Federal Register, Volume 61 Issue 195 (Monday, October 7, 1996)

[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]

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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.

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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:

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:

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]]

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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}}}}}}}}}}}}}}}}}}}}