Tuesday, October 29, 2013

How to File a Car Lease Lawsuit

By Michael Fuller, Portland Trial Attorney

Questions about car leases, car lease early termination fees, car lease warranties, responsibility for vehicle maintenance, car lease purchase options, car lease independent appraisal rights, or car lease payments?

You've come to the right post.

A lessor that fails to comply with any of the requirements under the Consumer Leasing Act (CLA) (other than those pertaining to advertising) is liable under 15 USC §1667d(a). This liability includes any actual damages sustained as a result of the violation, and statutory damages in the amount of 25% of the total amount of monthly payments under the lease, with a minimum liability of $100 and a maximum liability of $1,000. 15 USC §1640(a)(2)(A)(ii).

The Consumer Leasing Act

The federal Consumer Leasing Act contains hundreds of rules governing consumer car leases, described below. If a dealership accidentally violates even one rule, it's generally liable to pay you up to $1,000 statutory damages, and reimburse any financial loss or emotional harm you suffered.

A lessor who violates any provision of 15 USC §1667c, pertaining to advertisement of leases, is liable under the civil liability provisions of the Truth in Lending Act (TILA) to any person who suffers actual damages as a result of the violation. 15 USC §1667d(b).

You might also have the right to sue under the specific consumer protection laws of your state. Check with a local attorney in your area to learn more. 

Attorneys are expensive but you're generally entitled to recover your expenses from the lessor if your case is successful. 15 USC §1640(a)(3).


The relationship between the CLA and state laws is governed by 15 USC §1667e and 12 CFR §213.9. A state is free to enact its own consumer lease protection statutes, as long as they are not inconsistent with the provisions of the CLA. A state may apply for an exemption from the CLA and Regulation M for leases entered within that state. 12 CFR §213.9(b)(2). To date, only Oklahoma and Maine have been granted exemptions.

Lessors Subject to the CLA

For the CLA to apply, the lessor must be a person who in the ordinary course of business regularly leases, offers to lease, or arranges for the leasing of personal property pursuant to a consumer lease. 15 USC §1667(3); 12 CFR §213.2(h).


A person who has leased, offered to lease, or arranged to lease personal property more than five times in the preceding year, or more than five times in the current calendar year, is subject to the Consumer Leasing Act (CLA). 12 CFR §213.2(h). 

A lessor must comply with all applicable disclosure requirements of the CLA, Regulation M, and the Official Staff Commentary.

Person Who Arranges a Consumer Lease

A person who is regularly engaged in arranging to lease under a consumer lease will be considered a lessor, even though the person is not a party to the actual lease. 12 CFR part 213, Supp I, Official Staff Commentary, §213.2(h), comment 1.


To arrange for a consumer lease means to provide or offer to provide a lease that is or will be extended by another under a business or other relationship pursuant to which the person arranging the lease (a) receives or will receive a fee, compensation, or other consideration for the service or (b) has knowledge of the lease terms and participates in preparing the contract documents required in connection with the lease. Official Staff Commentary, supra, §213.2(h), comment 1.

The term "other consideration" refers to "an actual payment corresponding to a fee or similar compensation and not to intangible benefits, such as the advantage of increased business, which may flow from the relationship between the parties." Official Staff Commentary, supra, §213.2(h), comment 2. A person who arranges for a lease must comply with all the applicable disclosure requirements of the Consumer Leasing Act (CLA), Regulation M, and the Official Staff Commentary. See Ayers v. Nat’l Vehicle Mgmt. Co., Inc., 1991 WL 134354 (WDNY 1991) (not reported) (defendant was lessor under CLA even though not party to lease); Dwyer v. Barco Auto Leasing Corp., 903 F Supp 205 (D Mass 1995) (review of theories about what constitutes “compensation”); Applebaum v. Nissan Motor Acceptance Corp., 1999 WL 236601 (ED Pa Apr 21, 1999), rev’d on other grounds, 226 F3d 214 (3d Cir 2000) (dealer acting as authorized agent for lessor is person who arranges lease under CLA).

The "Four Month" and "$50,000" Rules

The Consumer Leasing Act (CLA) applies to any contract in the form of a lease or bailment for the use of personal property by a natural person primarily for personal, family, or household purposes, for a period of time exceeding four months and for a total contractual obligation not exceeding $50,000. 15 USC §1667(1); 12 CFR §213.2(e)(1). 

It is irrelevant that the lessee may have the option to become the owner of the property when the lease expires.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by the President on July 21, 2010, increased the $25,000 threshold to $50,000, effective July 21, 2011. The Act provides that the threshold shall be adjusted annually by any annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The FRB has proposed corresponding amendments to Regulation M. The threshold is set to increase to $51,800 effective January 1, 2012.

The initial term of the lease must be more than four months. A lease of exactly four months is not a consumer lease. 12 CFR pt 213, Supp I, Official Staff Commentary,  § 213.2(e)(2), comment 2. Extension of a lease originally for four months or less does not bring the lease within the scope of the CLA, even if the extension actually lasts for more than four months. If a lease contract is terminable at any time during the first four months without a penalty, it is not subject to the CLA because the consumer is not required to make payments for a period exceeding four months. A lease with a penalty provision for canceling during the first four months is considered to have a term of more than four months. See Lemay v. Stroman’s, Inc., 510 F Supp 921 (ED Ark 1981); Smith v. ABC Rental Systems of New Orleans, Inc., 491 F Supp 127 (ED La 1978), aff’d, 618 F2d 397 (5th Cir 1980).

The term consumer lease does not include a transaction that, in reality, is a credit sale as defined in Regulation Z. 12 CFR §213.2(e)(2).

About the Consumer Leasing Act

The Consumer Leasing Act (CLA), 15 USC §§1667–1667f, became effective on March 23, 1977, as an amendment to the Truth in Lending Act (TILA), 15 USC §1601. 

Courts have noted that case law interpreting the TILA is relevant to interpretations of the CLA. Kedziora v. Citicorp Nat. Services, Inc., 901 F Supp 1321, 1326-1327 (ND Ill 1995); Carmichael v. Nissan Motor Acceptance Corp. Union City Nissan, 291 F3d 1278 (11th Cir 2002).

The Federal Reserve Board (FRB) has promulgated enforcing regulations, known as Regulation M, found at 12 CFR pt 213. This chapter refers to all past provisions of Regulation M jointly as original Regulation M, except when otherwise noted.

The CLA was designed to ensure consumers receive meaningful disclosure of terms in consumer leases, to limit the liability resulting from the leasing of personal property, and to require meaningful and accurate disclosures of lease terms in advertising. 12 CFR §213.1(b). 

As a consumer protection statute, the CLA is liberally construed in favor of consumers. Dwyer v. Barco Auto Leasing Corp., 903 F Supp 205, 207 (D Mass 1995); Carmichael v. Nissan Motor Acceptance Corp. Union City Nissan, 291 F3d 1278 (11th Cir 2002); Mitchell v. Ford Motor Credit Co., 702 F Supp2d 1356, 1362 (MD Fla 2010).

The CLA applies only to leases of personal property with a term longer than four months and primarily for personal, family, or household purposes. Any violation of the CLA or Regulation M renders the lessor liable for actual damages, statutory minimum damages, and attorney fees.

After the implementation of Regulation M, the Division of Consumer and Community Affairs of the FRB issued Official Staff Commentary, published in Supplement I following 12 CFR pt 213, which is updated periodically. Good-faith compliance with the FRB Official Staff Commentary affords protection from liability under TILA §130(f) (15 USC §1640(f)). The Official Staff Commentary is entitled to deference by the courts. Applebaum v. Nissan Motor Acceptance Corp., 1999 WL 236601 at *4 (ED Pa Apr 21, 1999)(not reported), rev’d on other grounds, 226 F3d 214 (3d Cir 2000).

Under Appendix C of Regulation M, any person may request an official staff interpretation. If adopted, interpretations will be incorporated into the Official Staff Commentary following publication in the Federal Register. In unusual circumstances the FRB staff may issue separate interpretations independent from the Official Staff Commentary. The FRB staff will refuse to issue interpretations approving a lessor’s forms, statements, calculation tools, or methods.

Materials relevant to interpreting the Consumer Leasing Act include the Act itself, Regulation M, Official Staff Commentary to Regulation M, the model forms, and a limited amount of case law interpreting the Act.

Consumers with car lease questions should consult a local attorney to learn about possible protections under various states' laws, in addition to the CLA.

"Closed-End" Versus "Open-End" Leases

A closed-end lease is any lease that is not an open-end lease. 12 CFR §213.2(d). An open-end lease is 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.” 12 CFR §213.2(i). 

The residual value is the estimated value of the leased property at the end of the lease term, as determined by the lessor at the conception of the lease. 12 CFR §213.2(n). 

The realized value is either “(1) [t]he price received by the lessor for the leased property at disposition; (2) [t]he highest offer for disposition of the property; or (3) [t]he fair market value of the property at the end of the lease term.” 12 CFR §213.2(m).

“In closed-end leases, sometimes referred to as ‘walk-away’ leases, the lessee is not responsible for the residual value [the value determined at the start of the lease] of the leased property at the end of the lease term.” 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(d), comment 1. In a closed-end lease, the lessor assumes the risk that the residual value at the end of the lease term will be great enough to make the lease profitable. In an open-end lease, the lessee is liable for the difference between the residual value and the realized value.

Assignees

The assignee of a lease obligation may be considered a lessor, and be liable for damages as a lessor. In Ford Motor Credit Co. v. Cenance, 452 US 155, 101 S Ct 2239, 68 L Ed2d 744 (1981), the court held that the assignee of a retail installment contract could be considered a creditor when the assignee had substantial involvement in the credit transaction. Substantial involvement included the actual extension of credit by the assignee even though the dealer arranged the credit, approval of the credit terms by the assignee before the transaction could be consummated, and the instantaneous assignment of the contract to the assignee for financing.

The Cenance case involved a creditor under the Truth in Lending Act (TILA), rather than a lessor under the Consumer Leasing Act (CLA). The TILA was subsequently amended to provide that assignees of retail installment contracts subject to the TILA may not be considered creditors. However, the holding of Ford Motor Credit Co., 452 US 155, still applies to the CLA. Official Staff Commentary, 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(h), comment 3.

Consumer Purpose

The lease must be primarily for personal, family, or household purposes. If a question regarding the primary purpose exists, the lessor may make all required disclosures, and the fact that the disclosures are made is not controlling on the question of whether the transaction is exempt. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(e), comment 1.

The primary purpose of a lease is determined before or at consummation, and the lessor is not required to make subsequent Regulation M disclosures if the primary purpose subsequently changes from a business use to a consumer use.

Personal Property

The lease must involve personal property, which is 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. 12 CFR §213.2(l)
Leases that are incidental to a service are not subject to the regulation. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(e), comment 7. 

For example, home entertainment systems that require the consumer to lease a cable box, security systems requiring the installation of leased alarm equipment, and propane gas service requiring the leasing of a tank to receive the service are exempt.

Furthermore, the lease of a safe-deposit box is exempt from the Regulation. Official Staff Commentary, supra, §213.2(e), comment 8.

Contractual Obligation Not Exceeding $50,000

The lease must involve a total contractual obligation not exceeding $50,000.

The term total contractual obligation is not defined in either the Consumer Leasing Act (CLA) or Regulation M. In Easterwood v. Gen. Elec. Capital Auto Lease, 825 F Supp 306 (ND Ga 1993), the court reviewed the legislative history of the CLA and concluded that the term total contractual obligation included more than the total of the monthly lease payments. The court noted that the term could encompass typical lease charges such as registration fees, delinquency charges, capitalized cost reduction, and an advance monthly payment.

The Official Staff Commentary clarifies to some degree what the phrase total contractual obligation means. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(e), comment 3. For example, residual values and purchase price options are excluded. Also excluded are amounts collected by the lessor and paid to third parties, such as taxes, license fees, and registration fees.

If the lessee has offered a trade-in valued at $10,000 with a lien payoff of $8,000, only the $2,000 equity should be included in the total contractual obligation. Rivero v. J.P. Automotive, Inc., Civ No 96-01010HG, Clearinghouse No 52,063 (D Haw Aug 4, 1997). If the lessee is “upside down” in the trade (i.e., if the lessee owes more than the trade-in vehicle is worth), the resulting negative equity should not be included in the total contractual obligation because that negative equity is addressed in higher monthly lease payments.

When the consumer has the option to extend the lease, the payments under the option should not be included in the total contractual obligation.

Business Leases

The Consumer Leasing Act (CLA) does not cover leases for agricultural, business, or commercial purposes, leases to a governmental agency or instrumentality, or leases to an organization. 15 USC §1667(1); 12 CFR §213.2(e)(2). The exclusion also applies to leases for agricultural purposes. The term agricultural purpose is defined at 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(e), comment 5. See Clement v. Am. Honda Fin. Corp., 145 F Supp2d 206 (D Conn 2001) (lessee’s documentary evidence of consumer purpose sufficient to establish consumer purpose when lessor offered no rebuttal evidence).

The CLA also does not cover lease transactions of personal property that are incidental to the lease of real property, as long as the lessee has no liability for the value of the personal property at the end of the lease (except for wear and tear) and the lessee has no option to purchase the property. 12 CFR §213.2(e)(3)(i)–(ii).

Credit Sales

The Consumer Leasing Act (CLA) does not apply to any transaction that is actually a credit sale disguised as a lease. 15 USC §1667(1); 12 CFR §213.2(e)(2). A credit sale is any contract in the form of a bailment or lease in which the bailee or lessee agrees to pay a sum substantially equivalent to or more than the aggregate value of the property or services involved, and provides that the bailee or lessee will become or has the option to become, for no additional consideration or for nominal consideration, the owner of the property upon full compliance with the obligations under the contract. 12 CFR §226.2(a)(16). In Ortiz, the court interpreted 12 CFR §226.2(a)(16) to hold a lease that is terminable without penalty by the consumer is not a credit sale. See Ortiz v. Rental Mgmt., Inc., 65 F3d 335 (3d Cir 1995).

If a lease is in fact a credit sale, it may be subject to the disclosure provisions of the Truth in Lending Act (TILA) pertaining to credit sales. If the consumer can become the owner of the leased property at the end of the lease term for little or nominal consideration, the transaction is probably a disguised retail installment contract. This is not a distinction without a difference. There are vastly different advertising and disclosure requirements for installment sale contracts. See Truth in Lending Act, 15 USC §§1601–1667; revised Regulation Z, 12 CFR pt 226.

In an informal Federal Trade Commission (“FTC”) Staff Opinion dated February 1, 1984, interpreting the Equal Credit Opportunity Act, 15 USC §1691, and in Regulation B at 12 CFR §202.2(j), the FTC defined credit as “the right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment therefor.” The FTC Staff Opinion noted that, given its definition of credit, a consumer lease would not generally be considered credit and therefore would not be subject to the Equal Credit Opportunity Act. However, in Bros. v. First Leasing, 724 F2d 789, 793 (9th Cir 1984), the Ninth Circuit held that the Equal Credit Opportunity Act applies to consumer leases.

Rent-to-Own

A common type of consumer transaction involves a contract under which a consumer agrees to pay a weekly or monthly rental fee for an item, and becomes the owner of the property at the conclusion of the rental contract. If the rental contract is terminable at any time without a penalty, the transaction is not a credit sale because the consumer has not contracted to pay a sum substantially equivalent to or more than the aggregate value of the property. 15 USC §1602(g). Rather, the consumer has contracted to make only one rental payment for the use of the property for a certain period of time. When that period of time expires, the consumer, at the consumer’s option, may agree to make another payment. The transaction is not a consumer lease as defined by 15 USC §1667(1) unless the consumer is required by the contract to make payments for a period exceeding four months. 

See, e.g., LeMay v. Stroman’s, Inc., 510 F Supp 921 (ED Ark 1981); Smith v. ABC Rental Sys. of New Orleans, Inc., 491 F Supp 127, 129 (ED La 1978), aff’d, 618 F2d 397 (5th Cir 1980) (week-to-week rental agreements not covered by Consumer Leasing Act (CLA)).

True short-term rent-to-own agreements do not fall within the definition of lease under the CLA. However, as with short-term car title and payday loans, they continue to receive the scrutiny of the Federal Reserve Board, especially if the rent-to-own agreement appears to be structured for the purposes of avoiding regulatory requirements.

Required Lease Disclosures

A lessor must make certain written disclosures in connection with any lease transaction subject to the Consumer Leasing Act (CLA). The content of the lease disclosures is set forth in 12 CFR §213.4. The form of the disclosures is set forth in 12 CFR §213.3.

The disclosures must be made clearly and conspicuously before the consummation of the lease, and in a form that the consumer may keep. 12 CFR §213.3(a). Certain disclosures must be segregated from other information and may contain only directly related information. 12 CFR §213.3(a)(2).

In motor vehicle leases, a detailed disclosure of payment calculation is required. 12 CFR §213.4(f). Neither the CLA nor Regulation M requires the lessor to disclose administrative fees and itemize the rent charge with the rest of the disclosures. Schlenk v. Ford Motor Credit Co., 308 F3d 619, 621–622 (6th Cir 2002).

Description of the Property

The lessor must include a brief description of the leased property, sufficient to identify the property to the lessee and the lessor. 12 CFR §213.4(a). In a multiple-item lease, the property may be described in separate statements incorporated by reference in the disclosure statement.

The description of the leased property may not be included among the segregated disclosures. See 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(a), comment 1. In a lease of multiple items, the property description may be given in a separate statement that is incorporated by reference within regular disclosures. 12 CFR §213.3(a)(1). If the lessor leases two items of personal property to the same lessee on the same day, the lessor has the option of disclosing the leases as two separate transactions or as a single lease transaction. Official Staff Commentary, supra, §213.3(a), comment 4(i).

Total Payments Required at Consummation

The lessor must disclose the total amount of any payments required to be made by the lessee at the consummation of the lease. 12 CFR §213.4(b). Examples of such payments include a refundable security deposit, advance payment, capitalized cost reduction, or a trade-in allowance. In Blum v. Gen. Motors Acceptance Corp., 365 SE2d 474 (Ga App 1988), the lessee alleged that the lease failed to disclose the value credited for a trade-in allowance. The lease form noted that this disclosure was not applicable, and the court held that there was no violation of Regulation M because the lessee admitted that he was not allowed any credit for his trade-in. Blum, 365 SE2d at 475.

The lessor must disclose the total amount of any payments to be paid before or at lease signing or delivery, if delivery occurs after consummation. 12 CFR §213.4(b). Consummation takes place when a contractual relationship is created between the lessor and the lessee as determined under state or other applicable law. See 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(a)(3), comment 1. This disclosure must be made using the term “amount due at lease signing or delivery.” 12 CFR §213.4(b).

The lessor must itemize each component of the amount due by the consumer before or when the lease is signed, by both type and amount. This itemization includes any refundable security deposit, advance monthly or other periodic payments, and capitalized cost reduction. All of these disclosures must be segregated from other disclosures. 12 CFR §213.3(a)(2).

In a motor vehicle lease, the lessor must also itemize how the amount due under the lease will be paid, by type and amount, including any net trade-in allowance, rebates, noncash credits, and cash payments. See Taylor v. United Mgmt., Inc., 51 F Supp2d 1212, 1215-1216 (D NM 1999) (failure to disclose consumer’s trade-in constituted violation of the Consumer Leasing Act (CLA)). The format for this disclosure must be substantially similar to the model forms published by the Federal Reserve Board at 12 CFR part 213, Appendix A. The totals for the columns in a lease marked “total amount due at lease signing or delivery” and “how the amount due at lease signing or delivery will be paid” must be equal. Official Staff Commentary, supra, §213.4(b), comment 5.

Capitalized Cost Reduction

A capitalized cost reduction is in the nature of a down payment. It must be disclosed “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.’” 12 CFR §213.4(f)(2). The amount does not include a periodic payment made at lease signing. See 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(b), comment 2. The term cash is intended to include payments by check or other payments in addition to currency. See Official Staff Commentary, supra, §213.4(b), comment 6.

Many automobile sales involving retail installment contracts provide for a deferred down payment, or in the parlance of the business, a “pick-up payment.” Under Truth in Lending Act (TILA) regulations, a pick-up payment may be treated as part of the down payment if the payment is due not later than the second otherwise regularly scheduled payment and is not subject to an interest charge. 12 CFR §226.2(a)(18). There is no similar provision for capitalized cost reduction “pick-up payments.”

Are pick-up payments allowed in lease transactions? In many automobile credit transactions, the seller will obtain all or part of the down payment in a check bearing the date of the transaction, but the seller will promise the maker that it will not deposit the check for payment for a period of days. This is referred to as a “hold check,” and has many of the attributes of a deferred down payment. Are “hold checks” allowed in lease transactions?

If the lessor values a trade-in at less than the payoff amount of an existing obligation, a negative equity exists. However, the negative equity is not reflected as a negative number on the trade allowance. If the lessor is addressing a negative-equity trade, the lessor may disclose the trade allowance as zero, or not applicable, or the lessor may leave a blank line. See Official Staff Commentary, supra, §213.4(b), comment 3.

Neither Regulation M nor the Official Staff Commentary provides direction on how a lessor is to arrive at a value to assign to a trade-in. The lessor is apparently free to assign any value. One method for a lessor to address a negative equity is to assign a trade-in value at least equal to the payoff amount due on an existing obligation and then ratably increase the gross capitalized cost. For example, if the trade-in has a fair market value of $8,000 and the lien on the trade-in is $10,000, the lessor can simply “value” the trade-in at $10,000. The gross capitalized cost is then increased by $2,000. As a practical matter, this exercise merely transfers the negative equity of the trade-in to the new lease obligation. The negative equity will then be amortized over the term of the lease through the monthly lease payments. There is some suggestion that the Official Staff Commentary on Regulation Z prohibits this type of trade value/cash sale price mutual adjustment. However, the direction that Regulation M provides on this point is permissive rather than mandatory, and the lessor is arguably free to over-allow on the trade-in and ratably increase the gross capitalized cost. The lessor is in any case free to include the negative equity amount in the gross capitalized cost. Many lessors use proprietary disclosure forms to itemize how the negative equity is assigned and then transferred to the gross capitalized cost. In the absence of such a form, the lessee must request an itemization of the gross capitalized cost.

Payment Schedule

The lessor must disclose the number, amount, and due dates or periods of payments scheduled under the lease, and the total amount of these periodic payments. 12 CFR §213.4(c). This provision requires the disclosure of all amounts that are paid periodically, including maintenance and insurance charges.
The payment schedule and total amount of periodic payments must be segregated from other information and must contain only directly related information. 12 CFR §213.3(a)(2).

The Official Staff Commentary requires the inclusion “of all payments that are made at regular or irregular intervals and generally derived from rent, capitalized or amortized amounts such as depreciation and other amounts that are collected by the lessor at the same interval(s)” in this disclosure.” 12 CFR pt 213, Supp I, Official Staff Commentary §213.4(c), comment 1. Other types of periodic payments need not be disclosed. Official Staff Commentary, supra, §213.4(a), comment 1. Neither the Consumer Leasing Act (CLA) nor Regulation M gives any insight about what these “other” periodic payments might entail.

Fees and Taxes

The lessor must disclose the total amount paid or payable by the lessee during the lease term for official fees, registration fees, certificate of title, license fees, or taxes. 12 CFR §213.4(n).

The Official Staff Commentary provides explicit details on how various fees and taxes are to be disclosed. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(n), comment 1. Taxes due at lease-signing are disclosed both as an amount paid at lease signing under 12 CFR §213.4(b) and as part of the total of taxes under 12 CFR §213.4(n). Official Staff Commentary, supra, §213.4(n), comment 1(i). Taxes that are part of the scheduled payments are disclosed under total of taxes and total of periodic payments, and as a component of the periodic payment. Official Staff Commentary, supra, §213.4(n), comment 1(ii). Taxes that are passed on to the lessee and that are reflected in the lease documentation must be disclosed in the total of taxes. A tax that is payable by the lessor and absorbed as a cost of doing business does not require any form of disclosure. Official Staff Commentary, supra, §213.4(n), comment 1(iii).

Taxes charged in connection with an exercise of a purchase option must be disclosed under 12 CFR §213.4(i). Official Staff Commentary, supra, §213.4(n), comment 1(iv). Disclosure of these taxes under 12 CFR §213.4(n) is now prohibited.

All Other Charges

The lessor must disclose the total amount of all other charges, individually itemized, payable by the lessee to the lessor, that are not included in the periodic payments. This amount includes any liabilities that the lease imposes on the lessee at the end of the lease term, but does not include the potential difference between the estimated and realized values of the leased property. 12 CFR §213.4(d). Liability for that potential difference must be disclosed pursuant to 12 CFR §213.4(k).

 The lessor is not required to use any specific terminology in disclosing other charges, and the charges do not have to be located in specific places on the lease contract (although the disclosure must be clear and conspicuous).

The other charges mentioned in 12 CFR §213.4(d) are charges that are not required to be disclosed under some other provision of 12 CFR §213.4. The Official Staff Commentary offers the following illustration: “The price of a mechanical breakdown protection (MBP) contract is sometimes disclosed as an ‘other charge.’ Nevertheless, the price of MBP is sometimes reflected in the periodic payment disclosure under §213.4(c) or in states where MBP is regarded as insurance, the cost is to be disclosed in accordance with §213.4(o).” 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(d), comment 4(i).

The total amount of other charges must be segregated from other information and must contain only directly related information. 12 CFR §213.3(a)(2). 

According to the Official Staff Commentary, the lessor may disclose as “other charges” items that are “anticipated by” the parties to be incident to the normal operation of the lease agreement and that, presumably, do not fit within the definition of other disclosure terms. If a charge must be disclosed in any particular section of 12 CFR §213.4, it cannot be included in “other charges.” If the lessor is reasonably unsure of whether a particular fee is an “other charge,” the lessor may disclose the fee as such without violating 12 CFR §213.4(d). Official Staff Commentary, supra, §213.4(d), comment 1.

Official Staff Commentary, supra, §213.4(d), comment 2, excludes from “other charges,” charges for late payments, defaults, early termination, deferral of payments, and extension of lease. The Commentary also specifically prohibits including within “other charges,” third-party fees and charges. Official Staff Commentary, supra, §213.4(d), comment 3.

If the lease imposes a liability on the lessee at the end of the scheduled lease term, such as disposition and “pick-up” charges, these charges must be disclosed under 12 CFR §213.4(d). Official Staff Commentary, supra, §213.4(d), comment 5.

Insurance

The lessor must disclose a brief identification of any insurance in connection with the lease, including (1) types and amount of coverages and the cost to the lessee if the insurance is provided or paid for by the lessor or (2) if the insurance is not provided by the lessor, the types and amounts of coverages required of the lessee. 12 CFR §213.4(o).

Insurance that is purchased by the lessor primarily for the lessor’s own benefit, and that is absorbed as a business expense and not separately charged to the lessee, need not be disclosed even if it provides an incidental benefit to the lessee. Official Staff Commentary, 12 CFR pt 213, Supp I at 4(o), comment 2.
The Official Staff Commentary addresses how a lessor must disclose products such as mechanical breakdown protection (MBP) and guaranteed automobile protection (GAP) insurance. Only if these products are defined as insurance under state law are they required to be disclosed as insurance under 12 CFR §213.4(o). In states that do not treat MBP or GAP as insurance, these products are not disclosed under 12 CFR §213.4(o). In states treating MBP and GAP as noninsurance, the Official Staff Commentary provides that the lessor may disclose the information in accordance with the additional information provisions of 12 CFR §213.3(b). 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(o), comment 3.
The Official Staff Commentary states that insurance purchased by the lessor for its own benefit and absorbed as a cost of doing business (and not separately charged to the lessee) need not be disclosed under 12 CFR §213.4(o) even if the lessee receives an incidental benefit. Official Staff Commentary, supra, §213.4(o), comment 2.

Warranties

The lessor must provide a statement identifying any express warranties or guarantees made by the manufacturer or the lessor with respect to the leased property. 12 CFR §213.4(p). The statement identifying warranties may be brief, consisting, for example, of a reference to a standard manufacturer’s warranty. However, if a lessor provides a comprehensive list of warranties, some of which do not apply to the leased product, the lessor must indicate which warranties do not apply. Official Staff Commentary, 12 CFR pt 213, Supp I at 4(p), comment 1.

Whether an express warranty exists is determined by state or other applicable law. Although a disclaimer of warranties is not required by Regulation M, the lessor may make a disclaimer as additional information in accordance with 12 CFR §213.3(b). Official Staff Commentary, 12 CFR pt 213, Supp I at 4(p), comments 2–3.

Most automobile lessors will effectively disclaim warranties on a number of collateral documents. Additionally, the lease contract itself will generally disclaim warranties. In a true sales transaction, the Magnuson-Moss Warranty Act precludes the seller from disclaiming the implied warranties of merchantability and fitness if, at the time of the sale or within 90 days thereafter, the seller also sells the consumer a service contract. 15 USC §2308(a). The Magnuson-Moss Warranty Act defines a consumer as a “buyer.” 15 USC §2301(3). This definition probably disqualifies a lessee from the protection of 15 USC §2308(a) and the lessor may effectively disclaim all warranties even if a service contract is made a part of the lease. But see Bus. Modeling Techniques, Inc. v. Gen. Motors Corp., 123 Misc2d 605, 608 (NY Sup Ct 1984). If the transaction is a disguised credit sale as opposed to a lease, Magnuson-Moss warranty protections would apply.

The Seventh Circuit has held that a disclosure that a vehicle “may” be subject to a manufacturer’s warranty violated the act because it did not provide the consumer with any information about warranties at all. Highsmith v. Chrysler Credit Corp., 18 F3d 434, 440 (7th Cir 1994).

Responsibility for Maintenance

If a lessor has wear-and-use standards, they must be disclosed and must be reasonable. 12 CFR §§213.4(h), 213.3(a)(2). No disclosure is required if the lessor has no wear-and-use standards. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(h), comment 1; see 12 CFR §213.4(h)(2). If the lessor’s wear-and-tear standards are unreasonable, a disclosure violation arguably occurs even if those standards are clearly set forth in the lease. Neither Regulation M nor the Official Staff Commentary defines unreasonable wear-and-tear standards.

If the lessor of a motor vehicle has wear-and-use standards, the lease must include a notice in language that is “substantially similar to the following: Excessive Wear and Use. You may be charged for excessive wear based on our standards for normal use.’” 12 CFR §213.4(h)(3). This notice must also specify the standards for wear and use as either an amount (e.g., 10 cents a mile) or a method (e.g., charge based on standard industry guidebook) for determining any charge for excess mileage. 12 CFR §213.4(h)(3). The notice of wear-and-use standards must be segregated from other information in leases for motor vehicles. 12 CFR §213.3(a)(2).

The lessor must disclose whether the lessor or lessee (usually the lessee) is responsible for maintaining or servicing the leased property and briefly describe the responsibility. 12 CFR §213.4(h)(1).

Security Interest

The lessor must describe any security interest held or to be retained by the lessor in connection with the lease and a “clear identification of the property to which the security interest relates.” 12 CFR §213.4(r). A security interest is “any interest in property that secures the payment or performance of an obligation.” 12 CFR §213.2(o).

The term includes, but is not limited to, security interests under the Uniform Commercial Code; real property mortgages, deeds of trust, and other consensual or confessed liens whether or not recorded; mechanic’s, materialman’s, artisan’s, and other similar liens; vendor’s liens in both real and personal property; liens on property arising by operation of law; and any interest in a lease when used to secure payment or performance of an obligation. Official Staff Commentary, 12 CFR pt 213, Supp I at 2(o), comments 1–3.

The security interest to be disclosed is one taken by the lessor to secure performance of the lessee’s obligation. For example, if a lender who is not a lessor makes a loan to a leasing company and takes assignments of consumer leases generated by that company to secure the loan to the leasing company, the lender’s security interest in the lessor’s receivables is not a security interest that must be disclosed. The lessor’s right to insurance proceeds or unearned insurance premiums is not a security interest under Regulation M. Official Staff Commentary, 12 CFR pt 213, Supp I at 2(o), comments 2–3.

Charges for Default, Delinquency, or Early Termination

The lessor must disclose the amount or method of determining the amount of any penalty or other charge for delinquency, default, or late payments. The amount or the method of determining the amount must be reasonable. The lessor’s disclosing an unreasonable amount or method would arguably be a violation of the regulation. 12 CFR §213.4(q). In addition, attorney fees or collection costs that are automatically imposed on default must be disclosed. Official Staff Commentary, 12 CFR pt 213, Supp I at 4(q), comment 1.

Reasonableness is a question of fact. Corum v. Fifth Third Bancorp, 2003 WL 21672828 (WD Ky 2003)(not reported). Reasonableness is determined “in the light of the anticipated or actual harm caused by the delinquency, default, or early termination, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.” 15 USC §1667b(b).

One court has noted that “reasonable” termination penalties are penalties that “approximate acceptable liquidated damages provisions under UCC 2-718(1) and the Restatement (Second) of Contracts §356(1) (1981).” Wesley v. Gen. Motors Acceptance Corp., 1992 WL 281325, *2 (ND Ill 1992)(not reported). The Seventh Circuit has held there are two relevant time periods to examine when considering the enforceability of liquidated damages clauses: the time of contracting and the time of injury. If at either time the estimate is reasonable, the clause is enforceable. Highsmith v. Chrylser Credit Corp., 18 F3d 434, 437–438 (7th Cir 1994).

The Official Staff Commentary has adopted the position of the Seventh Circuit in Highsmith regarding disclosure in the lease of charges for early termination, default, or delinquency. See Official Staff Commentary, supra, §213.4(q), comment 5.

In Baez v. Banc One Leasing Corp., 348 F3d 972 (11th Cir 2003) the 11th Circuit affirmed a lower court decision holding Regulation M does not prohibit early termination charges based on the difference in residual and realized values in closed-end leases. The lower court ruled this type of charge was reasonable, in part because vehicles generally depreciate more at the beginning of a lease than at the end.

In Mitchell v. Ford Motor Credit Co., 702 F Supp2d 1356, 1368 (MD Fla 2010) the District Court held that the type of early termination formula discussed in Baez is not per se reasonable. . The court ultimately ruled Ford Motor Credit Co.’s early termination formula was unreasonable because the lessee ended up owing $3,416 more under the formula than if the lease had gone to term. Mitchell, 702 F Supp2d 1356
Note: An additional lease charge that accrues on the lease balance when a periodic payment is made after the due date does not constitute a penalty or other charge for late payment. A charge that accrues because the lessee fails to return the leased property does not constitute a default charge. Unless the additional charge accrues at a rate higher than the normal lease charge, the lessor does not have to disclose the amount or method of determining the additional charge. Official Staff Commentary, 12 CFR pt 213, Supp I, at 4(q), comment 3.

When a default is a condition of an early termination of a lease, the default charges must also be disclosed under 12 CFR §213.4(q). The charges under §§213.4(q) and 213.4(g)(1) may, but need not, be combined. 12 CFR pt 213, Supp I, Official Staff Commentary §213.4(q), comment 2.

In a motor vehicle lease, the lessor must include a notice concerning early termination. The notice must be segregated from other information. 12 CFR §213.3(a)(2).

Regulation M originally required that the lessor disclose “the amount . . . or method of determining the amount of any penalty or other charge for early termination.” Former 12 CFR §213.4(g)(12). Regulation M also originally required that all disclosures be made “clearly, conspicuously, [and] in meaningful sequence.” Former 12 CFR §213.4(a). Several courts dealt with the application of these two provisions to the lessor’s disclosure of charges for early termination. For instance, in Lundquist v. Sec. Pac. Auto. Fin. Services Corp., 993 F2d 11, 15 (2d Cir 1993), the court held that the lease provision regarding liability for early termination violated these two provisions of Regulation M. The court noted: “[T]he…lease disclosures are not reasonably understandable. They are ‘confusing, unduly complicated, and unnecessarily convoluted.’ In particular, the termination formula in Item 16(c) of the lease is a Byzantine formula, beyond the understanding of the average consumer.” Lundquist, 993 F2d at 15.

However, in Channell v. Citicorp Nat. Services, Inc., 89 F3d 379 (7th Cir 1996), the lease referred to the use of the “Rule of 78s” to calculate the early-termination charge. The court held that 12 CFR §213.4(g)(12) permitted the lessor to name a method of calculation without providing an explanation of the method’s operation. The court also held that the term clear and conspicuous means visible or noticeable, not simple or easy to apply. Channell, 89 F3d at 382. In Applebaum v. Nissan Motor Acceptance Corp., 1999 WL 236601 (ED Pa Apr 21, 1999), rev’d on other grounds, 226 F3d 214 (3d Cir 2000), the lease provided that early-termination charges would be determined by the “constant yield method.” The court held [t]he consumer may not understand the meaning of ”constant yield method,” but the clause is otherwise decipherable. Explaining the ”constant yield method,” a method well known in the industry, rather than merely naming it would cause more confusion that it resolved. . . . The CLA does not require the lessor to explain complex mathematics in the lease; stating the method used satisfies the disclosure requirements.
 Applebaum, 1999 WL 236601at *6.

Each of the foregoing cases was decided before Regulation M was amended. It is arguable whether the amendments to Regulation M would alter the conclusion of these cases. For instance, 12 CFR §213.4(g)(1), the successor to former 12 CFR §213.4(g)(12), requires disclosure of the “amount or a description of the method” for determining early-termination charges; language that is virtually identical to its predecessor. Section 213.3(a), the successor to former 12 CFR §213.4(a), was not changed, except that the requirement of “meaningful sequence” was deleted.

Section 213.4(g)(1) requires a full description of the method of determining an early termination charge. The lessor should attempt to provide consumers with clear and understandable descriptions of its early termination charges. Descriptions that are full, accurate, and not intended to be misleading will comply with  §213.4(g)(1), even if the descriptions are complex. In providing a full description of an early termination method, a lessor may use the name of a generally accepted method of computing the unamortized cost portion (also known as the “adjusted lease balance”) of its early termination charges. For example, a lessor may state that the “constant yield” method will be utilized in obtaining the adjusted lease balance, but must specify how that figure, and any other term or figure, is used in computing the total early termination charge imposed upon the consumer. Additionally, if a lessor refers to a named method in this manner, the lessor must provide a written explanation of that method if requested by the consumer. The lessor has the option of providing the explanation as a matter of course in the lease documents or on a separate document.
Official Staff Commentary, supra, §213.4(g)(1), comment 2.

Section 1667b(b) of Title 15 of the United States Code, implemented by 12 CFR §213.4(g)(1), requires the disclosure of charges for default, delinquency, or early termination, and requires the charges be reasonable. 15 USC §1667b(b).

In Jordan v. Schaumburg Toyota, 1999 WL 116224 (ND Ill Feb 24, 1999)(not reported), the court held that a consumer did not have to terminate a lease to have standing to raise a violation of the disclosure requirements of 12 CFR §213.4(g).

Option to Purchase

The lessor must provide a statement of whether the lessee has the option to purchase the leased property; and, if the option arises at the end of the lease term, at what price; and if before the end of the lease term, at what time, and the price or method of determining the price. 12 CFR §213.4(i). The lessor must affirmatively disclose that the lessee has no option to purchase the leased property, if that is the case under the lease. Official Staff Commentary, 12 CFR pt 213, Supp I at 4(i), comment 1.

The Official Staff Commentary provides the lessor with two basic procedures to disclose a purchase price: (1) by stating the purchase price as a sum certain or (2) by stating the price as a sum certain to be determined at a future date by reference to a readily available and independent source. This “reference should provide sufficient information so that the lessee will be able to determine the actual price when the option becomes available.” 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(i), comment 5. Statements of a future purchase price as a “negotiated price” or the “fair market value” are not sufficient.

Neither the regulation nor the Official Staff Commentary provides examples or definitions for a readily available independent source. Presumably, the lessor could state that the price at termination will be that set in a then-current National Automobile Dealers Association (NADA) or Kelley Blue Book.

There appears to be considerable ambiguity in the regulation and commentary. For example, when it comes time for the lessee to exercise the purchase option, will the price be referenced to the wholesale value or the retail book value? Will the vehicle’s options be compared to the retail or wholesale option prices? Who makes the decision that the vehicle meets the book standards for condition and wear and tear for the quoted price?

The Official Staff Commentary addresses how a lessor may disclose official fees, such as for taxes, licenses, and registration, charged in connection with the exercise of an option to purchase. Such fees may be disclosed under 12 CFR §213.4(i) as part of the purchase-option price or may be disclosed and itemized by category. “Alternatively, a lessor may provide a statement indicating that the purchase-option price does not include fees for tags, taxes, and registration.” Official Staff Commentary, supra, §213.4(i), comment 4.

Any purchase-option fee must be disclosed under 12 CFR §213.4(i) and not under the “other charges” provision of 12 CFR §213.4(d). Official Staff Commentary, supra, §213.4(i), comment 3.

Whether or not a purchase option exists under the lease is determined by state or other applicable law. Official Staff Commentary, supra, §213.4(i), comment 2.

A disclosure violation occurs if the purchase-option price disclosed varies from the lessor’s actual practice or legal obligation even if the actual practice is more favorable to the lessee because such a disclosure would discourage the lessee from exercising the purchase option. See Highsmith v. Chrysler Credit Corp., 18 F3d 434 (7th Cir 1994). Similarly, if the lease says there is no option to purchase, it would be a disclosure violation if the lessor’s actual practice is to allow lessees to buy the leased property at a negotiated price.

Termination Options

The lessor must provide a statement of the conditions under which either the lessee or the lessor may terminate the lease before the end of the lease term, and the amount or method of determining the amount of any penalty or other charge for early termination. If the lessee will be liable for charges on default and early termination of the lease, the default charges must be disclosed under 12 CFR §213.4(g)(1).

The amount or method of determining the amount of any penalty or charge must be reasonable. 12 CFR §213.4(g). The Official Staff Commentary incorporates the standard of reasonableness set forth in 15 USC §1667b and Official Staff Commentary §213.4(q), comment 5. Presumably, if the lessor discloses a method that is unreasonable, the lessor would be in violation of this section.

Penalties or other charges for delinquency, default, or early termination may be specified in the lease but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the delinquency, default, or early termination, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

15 USC §1667b(b). In Miller v. Nissan Motor Acceptance Corp., 2000 WL 175128 at **4-5 (ED Pa Oct 27, 2000), the court held that §1667b(b) does not apply to the implicit cost to the consumer in forfeited lease payments created when a vehicle is turned in prior to the monthly payment due date.

Some leases prohibit early termination during the first part of the lease, usually during the first year. The language of the Consumer Leasing Act (CLA) seems to suggest that the lessee may terminate the lease at any time, as long as the lessee is willing to shoulder reasonable early-termination charges. Is the prohibition on termination within a period of time unreasonable? See Robinson v. Toyota Motor Credit Corp., Clearinghouse No 51,289 (Ill Cir Ct May 23, 1996).

Regulation M requires a motor vehicle lessor to include an early-termination clause 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’”. 12 CFR §213.4(g)(2). Although Regulation M does not require a specific type size, the model form places the warning in bold type. 12 CFR pt 213, App A-1. The notice must be segregated from other information. 12 CFR §213.3(a)(2).

Most lease forms contain early-termination formulas that are quite complex. The Commentary recognizes this fact. Official Staff Commentary, supra, §213.4(g)(1), comment 2. Pursuant to the Commentary, the lessor “should” provide the lessee with a clear and understandable description of early-termination charges. However, descriptions that are full, fair, accurate, and not intended to be misleading will comply with Regulation M, even if the descriptions are complex. In providing the required full description, the lessor may identify by name a generally accepted method, such as the “constant yield” method of computing adjusted lease balances. A lessor who refers to a named method must provide a written explanation of that method if requested by the lessee. The lessor may provide the explanation in the lease itself or in a separate writing. If the lessee does not request a written explanation at consummation, the lessor can comply with the written-explanation requirement by providing the lessee with an address or telephone number so that the consumer can request a written explanation. If the lessee requests an explanation at consummation, the written explanation must be provided at that time. If the lessee requests a written explanation of the named early-termination method subsequent to consummation, the lessor must provide the written explanation within a reasonable time. Official Staff Commentary, supra, §213.4(g)(1), comments 2–3.

The Commentary does not state how long the lessor is responsible for providing a written explanation of a calculation method for early termination. Presumably, the obligation survives even a lessee’s default. The lessor must provide a written explanation within a reasonable time of being asked by the consumer. Official Staff Commentary, supra, §213.4(g)(1), comment 3.

If the lessee provides that the lessee is responsible for the unamortized cost and the realized value at early termination, the amount or method must still be disclosed under 12 CFR §213.4(g)(1). See Official Staff Commentary, supra, §213.4(g)(1), comment 5.

In Baez v. Banc One Leasing Corp., 348 F3d 972 (11th Cir 2003), the 11th Circuit affirmed a lower court decision holding Regulation M does not prohibit early termination charges based on the difference in residual and realized values in closed-end leases. The lower court ruled this type of charge was reasonable, in part because vehicles generally depreciate more at the beginning of a lease than at the end.

In Mitchell v. Ford Motor Credit Co., 702 F Supp 2d 1356, 1368 (MD Fla 2010) the district court held that the type of early termination formula discussed in Baez is not per se reasonable. The court ultimately ruled Ford Motor Credit Co.’s early termination formula was unreasonable because the lessee ended up owing $3,416 more under the formula than if the lease had gone to term. Mitchell, 702 F Supp2d at 1368.

Lessee’s Liability for Value Difference

The lessor must provide a statement that the lessee will be liable for the difference between the residual value of the property and its realized value at early termination or the end of the lease term, if such a liability exists. 12 CFR §213.4(k).

Realized Value

The term realized value means (1) the price received by the lessor for the leased property at disposition; (2) the highest offer for disposition that has not been withdrawn and that is able to be performed by the offeror; or (3) the fair market value at the end of the lease term. 12 CFR §213.2(m); Official Staff Commentary, 12 CFR pt 213, Supp I at 2(m), comment 1.

The lessor may choose any of three methods for determining realized value, subject to the contract terms, state law, or other applicable law. If the lessor sells the property before making the determination, the price received is the realized value. Official Staff Commentary, 12 CFR pt 213, Supp I at 2(m), comment 2. If the realized value is determined to be the market value at the end of the term, the lessor may stipulate either wholesale or retail market value. Blum v. Gen. Motors Acceptance Corp., 365 SE2d 474, 476 (Ga App 1988).

The realized value is not a required disclosure and becomes “relevant only to leases in which the lessee’s liability at early termination” or at lease end is “based on the difference between the residual value . . . of the leased property and its realized value.” Official Staff Commentary, supra, §213.2(m), comment 1.

The Commentary states that realized value is either the retail or wholesale value of the leased property at early termination or lease end. Official Staff Commentary, supra. Nothing in 12 CFR §213.2(m) or the Official Staff Commentary contemplates the disposition of the leased property at wholesale, even if that should mean a substantially high “deficiency” obligation to the lessee.

The Commentary makes clear that disposition charges may be included in determining the realized value. Amounts attributable to taxes may be excluded. Official Staff Commentary, supra, §213.2(m), comment 3.

Right to Professional Appraisal

The lessor must disclose that the lessee may obtain, at the lessee’s expense, a professional appraisal of the value that could be realized at the sale of the leased property. The appraisal is conducted by an independent third party agreed on by the lessee and lessor, and is final and binding on the parties. 12 CFR §213.4(l). If the lessee is liable at the end of the lease term or at an early termination for unreasonable wear or use but not for the estimated value of the leased property, the lessor need not disclose the lessee’s right to an independent appraisal. Official Staff Commentary, 12 CFR pt 213, Supp I at 4(1), comment 1.

The lessee’s appraisal rights are triggered only if the lessee’s liability at early termination or at lease end is based on the realized value of the leased property.

“The lessee does not have the right to an independent appraisal merely because the lessee is liable at the end of the lease term or at early termination for unreasonable wear or use.” 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(l), comment 1. If the lessor obtains an appraisal of the leased property to determine its realized value, the lessor must still disclose the lessee’s right to an independent appraisal. The lessor must indicate in the disclosure whether the wholesale or retail appraisal will be used. Official Staff Commentary, supra, §213.4(l), comments 2–3.

The Commentary states that the lessor may require the lessee to obtain the appraisal within a reasonable period of time after the termination of the lease; presumably before the disposition of the leased property. Official Staff Commentary, supra, §213.4(l), comment 4. Neither the regulation nor the Official Staff Commentary provides guidance on how the lessor is to “require the lessee to obtain the appraisal.”

Value at Consummation and End of Term

When the lease provides that 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, the lessor must disclose the value of the property at the consummation of the lease, the itemized total lease obligation at the end of the lease, and the difference between them. 12 CFR §213.4(m).

In addition, the lessor must disclose that (1) there is a rebuttable presumption that the estimated value of the leased property at the end of the term is unreasonable and not in good faith to the extent that it exceeds the realized value by more than three times the average payment allocable to a monthly payment period; (2) the lessor cannot collect the amount of the excess liability unless the lessor brings a successful action in court in which the lessor pays the lessee’s attorney fees; and (3) the foregoing provisions do not apply to the extent that the excess of estimated value over realized value is due to unreasonable wear or use, or excessive use. 12 CFR §213.4(m)(2).

The lessor also must disclose that the foregoing disclosure requirements do not preclude the right of a willing lessee to make any mutually agreed final adjustment regarding any excess liability. 12 CFR §213.4(m)(3).

Section 213.4(m) applies only if the lessee is liable at the end of the lease term for the value difference between the residual value of the leased property and its realized value.

The lessor may choose either a retail value or a wholesale value in estimating the value of the leased property at scheduled termination, as long as the choice is consistent with the lessor’s usual practice. The Commentary suggests that the lessor should indicate whether the lessor used a retail or wholesale basis in setting the residual value. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(d)(1)[K7] , comment 4.

If the lessor uses a wholesale basis to set the residual value, must a wholesale basis for the leased property also be used to determine the 12 CFR §213.4(m) excess liability at the scheduled termination of the lease?
If 12 CFR §213.4(m) applies because of the lessee’s liability for a value differential, the lessor is required to disclose the amount of rent and other charges paid by the lessee and required by the lessor as an incident to the lease, with a description such as “the total amount of rent and other charges imposed in connection with your lease $________.” 12 CFR §213.4(m)(1). This is a 12 CFR §213.3(a)(2) segregated disclosure.

Official Staff Commentary §213.4(m)(2), comment 1, makes clear that the limiting disclosure does not apply in early-termination cases; it applies only to a lessee’s liability following termination at the scheduled termination of the lease. Consumer protections for a lessee’s liability for value differences in the event of early termination are found at 12 CFR §213.4(g) and (k). In a lease having an alternative minimum term, the limiting disclosure does not apply to the minimum term. See Official Staff Commentary, supra, §213.4(m)(2), comment 2.

The Commentary states that 12 CFR §213.4(m) does not preclude the lessor from recovering other charges based at the end of the lease term, such as charges for disposition, excess mileage, late payments, defaults, and certain interest accrual, for failure to make timely payments. In other words, a lessor may subtract these charges following disposition before arriving at the “realized value” for purposes of 12 CFR §213.4(m). Official Staff Commentary, supra, §213.4(m)(2), comment 3.

The rules for determining the reasonableness of an assigned residual value in an open-end lease are set forth in 12 CFR §213.3(d) and in Official Staff Commentary §213.3(d)(1), comment 3.
Gross Capitalized Cost

The gross capitalized cost is a subjective value of the leased property as determined by agreement between the lessor and the lessee. Included within the definition are any items that are capitalized or amortized over the term of the lease, including but not limited to taxes, insurance, service contracts, and any prior negative equity. 12 CFR §213.2(f).

Motor vehicle leases must contain two disclosures, which must be segregated: (1) gross capitalized cost and (2) adjusted capitalized cost. 12 CFR §213.4(f)(1), (3). These disclosures eliminate the need to state a “value at consummation,” which was originally defined at former 12 CFR §213.2(a)(18).

Payment Calculation

For motor vehicle leases, the lessor must include a series of 11 segregated disclosures showing the derivation of the monthly payment amount: the gross capitalized cost (separately disclosing the agreed-on value of the vehicle), capitalized cost reduction, the adjusted capitalized cost, the residual value, depreciation and other amortized costs, rent charges, the total of base period payments, the lease term, the base periodic payment, the itemization of the period payment, and the total periodic payment. 12 CFR §213.4(f).

The gross capitalized cost is the agreed-on value of the vehicle, together with any other charges that will be paid over the lease term. The disclosure must include language similar to “’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 credit or lease balance),’” and a statement of the lessee’s right to receive on request an itemization of the gross capitalized cost before consummation. See 12 CFR §213.4(f)(1).

The capitalized cost reduction must be disclosed using 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.” 12 CFR §213.4(f)(2). The capitalized cost reduction is not the total of initial payments or credits but the amount of these initial payments or credits after initial charges such as security deposits, first month’s lease payment, and fees are subtracted. See 12 CFR §213.4(f)(2).

Adjusted capitalized cost must be disclosed using a description similar to “the amount used in calculating you base [periodic] payment.” It is equal to the gross capitalized cost minus the capitalized cost reduction. See 12 CFR §§213.4(f)(3), 213.2(f).

Residual value must be disclosed using a description like “the value of the vehicle at the end of the lease used in calculating your base [periodic] payment.” 12 CFR §213.4(f)(4). The amount of the residual value is not directly regulated by the Consumer Leasing Act (CLA).

An artificially high residual value will result in unreasonable early-termination charges in violation of the requirements of 12 CFR §213.4(g)(1).

Depreciation and any amortized amounts must be disclosed using a description like “‘ amount charged for the vehicle’s decline in value through normal use and for any other items paid over the lease term.’” 12 CFR §213.4(f)(5). The sum disclosed as “depreciation and any amortized amounts” is equal to the difference between adjusted capitalized cost and the residual value.

Rent charges must be disclosed using a description like “’the amount charged in addition to the depreciation and any amortized amounts.’” 12 CFR §213.4(f)(6). The lessor is not required to itemize the components of the rent charge. The rent charge is the difference between “the total of the base periodic payments” and the “depreciation and any amortized amounts.” 12 CFR §213.4(f)(6). The total of base periodic payments is the total of periodic lease payments (including any periodic payment due at lease inception), but not including other periodic charges paid to third parties. 12 CFR §213.4(f)(7), (10)–(11).

The total of base periodic payments must be disclosed using a description like “depreciation and any amortized amounts plus the rent charge.” 12 CFR §213.4(f)(7).

The number of payments in the lease term must be disclosed using a description like “’the number of [periods of repayment] in your lease.’” 12 CFR §213.4(f)(8). The intention reflected in the model form is that the lessor discloses the number of payment periods (e.g., “36 months”) rather than the lease term (e.g., “three years”).

The base periodic payment is the “’total of base periodic payments divided by the number of payment periods in the lease.’” 12 CFR §213.4(f)(9). It is the amount of the periodic payment before taxes, and other charges are included.

The itemization of other charges is an itemization of “any other charges that are part of the periodic payments.” The likely intent of the regulation is that these charges be disclosed by type, amount, and as periodic payments rather than as a total charge. 12 CFR §213.4(f)(10).

The final disclosure of the payment calculation is the total periodic payment, which is the sum of the base periodic payment and the other charges. This is the amount that the lessee pays each month or other period of payment. 12 CFR §213.4(f)(11).

Total of Payments

The “total of payments” is the sum of the amount due at lease signing, minus any refundable amounts, and the total amount of periodic payments, minus any periodic payment paid at lease signing, and other charges payable by the lessee and identified under 12 CFR §213.4(b), (c), and (d). 12 CFR §213.4(e).
The total of payments must be disclosed with a description like “the amount you will have paid by the end of the lease.” 12 CFR §213.4(e).

In open-end leases, the lessor must also include with the disclosure a description of the lessee’s obligation for the value differential between the actual value of the vehicle at lease end (realized value) and its stated residual value. The regulations suggest that the lessor use language such as “You will owe an additional amount if the actual value of the vehicle is less than the residual value.” 12 CFR §213.4(e). See 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(e), comment 1.

The suggested disclosure in Regulation M regarding the potential value differential in open-end leases uses the term vehicle to describe the leased property. 12 CFR §213.4(e). However, neither Regulation M nor the Official Staff Commentary to 12 CFR §213.4(e) specifically limits the open-end lease disclosure requirement to motor vehicle leases. Open-end leases for property other than motor vehicles remain subject to the CLA regarding end-of-term liability.

Closed-End Lease/Open-End Lease

A definition of open-end lease is found at 12 CFR §213.2(i). An open-end lease is a consumer lease in which the liability of the lessee at the end of the lease term is based on the difference between the residual or estimated value and the realized value of the leased property. There is no Official Staff Commentary supplementing this definition.

“Residual value means the value of the leased property at the end of the lease term, as estimated or assigned at consummation by the lessor, used in calculating the base periodic payment.” 12 CFR §213.2(n). “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.” 12 CFR §213.2(m).

Timing of Disclosures

All the lease disclosures must be made before consummation of the lease. 12 CFR §213.3(a)(3). Consummation occurs when a contractual relationship is created under state law between the lessor and the lessee. The Official Staff Commentary continues to provide that consummation occurs when a contractual relationship is created between the lessor and the lessee as determined under state law. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(a)(3), comment 1.

Form and Location of Disclosures

Regulation M contains specific requirements for the form and location of the required disclosures. Any violation of these requirements will render the lessor liable for statutory damages.

The disclosures must be made clearly and conspicuously in writing and in a form the consumer may keep. 12 CFR §213.3(a); 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(a), comment 2.
The clear-and-conspicuous standard requires that the disclosures be “reasonably understandable.” Although there is no minimum type-size requirement, the disclosures must be legible, whether typewritten, handwritten, or computer-generated. Official Staff Commentary, supra. Appendix A to Regulation M contains model forms for furniture leases and open-end and closed-end vehicle leases. The use of the model forms should effectively address the court’s concerns in Thomka v. A.Z. Chevrolet, Inc., 619 F2d 246 (3d Cir 1980).

The model forms contain only disclosures required by Regulation M and the Official Staff Commentary. They do not contain other elements of a standard-form lease agreement, such as specified acts of default, remedies, and requirements for casualty insurance. A reference to a lessor’s use of a model form presumably is to a lessor’s incorporation of all the elements of the model form into a more complete lease agreement.

A lease need not be contained within a single document. The disclosures must be given to a lessee 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 12 CFR §213.3(a)(2) 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. However, all disclosures must be given at the same time. Official Staff Commentary, supra, §213.3(a)(2), comment 1.

“The disclosures required to be segregated may contain only the information required or permitted to be included among the segregated disclosures.” Official Staff Commentary, supra, §213.3(a)(2), comment 2. 
Lessors may include a cross-reference to items in the segregated disclosures rather than repeat those items in the non-segregated disclosures. “A lessor may include in the segregated disclosures numeric or alphabetic designations as cross-references to related information” as long as the references do not “obscure or detract from” the segregated disclosures. Official Staff Commentary, supra, §213.3(a)(1), comment 1.

Certain disclosures must be segregated from other required disclosures and from other lease information. Additional information may be included with the non-segregated disclosures, but this additional information must not “mislead or confuse the lessee” and must not “contradict, obscure, or detract attention” from the required disclosures. 12 CFR §213.3(b).

Segregated Disclosures

Under 12 CFR §213.3(a)(2), 10 specific disclosures must be segregated from other information (required or otherwise):

(1)     The amount due at lease-signing or delivery, if delivery occurs after lease-signing. 12 CFR §213.4(b).

(2)     The payment schedule and the total amount of periodic payments. 12 CFR §213.4(c).

(3)     Other charges payable to the lessor. 12 CFR §213.4(d).

(4)     The total of payments to be paid under the lease, including the open-end lease caveat concerning the lessee’s liability for the realized value versus the residual value. 12 CFR §213.4(e). The required open-end lease language refers to the lessee’s liability for the value difference for a “vehicle.” This reference to a “vehicle” in the required explanatory statement of this lease charge may have been an oversight that unnecessarily limits the application of 12 CFR §213.4(e).

(5), (6), (7)   In a motor vehicle lease, the 11-step payment calculation required by 12 CFR §213.4(f), the early-termination warning required by 12 CFR §213.4(g)(2), and a notice concerning excessive wear and use. 12 CFR §213.4(h)(3).

(8)     “A statement of whether or not the lessee has the option to purchase the leased property, and . . . [i]f at the end of the lease term, the purchase price.” 12 CFR §213.4(i)(1).

(9)     A statement that the lessee should refer to certain non-segregated disclosures for important information on other applicable disclosures. 12 CFR §213.4(j).

(10)    In open-end leases in which 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, the rent and other charges required by the lessor as an incident to the lease transaction. 12 CFR §213.4(m)(1).

Most of the disclosures that must be segregated must be disclosed in statutory language. In addition, the content and format of the segregated disclosures must be provided in a manner substantially similar to the applicable model form.

The lessor may provide the segregated disclosures in a separate, dated statement that identifies the lease. 12 CFR §213.3(a)(1).

The headings, content, and format for the segregated disclosures must be substantially similar to the applicable model form. 12 CFR pt 213, App A—Model Forms, Form A-1. No additional information may be included in the segregated box. Information required by state law may not be included. See 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(a)(2), comment 2.

Disclosures by Electronic Communication

The Consumer Leasing Act (CLA) and Regulation M require a lessor to provide written disclosures to consumers. See 12 CFR §213.3(a) (disclosures must be made “in writing in a form the consumer may keep”). The assumption is that “written” disclosures are “paper” disclosures. However, in many areas, information in a visual electronic format is considered tantamount to a writing.

The disclosures required by Regulation M may be provided to the lessee in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 USC §7001 et seq.). For an advertisement accessed by the consumer in electronic form, the disclosures required by §213.7 may be provided to the consumer in electronic form in the advertisement, without regard to the consumer consent or other provisions of the E-Sign Act. 12 CFR §213.3(a).

Location

“The segregated disclosures referred to in §213.3(a)(2) may be provided on a separate document and the other required disclosures may be provided in the lease contract, so long as all disclosures are given at the same time. Alternatively, all disclosures may be provided in a separate document or in the lease contract.” 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(a)(2), comment 1.

The Official Staff Commentary provides that the lessee is not required to sign the disclosure statement, regardless of whether the disclosures are separately provided or part of the lease contract. However, the Commentary no longer addresses whether the disclosures may appear on both sides of a page, or where the lessee’s signature must be located. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(a)(1), comment 5 (formerly §213.4(a)(2), comment 5).

The disclosures must be dated and in a form the lessee can keep. The copy of the disclosures that the lessee receives must have all disclosures included. The lessor may incorporate the required disclosures in a separate document or may include them on the lease contract. The segregated disclosures could be included on the lease contract and the other discloses could be on a separate document that references the lease. 12 CFR §213.3(a)(1)–(2); Official Staff Commentary, supra, §213.3(a)(1)–(2).

Language of Disclosures

The language of the disclosures may be made in any language other than English, as long as they are made in English on the lessee’s request. 12 CFR §213.3(a)(4).

Clear and Conspicuous

All disclosures must be made clearly and conspicuously. 12 CFR §213.3(a). The term clear and conspicuous is not defined in Regulation M. The Official Staff Commentary states that the clear-and-conspicuous standard requires that the disclosures be “reasonably understandable. For example, the disclosures must be presented in a way that does not obscure the relationship of the terms to each other.” 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(a), comment 2.

In Thomka v. A.Z. Chevrolet, Inc., 619 F2d 246 (3d Cir 1980), the court held that a lease violated the “clear and conspicuous” standard of 15 USC §1667a when finding the disclosures required reading through numerous paragraphs in the lease. The court cited as one example the fact that the total amount paid for official fees, license fees, or taxes, required to be disclosed by 12 CFR §226.15(b)(4) of the original Regulation Z, could be determined only by looking at four different paragraphs. Thomka, 619 F2d at 249.

Although Thomka, 619 F2d 246, was decided before the original TILA and original Regulation Z were repealed, the holding regarding the requirement of clear and conspicuous disclosures appears to apply to the provision of the Reform Act. The language of 15 USC §1667a and 12 CFR §213.4(a), which require clear and conspicuous disclosures, is identical to that under the original TILA and original Regulation Z.

In Lundquist v. Sec. Pac. Auto. Fin. Services Corp., 1992 WL 475652 (D Conn Aug 13, 1992), the court held that for a disclosure to satisfy the provisions of the Consumer Leasing Act (CLA), it must be “reasonably understandable” from the perspective of the “average consumer.”

Meaningful Sequence

The “meaningful sequence” requirement no longer appears in the Consumer Leasing Act (CLA). Disclosures required under 12 CFR §213.4 are now divided into two groups: disclosures required to be segregated pursuant to 12 CFR §213.3(a)(2) and all other required disclosures. Disclosures that are required to be segregated must be provided in a manner that substantially complies with the applicable model form in Appendix A of 12 CFR part 213.

Type Size

Regulation M no longer requires a minimum type size for lease disclosures. Nevertheless, the disclosures must be legible, whether typewritten, handwritten, or computer-generated. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(a), comment 2.

Additional Information

The lessor, at the lessor’s option, may include additional information or explanations with any of the disclosures required by Regulation M. However, none of this information may be “stated, used, or placed to mislead or confuse” the lessee, or to “contradict, obscure, or detract attention from” the information that must be disclosed. 12 CFR §213.3(b).

Disclosure Under Inconsistent State Laws

The laws of some states may require a lessor to make disclosures that are inconsistent with the requirements of Regulation M. If a lessor cannot comply with a state law without violating a provision of Regulation M, the state law is preempted by the Consumer Leasing Act (CLA). 12 CFR §213.9(a).

Unknown-Information Estimates

The lessor may use estimates to make disclosures if necessary information is unknown or unavailable at the time the disclosures are made. To use estimates, the lessor must have made a reasonable effort, acting in good faith and with due diligence, to obtain the information, and the estimate or approximation (1) must be clearly identified as an estimate, (2) must be reasonable, (3) must be based on the best information available to the lessor, and (4) must not be used for the purpose of circumventing or evading the disclosure requirements of Regulation M. 12 CFR §213.3(d).

Subsequent Occurrences

If information required to be disclosed by Regulation M is subsequently rendered inaccurate as a result of any act, occurrence, or agreement after the required disclosures are delivered, the inaccuracy is not a violation of Regulation M. 12 CFR §213.3(e). Examples of such occurrences include: (1) An agreement between the lessee and lessor to change from a monthly to a weekly payment schedule, (2) late delivery of a vehicle caused by a strike, (3) increase in insurance cost or coverage caused by a change of law, and (4) an increase in official fees or taxes. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.3(e), comment 1.

If a lessor adds casualty insurance (often referred to as “VSI” or “collateral-protection insurance”) to a lease as a result of the lessee’s failure to procure required casualty insurance, the addition of the premium to the lessee’s lease obligation does not require an additional disclosure, nor does it render a prior disclosure inaccurate. Official Staff Commentary, supra, §213.3(e), comments 2–3.

Lessee’s Independent Appraisal Rights

“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,” the lessor must disclose that the lessee has the right, at lessee’s expense, to an independent professional appraisal by a third-party agreed to by the lessor and lessee. This appraisal is final and binding on the parties. 12 CFR §213.4(l).

The lessee does not have a right to an appraisal merely because the lessee is liable at termination for unreasonable wear and tear on the leased property. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.4(l), comment 1. In providing the 12 CFR §213.4(l) disclosures, the lessor must now indicate whether a wholesale or a retail appraisal value will be used. Official Staff Commentary, supra, §213.4(l), comment 3.

Consumer Lease Advertising

An advertisement is defined as a commercial message in any medium that directly or indirectly promotes a consumer lease transaction. 12 CFR §213.2(b). For examples of the types of printed, visual, oral, and electronic media that the rule encompasses, see 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(b), comment 1. Internet online commercial messages are now explicitly included within the definition of advertisement. Official Staff Commentary, supra, §213.2(b), comment 1(vi).

The advertisement of consumer leases is governed by 12 CFR §213.7. Official Staff Commentary §213.7(a), comment 1 makes clear that all “persons” must comply with the advertising provisions of 12 CFR §213.7, not just those who meet the definition of lessor in 12 CFR §213.2(h). However, the Consumer Leasing Act (CLA) explicitly grants a private right of action only against any lessor who fails to comply with the advertising provisions. 15 USC §1667d(b).

The CLA only provides private remedies for advertising disclosure violations when the lessee “suffers actual damage from the violation.” 15 USC §1667d(b).

The Commentary has extended the scope of the Regulation M advertising rules to automobile dealers, merchants, and other persons who advertise consumer leases even though they are not lessors within the definition of that term. The Commentary specifically excludes “owners and personnel of the media in which an advertisement appears or through which it is disseminated” from civil liability for CLA advertising violations. Official Staff Commentary, supra, §213.7(a), comment 1.

Disclosure Rules

Usually and customarily. An advertisement for a consumer lease may state that a specific lease of any 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. 12 CFR §213.7(a). The apparent purpose of this rule is to prevent “bait and switch” lease advertising. It does not preclude the advertisement of a single item or the promotion of a new or one-time leasing program. The Official Staff Commentary expounds on the phrase usually and customarily by stating that 12 CFR §213.7(a) does not preclude the advertisement of a single item or the promotion of a new or one-time leasing program, but that it does prohibit the advertisement of lease terms that are not and will not be available to the consumer. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.7(a), comment 2.

Clear and conspicuous

Regulation M requires that all required advertising lease disclosures be made clearly and conspicuously. 12 CFR §213.7(b). The Commentary places a reasonableness standard on what is to be considered clear and conspicuous. Official Staff Commentary, supra, §213.7(b), comment 1.

Most lease advertising occurs in print or electronic media. There is no stated minimum print size for any advertising media. However, the Commentary states, for example, that “very fine print” in a television advertisement or detailed and “very rapidly stated” information in a radio advertisement will not pass the clear-and-conspicuous standard. Official Staff Commentary, supra, §213.7(b), comment 1.

Triggering terms

The disclosure requirements of an advertisement for a lease depend on the precise language of the advertisement. If the advertisement uses any of the following triggering terms (identified in 12 CFR §213.7(d)(1)), additional disclosure requirements come into play:

(1)     The “amount of any payment”; and

(2)     “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.” 12 CFR §213.7(d)(1)(ii) makes clear that a statement in an advertisement that “no initial payment is required” is a triggering term. The Federal Reserve Board (FRB) had inadvertently omitted this triggering term from the previous Regulation M section. 

If one or both of the triggering terms are used in an advertisement for a consumer lease, the advertisement must include the following additional disclosures:

(1)     That the transaction advertised is a lease.

(2)     The total amount due before or at consummation or by delivery, if delivery occurs after consummation.

(3)     The number, amounts, due dates, or periods of scheduled payments under the lease. Under prior law, the “total of the scheduled payments” was also a required disclosure.

(4)     A statement of whether or not a security deposit is required.

(5)     A statement that an extra charge may be imposed at the end of the lease term if the lessee’s liability is based on “the difference between the residual value of the lease property and its realized value.” 12 CFR §213.7(d)(2). If a triggering term was employed in an advertisement, original Regulation M required a statement of whether the lessee had the option to purchase the leased property and at what price and time. Former 12 CFR §213.5(c)(4). That requirement no longer exists. Original Regulation M also required a statement of the amount or method of determining the amount of any liabilities the lease imposed on the lessee at the end of the lease term, and a statement that the lessee would be liable for any difference between the estimated value of the leased property and its realized value at the end of the lease term, if the lessee had such liability. Former 12 CFR §213.5(c)(5). That requirement has also been deleted under new Regulation M.

Prominence

Except for a statement of a periodic payment, such as the monthly lease payment, any affirmative or negative oral or written references to a charge that is part of the total amount due at lease-signing or delivery may not be more prominent than the disclosure of the total amount due at lease-signing or delivery. 12 CFR §213.7(b)(1). The total amount due at lease-signing includes such charges as the capitalized cost reduction (down payment), refundable security deposit, acquisition fee, and license and title fees. See 12 CFR §213.4(b). For example, a lease advertisement may not include a statement such as “Zero Due at Start,” “No Down Payment,” or “$100 Down” in terms more prominent than any of the other elements of the total due at lease-signing.

A percentage rate provided by a lessor in an advertisement may not be more prominent than any of the 12 CFR §213.4 disclosures (amount due at signing, payment schedule, total or periodic payments, gross capitalized cost, etc.) with the exception of 12 CFR §213.4(s). In addition, if a lessor advertises a percentage rate, the advertisement must include a notice that the percentage rate may not measure the overall cost of financing the lease. 12 CFR §213.4(s). The Commentary requires this limiting notice to be placed in close proximity to the rate without any other intervening language or symbols. A lease advertiser may not place an asterisk next to the percentage rate and locate the notice elsewhere in the advertisement. Official Staff Commentary, supra, §213.7(b)(2), comment 1.

The FRB must have been adamant about the exclusion of terms such as annual percentage rate, annual lease rate, or equivalent terms in lease advertising. The unequivocal prohibition against the use of such terms is found in both 12 CFR §213.4(s) and 12 CFR §213.7(b)(2). Neither of these sections provides an alternative term for percentage rate. Lease advertisers who desire to feature rate advertising would be well advised to strictly adhere to the term percentage rate.

Prominence is not a defined term under Regulation M or the Official Staff Commentary. Presumably, a statement of “Zero Down” in a type size larger or in bolder print than a dollar disclosure of an acquisition fee would violate 12 CFR §213.7(b)(1). Is prominence an issue if “zero down” appears in red ink and the acquisition fee appears in standard print black, albeit in the same font and type size?

Catalogs and Multiple-Page Advertisements

A catalog or other multiple-page advertisement that promotes any consumer lease is considered a single advertisement, provided a table or schedule provides for all required disclosures, and any statement of lease terms appearing anywhere other than in the table or schedule of lease terms clearly and conspicuously refers to the page on which the table or schedule appears. 12 CFR §213.7(c).

Merchandise Tags

A merchandise price tag falls within the definition of an advertisement under 12 CFR §213.2(b). See 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(b), comment 1. Therefore, if a merchandise tag contains one or both of the triggering terms identified in 12 CFR §213.7(d)(1), it is subject to the additional five-step disclosure requirement of 12 CFR §213.7(d)(2). Needless to say, including the triggered disclosures on a merchandise tag would prove to be cumbersome. Section 213.7(e) provides the lease advertiser with the option of forgoing the detailed disclosures on the merchandise tag, but only if the tag refers the prospective lessee to a sign or display prominently posted in the lessor’s place of business. 12 CFR §213.7(e). The prominently posted sign or display must contain a table or schedule of the required disclosures.

Radio Advertisements

Any advertisement by radio broadcast that aids, promotes, or assists any consumer lease must clearly and conspicuously:

(1)     State that the transaction advertised is a lease, and the amount of any payment required at the inception of the lease. If no payment is required, the advertisement must state that is the case;

(2)     State the number, amounts, due dates, or periods of scheduled payments, and the total of such payments under the lease;

(3)     Refer to a toll-free telephone number or written advertisement that will provide consumers with all information required by the Consumer Leasing Act (CLA). 15 USC §1667c(c). If the lessor must provide a toll-free telephone number, the number must be established on or before the date on which the advertisement is broadcast. The number must be maintained for at least 10 days, beginning on the date of the broadcast advertisement. The lessor must provide all the information required by the CLA either verbally or in written form, if so requested by the consumer. 15 USC §1667c(c)(2).

Television Advertisements

Lease advertisements made through the television are subject to Regulation M. See 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(b), comment 1(ii); 12 CFR §213.2(b) (advertisement defined). Advertisements made through the television are treated the same as advertisements made through the radio. 12 CFR §213.7(f).

If a lease advertisement made through television or radio contains a 12 CFR §213.7(d)(1) triggering term, the lessor may include the 12 CFR §213.7(d)(2) five-step disclosure process in the ad. In the alternative, the lessor may limit the immediate disclosures to those required by 12 CFR §213.7(d)(2)(i)–(iii) and either:

(1)     List a toll-free number as allowed under 12 CFR §213.7(f)(1)(i); or

(2)     Direct the consumer to a written advertisement in a publication of general circulation in the community served by the media station, including the name and date of the publication with a statement that the information required by 12 CFR §213.7(d)(2) is included the advertisement. The written advertisement must be published at least three days before the broadcast of the truncated ad and must run for at least 10 days after the last broadcast. The Commentary now makes clear that the required publication may appear in a nationally circulated newspaper such as USA Today or the Wall Street Journal. Official Staff Commentary, supra, §213.7(f)(1), comment 1.

Liability of Advertisers

Neither the owner nor the personnel of any medium in which a consumer lease advertisement appears or through which it is disseminated is liable for a violation of the Consumer Leasing Act (CLA). 15 USC §1667c(b).

Possible Defenses

The statutory defenses available to a lessor under the Consumer Leasing Act (CLA) are identical to those for an action under the Truth in Lending Act (TILA). The practitioner should review relevant case law interpreting these provisions for the TILA.

The CLA states that “[a]ny lessor who properly uses the material aspects of any model disclosure form established by the Bureau . . . shall be deemed to be in compliance with the disclosure requirements to which the form relates.” 15 USC §1667f(b)(4). In addition, 15 USC §1640(f) provides a defense against liability for any lessor who, in good faith, has acted in conformity with any rule, regulation, or interpretation by the Federal Reserve Board (FRB) or in conformity with any interpretation or approval by an official or employee of the Federal Reserve System duly authorized by the FRB to issue such. This good-faith conformity defense can be based only on Official Board Interpretations and Official Staff Interpretations. The Official Staff Commentary now supersedes all Official Staff Interpretations.

Statute of Limitations

An action for damages under the Consumer Leasing Act (CLA) must be commenced within one year of the termination of the lease agreement. 15 USC §1667d(c).

A private action based on a violation of the Truth in Lending Act is also subject to a one-year statute of limitations. However, the Truth in Lending Act (TILA) one-year period commences from the date the violation occurred. A TILA violation typically occurs on the date that the credit contract is consummated. 15 USC §1640(e). Although the CLA also has a one-year statute of limitations, the one-year period commences on the date the lease actually terminates. Termination is not defined in the CLA, Regulation M, or the Official Staff Commentary. Presumably, termination means either the end of the lease at scheduled termination or termination on the lessee’s default. As a practical matter, the usual statute of limitations would be the term of the lease plus one year. If the lease is terminated as a result of a lessee’s default, the one-year period would commence on the date of the early termination. See Pettola v. Nissan Motor Acceptance Corp., 44 F Supp2d 442, 448-450 (D Conn 1999) (limitations period refers to termination of lease, not to expiration of term set forth in lease agreement; lease may terminate before expiration of full lease term); Kedziora v. Citicorp Nat. Services, Inc., 844 F Supp 1289, 1292 (ND Ill 1994) (default occurred when car was destroyed in accident, thus triggering early termination of lease). One court has measured the termination date from the date a vehicle was repossessed, rather than the date the early-termination charge was assessed. Carmichael v. Nissan Motor Acceptance Corp., 291 F3d 1278 (11th Cir 2002).

A time-barred TILA action may be resurrected in part if the debtor is sued on the debt. Under 15 USC §1640(e), the one-year statute does not bar a person from asserting a violation of the TILA by way of the defense of recoupment. The CLA has no similar provision.

Equitable Tolling of Statute of Limitations

The doctrine of equitable tolling is read into every federal statute of limitations. It provides that the active concealment of fraudulent conduct tolls the statute of limitations in favor of the defrauded party until the party becomes aware of the fraudulent conduct. Ellis v. Gen. Motors Acceptance Corp., 160 F3d 703, 707 (11th Cir 1998). In Pettola v. Nissan Motor Acceptance Corp., 44 F Supp2d 442 (D Conn 1999), the court held that the doctrine of equitable tolling applies to actions under the CLA.

Bona Fide Error

A lessor may be relieved from liability if they can prove by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error, notwithstanding procedures reasonably adapted to avoid such errors. 15 USC §1640(c). Examples of bona fide errors include, but are not limited to, clerical, calculation, computer malfunction and programming, and printing. Errors of legal judgment about the requirements of the CLA are not bona fide errors. See Thomka v. A.Z. Chevrolet, Inc., 619 F2d 246, 251 (3d Cir 1980) (court noted this defense did not apply to nonclerical errors in consumer lease).

Even if an error is unintentional and bona fide, the lessor may not rely on the statutory defense unless the lessor can show that the error occurred despite the existence of avoidance procedures. Turner v. Firestone Tire & Rubber Co., 537 F2d 1296 (5th Cir 1976). See McPhillips v. Gold Key Lease, Inc., 38 F Supp2d 975 (MD Ala 1999) (creditor’s cognitive analysis or belief of its obligations under statute is not relevant).

Notification of Error Within 60 Days of Discovery

A lessor may be relieved of liability if, within 60 days of discovering an error, the creditor notifies the consumer of the error. The creditor also must make arrangements to ensure that the consumer is not overcharged. 15 USC §1640(b). 

In Thomka v. A.Z. Chevrolet, Inc., 619 F2d 246, 251 (3d Cir 1980), the court interpreted this defense, under the original Truth in Lending Act (TILA), which allowed a creditor 15 days to notify a consumer of an error, to apply only to mathematical errors in a lease. 

A lessor who violates the Consumer Leasing Act (CLA) other than by a mathematical mistake cannot be relieved of liability by sending a corrected disclosure to the lessee. Thomka, 619 F2d at 251(dictum).

Jurisdiction

An action under the Consumer Leasing Act (CLA) may be brought in any United States district court or any other court of competent jurisdiction. 15 USC §1667d(c).

Official Staff Commentary

Good-faith compliance with the Official Staff Commentary affords protection from liability under §130(f) of the Truth in Lending Act (TILA). 12 CFR pt 213, Supp I, Official Staff Commentary, Introduction, comment 1.

Courts are bound to follow Federal Reserve Board staff opinions unless the opinions are determined to be demonstrably irrational. Ford Motor Credit Co. v. Milhollin, 444 US 555, 565, 100 S Ct 790, 63 L Ed2d 22 (1980).

Model disclosure forms have been promulgated under Regulation M. 12 CFR pt 213, App A. Although use of these forms is not required, lessors who properly use them will be deemed to be in compliance with Regulation M.

In ascertaining compliance with Regulation M, it is imperative to review the interpretations contained in the Commentary. Virtually every section of Regulation M is further explained or expanded by an interpretation.
Other Relevant Statutes

Several other statues and regulations apply, at least in part, to consumer leases. The Magnuson-Moss Warranty Act, 15 USC §§2301–2312, which pertains to the form and disclosure of written warranties, has been held by several courts to apply to leases. See chapter 16. The Federal Trade Commission (FTC) Rules concerning credit practices and preservation of consumers’ claims and defenses apply to certain types of consumer leases.

A lessor must retain evidence of compliance with the CLA and Regulation M for not less than two years after the date the disclosures are required to be made. 12 CFR §213.8. The lessor may maintain the records in paper form; on microfiche, microfilm, or computer; or by any other method designed to reproduce accurate records of the required disclosures. 12 CFR pt 213, Supp I, Official Staff Commentary, §213.8, comment 1.

The authority for promulgating rules under the CLA has been given to the Board of Governors of the Federal Reserve System. 15 USC §§1604, 1608. Nine federal agencies share administrative enforcement duties. To the extent not otherwise committed to another federal agency, enforcement authority rests with the FTC. 15 USC §1607(b). Most consumer leasing transactions and consumer lease advertising cases will fall within the jurisdiction of the FTC. The FTC may now bring civil actions and recover civil penalties of up to $10,000 per violation against offending lessors.

Liability of Assignees

The Consumer Leasing Act (CLA) does not expressly address assignee liability. The Official Staff Commentary provides that an “assignee may be a lessor for purposes of the regulation in circumstances where the assignee has substantial involvement in the lease transaction.” 12 CFR pt 213, Supp I, Official Staff Commentary, §213.2(h), comment 3. 

See Kennedy v. BMW Fin. Services, N.A., 2003 WL 22305163 (D Conn Oct 3, 2003)(issue of assignee liability under CLA not yet decided), Jordon v. Schaumburg Toyota, 1999 WL 116224 (ND Ill Feb 26, 1999) aff'd 236 F3d 866 (7th Cir 2001)(acknowledging “Regulation M imposes a broader scope of liability on assignees than does 15 USC §1641(a)”)

A consumer may not recover separate statutory and actual damages from both the original creditor and an assignee. Kittrell v. RRR, L.L.C., 280 F Supp2d 517 (ED Va 2003).