[Federal Register Volume 63, Number 57 (Wednesday, March 25, 1998)]
[Proposed Rules]
[Pages 14538-14548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6990]


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

FEDERAL RESERVE SYSTEM

12 CFR Part 213

[Regulation M; Docket No. R-1004]


Consumer Leasing

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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

SUMMARY: The Board is publishing for comment a proposed rule amending 
Regulation M, which implements the Consumer Leasing Act. The act 
requires lessors to provide consumers with uniform cost and other 
disclosures about consumer lease transactions. The proposed rule would 
allow lessors to deliver by electronic communication the disclosures 
required by the act and regulation, if the consumer agrees to such 
delivery. For purposes of the regulation, an electronic communication 
is a message transmitted electronically that allows visual text to be 
displayed on equipment such as a modem-equipped computer. In addition, 
the proposal contains several technical amendments that would be made 
to the regulation and commentary.

DATES: Comments should be received by May 15, 1998.

ADDRESSES: Comments should refer to Docket No. R-1004, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.12 of the Board's 
Rules Regarding Availability of Information.

FOR FURTHER INFORMATION CONTACT: Obrea Poindexter or Kyung Cho-Miller, 
Staff Attorneys, Division of Consumer and Community Affairs, Board of 
Governors of the Federal Reserve System, at (202) 452-3667. For users 
of Telecommunications Device for the Deaf (TDD) only, Diane Jenkins at 
(202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The Consumer Leasing Act (CLA), 15 U.S.C. 1667-1667e, was enacted 
into law in 1976 as an amendment to the Truth in Lending Act (TILA), 15 
U.S.C. 1601 et seq. The Board's Regulation M (12 CFR 213) implements 
the act. The CLA requires lessors to provide consumers with uniform 
cost and other disclosures about consumer lease transactions. The act 
generally applies to consumer leases of personal property in which the 
contractual obligation does not exceed $25,000 and has a term of more 
than four months. An automobile lease is the most common type of 
consumer lease covered by the act.
    As part of the Regulatory Planning and Review Program and its 
review of regulations under section 303 of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4803), 
the Board determined that the use of electronic communication to 
deliver information to consumers that is required by federal consumer 
financial services and fair lending laws could effectively reduce 
regulatory compliance burden without adversely affecting consumer 
protections. Thus, the Board has been considering the issue and closely 
following the development of electronic communication. For example, in 
May 1996 the Board proposed to amend Regulation E (Electronic Fund 
Transfers) to permit disclosures to be provided electronically. In 
March 1997, the Board issued an amendment to the staff commentary to 
Regulation CC (Availability of Funds and Collection of Checks) that 
allowed financial institutions to send notices electronically. (62 FR 
13801, March 18, 1997.)
    Having considered the comments received on the Regulation E 
proposal and other rulemakings, the Board now proposes to amend 
Regulation M to allow lessors to provide Regulation M disclosures 
electronically. Any electronic communication would remain subject to 
the timing, format, and other requirements of the act and the 
regulation. Concurrently, the Board is issuing similar proposed rules 
to address electronic communication under Regulations DD (Truth in 
Savings), B (Equal Credit Opportunity), and Z (Truth in Lending), 
published elsewhere in today's Federal Register. In addition, the Board 
has issued an interim rule under Regulation E also published elsewhere 
in today's Federal Register so that financial institutions can 
implement systems to provide Electronic Fund Transfer Act disclosures 
electronically.

II. Proposed Regulatory Revisions

    The CLA and Regulation M require disclosures to be provided to 
consumers in writing. Under Regulation M, the requirement that 
disclosures be in writing has been presumed to require that lessors 
provide paper documents. However, under many laws that call for 
information to be in writing, information in electronic form is 
considered to be ``written.'' Information produced, stored, or 
communicated by computer is also generally considered to be a writing 
at least where text is involved.
    Pursuant to its authority under section 187 of the CLA, the Board 
proposes to amend Regulation M to permit lessors to use electronic 
communication where the regulation calls for information to be provided 
in writing. Few lessors currently consummate lease agreements 
electronically; however, as standards are developed for establishing 
legal agreements by electronic communication, more lease contracts may 
be entered into by that means.
    The term ``electronic communication'' is limited to a communication 
that can be displayed as visual text. An example is an electronic 
visual text message that is displayed on a screen (such as the 
consumer's computer monitor). Communications by telephone voicemail 
systems do not meet the definition of ``electronic communication'' for 
purposes of this regulation because they do not have the feature 
generally associated with a writing--visual text.

Section 213.3--General Disclosure Requirements

3(a) General requirements

Definition
    Section 213.3(a) would be revised to address electronic 
communications under Sec. 213.3(a)(5). Electronic communication is a 
visual text message electronically transmitted between a lessor and a 
consumer's home computer or other electronic device used by a consumer.
Agreements Between Lessors and Consumers
    Section 213.3(a)(5) permits lessors to send electronic disclosures 
if the consumer agrees. There may be various ways that a lessor and a 
consumer could agree to the electronic delivery of disclosures and 
other information. Whether such an agreement exists between the parties 
would be

[[Page 14539]]

determined by applicable state law. The regulation would not preclude a 
lessor and a consumer from entering into an agreement electronically, 
nor does it prescribe a formal mechanism for doing so. The Board does 
believe, however, that consumers should be clearly informed when they 
are consenting to the delivery of CLA and Regulation M disclosures 
electronically.
Delivery Requirements for Electronic Communication
    Regulation M provides that a lessor make disclosures to a consumer. 
The requirement is satisfied when the institution ensures that the 
disclosures will be presented to the consumer in a timely manner. 
Electronic disclosures remain subject to the format, timing, and other 
applicable requirements under Regulation M.
The ``Clear and Conspicuous'' Standard
    Regulation M requires lessors to present required information 
``clearly and conspicuously'' in writing. The ``clear and conspicuous'' 
requirement applies to electronic disclosures. The Board does not 
intend to discourage or encourage specific types of technologies. 
Regardless of the technology, however, the disclosures provided by 
electronic communication must meet the ``clear and conspicuous'' 
standard. A lessor must satisfy this requirement, but is generally not 
required to ensure that the consumer has the equipment to read the 
disclosures.
Consumer Ability to Retain Disclosures
    Regulation M requires that written disclosures be in a form the 
consumer may keep. This requirement applies to disclosures provided by 
electronic communication. Lessors satisfy the retention requirement if, 
for example, disclosures can be printed or downloaded by the consumer. 
Thus, lessors would not be required to monitor an individual consumer's 
ability to retain the information, nor to take steps to find out 
whether the consumer has in fact retained it. The Board anticipates 
that, where appropriate, a lessor will inform consumers of any special 
technical specifications for receiving or retaining information before 
or at the time a consumer agrees to receive information electronically.
Current Need for Safeguards Concerning the Electronic Delivery of 
Disclosures
    Today, most consumers receive disclosures in paper form. As 
electronic commerce increases and technology advances take place, 
obtaining disclosures by electronic communication may likely become 
more commonplace. Compliance and other issues will arise that suggest 
further interpretations. Currently, however, the use of electronic 
communication in the delivery of financial services is still evolving. 
Thus, it is difficult to fully predict the extent to which additional 
safeguards, if any, may be needed to ensure that consumers receive the 
same protections that exist for disclosures in paper form. The Board 
expects that lessors will provide sufficient details about the delivery 
of disclosures electronically. The Board plans to closely monitor the 
development of the electronic delivery of Regulation M disclosures, and 
will address compliance or other issues that may arise as appropriate.
Section 213.4--Content of Disclosures

4(f)(8) Lease term

    In September 1996, Regulation M was revised to require, among other 
things, that lessors show consumers a mathematical progression of how a 
scheduled payment is derived in a motor vehicle lease. In deriving a 
scheduled payment, the ``total of base periodic payments'' is divided 
by the number of lease payments. The caption in the regulation and on 
the model forms refers to the number of lease payments as the ``lease 
term.''
    For leases with monthly payments, typically the lease term and the 
number of payments are the same. For leases with other payment 
arrangements, the number of payments and the lease term typically are 
not the same, for example, single-payment leases. In reflecting the 
consumer's legal obligation to make one payment under a single-payment 
lease, the figure disclosed under Sec. 213.4(f)(8) should be one, not 
the lease term of 24 months or 36 months, for example.
    To avoid confusion, references to the ``lease term'' in 
Sec. 213.4(f)(8) would be changed to ``lease payments'' with 
corresponding changes to the model forms in appendix A. Despite the 
proposed revision to the model forms, lessors would continue to use the 
existing form until the supply is exhausted. If properly completed, 
those forms comply with the requirements of the act and regulation, 
protecting lessors from civil liability under sections 130 of the Truth 
in Lending Act and 185 of the Consumer Leasing Act.
    The disclosure of the lease term is not a required disclosure. If 
they choose, however, lessors may disclose the lease term among the 
segregated disclosures along with the number of lease payments, but 
should note that the calculation under Sec. 213.4(f)(8) calls for the 
number of payments.

Section 213.7--Advertising

    In April 1997, the Board revised Regulation M to implement 
amendments to the act contained in the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996, which streamlined the advertising 
disclosures for lease transactions. (62 FR 15364, April 1, 1997) Under 
the act, certain terms in an advertisement will trigger the disclosure 
of additional information. One of them is a statement in a lease 
advertisement that no initial payment is required, which triggers the 
disclosure of additional information. This ``triggering'' term was 
inadvertently omitted from Sec. 213.7(d)(1)(ii), and is being added.

Appendix A--Model Forms

    The Board is proposing several technical changes to the model forms 
in appendix A. The model forms for open-and closed-end leases in 
appendix A-1 and A-2 would be revised to change the reference under the 
payment calculation from ``Lease term. The number of months in your 
lease.'' to ``Lease payments. The number of payments in your lease.'' 
Page 2 of the open-end model form would be revised by adding ``value'' 
after ``actual'' in the ``end of term liability'' disclosure (a)(3), 
line 3. Model form A-3 for a furniture lease would be revised by adding 
``or delivery'' after the heading ``Amount due at lease signing.''

III. Proposed Commentary Provisions

Section 213.4--Content of Disclosures

4(f) Payment Calculation

4(f)(7) Total of Base Periodic Payments.

    For motor vehicle leases, lessors are required under Sec. 213.4(f) 
to provide a mathematical progression of how scheduled lease payments 
are derived. Some lessors are concerned about exposure to civil 
liability because if one divides the total of the base periodic 
payments disclosed under Sec. 213.4(f)(7) by the number of payments in 
the lease disclosed under Sec. 213.4(f)(8) and then multiplies the base 
periodic payment disclosed under Sec. 213.4(f)(9) by the number of 
payments in the lease disclosed under Sec. 213.4(f)(8), the result is 
different because of rounding.
    This anomaly may be avoided by making adjustments to the rent 
charge. However, some lessors have requested a small tolerance for the 
total of base periodic payments disclosure. They believe that a 
tolerance of $1 would be sufficient to remedy differences due to 
rounding.

[[Page 14540]]

    In response to issues concerning rounding, proposed comment 
4(f)(7)-1 would be added to clarify that if the periodic payment 
calculation under Sec. 213.4(f) is calculated correctly, the disclosed 
total of base periodic payments is correct for disclosure purposes even 
if it varies from the base periodic payments multiplied by the number 
of payments in the lease, when the difference is solely due to 
rounding.

4(n) Fees and Taxes

    Several examples are provided in comment 4(n)-1 to illustrate when 
taxes are disclosed under this section. The treatment of taxes paid as 
a part of regularly scheduled payments is unclear. This comment would 
be revised to clarify that taxes that are part of the regularly 
scheduled payments are required to be disclosed under Sec. 213.4(n).

Appendix A--Model Forms

    Comment 2 to Appendix A provides examples of acceptable changes 
that may be made to the model forms. At the request of lessors, the 
comment would be revised to clarify that inapplicable disclosures may 
be deleted.

IV. Form of Comment Letters

    Comment letters should refer to Docket No. R-1004 and, when 
possible, should use a standard typeface with a type size of 10 or 12 
characters per inch. This will enable the Board to convert the text to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Also, if accompanied by an 
original document in paper form, comments may be submitted on 3\1/2\ 
inch or 5\1/4\ inch computer diskettes in any IBM-compatible DOS-based 
format.

V. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act, 
the Board's office of the Secretary has reviewed the proposed 
amendments to Regulation M. Overall, the proposed amendments are not 
expected to have any significant impact on small entities. The proposed 
rule would relieve compliance burden. The proposed rule would also give 
lessors flexibility in providing disclosures. A final regulatory 
flexibility analysis will be conducted after consideration of comments 
received during the public comment period.

VI. Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed 
the proposed rule under the authority delegated to the Board by the 
Office of Management and Budget.
    The Federal Reserve has no data with which to estimate the burden 
the proposed revised requirements would impose on state member banks. 
Lessors would be able to use electronic communication to provide 
disclosures and other information required by this regulation rather 
than having to make the information available in paper form. The use of 
electronic communication in home banking and financial services may 
reduce the paperwork burden of lessors or merely may reduce the dollar 
cost.
    The Federal Reserve requests comments from lessors, especially 
state member banks, that will help to estimate the number and burden of 
the various disclosures that would be made in the first year this rule 
is effective. Comments are invited on: (a) Whether the proposed revised 
collection of information is necessary for the proper performance of 
the Federal Reserve's functions; including whether the information has 
practical utility; (b) the accuracy of the Federal Reserve's estimate 
of the burden of the proposed revised information collection, including 
the cost of compliance; (c) ways to enhance the quality, utility, and 
clarity of the information to be collected; and (d) ways to minimize 
the burden of information collection on respondents, including through 
the use of automated collection techniques or other forms of 
information technology. Comments on the collection of information 
should be sent to the Office of Management and Budget, Paperwork 
Reduction Project (7100-0202), Washington, DC 20503, with copies of 
such comments to be sent to Mary M. McLaughlin, Chief, Financial 
Reports Section, Division of Research and Statistics, Mail Stop 97, 
Board of Governors of the Federal Reserve System, Washington, DC 20551.
    The collection of information requirements in this proposed revised 
regulation are found in 12 CFR 213.3, 213.4, 213.5, 213.7, 213.8, and 
appendix A. This information is mandatory (15 U.S.C. 1667 et seq.) to 
ensure adequate disclosure of basic terms, costs, and rights relating 
to services affecting consumers using certain home-banking services and 
consumers receiving certain disclosures by electronic communication. 
The respondents/recordkeepers are for-profit, including small 
businesses. Records, required to evidence compliance with the 
regulation, must be retained for twenty-four months.
    The Board also proposes to extend the Recordkeeping and Disclosure 
Requirements in Connection with Regulation M (OMB No. 7100-0202) for 
three years. The current estimated total annual burden for this 
information collection is 11,179 hours, as shown in the table below. 
The proposed clarifications of some leasing terms are not estimated to 
affect the paperwork burden. These amounts reflect the burden estimate 
of the Federal Reserve System for the state member banks under its 
supervision, of which relatively few engage in consumer leasing. This 
regulation applies to all types of lessors, not just state member 
banks. However, under Paperwork Reduction Act regulations, the Federal 
Reserve accounts for the burden of the paperwork associated with the 
regulation only for state member banks. Other agencies account for the 
paperwork burden for the institutions they supervise.

----------------------------------------------------------------------------------------------------------------
                                                                                                      Estimated 
                                           Number of    Estimated                                       annual  
                                          respondents     annual        Estimated response time         burden  
                                                        frequency                                       hours   
----------------------------------------------------------------------------------------------------------------
Disclosures.............................          310          120  18 minutes                            11,160
Advertising.............................           15            3  25 minutes                                19
                                                                                                    ------------
    Total...............................  ...........  ...........  ...............................       11,179
----------------------------------------------------------------------------------------------------------------

    Consumer lease information in or referred to by advertisements is 
available to the public. Disclosures of the costs, liabilities, and 
terms of consumer lease transactions relating to specific leases are 
not publicly available. Because the Federal Reserve does not collect 
any information, no issue of confidentiality under the Freedom of 
Information Act normally arises. However, the information may be 
protected from disclosure under the

[[Page 14541]]

exemptions (b)(4), (6), and (8) of the Freedom of Information Act (5 
U.S.C. 522 (b)). An agency may not conduct or sponsor, and an 
organization is not required to respond to, an information collection 
unless it displays a currently valid OMB control number. The OMB 
control number for the Recordkeeping and Disclosure Requirements in 
Connection with Regulation M is 7100-0202.

List of Subjects in 12 CFR Part 213

    Advertising, Federal Reserve System, Reporting and recordkeeping 
requirements, Truth in lending.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
changes to Regulation M. New language is shown inside bold-faced 
arrows, while language that would be removed is set off with brackets.
    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation M, 12 CFR part 213, as set forth below:

PART 213--CONSUMER LEASING (REGULATION M)

    1. The authority citation for part 213 would continue to read as 
follows:

    Authority: 15 U.S.C. 1604.

    2. Section 213.3 would be amended by adding a new paragraph (a)(5) 
to read as follows:


Sec. 213.3  General disclosure requirements.

    (a) General requirements. * * *
    (5) Electronic communication. For purposes of this 
regulation, the term electronic communication means a message 
transmitted electronically between a consumer and a lessor in a format 
that allows visual text to be displayed on equipment such as a personal 
computer monitor. A lessor and a consumer may agree to send by 
electronic communication the disclosures required by this regulation to 
be provided in writing. Any electronic communication must comply with 
paragraph (a) of this section.
* * * * *
    3. Section 213.4 would be amended by revising paragraph (f)(8) to 
read as follows:


Sec. 213.4  Content of disclosures.

* * * * *
    (f) Payment calculation. * * *
    (8) [Lease term. The lease term with a description such as ``the 
number of periods of repayment in your lease.''] Lease 
payments. The lease payments with a description such as ``the number of 
payments in your lease.''
* * * * *
    4. Section 213.7 would be amended by revising paragraph (d)(1)(ii) 
to read as follows:


Sec. 213.7  Advertising.

* * * * *
    (d) Advertisement of terms that require additional disclosure.--(1) 
Triggering terms. * * *
    (ii) A statement of any capitalized cost reduction or other payment 
or that no payment is required , 
prior to or at consummation or by delivery, if 
delivery occurs after consummation. [or that no payment is 
required.]
* * * * *
    5. Appendix A to part 213 would be amended by revising Appendix A-
1, Appendix A-2, and Appendix A-3 to read as follows:

BILLING CODE 6210-01-P

[[Page 14542]]

[GRAPHIC] [TIFF OMITTED] TP25MR98.000



[[Page 14543]]

[GRAPHIC] [TIFF OMITTED] TP25MR98.001



[[Page 14544]]

[GRAPHIC] [TIFF OMITTED] TP25MR98.002



[[Page 14545]]

[GRAPHIC] [TIFF OMITTED] TP25MR98.003



[[Page 14546]]

[GRAPHIC] [TIFF OMITTED] TP25MR98.004



[[Page 14547]]

[GRAPHIC] [TIFF OMITTED] TP25MR98.005



BILLING CODE 6210-01-C

[[Page 14548]]

    6. In Supplement I to Part 213--Official Staff Commentary to 
Regulation M, under Section 213.4--Content of Disclosures, the 
following amendments would be made:
    a. A new paragraph heading ``4(f)(7) Total of base periodic 
payments'' would be added in numerical order and a new paragraph 1. 
would be added immediately below the new heading.
    b. Under (4)(n) Fees and taxes, paragraph 1.ii. would be revised.
    The addition and revision would read as follows:

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

* * * * *

Section 213.4--Content of Disclosures

* * * * *
    4(f)(7) Total of base periodic payments.
    1. Accuracy of disclosure. Lessors are deemed to be in 
compliance with Sec. 213.4(f)(7) of the regulation if due to 
rounding in a manner the lessor arrives at the base periodic 
payment, the amount disclosed under Sec. 213.4(f)(7), the total of 
base periodic payments, differs from the base periodic payment 
disclosed under Sec. 213.4(f)(9), multiplied by the number of 
payments under the lease disclosed under 
Sec. 213.4(f)(8).
* * * * *
    4(n) Fees and taxes.
    1. Treatment of certain taxes. * * *
    ii. Taxes that are part of regularly scheduled payments are 
reflected in the disclosure under Secs. 213.4(c) and 
213.4(n) and itemized under Sec. 213.4(f)(10).
* * * * *
    7. In Supplement I to Part 213, under Appendix A--Model Forms, 
paragraph 2.v. would be revised as follows:
* * * * *

Appendix A--Model Forms

* * * * *
    2. Examples of acceptable changes. * * *
    v. Deleting or blocking out inapplicable 
disclosures [by blocking out], filling in ``N/A'' (not applicable) 
or ``0,'' crossing out, leaving blanks, checking a box for 
applicable items, or circling applicable items (this should 
facilitate use of multipurpose standard 
forms[.]).
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, March 12, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-6990 Filed 3-24-98; 8:45 am]
BILLING CODE 6210-01-P