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309 S-326 Reg. W-52 INTERPRETATION OF LAW OR REGULATION (Copies to be sent to all Federal Reserve Banks) TELEGRAM Young - Boston Sproul - New York Williams - Philadelphia Fleming - Cleveland Leach McLarin Young Davis - Richmond - Atlanta Chicago St. Louis September 11, 1941 Payton - Minneapolis Leedy - Kansas City Gilbert - Dallas Day - San Francisco The Board has been asked several questions about the application of Regulation W to a case in which a Registrant rents a piano or other listed article to a customer and the rental contract includes an option giving the customer the right to purchase the article. Executive Order No. 884-3 > under the authority of which Regulation W is issued, and section 2(b) of the regulation, define "extension of credit" as including "any rental-purchase contract, or any contract for the bailment or leasing of property under which the bailee or lessee ... has the option of becoming the owner thereof ..." Therefore the type of contract to which the inquiry relates is subject to the provisions of Regulation W. Under these provisions it is necessary that, under such a contract, the Registrant obtain, at or before the delivery of the article to the lessee, a deposit equal to the amount of the down payment which the regulation would require upon an instalment sale of the listed article, and that the lease call for periodic payments in an amount not less than the amount of the instalments which Regulation W would require on an extension of instalment sale credit arising out of the sale of the article. In the event that the lessee decides to exercise his option to purchase the article, these payments, including the deposit, under the lease will serve in lieu of both the necessary down payment and the instalments which would have been due between the date of the original lease and the date the option to purchase is exercised, and the balance of the sale price may be paid in instalments subject to the final maturity of 18 months from the date of the original lease. In the event that the lessee decides not to exercise his option to purchase, the Registrant may return to him the difference between the payments, including the deposit, which the lessee has made and the amount of rental that may have been agreed upon' for the period that the lessee has retained the article, and it is permissible for the lease to contain a provision to this effect. It should be noted that the regulation does not apply to a bona fide- rental agreement under which the lessee does not receive a transfer of ownership, does not obligate himself to pay as compensation a sum substantially equal to or in excess of the value of the article, and does not receive an option to purchase. Morrill
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