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F o r release on delivery Statement by Jeffrey M. Bucher M em ber, Board of Governors of the F ed eral R eserve System before the Subcommittee on Consumer A ffa irs of the Committee on Banking, Currency and Housing United States House of Representatives July 8, 1975 M r. Chairman and m em bers of the Com m ittee, it is indeed a pleasure to have the opportunity o f appearing before this Sub com m ittee on Consumer A ffa irs to present the Board's views on the Consumer Leasin g A ct of 1975, H. R. 4657. The Board is particu larly pleased to see leg is la tive action beginning in this area, since the need fo r consumer leasing disclosures has been of some concern to us over the last two yea rs. In its Annual Report to Congress on Truth in Lending fo r 1973, the Board pointed out s e v e ra l disclosure problem s in the area of consumer leasing and suggested that the Congress m ight wish to examine this rapidly expanding fie ld . The additional step of recommending leg is la tive provision s was taken by the Board in its Truth in Lending Report fo r 1974, and I was g ra tified to note that many of the provisions of the B oard's proposal have been incorporated into H. R. 4657. I would like to state at the outset that the Board b elieves that consumer leasing is an appropriate method o f utilizing and, in some cases, of purchasing consumer durables. experienced rapid growth within the last decade. Consumer leasin g has This growing popularity suggests that the public is increasingly coming to vie w leasin g as a viable altern ative to credit purchases fo r some products. A va ila b le statistics on the growth of consumer leasin g indicate that the so-called "b ig-tick et durables, " such as automobiles, color television sets, and home furnishings a re the m ost common goods leased by consum ers. Automobiles presently constitute the m ost - 2- popular leased goods, and this aspect of consum er leasin g w ill no doubt absoi-b much of the Subcom m ittee's attention during its d e lib erations on this legislation. Autom obile leasing has experienced rapid growth o v e r the past decade. A ccordin g to statistics from the National Autom obile D ealers A ssociation, in 1965, m ore than 1.5 m illion , some 14 per cent of the total number of automobiles produced, w ere leased, and one-fifth of this total was leased to individuals. By 1970, the percentage of automobile production that was leased had grown to 24 per cent (2.6 m illion ), m o re than a quarter of which represented leases to individuals. As of 1974, 2.8 m illion , about 26 per cent of the total number of cars made, w ere leased, and 36 p er cent o f this total was leased to individuals. Thus, over alm ost a decade, the percentage of total automobile production leased to individuals has trip led in size: from loss than 3 per cent in 1965 to 9. 2 per cent in 1974. Projection s from auto m akers in D etroit, m o reo v er, estim ate that 80 per cent of the growth in leasing through 1980 w ill be seen in leatses to individuals. The Board's concern with consumer leasin g is that p r e sently, except fo r provisions made in a few State statutes, there is no requirem ent that a standardized aggregate cost disclosu re be given the consumer when he leases goods under a lon g-term contract. Truth in Lending's m ajor purpose has been to fa cilitate meaningful consumer shopping of the cred it m arket by providing standardized - disclosures of credit costs. 3- Without comparable disclosures on consumer leasing, it is difficult, if not im possible, for consumers to shop in the expanding leasing m arket. Our hope is that the passage of this type of legislation w ill help consumers not only to compare leasing alternatives, but also to compare lease transac tions with conventional credit sales. The need for com parability in disclosure between lease and credit transactions is particularly important, because many con sumer leasing arrangements now prevalent in the m arket are essentially the equivalent of credit sales. The term inology of the trade, for example, re fe rs to certain lease agreements as "financing leases. " The fact that many of these leases are essentially equivalent to credit sales is not coincidental. F or example, both the C om ptroller of the Currency as to national banks and the Board in its rules governing bank holding company activities require that leases entered into by these institutions be the functional equivalent of a credit transaction and have thus lim ited the asset risk that banks and bank-related lessors may take in engaging in leasing operations. These rules, designed to protect the safety and soundness of banks in which the public deposits its funds, have the effect of placing the risk of any unforeseen deterioration or depreciation of the product leased on the lessee. Thus, legislation to protect the consumer by requiring proper disclosure of the consumer le s s e e 's risks becom es a ll the m ore important. Otherwise, the lessee may unknowingly undertake nearly a ll the burdens of ownership, without the benefit of title or adequate cost disclosures. - 4 - It is presently not possible as a p ra c tic a l m a tter to re qu ire adequate cost disclosu res on leases under the Truth in Lending Act. The Truth in Lending A ct brings certain lea ses within its d isclosu re requirem ents, through the definition of cred it sale contained in § 103(g). H ow ever, these requirem ents apply only with respect to those leases which contain provisions permitting the les s e e to become the owner of the goods leased nfo r no other or a nominal consideration. M The Board might conceivably expand this provision by adopting a broad definition of what constitutes nominal consideration. H ow ever, this would still not accom plish the purpose of assuring that adequate cost d isclosu res are given in a ll consumer lea ses, such as those in which there is no option to purchase. In addition, we believe that the number of leases with nominal purchase options is quite small. The focal point of the Board1s concern is thus those lo n g te rm leases of personal property to be used fo r personal, fa m ily or household purposes, which typically have a m aturity approaching that of a credit sale agreem ent, and potentially bind the le s s e e to the payment of an aggregate sum substantially equivalent to the value of the goods leased. This does not include the sh o rt-te rm convenience leasing such as re n t- a -c a r arrangements. We fe e l that standardized d isclosu res, comparable to those set forth under Truth in Lending, should be requ ired for lease advertisem ents as w e ll as fo r consumer lease transactions. H ow ever, we do not b elie ve that rate d isclosu res, analogous to the annual - disclosures of credit costs. 3- Without comparable disclosures on consumer leasing, it is difficult, if not im possible, for consumers to shop in the expanding leasing m arket. Our hope is that the passage of this type of legislation w ill help consumers not only to compare leasing alternatives, but also to compare lease transac tions with conventional crcdit sales. The need for com parability in disclosure between lease and credit transactions is particularly important, because many con sumer leasing arrangements now prevalent in the m arket are essentially the equivalent of credit sales. The term inology of the trade, for example, r e fe rs to certain lease agreements as "financing leases. " The fact that many of these leases are essentially equivalent to credit sales is not coincidental. F or example, both the C om ptroller of the Currency as to national banks and the Board in its rules governing bank holding company activities require that leases entered into by these institutions be the functional equivalent of a credit transaction and have thus lim ited the asset risk that banks and bank-related lessors may take in engaging in leasing operations. These rules, designed to protect the safety and soundness of banks in which the public deposits its funds, have the effect of placing the risk of any unforeseen deterioration or depreciation of the product leased on the lessee. Thus, legislation to protect the consuniei by requiring proper disclosure of the consumer le s s e e 's risks bccomey a ll the m ore important. Otherwise, the lessee may unknowingly undertake nearly a ll the burdens of ownership, without tlie benefit of title or adequate cost disclosures. - 4- It is presently not possible as a practical m atter to require adequate cost disclosures on leases under the Truth in Lending Act. The Truth in Lending A ct brings certain leases within its disclosure requirem ents, through the definition of credit sale contained in § 103(g). However, these requirements apply only with respect to those leases which contain provisions permitting the lessee to become the owner of the goods leased "fo r no other or a nominal consideration. " The Board might conceivably expand this provision by adopting a broad definition of what constitutes nominal consideration. However, this would still not accomplish the purpose of assuring that adequate cost disclosures are given in a ll consumer leases, such as those in which there is no option to purchase. In addition, we believe that the number of leases with nominal purchase options is quite sm all. The focal point of the Board's concern is thus those long term leases of personal property to be used fo r personal, fam ily or household purposes, which typically have a m aturity approaching that of a credit sale agreement, and potentially bind the lessee to the payment of an aggregate sum substantially equivalent to the value of the goods leased. This does not include the short-term convenience leasing such as ren t-a -ca r arrangements. We fe e l that standardized disclosures, comparable to those set forth under Truth in Lending, should be required for lease advertisem ents as w ell as fo r consumer lease transactions. However, we do not b elieve that rate disclosures, analogous to the annual - 5- percentage rate under Truth in Lending, are practical. The develop ment of lease rate disclosures is im practical, we feel, because of the difficulty of determining what common costs should be isolated in the computation of such rates. I would now like to comment on two sections of H. R. 4657 that we regard as highly important. The fir s t is § 183 which sets a lim itation on a consumer le s s e e 's liability. This provision of the b ill addresses the lia b ility that the lease may impose on a consumer lessee at the end of the lease term . It is not uncommon fo r consumer leases to provide that upon the expiration of the lease, the product w ill have a stipulated depreciated value and w ill either be purchased by the lessee or sold to an independent party. Under the term s of such an agreem ent, if the product is sold and brings less than the depreciated value stipulated in the contract, the lessee is liable for the difference; if it brings m ore, the lessee is entitled to the surplus. F or example, a typical tw o-year auto lease on a $5, 400 car might ca ll for 24 $100 instalment payments and set an end-term depreciated value of $3, 000 on the car. Under such an agreem ent, the lessee may have no understanding of how much the lease may cost, unless he can accurately predict the second-hand m arket value of the product. F or example, in this case, the depreciated value of the car might be $2, 500, which under the lease contract would leave the le s s e e liable fo r an additional $500 balloon payment. Thus, if the contract sets an u n rea listica lly high depreciated value on the leased goods, the contingent lia b ility of the le s s e e w ill in crea se accordingly, and the le s s o r can o ffer d ecep tively low monthly rental payments to an unwary public. Under § 183, the le s s e e ’ s contingent lia b ility would be lim ite d to twice the a vera g e monthly rental payment, except fo r additional charges im posed fo r le s s e e default or for damage to the leased goods in excess of norm al w ear and tear. The section is thus designed to protect the consumer le s s e e in two ways. F ir s t , it is designed to notify the consumer of his maximum contract lia b ility under the lease. Secondly, by incorporating a monthly payment fa cto r into the computation of the maximum en d -term lia b ility figure, the section seeks to assure that the le s s o r w ill p rice the rental instalments of the goods leased sufficiently high to cover expected depreciation and thus avoid leaving the consumer le s s e e with an unduly la rg e balloon payment at the end of the lea se term . L e t m e re ite ra te at this point what the Board stated in its 1974 Annual Report: We are not comm itted to a two-month form ula Another formula, such as three months or 15 per cent of rental p a y ments over the life of the lease, may w ork as w e ll or better. The Board would hope that whatever formula m ay be chosen w ill re fle c t industry experience in accurately setting depreciated values. However we b elieve that some limitation tied to instalment payments is highly -7- d esirable. Such a limitation re flects the fact that typ ic a lly the le s s o r is better able to predict residual values than is the less ee. In addition, this limiting factor reduces the possibility of a large contingent liability on the part of the lessee and gives the lessee a ’’bottom line” price tag which m a y facilitate comparative shopping. The second provision on which I would like to comment is § 105 of H. R. 4657. This section places an e ffective date fo r this legislation as the fir s t day of the second full calendar month after the date of enactment. As we have mentioned b efore, we b e lie v e the time that the Congress grants to an agency to implement a given statute has a direct bearing on the quality and effectiven ess of the a gen cy’ s regulations. We believe the two-month period acccrdod under H. R. 4657 is fa r too short to develop w e ll-c o n s id e re d implementing regulations, which are fa ir to the le s s e e and le s s o r alike. Tim e for consultation with both business and consumer groups is needed. Tim e is also needed to comply with the A d m in istrative P roced u re A ct which requ ires publication of proposed rules for comment. Responding comments must be ca refu lly analyzed. F in a lly, if the regulations are to be p ro p e rly complied with, industry must have some time to study them and to change business procedures. T h ere fo re, the Board would respectfu lly urge that a minimum o f 12 months be provided before this A ct is to become e ffe c tiv e . In closing, I would like to commend this C om m ittee for the action taken in this area. This new and expanding alternative to credit purchases, we feel, m e rits carefu l attention, and we are -8- coniident that the Congress w ill provide a statutory basis to assure that the consuming public w ill have the n e c e s s a ry information to make intelligent shopping decisions in lease transactions. The Board, of course, stands ready to a ssist in the implementation of such leg isla tio n , and I would be pleased to respond to any o f your questions.
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