price in 
place of the lease residual introduces into the calculations and 
disclosures a quantity for which the consumer is not contractually 
liable. Many consumers do not purchase their leased car at lease end. 
Substituting the optional purchase price for the lease residual for 
purposes of calculating the ALR while retaining the residual for 
calculating the monthly payment, in effect, adds the algebraic 
difference between the optional purchase price and the residual to the 
lease charge. But, the closed-end lessee is never contractually liable 
for this difference at the time the dealer makes disclosures. At the 
outset of the lease consumers do not agree to subsequent purchase of 
the vehicle or, consequently, for paying the optional purchase price or 
the difference between it and the lease residual. In many cases lessees 
do not purchase their vehicles or ever pay these amounts. Thus, 
disclosures of a lease charge or an ALR based on optional purchase 
price are never right for these consumers. Even for consumers who 
purchase their vehicles at lease end, the price may be negotiated at 
that time anyway, and may well diverge from the optional purchase price 
originally disclosed.
    A third difficulty is that the exercise price of a purchase option 
is not simply another estimate of the residual value of an asset. The 
exercise price of the purchase option may depend on the lessor's 
business strategy. Even if lessors have the same expectations about 
depreciation, they may quote different exercise prices because one may 
want to keep the asset and the other may prefer that the lessee buy the 
asset at lease end. Lessors may hedge against the possibility that 
certain high-demand assets may not actually depreciate very much in 
value over time by quoting a high, but negotiable, optional price. As a 
result, a lease charge or lease rate calculation that requires use of 
this optional purchase price, may not even approximate the lease charge 
or lease rate that a consumer actually pays, especially if the lessee 
declines to purchase the asset.

V. Impact on Small Entities

    The above analysis contains a description of the implications of 
requiring new methods of disclosures on consumers' automobile leases. 
The

[[Page 52278]]

changes will require a substantial revision to the disclosure format 
currently required of lessors. In issuing the new rule the Board has 
attempted to minimize the burden of changing to the new disclosure 
format by requiring, wherever possible, disclosures that can be 
preprinted. Furthermore, the Board took the opportunity to provide 
model forms to guide lessors. Section 105 of the Truth-in-Lending Act 
provides that a creditor or lessor that uses the appropriate model 
forms published by the Board ``shall be deemed to be in compliance with 
the disclosure provisions of this title with respect to other than 
numerical disclosures * * *.'' Thus, using the model forms provides a 
safe harbor from civil liability if the numbers are filled in 
accurately.
    Required disclosures will be the same for large and small lessors, 
but the Board does not expect that the changes to Regulation M will 
have a substantial adverse economic impact on a large number of small 
entities. The automobile leasing industry, at which the bulk of the 
changes are directed, is highly concentrated in a small number of large 
firms. Actual preparation of lease documents will typically take place 
in the offices of numerous automobile dealers, many of which are small 
entities. Preparation will take place through computer terminals and 
computer programs provided by the lessors, however. Because the new 
forms are provided through the lessors' computer systems will be 
clearer and easier for dealer personnel to understand, explanations and 
necessary training of personnel should actually be enhanced and made 
easier for dealers.

Reference

    Myers, Stewart C., David A. Dill, and Alberto J. Bautista, 
``Valuation of Financial Lease Contracts,'' Journal of Finance, June 
1976.

BILLING CODE 6210-01-P

Equations (2) Through (5)
[GRAPHIC] [TIFF OMITTED] TR07OC96.062


[[Page 52279]]

[GRAPHIC] [TIFF OMITTED] TR07OC96.063


[GRAPHIC] [TIFF OMITTED] TR07OC96.064


[[Page 52280]]

[GRAPHIC] [TIFF OMITTED] TR07OC96.065



BILLING CODE 6260-01-C


 Table 1.--Cash Outflows Associated With Obtaining Use of Assets Through Closed-End Operating Leases and Credit 
                                                    Purchases                                                   
----------------------------------------------------------------------------------------------------------------
                             Lease                                               Credit purchase                
      --------------------------------------------------        ------------------------------------------------
          Retain auto at              Turn in auto at              Retain auto when             Sell auto when  
            lease end                    least end                       paid                        paid       
----------------------------------------------------------------------------------------------------------------
(1)..  -Trans Serv........          -Trans Serv........          -Trans Serv........          -Trans Serv       
(2)..  +Trade-In..........       =  +Trade-In..........       =  +Trade-In..........       =  +Trade-In         
(3)..  +CCR...............          +CCR...............          +Down Pay..........          +Down Pay         
(4)..  +Secur Dep.........          +Secur Dep.........            .................                            
(5)..  -PV (Dep Ref)......          -PV (Dep Ref)......            .................                            
(6)..  +Sum PV (LP).......          +Sum PV (LP).......          +Sum PV (FP).......          +Sum PV(FP)       
(7)..    .................            .................          +Sum PV (PPT)......          +SumPV (PPT)      
(8)..  +PV (Pur Price)....            .................            .................                            
(9)..    .................          +PV (Disp Chrge)...            .................                            
(10).    .................            .................            .................          -PV (Sale)        
(11).    .................            .................            .................          +PV (EL/S)        
(12).  +PV (EL/ET)........       =  +PV (EL/ET)........          +PV (EL/ET)........       =  +PV (EL/ET)       
----------------------------------------------------------------------------------------------------------------
Abbreviations Used:                                                                                             
PV (    )--Present Value (of Quantity in Brackets).                                                             
Trans Serv--Transportation Services Provided.                                                                   
CCR--(Cash) Capitalized Cost Reduction.                                                                         
Down Pay--(Cash) Down Payment.                                                                                  
Secur Dep--Security Deposit.                                                                                    
Dep Ref--Security Deposit Refund.                                                                               
LP--Lease Payments.                                                                                             
FP--Finance Payments.                                                                                           
PPT--Personal Property Taxes.                                                                                   
Pur Price--Purchase Price.                                                                                      
Disp Chrge--Disposition or Drop-Off Charge.                                                                     
Sale--Sale Price.                                                                                               
EL/S--Expected Loss on Sale of the Vehicle.                                                                     
EL/ET--Expected Loss Upon Early Termination of Lease.                                                           


                    Table 2--Patterns of Disclosures                    
------------------------------------------------------------------------
                                                     1            2     
                                               -------------------------
                                                                Lower   
                                                 Base case     residual 
------------------------------------------------------------------------
(1) Gross Cap. Cost...........................       20,000       20,000

[[Page 52281]]

                                                                        
(2) Cap. Cost Reduction.......................        -2000        -2000
                                               -------------------------
(3) Adjusted Cap. Cost........................      =18,000      =18,000
(4) Residual Value............................      -12,000      -10,500
                                               -------------------------
(5) Depreciation..............................        =6000        =7500
(6) Rent Charge...............................        +1500           +0
                                               -------------------------
(7) Amount of Periodic Payments...............        =7500        =7500
(8) Lease Term................................           24           24
                                               -------------------------
(9) Base Monthly Payment......................       312.50       312.50
                                                                        
------------------------------------------------------------------------
                Additional Information about Transaction                
                                                                        
------------------------------------------------------------------------
(10) Sale Price of Vehicle....................       12,000       12,000
(11) Gain on Sale.............................            0         1500
(12) Recovery of Adjusted Cap. Cost...........       19,500       19,500
------------------------------------------------------------------------


                                        Table 3.--Patterns of Disclosures                                       
----------------------------------------------------------------------------------------------------------------
                                                                                1            2            3     
                                                                          --------------------------------------
                                                                                                       Subvent  
                                                                             Subvent      Subvent       lease   
                                                                             residual      rebate       charge  
----------------------------------------------------------------------------------------------------------------
(1) Gross Cap. Cost......................................................       20,000       20,000       20,000
(2) Cap. Cost Reduction..................................................        -2000        -3500        -2000
                                                                          --------------------------------------
(3) Adjusted Cap. Cost...................................................      =18,000      =16,500      =18,000
(4) Residual Value.......................................................      -13,500      -12,000      -12,000
                                                                          --------------------------------------
(5) Depreciation.........................................................        =4500        =4500        =6000
(6) Rent Charge..........................................................        +1500        +1500           +0
                                                                          --------------------------------------
(7) Amount of Periodic Payments..........................................        =6000        =6000        =6000
(8) Lease Term...........................................................           24           24           24
                                                                          --------------------------------------
(9) Base Monthly Payment.................................................          250          250          250
                                                                                                                
----------------------------------------------------------------------------------------------------------------
                                    Additional Information about Transaction                                    
                                                                                                                
----------------------------------------------------------------------------------------------------------------
(10) Sale Price of Vehicle...............................................       12,000       12,000       12,000
(11) Gain on Sale........................................................       (1500)            0            0
(12) Recovery of Adjusted Cap. Cost......................................       18,000       18,000       18,000
----------------------------------------------------------------------------------------------------------------

    By order of the Board of Governors of the Federal Reserve 
System, September 27, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-25273 Filed 10-4-96; 8:45 am]
BILLING CODE 6210-01-P