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Federal R eserve Bank OF DALLAS ROBERT D. M c T E E R , J R . p re s id e n t DALLAS, TEXAS A N D C H IE F E X E C U T IV E O F F IC E R 7 5 2 6 5 -5 9 0 6 February 26, 1997 Notice 97-20 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Proposal to Revise the Official Staff Commentary to Regulation M (Consumer Leasing) DETAILS The Board of Governors of the Federal Reserve System has requested public comment on a second proposal revising the Official Staff Commentary to Regulation M, which implements the Consumer Leasing Act. The act requires lessors to provide uniform cost and other disclosures about consumer lease transactions. Regulation M was revised in September 1996 under the Board’s Regulatory Planning and Review Program, which calls for the periodic review of Board regulations. The commentary applies and interprets the requirements of Regulation M. The first proposal to revise the commentary was published in September 1995. This second proposal includes material published for comment in September 1995, incorporates guidance on the final rule issued in September 1996, and addresses certain questions raised following public review of the final rule. The Board must receive comments by March 13, 1997. Please address comments to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551. All comments should refer to Docket No. R-0961. ATTACHMENT A copy of the Board’s notice as it appears on pages 7363-73, Vol. 62, No. 33, of the Federal Register dated February 19, 1997, is attached. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) -2- MORE INFORMATION For more information, please contact Eugene Coy at (214) 922-6201. For additional copies of this Bank's notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, 7363 Proposed Rules Federal Register Vol. 62, No. 33 Wednesday, February 19, 1997 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. FEDERAL RESERVE SYSTEM 12CFR Part 213 [Regulation M; Docket No. R -0961] Consumer Leasing Board of Governors of the Federal Reserve System. ACTION: Proposed official staff interpretation. AGENCY: The Board is publishing for comment a second proposal revising the official staff commentary to Regulation M which implements the Consumer Leasing Act. The act requires lessors to provide uniform cost and other disclosures about consumer lease transactions. Regulation M was revised in September 1996 under the Board’s Regulatory Planning and Review program which calls for the periodic review of Board regulations. The commentary applies and interprets the requirements of Regulation M. A proposal to revise the commentary was published in September 1995. This proposal includes material that was published for comment in September 1995, incorporates guidance on the final rule issued in September 1996, and addresses certain questions raised following public review of the final rule. DATES: Comments must be received by March 13, 1997. ADDRESSES: Comments should refer to Docket No. R-0961, and may be mailed to Mr. William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. They may also be delivered to the Board’s mail room between 8:45 a.m. and 5:15 p.m. weekdays, and to the security control room at all other times. The mail room and the security control room are accessible from the courtyard entrance on 20th Street, NW. (between Constitution Avenue and C Street). Comments will be available for inspection and copying by members of the public in the Freedom of Information Office, Room MP-500 of the SUMMARY: Martin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in Section 261.8 of the Board’s rules regarding the availability of information. December 6,1995). The proposal contained substantive revisions to the regulation, including new disclosure requirements. FOR FURTHER INFORMATION CONTACT: The September 1996 final rule Kyung H. Cho-Miller or Obrea Otey includes new disclosures to supplement Poindexter, Staff Attorneys, Division of the act’s requirements (61 FR 52246, Consumer and Community Affairs, October 7,1996). The major changes Board of Governors of the Federal primarily affect motor-vehicle leasing. Reserve System, Washington, DC 20551, They include a mathematical at (202) 452-2412 or 452-3667. For progression on how scheduled users of Telecommunications Devices payments are derived (using figures for the Deaf (TDD) only, contact such as the gross capitalized cost of a Dorothea Thompson, at (202) 452-3544. lease, the vehicle’s residual value, the amount of depreciation, and the rent SUPPLEMENTARY INFORMATION: charge) and a warning statement about I. Background charges for terminating a lease early. The Consumer Leasing Act (CLA), 15 General changes in the format of the U.S.C. 1667-1667e, was enacted into disclosures require that certain lease law in 1976 as an amendment to the disclosures be segregated from other Truth in Lending Act (TILA), 15 U.S.C. information. A lessor is not required to 1601 et seq. The CLA is implemented by disclose the cost of a lease expressed as the Board’s Regulation M (12 CFR part a percentage rate; however, if a rate is 213). An official staff commentary disclosed or advertised, a special notice (Supplement I-CL-1 to 12 CFR part 213) must accompany the rate stating that it provides guidance to lessors in applying may not measure the overall cost of the regulation to specific transactions. financing the lease. Further, a rate in an The CLA requires lessors to provide advertisement cannot be more consumers with uniform cost and other prominent than any other Regulation M disclosures about consumer lease disclosure. transactions. The act generally applies The final rule also implements to consumer leases of personal property amendments to the CLA contained in in which the contractual obligation does the Riegle Community Development and not exceed $25,000 and has a term of Regulatory Improvement Act of 1994 more than four months. An automobile (Pub. L. 103-325, 108 Stat. 2160), lease is the most common type of allowing a toll-free number or a print consumer lease covered by the act. advertisement to substitute for certain In September 1996, the Board lease disclosures in radio commercials approved a final rule revising (which was expanded in the final rule Regulation M, after a review of the to television commercials) and makes regulation and consumer leasing other changes to the advertising rules. generally. The review was conducted The CLA’s advertising rales were under the Board’s Regulatory Planning and Review Program which calls for the amended and streamlined on September 30,1996 when the Congress enacted the periodic review of Board regulations Economic Growth and Regulatory with four goals in mind: To clarify and Paperwork Reduction Act of 1996 (Pub. simplify regulatory language; to L. 104-208, 110 Stat. 3009). The Board determine whether regulatory issued a proposal to implement those amendments are needed to address changes. (62 FR 62, January 2, 1997.) technological and other developments; The Board is now publishing an to reduce undue regulatory burden on updated proposal to the commentary. the industry; and to delete obsolete This proposal includes material that provisions. was published for comment in The Board began the review of Regulation M in November 1993, with September 1995, incorporates guidance on the September 1996 final rule, and the publication of an advance notice of addresses certain questions raised proposed rulemaking (58 FR 61035, November 19, 1993). In September 1995, following public review of the final rule. the Board published a proposal revising It is contemplated that the proposed the regulation and the staff commentary revisions to the Regulation M commentary will be adopted in final (60 FR 48752, September 20, 1995; comment period extended, 60 FR 62349 form in April 1997. Federal Register / Vol. 62, No. 33 / Wednesday, February 19, 1997 / Proposed Rules 7364 II. Discussion of Proposed Revisions The following discussion covers the proposed revisions to the Regulation M commentary section-by-section. Most of the discussion focuses on new comments and significant revisions to existing comments. Introduction § 213.2(a)(2) and to indicate that the term “advertisement” includes electronic messages. 2(d) Closed-end Lease Proposed comment 2(d)— provides 1 general guidance on the definition of a closed-end lease. 2(e) Consumer Lease Current comments 1-3,1— and 1-6 4, Comment 2(e)-2, current comment would be deleted as obsolete or unnecessary. Comments I— 1,1-2, and I— 2(a)(6)-2, would be revised to clarify that leases with penalties for not 5 would be redesignated accordingly. continuing beyond an initial four Section 213.1—Authority, Scope, months are covered under the Purpose, and Enforcement regulation. Proposed comment 2(e)-3 provides Current Proposed guidance on the total contractual obligation for purposes of determining 1-1 .......... 1-1. 1 - 2 .......... Deleted as unnecessary (see whether a lease is covered under the Appendix C). regulation, and indicates that the total contractual obligation may be different Section 213.2—Definitions from the total of payments disclosed under § 213.4(e). 2(a) Definitions Proposed comment 2(e)-5 incorporates former § 213.2(a)(3), the Proposed Current statutory definition of agricultural 1 2(a)(2)— .. 2(b)— and -2 ; including text purpose in section 103(s) of the TILA. 1 from former §213.2(a)(2). Comment 2(e)-7, current comment 2(a)(2)-2 .. 2(b)— 3. 2(a)(6)-6, would be revised to add 2(d)— new. 1 another example of a lease deemed 1; 2(a)(4)— .. 2(h)— includes text from former 1 incidental to a service. The narrow list §213.2(a)(4). of exceptions is exhaustive, rather than 2(a)(4)-2 .. 2(h)— 4. illustrative. Questions have arisen about 2. 2(a)(4)-3 .. 2(h)— 2(a)(6)-1 .. 2(e)— 1. Regulation M coverage of cellular 2(a)(6)-2 .. 2(e)-2. phones leased in conjunction with 2(e)-3 new. obtaining cellular service. Cellular 2(a)(6)— .. 2(e)-6. 3 service providers typically offer 4. 2(a)(6)— .. 2(e)— 4 2(e)-5 new; includes text from customers the opportunity to lease or purchase cellular telephones when former §213.2(a)(3). subscribing for cellular service. The 2(a)(6)-5 .. 2(e)-8. 7. 2(a)(6)-6 .. 2(e)— leasing of a cellular telephone is not 2(f)— new. 1 incidental to obtaining cellular service 2(a)(7)-1 .. 2(g)— 1. and is, thus, covered under the 3. 2(a)(8)— .. 2(h)— 1 regulation. 2(a)(9)— .. 1 2(a)(12)— 1 2(a)(14)-1 and -2. 2(a)(14)— 3 and -4. 2(a)(14)-5 2(a)(14)— 6 2(a)(15)-1 2(a)(15)— 2 2(a)(15)— 3 2(a)(17)— 1 through -5. 2(a)(18)-1 through 2(j)-1 ■ 2(l)— ■ 1 2(m)-1 and -2. 2(m)-3. 2(m)-4. 4(l)— 2. 2(o)-2. 2(o)-1; includes text from former § 213.2(a)(15). 2(o)-3. Deleted as unnecessary. Deleted as unnecessary. Proposed comment 2(f)— provides 1 guidance on what type of fees are included or excluded from the gross capitalized cost disclosure in § 213.4(f)(1). 2(h) Deleted as unnecessary. 4(b)— 1. 2(b) Advertisement Comment 2(b)-l, current comment 2(a)(2)-l, would be revised to include examples of advertisements formerly in Lessor Comment 2(h)-l, current comment 2(a)(4)-l, would be revised to include the definition of the phrase “arrange for leasing of personal property” in former § 213.2(a)(4). 2(m) _Q 2(b)— ..... 1 2(b)— ..... 2 2(f) Gross Capitalized Cost Realized Value Comment 2(m)-3 provides guidance on what is included or what may be excluded from the realized value, combining current comments 2(a)(14)— 3 and -4. The second and third sentences of current comment 2(a)(14)-4 are deleted as unnecessary. 2(o) Security Interest and Security Comment 2(o)— current comment 1, 2(a)(15)-2, would be revised to include examples of a security interest formerly in § 213.2(a)(15). Questions have arisen about whether interest on a security deposit meets the definition of a security interest for purposes of this regulation and thus required to be disclosed. Such interest is required to be disclosed if it is considered a security interest under state or other applicable law. Section 213.3— General Disclosure Requirements 3(a) General Requirements Current Proposed 4(a)— ..... 1 4(a)-2 ..... 4(a)-3 ..... 4(a)-4 4(a)— ..... 5 4(a)(1)— .. 1 4(a)(1)-2 .. 4(a)(2)-1 .. 4(a)(2)— .. 2 3(a)— 1. Moved to §213.3(f). 3(a)(1)-1. 3(a)-4. Deleted as unnecessary. 3(a)-2 and -3. Deleted as unnecessary. 4(b)— 1. 3(a)(1)— 2. 3(a)(1)— new. 3 3(a)(1)— 4. Deleted as unnecessary. 3(a)(1 )-5. 3(a)(2)— through -3 new. 1 Deleted as unnecessary, see re vised §213.3(a)(4). Deleted as unnecessary, see re vised §213.3(a)(4). 3(b)— 1. 3(c)-1. 3(d)(1)— through -5. 1 4(a)(2)-3 .. 4(a)(2)-4 .. 4(a)(2)-5 .. 4(a)(4)— .. 1 4(a)(4)-2 .. 4(b)— ..... 1 4(c)— ..... 1 4(d)— 1 through -5. 4(d)-6 4(e)— and 1 -2. Deleted as unnecessary. 3(e)-1 and -2. 3(e)-3 new; text from footnote 1 of former regulation. 3(a) General Requirements Comment 3(a)-l, current comment 4(a)-l, would be revised to clarify that leasing disclosures must reflect the terms of the legal obligation. Comment 3(a)— current comment 4, 4(a)— would be revised to provide 4, guidance on disclosing a prior lease or loan balance added to a lease transaction. 3(a)(1) Form of Disclosures Proposed comment 3(a)(1)— provides 3 guidance on disclosing the lessor’s address. Comment 3(a)(l)-5, current comment 4(a)(2)— would be revised to provide 5, additional guidance on ways in which lessors may demonstrate compliance with the requirement that lessees receive disclosures prior to being obligated on the lease transaction. Federal Register / Vol. 62, No. 33 / Wednesday, February 19, 1997 / Proposed Rules 3(a)(2) Segregation of Certain Disclosures Proposed comment 3(a)(2)-l provides general guidance on the location of the segregated disclosures referenced in § 213.3(a)(2). Proposed comment 3(a)(2)— restates 2 the general rule on including additional information among the segregated disclosures referenced in § 213.3(a)(2). Proposed comment 3(a)(2)-3 provides a cross-reference to the commentary to appendix A which provides guidance on designing lease forms that are substantially similar to the regulation’s model forms. 3(b) Additional Information; Nonsegregated Disclosures Comment 3(b)-l, current comment 4(b)— on state law disclosures would 1, be revised by adding clarifying language and by deleting the second sentence. 3(d) Use of Estimates Comment 3(d)(1)— current comment 4, 4(d)-4, would be revised to provide that in disclosing the estimate of the value of leased property at termination a lessor should indicate whether the retail or wholesale value is used. This provision was previously contained in Regulation M in the instructions to the model forms. 3(e) Effect of Subsequent Occurrence Proposed comment 3(e)-3 incorporates the first sentence of footnote 1 of the former regulation. Section 213.4— Context o f Disclosures Current 4(g)— ..... 1 4 (g )- 2 ..... 4(g)(1)— .. 1 4(g)(2)— .. 1 4(g)(2)-2 .. 4(g)(2)-3 .. 4(g)(3)— .. 1 4(g)(3)-2 .. 4(g)(4)— .. 1 4(g)(5)— .. 1 4(g)(5)-2 .. 4(g)(5)-3 .. 4(g)(5)— .. 4 Proposed 4(a)— new. 1 Deleted as unnecessary. 3(a)(1)— 3; date requirement moved to §213.3(a)(1). Deleted as unnecessary. Deleted as unnecessary. 4(b)-1 (incorporates current comment 2(b)-2)). 4(b)-2. 4(b)-3 new (incorporated from the instructions to the model form in former appendix C-2). 4(b)-4 through -6 new. Deleted as unnecessary. 4(c)— ; reference to open-end 1 lease deleted. 4(n)-1. 4(d)— and -2. 1 Deleted as unnecessary; see §213.3(a)(2). 4(d)-3 new. 4(d)-4. 4(d)-5. 4(d)— new. 6 4(e)— new. 1 4(f)— new. 1 4(f)(1)-1 and -2 new. 4(f)(2)— new. 1 Current 4(g)(6)— .. 1 4(g)(6)-2 .. 4(g)(7)— 1 through -3. 4(g)(8)— .. 1 4(g)(9)— .. 1 4 (g )(io )-i through -5. 4(g )(i1)— 1 through -3. 4(g)(12)-1 4(g)(12)— 2 4(g)(12)— 3 4 (g )(i4 )-i through -3. 4 (g )(i5 )-i 4(g)(15)— 2 4(g)(15)— 3 4(g)(15)— 4 4(g)(15)— 5 4(g)(15)-6 Proposed 4(f)(8)— new. 1 4(o)-1 new. 4(o)— 2. 4(o)-3. 4(p)-1 through -3. 4(h)— 1. 4(h)-2 new. 4(r)— 1. 4(q)-1 through -5. 4(i)-1 through -3. 4(i)— and -5 new. 4 4(g)(1)— the word “capitalized” 3; is deleted. 4(g)(1)— 4. 4 (g )(i)-i. 4(g)(1)— new. 2 4(j)-1 new. 4(l)-1 through -3. 4(m)-1 new. 4(m)(2)-1. deleted. 4(m)(1)-1 new. deleted. 4(m)(2)-2. deleted. 4(m)(2)-3. 4(s)-1 new. 4(a) Description of Property Proposed comment 4(a)-l clarifies that the description of leased property cannot be among the segregated disclosures. 4(b) Total Amount Due at Lease Signing Comment 4(b)— would incorporate 1 the first sentence of current comment 2(b)— on consummation. 2 Proposed comment 4(b)-3 incorporates a definition of “capitalized cost reduction” from the instructions in former appendix C -l of the regulation. Proposed comment 4(b)-4 provides guidance on negative net trade-in allowances where the amount owed on a prior loan or lease exceeds an agreedupon trade-in value. Proposed comment 4(b)— clarifies 5 that a rebate would be included in the itemization under this section only when used to reduce an amount due at lease signing. Proposed comment 4(b)-6 clarifies that where the balance sheet method is required, in motor-vehicle leases, the totals in each column must equal one another. 4(d) Other Charges Comment 4(d)-l, current comment 4(g)(5)-!, would be revised to provide 7365 flexibility in making the “other charges” disclosure. Proposed comment 4(d)— clarifies 3 that third-party charges are not disclosed under § 213.4(d). Proposed comment 4(d)-6 provides guidance on the disclosure of optional “disposition” fees. 4(e) Total of Payments Proposed comment 4(e)-l explains the additional statement in the total of payments disclosure for open-end leases. 4(f) Payment Calculation Proposed comment 4(f)— clarifies 1 that lessors should defer to state or other applicable law in determining whether the leased property is a motor vehicle. 4(f)(1) Gross Capitalized Cost Proposed comment 4(f)(1)— provides 1 guidance on disclosing the agreed upon value of a leased motor vehicle. Proposed comment 4(f)(1)— provides 2 guidance on providing the itemization of the gross capitalized cost. 4(f)(2) Capitalized Cost Reduction Proposed comment 4(f)(2)— provides 1 guidance on the amounts not included in the capitalized cost reduction disclosure. 4(f)(8) Lease Term Proposed comment 4(f)(8)— clarifies 1 the meaning of the phrase “lease term” referenced under § 213.4(f)(8). 4(g) Early Termination Proposed comment 4(g)-2 provides guidance on disclosing the method used to determine the amount of an early termination charge. 4(h) Maintenance Responsibilities Proposed comment 4(h)— clarifies 2 that lessors may not disclose a description of the method used for calculating excess mileage charges if a specific amount for excess mileage is available. 4(i) Purchase Option Proposed comment 4(i)— provides 5 guidance on disclosing a “fair market value” purchase-option price. Several commenters on the September 1995 proposal requested clarification on whether lessors are allowed to disclose a purchase-option fee and other fees and taxes applicable to the purchase option separately from the purchase-option price. Comments 4(i)-3 and -4, current comment 4(g)(ll)-3, would be revised to allow lessors flexibility in disclosing fees associated with a purchase-option price. Further, with the September 1996 7366 Federal Register / Vol. 62, No. 33 / W ednesday, February 19, 1997 / Proposed Rules revisions to the disclosure format and since a lessee is not obligated to purchase the leased property, the purchase-option fee and any other fee associated with exercising the purchase option must be disclosed under § 213.4(i) and not § 213.4(d). 4(j) Statement Referencing Nonsegregated Disclosures Proposed comment 4(j)— clarifies 1 that inapplicable information may be deleted from the § 213.4(j) disclosure, which references and alerts consumers to read CLA required disclosures not included among the segregated disclosures. 4(1) Right of Appraisal Comment 4(l)-2, current comment 4(g)(14)-2, would be revised to provide that a lessor must indicate when an appraisal should be based on the wholesale or retail value. This provision was contained in the former regulation in the instructions to the model forms. 4(m) Liability at End of Lease Term Based on Estimated Value The regulation reformats this section, former § 213.4(g)(15), for clarity. The commentary has been similarly reformatted. Proposed comment 4(m )-l states the intent of section 183(a) of the CLA that lessors must pay the lessees’ attorney’s fees in all actions brought by lessors under § 213.4(m), even if those actions are decided in favor of the lessor. The CLA advertising provisions were amended on September 30,1996 by the Economic Growth and Regulatory Section 213.5, formerly § 213.4(h), Paperwork Reduction Act of 1996. The contains the disclosure rules governing final rule revising the commentary will leases that are renegotiated, extended, or reference the revised provisions in the assumed. Many of the commentary regulation that implement the statutory provisions have been moved to the changes. regulation. For example, the definitions of a renegotiation and an extension have 7(b) Clear and Conspicuous Standard Proposed comment 7(b)— provides 1 been included in the regulation. This guidance on the clear and conspicuous change parallels the approach under standard. A comment in the September Regulation Z for refinancings and 1995 proposal which provided that assumptions, 12 CFR 226.20. lease disclosures must appear on a Proposed television screen for at least five Current seconds has been deleted. The comment 4(h)-1 ..... 5-1. was intended as guidance on the clear sentence moved to and conspicuous standard. It did not 4(h)— ..... First 2 §213.5(a); second sentence provide a safe harbor, as the “five deleted; third sentence moved second” rule may be inadequate as a test to 5-1. for determining full compliance with 4(h)— ..... Moved to §213.5(d). 3 the clear and conspicuous standard. 4(h)-4 ..... Moved to §213.5(b). Section 213.5—Renegotiations, Extensions, and Assumptions 4(h)— ..... 5 4(h)-6 4(h)-7 4(h)— 8 4(h)— 9 ..... ..... ..... ..... 5(b)— 1. 5(b)— new. 2 Deleted as unnecessary. Moved to §213.5(d)(6). Moved to §213.5(d)(2). Moved to §213.5(c). 5(b) Extension Proposed comment 4(o)-l provides that § 213.4(o) applies to voluntary and required insurance provided in connection with a lease transaction. Comment 4(o)-3, current comment 4(g)(6)— is revised to provide 2, additional guidance on the disclosure of mechanical breakdown insurance. Comment 5(b)-l, current comment 4(h)-5, would be revised to clarify that if a consumer lease is extended on a month-to-month basis for more than six months, new disclosures are required at the beginning of the seventh month, and also at the start of each seventh month thereafter. This revision incorporates into the commentary a longstanding interpretation originally issued under leasing provisions that were a part of Regulation Z (Truth in Lending) prior to 1982. Proposed comment 5(b)— also 2 incorporates a longstanding interpretation originally issued under the pre-1982 leasing provisions in Regulation Z that disclosures for a consumer lease, originally covered by the regulation and extended on a month-to-month basis for more than six months, should reflect the month-tomonth nature of the transaction. 4(p) Warranties or Guarantees Section 213.7—Advertising 4(n) Fees and Taxes Proposed comment 4(n)-l provides guidance on what taxes are disclosed under § 213.4(n). 4(o) Insurance Comment 4(p)-l, current comment 4(g)(7)— would be revised to provide 1, further guidance on identifying warranties under § 213.4(p), when lessors provide a comprehensive list of warranties to lessees. 4(s) Limitation on Rate Information Proposed comment 4(s)-l clarifies that a lease rate may not be included among the segregated disclosures referenced in § 213.3(a)(2). Current 5(a)-1 ..... 5(a)-2 ..... 5(b)— and 1 2. 5(c)— ..... 1 5(c)-2 ..... 5(d)— ..... 1 Proposed 7(a)-1. 7(a)-2. 7(c)— and 2. 1 7(b)— 1. 7(d)(1)— 1 7(d)(2)-1 new. Deleted. 7(e)— new. 1 7(f)(1)— through -4 new. 1 7(b)(1) Amount Due at Lease Signing Proposed comment 7(b)(1)— clarifies 1 that an itemization of the amount due at lease signing or delivery is not required under §213.7(b)(1). Proposed comment 7(b)(l)-2 provides general guidance on the prominence rule in § 213.7(b)(1). 7(b)(2) Advertisement of a Lease Rate Proposed comment 7(b)(2)-l provides guidance on the location of the statement that must accompany any percentage rate stated in an advertisement. 7(d) Advertisement of Terms That Require Additional Disclosure 7(d)(2) Additional Terms Commenters requested clarification on how third-party fees that vary by jurisdiction such as taxes, licenses and registration fees should be reflected in the total amount due at lease signing disclosure under § 213.7(d)(2)(ii). Comment 7(d)(2)— provides lessors 2 flexibility in disclosing such fees. 7(e) Alternative Disclosures— Merchandise Tags Proposed comment 7(e)-l provides general guidance on disclosing multiple item leases with merchandise tags. 7(f) Alternative Disclosures— Television or Radio Advertisements 7(f)(1) Toll-Free Number or Print Advertisement Proposed comment 7(f)(1)— clarifies 1 that a newspaper circulated nationally may qualify as a publication in general circulation in the community served by the media station. Proposed comment 7(f)(1)— provides 2 guidance on establishing a number for Federal Register / Vol. 62, No. 33 / W ednesday, February 19, 1997 / Proposed Rules consumers to call for disclosure information. Proposed comment 7(f)(l)-3 provides guidance on the use of a multi-function toll-free number to provide disclosures. Proposed comment 7(f)(l)-4 provides general guidance on the statement that must accompany a toll-free number instructing consumers to call the number for details about costs and terms. Section 213.8 Record Retention Current Proposed 6-1 information to the September 1996 final rule. The Board believes that it is desirable to ensure that a commentary takes effect along with the final rule as promptly as possible. Accordingly, the Board is providing an abbreviated comment period. foreign banks or leasing com panies located in the U nited States) that offer consum er leases to residents (including resident aliens) of any state as defined in § 213.2(p). The regulation does not apply to a foreign branch of a U.S. bank or to a leasing com pany leasing to a U.S. citizen residing or visiting abroad or to a foreign national abroad. List of Subjects in 12 CFR Part 213 Section 213.2-—D efinitions 2(b) Advertisement. 1. Coverage. The term advertisem ent includes messages inviting, offering, or otherwise generally announcing to prospective customers the availability of consum er leases, w hether in visual, oral, prin t or electronic media. Examples include: 1. Messages in new spapers, magazines, leaflets, catalogs, and fliers. ii. Messages on radio, television, and public address systems. iii. Direct m ail literature. iv. Printed m aterial on any interior or exterior sign or display, in any w indow display, in any point-of-transaction literature or price tag that is delivered or made available to a lessee or prospective lessee in any m anner whatsoever. v. Telephone solicitations. vi. Messages on the Internet. 2. Exclusions. The term does not apply to the following: i. Direct personal contacts, including follow-up letters, cost estimates for individual lessees, or oral or w ritten com m unications relating to the negotiation of a specific transaction. ii. Informational material distributed only to businesses. iii. Notices required by federal or state law, if the law m andates that specific inform ation be displayed and only the m andated inform ation is included in the notice. iv. News articles controlled by the new s m edium. v. Market research or educational materials that do no t solicit business. 3. Persons covered. See the com mentary to § 213.7(a). 2(d) Closed-end lease. 1. General. In closed-end leases, sometimes referred to as “w alk-away” leases, the lessee is not responsible for the residual value of the leased property at the end of the lease term. 2(e) C onsum er lease. 1. Prim ary purposes. A lessor m ust determ ine in each case if the leased property w ill be u sed prim arily for personal, family, or household purposes. If a question exists as to the prim ary purpose for a lease, the fact that a lessor gives disclosures is not controlling on the question of w hether the transaction was exempt. The primary purpose of a lease is determ ined before or at consum m ation and a lessor need not provide Regulation M disclosures w here there is a subsequent change in prim ary usage. 2. Period o f time. To be a consum er lease, the initial term of the lease m ust be more than four m onths. Thus, a lease of personal property for four m onths, three m onths or on a m onth-to-m onth or week-to-week basis (even though the lease actually extends beyond four months) is not a consum er lease and is not subject to the disclosure Advertising, Federal Reserve System, Reporting and recordkeeping requirements, Truth in lending. For the reasons set forth in the preamble, 12 CFR part 213 is proposed to be amended as follows: 8-1 Section 213.8 of the regulation was formerly § 213.6. Section 213.9 Relations to State Laws Section 213.9 of the regulation combines and simplifies former §§213.7 and 213.8. The comments to these sections, as well as references in former appendices A and B, have been deleted as unnecessary. Appendix A Model Forms Under the final rule, the model forms are moved from appendix C to appendix A. Comment app. A-2 would be deleted as unnecessary. Minor revisions would be made to other comments in this appendix. For example, comment app. A -l would be revised to indicate that changes to the headings, format, and the content of the segregated disclosures should be minimal. Also the definition of a closed-end lease in comment app. A-3 would be deleted because a definition has been added in the regulation. III. Form of Comment Letters Comment letters should refer to Docket No. R-0961 and, when possible, should use a standard courier typeface with a type size of 10 or 12 characters per inch. This will enable the Board to convert the text to machine-readable form through electronic scanning, and will facilitate automated retrieval of comments for review. Also, if accompanied by an original document in paper form, comments may be submitted on 3V2 inch or 5V4 inch computer diskettes in any IBMcompatible DOS-based format. The comment period ends on March 13, 1997. Normally, the Board provides a 60-day comment period, in keeping with the Board’s policy statement on rulemaking (44 FR 3957, January 19, 1979). The proposed commentary revisions primarily include interpretations published for comment in September 1995 and guidance included in the supplemental 7367 PART 213— CONSUMER LEASING (REGULATION M) 1. The authority citation for part 213 continues to read as follows: Authority: 15 U.S.C. 1604. 2. Supplement I to Part 213—Official Staff Commentary to Regulation M would be revised to read as follows: Supplement I to Part 213—Official Staff Commentary to Regulation M Introduction 1. O fficial status. The com mentary in this supplem ent I is the vehicle by w hich the Division of Consumer and Community Affairs of the Federal Reserve Board issues official staff interpretations of Regulation M (12 CFR part 213). Good faith com pliance w ith this com mentary affords protection from liability u n d er section 130(f) of the T ruth in Lending Act (15 U.S.C. 1640f). Section 130(f) protects lessors from civil liability for any act done or om itted in good faith in conformity w ith any interpretation issued by a duly authorized official or em ployee of the Federal Reserve System. 2. Procedures fo r requesting interpretations. U nder appendix C of Regulation M, anyone may request an official staff interpretation. Interpretations that are adopted w ill be incorporated in this com mentary following publication in the Federal Register. No official staff interpretations are expected to be issued other th an by m eans of this commentary. 3. C om m ent designations. Each com m ent in the com mentary is identified by a num ber and the regulatory section or paragraph that it interprets. The com ments are designated w ith as m uch specificity as possible according to the particular regulatory provision addressed. For example, some of the comments to § 213.4(f) are further divided by subparagraph, such as com ment 4(f)(1)— and com ment 4(f)(2)— In other 1 1. cases, com ments have more general application and are designated, for example, as com ment 4 (a)-l. This introduction may be cited as com ments I—1 through I—3. An appendix may be cited as com m ent app. A— 1. Section 213.1—A uthority, Scope, Purpose, and E nforcem ent 1. Foreign applicability. Regulation M applies to all persons (including branches of 7368 Federal Register / Vol. 62, No. 33 / Wednesday, February 19, 1997 / Proposed Rules requirem ents of the regulation. However, a lease that im poses a penalty for not continuing a lease beyond four m onths is considered to have a term of more th an four m onths. To illustrate: i. A m onth-to-m onth lease w ith a penalty, such as the forfeiture of a security deposit for term inating before one year, is subject to the regulation. ii. A three-m onth lease extended on a m onth-to-m onth basis and term inated after one year is not subject to the regulation. 3. Total contractual obligation. The total contractual obligation is not necessarily the same as the total of paym ents disclosed u n d er § 213.4(e). The total contractual obligation includes nonrefundable am ounts a lessee is contractually obligated to pay to the lessor. The term excludes: i. Residual value am ounts or purchase-option prices; ii. Am ounts collected by the lessor b u t paid to a th ird party, such as taxes, license and registration fees. 4. Credit sale. The regulation does not cover a lease th at m eets the definition of a credit sale in R egulation Z, 12 CFR 226.2(a)(16), w hich is defined, in part, as “a bailm ent or lease (unless term inable w ithout penalty at any tim e by the consumer) under w hich the consumer: i. Agrees to pay as com pensation for use a sum substantially equivalent to, or in excess of, the total value of the property and services involved; and ii. W ill becom e (or has the option to become), for no additional consideration or for nom inal consideration, the ow ner of the property upon com pliance w ith the agreem ent.” 5. A gricultural purpose. Agricultural purpose means a purpose related to the production, harvest, exhibition, marketing, transportation, processing, or m anufacture of agricultural products by a natural person w ho cultivates, plants, propagates, or nurtures those agricultural products, including b ut not lim ited to the acquisition of personal property and services used prim arily in farming. Agricultural products include horticultural, viticultural, and dairy products, livestock, wildlife, poultry, bees, forest products, fish an d shellfish, and any products thereof, including processed and m anufactured products, and any and all products raised or produced on farms and any processed or m anufactured products thereof. 6. Organization. A consum er lease does not include a lease m ade to an organization such as a corporation or a governm ent agency or instrum entality. Such a lease is not covered by the regulation even if the leased property is used (by an em ployee, for example) prim arily for personal, family or household purposes, or is guaranteed by or subsequently assigned to a natural person. 7. Leases o f personal property incidental to a service. The following leases of personal property are deem ed incidental to a service and thus are not subject to the regulation: i. Home entertainm ent systems requiring the consum er to lease equipm ent that enables a television to receive the transm itted programming. ii. Security alarm systems requiring the installation of leased equipm ent intended to m onitor unlaw ful entries into a home. iii. Propane gas service w here the consum er m ust lease a propane tank to receive the service. 8. Safe deposit boxes. The lease of a safe deposit box is not a consum er lease under § 213.2(e). 2(f) Gross capitalized cost. 1. Charges p a id at lease signing. The gross capitalized cost figure includes only those fees, charges, and other items, such as a prior un paid lease balance, that are capitalized or am ortized over the lease term. Charges paid at lease signing, such as taxes, are not included in the gross capitalized cost. 2(g) Lessee. 1. Guarantors. Guarantors are not lessees for purposes of the regulation. 2(h) Lessor. 1. Arranger o f a lease. To “arrange” for the lease of personal property means to provide or offer to provide a lease that is or w ill be extended by another person u nd er a business or other relationship p ursuant to w hich the person arranging the lease (a) receives or will receive a fee, com pensation, or other consideration for the service or (b) has knowledge of the lease terms and participates in the preparation of the contract docum ents required in connection w ith the lease. To illustrate: 1. An automobile dealer who, pursuant to a business relationship, completes the necessary lease agreement before forwarding it to the leasing com pany (to w hom the obligation is payable on its face) for execution is “arranging” for the lease. ii. An automobile dealer w ho, receiving no fee for the service, refers a custom er to a leasing com pany that w ill prepare all relevant contract docum ents is not “arranging” for the lease. 2. Consideration. The term “other consideration” as used in com m ent 2(h)-l refers to an actual paym ent corresponding to a fee or sim ilar com pensation and n ot to intangible benefits, such as the advantage of increased business, w hich may flow from the relationship betw een the parties. 3. Assignees. A n assignee may be a lessor for purposes of the regulation in circum stances such as those described in Ford M otor Credit Co. v. Cenance, 452 U.S. 155 (1981). In that case, the U.S. Supreme Court held that an assignee was a creditor for purposes of the pre-1980 T ruth in Lending Act and Regulation Z because of its substantial involvem ent in the credit transaction. 4. M ultiple lessors. See the commentary to § 213.3(c). 2(j) Organization. 1. Coverage. The term organization includes joint ventures and persons operating un d er a business name. 2(1) Personal property. 1. Coverage. W hether property is personal property depends on state or other applicable law. For example, a mobile hom e or houseboat may be considered personal property in one state but real property in another. T32(m) Realized value. 1. General. Realized value refers to the value of the leased property at early term ination or at the end of the lease term. It is not a required disclosure. It may be either the retail or w holesale value. Realized value is relevant only to leases in w hich the lessee’s liability at early term ination or at the end of the lease term is the difference betw een the residual value of the leased property and its realized value. 2. Options. Subject to the contract and to state or other applicable law, the lessor may calculate the realized value in determ ining the lessee’s liability at the end of the lease term or at early term ination in one of the three ways stated in § 213.2(m). If the lessor sells the property p rior to making that determ ination, the price received for the property is the realized value. If the lessor does not sell the property prior to making that determ ination, the lessor may choose either the highest offer or the fair market value as the realized value. 3. D eterm ination o f realized value. Disposition charges are included in determ ining the realized value b ut amounts attributable to taxes may be excluded. 4. Offers. In determ ining the highest offer for disposition, the lessor may disregard offers that an offeror has w ithdraw n or is unable or unw illing to perform. 5. Lessor’s appraisal. See com mentary to §213.4(1). 2(o) Security interest and security. 1. Disclosable interests. For purposes of disclosure, a security interest is an interest taken by the lessor to secure performance of the lessee’s obligation. For example, if a bank that is not a lessor makes a loan to a leasing com pany and takes assignments of consum er leases generated by that com pany to secure the loan, the bank’s security interest in the lessor’s receivables is not a security interest for purposes of this regulation. 2. General coverage. An interest the lessor may have in leased property m ust be disclosed only if it is considered a security interest u nd er state or other applicable law. The term includes, bu t is not lim ited to, security interests un der the Uniform Commercial Code; real property mortgages, deeds of trust and other consensual or confessed liens w hether or no t recorded; m echanic’s, m aterialm an’s, artisan’s, and other sim ilar liens; vendor’s liens in both real and personal property; liens on property arising by operation of law; and any interest in a lease w hen used to secure paym ent or performance of an obligation. 3. Insurance exception. The lessor’s right to insurance proceeds or unearned insurance prem ium s is not a security interest for purposes of this regulation. Section 213.3— General Disclosure Requirem ents 3(a) General requirem ents. 1. Basis o f disclosures. Disclosures m ust reflect the terms of the legal obligation betw een the parties. For example: i. In a three-year lease w ith no penalty for term ination after a one-year m inim um term, Federal Register / Vol. 62, No. 33 / Wednesday, February 19, 1997 / Proposed Rules disclosures should be based on the full threeyear term of the lease. The one-year m inim um term is only relevant to the early term ination provisions of §§ 213.4(g)(1), (k) and (1). 2. Clear and conspicuous standard. The clear and conspicuous standard requires that disclosures be reasonably understandable. For exam ple, the disclosures m ust be presented in a way that does not obscure the relationship of the terms to each other. A ppendix A of this part contains m odel forms that m eet this standard. In addition, although no m inim um typesize is required, the disclosures m ust be legible, w hether typew ritten, handw ritten, or printed by computer. 3. M ultipurpose disclosure form s. A lessor may use a m ultipurpose disclosure form that enables the lessor to designate the specific disclosures applicable to a given transaction, consistent w ith the requirem ent that disclosures be clearly and conspicuously provided. 4. N um ber o f transactions. Lessors have flexibility in handling lease transactions that may be viewed as m ultiple transactions. For example: i. W hen a lessor leases two items to the same lessee on the same day, the lessor may disclose the leases as either one or two lease transactions. ii. W hen a lessor sells insurance or other incidental services in connection w ith a lease, the lessor may disclose in one of two ways: a single lease transaction or a lease and a credit sale transaction. iii. W hen a lessor includes an outstanding lease or loan balance in a lease transaction, the lessor may disclose the prior loan or lease balance as part of a single lease transaction or may disclose it as a separate credit transaction. 3(a)(1] Form o f disclosures. 1. Cross-references. In making disclosures, lessors may include in the nonsegregated disclosures a cross-reference to items contained among the segregated disclosures rather than repeat the items. 2. Identification o f parties. W hile disclosures m ust be made clearly and conspicuously, lessors are n ot required to use the w ord “lessor” and “lessee” to identify the parties to the lease transaction. 3. Lessor’s address. The lessor need only be identified by name; an address may be provided but is not required. 4. M ultiple lessors and lessees. In transactions involving m ultiple lessors and m ultiple lessees, a single lessor may make all the disclosures to a single lessee as long as the disclosure statem ent identifies all the lessors and lessees. 5. Lessee’s signature. The regulation does not require th at the lessee sign the disclosure statement, w hether disclosures are separately provided or are p art of the lease contract. Nevertheless, to ensure that disclosures are given before a lessee becomes obligated on the lease transaction, the lessor may ask the lessee to sign th e disclosure statem ent or an acknow ledgem ent of receipt, may place disclosures that are included in the lease docum ents above the lessee’s signature, or may include instructions alerting a lessee to read the disclosures prior to signing the lease. 3(a)(2) Segregation o f certain disclosures. 1. Location. The segregated disclosures referred to in § 213.3(a)(2) may be provided on a separate docum ent and the other required disclosures may be provided in the lease contract, so long as all disclosures are given at the same time. 2. A dd ition al inform ation am ong segregated disclosures. The disclosures required to be segregated m ay contain only the inform ation required or perm itted to be included among the segregated disclosures (see com m ents to § 213.4 for guidance on additional inform ation in the segregated disclosures). 3. Substantially similar. See com mentary to appendix A of this part. 3(b) A dd itio n a l inform ation; nonsegregated disclosures. 1. State law disclosures. A lessor may include among the nonsegregated disclosures any state law disclosures that are not inconsistent w ith the act and regulation un der § 213.9, as long as they are n ot used or placed to m islead or confuse or detract from any disclosure required by the regulation in accordance w ith the standard set forth in § 213.3(b) for additional information. 3(c) M ultiple lessors or lessees. 1. M ultiple lessors. If a single lessor provides disclosures to a lessee on behalf of several lessors, all disclosures for the transaction m ust be given, even if the lessor making the disclosures w ould not otherwise have been obligated to make a particular disclosure. 3(d) Use o f estim ates. 3(d)(1) Standard. 1. Tim e o f estim ated disclosure. The lessor may use estimates to make disclosures if necessary inform ation is unknow n or unavailable at the tim e the disclosures are made. For example: 1. Section 213.4(n) requires the lessor to disclose the total am ount payable by the lessee during the lease term for official and license fees, registration, certificate of title fees, or taxes. If these am ounts are subject to increases or decreases over the course of the lease, the lessor may estimate the disclosures based on the rates or charges in effect at the tim e of the disclosure. 2. Basis o f estim ates. Estimates m ust be m ade on the basis of the best inform ation reasonably available at the tim e disclosures are made. The “reasonably available” standard requires that the lessor, acting in good faith, exercise due diligence in obtaining information. The lessor may rely on the representations of other parties in obtaining information. For example, the lessor m ight look to the consum er to determ ine the purpose for w hich leased property w ill be used, to insurance com panies for the cost of insurance, or to an automobile m anufacturer or dealer for the date of delivery. 3. R esidual value o f leased property at term ination. W hen the lessee’s liability at the end of the lease term is based on the residual value of the leased property as determ ined at consum m ation, the estimate of the residual value m ust be reasonable and based on the best inform ation reasonably available to the lessor (see § 213.4(m)). A lessor may use a 7369 generally accepted trade publication listing estim ated current or future m arket prices for the leased property or may rely on other information, its experience, or reasonable belief if those sources provide the better information. For example: i. An automobile lessor offering a threeyear open-end lease assigns a wholesale value to the vehicle at the end of the lease term. The lessor may disclose as an estimate a w holesale value derived from a generally accepted trade publication listing current w holesale values, if the trade publication is the best inform ation available. ii. Same facts as above, except that the lessor discloses an estim ated value derived by adjusting the residual value quoted in the trade publication because, in its experience, the trade publication values either understate or overstate the prices actually received in local used-vehicle markets. The lessor may adjust estim ated values quoted in trade publications based on the lessor’s experience or reasonable belief that the values w ill be understated or overstated. 4. R etail or wholesale value. The lessor may choose either a retail or a wholesale value in estimating the value of leased property at term ination, provided the choice is consistent w ith the lessor’s general practice or intention w hen determ ining the value of the property at the end of the lease term. The lessor should indicate w hether the value disclosed is a retail or w holesale value. 5. Labelling estim ates. Generally, only the disclosure for w hich the exact inform ation is unknow n is labelled as an estimate. N evertheless, w hen several disclosures are affected because of the unknow n information, the lessor has the option of labelling as an estimate every affected disclosure or only the disclosure prim arily affected. 3(e) Effect o f subsequent occurrence. 1. Subsequent occurrences. Examples of subsequent occurrences include: 1. An agreement between the lessee and lessor to change from a m onthly to a weekly paym ent schedule. ii. An increase in official fees or taxes. iii. A n increase in insurance prem ium s or coverage caused by a change in the law. iv. Late delivery of an autom obile caused by a strike. 2. Redisclosure. W hen a disclosure becomes inaccurate because of a subsequent occurrence, the lessor need n ot make new disclosures unless new disclosures are required u nd er § 213.5. 3. Lessee’s failure to perform . The lessor does not violate the regulation if a previously given disclosure becomes inaccurate w hen a lessee fails to perform obligations u nd er the contract and a lessor takes actions that are necessary and proper in such circumstances to protect its interest. For example, the addition of insurance or a security interest by the lessor because the lessee has not perform ed obligations contracted for in the lease is not a violation of the regulation. Section 213.4— Content o f Disclosures 4(a) Description o f property. 1. Placem ent o f description. Although the description of leased property m ay not be included among the segregated disclosures, a 7370 Federal Register / Vol. 62, No. 33 / W ednesday, February 19, 1997 / Proposed Rules lessor may choose to place the description directly above the segregated disclosures. 4(b) A m o u n t due at lease signing. 1. C onsum m ation. W hen a contractual relationship is created between the lessor and the lessee is a m atter to be determ ined under state or other applicable law. 2. Fees payable upon delivery. This paragraph does not apply to fees paid at delivery, w hen delivery occurs after consum m ation. For example, if the lessee agrees to pay registration fees, sales taxes, and a delivery charge on the date the automobile is delivered som etime after consum m ation, none of these charges is an initial paym ent under § 213.4(b). The registration fees and sales taxes are disclosed u n d er § 213.4(n), and the delivery charge is disclosed as an “other charge” under § 213.4(d). 3. C apitalized cost reduction. A capitalized cost reduction is a paym ent in the nature of a dow npaym ent that reduces the am ount of the leased property to be capitalized over the term of the lease. This am ount does not include any am ounts included in a periodic paym ent p aid at lease signing. 4. “N egative" equity trade-in allowance. If an am ount owed on a prior lease or loan exceeds an agreed u po n trade-in value, the difference is n ot reflected as a negative tradein allowance un der § 213.4(b). The lessor may disclose the trade-in allowance as zero, no t applicable, or leave a blank line. 5. Rebates. Only rebates applied tow ard an am ount due at lease signing are required to be disclosed u n d er § 213.4(b). 6. Balance sheet approach. In motor vehicle leases, the total for the colum n labeled “total am ount due at lease signing” m ust equal the total for the colum n labeled “how the am ount due at lease signing w ill be p aid .” 4(c) P aym ent schedule and total am ount o f periodic paym ents. 1. Periodic paym ents. The phrase “number, am ount, and due dates or periods of paym ents” requires the disclosure of all paym ents made periodically, including taxes, m aintenance and insurance charges. In addition, the lessor m ust disclose the total of the periodic paym ents. 4(d) O ther charges. 1. Coverage. Section 213.4(d) requires the disclosure of charges that are anticipated by the parties as incident to the norm al operation of the lease agreement. If a lessor is unsure w hether a particular fee is an “other charge,” the lessor may disclose the fee as such w ithout violating § 213.4(d) or the segregation rule u n d er § 213.3(a)(2). 2. E xcluded charges. This section does not require disclosure of charges that are im posed w hen the lessee term inates early, fails to abide by, or modifies the terms of the existing lease agreement, such as charges for: i. Late payment. ii. Default. iii. Early termination. iv. Deferral of payments. v. Extension of the lease. 3. Third-party fe es and charges. Thirdparty fees or charges collected by the lessor on behalf of third parties, such as taxes, are not disclosed un der § 213.4(d). 4. R elationship to other provisions. The other charges m entioned in this paragraph are charges that are not required to be disclosed under another provision of § 213.4. To illustrate: i. A delivery charge that is paid after consum m ation is disclosed as an “other charge.” A delivery charge that is paid at consum m ation, however, is disclosed as part of the am ount due at lease signing under § 213.4(b), not as an “other charge.” ii. Occasionally, the price of a m echanical breakdow n protection (MBP) contract is disclosed as an “other charge.” More often, the price of MBP is reflected in the periodic paym ent disclosure under § 213.4(c), in w hich case it is not disclosed as an “other charge.” In states w here MBP is regarded as insurance, however, the cost should be disclosed in accordance w ith § 213.4(o), not as an “other charge.” 5. Lessee's liabilities at the end o f the lease term. Liabilities that th e lease imposes upon the lessee at the end of the scheduled lease term and that m ust be disclosed u nd er this section include disposition and “pick-up” charges. 6. O ptional “disposition” charges. D isposition charges (and sim ilar charges) that are anticipated by the parties as an incident to the norm al operation of the lease agreement m ust be disclosed un der § 213.4(d). If under a lease agreement, a lessee may return leased property to various locations, and the lessor charges a disposition fee depending upon the location chosen, un der § 213.4(d), the lessor m ust disclose the highest am ount charged. In such circum stances, the lessor may also include a brief explanation of the fee structure in the segregated disclosure. For example, if no fee or a lower fee is im posed for returning a leased vehicle to the originating dealer as opposed to another location, that fact may be disclosed. By contrast, if the terms of the lease treat the leased property returned outside the lessor’s service area as a default, that fee is not disclosed as an “other charge,” although it may be required to be disclosed un der § 213.4(q). 4(e) Total o f paym ents. 1. O pen-end lease. A n additional statem ent is required un der § 213.4(e) for open-end leases because, w ith some lim itations, a lessee is liable for the difference betw een the residual and realized values of the leased property. 4(f) P aym ent calculation. 1. Motor-vehicle lease. W hether leased property is a m otor vehicle is determ ined by state or other applicable law. 4(f)(1) Gross capitalized cost. 1. Agreed upon value o f the vehicle. The agreed upon value of a motor vehicle is the am ount for the vehicle agreed upon by the lessor and lessee for purposes of the lease. This includes the am ount of capitalized items such as charges for vehicle accessories and options, and delivery or destination charges. The lessor may also include taxes and fees for title, license, and registration. Charges for service or m aintenance contracts, insurance products, guaranteed automobile protection, or an outstanding balance on a prior lease or loan are not included in the agreed upon value. 2. Item ization o f the gross capitalized cost. The lessor may choose to provide the item ization of the gross capitalized cost as a m atter of course or only on request. In either case, the item ization m ust be provided at the same tim e as the other disclosures required by § 213.4. The item ization may n ot be included among the segregated disclosures. 4(f)(2) Capitalized cost reduction. 1. A m o u n ts n o t included. The capitalized cost reduction does not include periodic paym ents paid at lease signing. 4(f)(8) Lease term. 1. D efinition. U nder § 213.4(f)(8) the “lease term ” refers to the num ber of periodic payments. 4(g) Early termination. 4(g)(1) Conditions and disclosure of charges. 1. Reasonableness o f charges. See the commentary to § 213.4(q). 2. Description o f the m ethod. A full description of the m ethod of determ ining an early term ination charge is required by the regulation. Lessors should attem pt to provide consum ers w ith clear and understandable descriptions of their early term ination charges. Descriptions that are full, accurate, and not intended to be m isleading w ill com ply w ith the regulation, even if complex. In providing a full description of an early term ination m ethod, a lessor may use the nam e of a generally accepted m ethod of com puting the unam ortized cost portion (also know n as the “adjusted lease balance”) of its early term ination charges. For example, a lessor may state that the “constant yield” m ethod w ill be utilized in obtaining the adjusted lease balance, but m ust specify how that figure, and any other term or figure, is used in com puting the total early term ination charge im posed upon the consumer. Additionally, if a lessor refers to a nam ed m ethod in this m anner, the lessor m ust provide a w ritten explanation of that m ethod if requested by the consumer. The lessor has the option of providing the explanation as a m atter of course in the lease docum ents or on a separate document. 3. Default. W hen default is also a condition for early term ination of a lease, default charges m ust be disclosed under § 213.4(g)(1). See the com mentary to § 213.4(q). 4. Lessee’s liability at early termination. W hen the lessee is liable for the difference betw een the unam ortized cost and the realized value at early term ination, the am ount or the m ethod of determ ining the am ount of the difference m ust be disclosed under § 213.4(g)(1). 4(h) M aintenance responsibilities. 1. Standards fo r wear an d use. No disclosure is required if a lessor does not impose standards for w ear and use (such as excess mileage). 2. A m o u n t or m eth od o f determ ining excess m ileage charges. In a m otor vehicle lease, a description of the m ethod for calculating excess mileage charges may not be disclosed if a specific am ount for excess mileage has been established. 4(i) Purchase option. 1. M andatory disclosure o f no purchase option. Generally the lessor need only make the specific required disclosures that apply to a transaction. In the case of the purchase option disclosure, however, a lessor m ust Federal Register / Vol. 62, No. 33 / Wednesday, February 19, 1997 / Proposed Rules disclose affirmatively that the lessee has no right. The lessor may require a lessee to option to purchase the leased property w hen obtain the appraisal w ithin a reasonable time the purchase option is inapplicable. after term ination of the lease. 2. Existence o f purchase option. W hether a 4(m) Liability at end of lease term based on purchase option exists is determ ined by state residual value. or other applicable law. The lessee’s right to 1. O pen-end leases. Section 213.4(m) subm it a bid to purchase property at applies only to open-end leases. term ination of the lease is not an option to 2. Lessor’s p a ym en t o f attorney’s fees. purchase u nd er § 213.4(i) if th e lessor is not Section 183(a) of the act requires that the required to accept the lessee’s b id and the lessor pay the lessee’s attorney’s fees in all lessee does n ot receive preferential treatment. actions brought by the lessor under 3. Purchase-option fee. A purchase-option § 213.4(m), w hether successful or not. fee m ust be disclosed u n der § 213.4(i), not 4(m )(l) Rent and other charges. § 213.4(d). The fee may be separately 1. General. This disclosure is intended to item ized or disclosed as part of the purchase- represent the cost of financing an open-end option price. lease based on charges and fees that the 4. Official fe e s a nd taxes. The existence of lessor requires the lessee to pay. Examples of official fees such as those for taxes, licenses, disclosable charges, in addition to the rent and registration charged in connection w ith charge, include acquisition, disposition, or the exercise of a purchase option may be assignment fees. Charges im posed by a third disclosed un der § 213.4(i) in several ways. party w hose services are n ot required by the The fees may be disclosed as part of the lessor are not included in the § 213.4(m)(l) purchase-option price (with or w ithout a disclosure such as official fees and voluntary reference to th eir inclusion in that price) or insurance. may be separately disclosed and item ized by 4(m)(2) Excess liability. category. A lternatively, a lessor may provide 1. Coverage. The disclosure limiting the a statem ent such as fees for tags, taxes, and lessee’s liability for the value of the leased registration are not included in the purchase property does no t apply at early termination. price. 2. Leases with a m in im um term. If a lease 5. Purchase-option price. Lessors m ust has an alternative m inim um term, the disclose the purchase-option price as a sum disclosures governing the liability lim itation certain or a sum certain to be determ ined at are not applicable for the m inim um term. See a future date by reference to an independent the com mentary to § 213.3(a). source. The reference should provide 3. Charges n o t subject to rebuttable sufficient inform ation so that the lessee will presum ption. The lim itation on liability be able to determ ine the actual price w hen applies only to liability th at is based on the the option becomes available. Statements of residual value of the property at the end of a purchase price as the “negotiated price” or the lease term. The regulation does not the “fair m arket v alue” do not com ply w ith preclude a lessor from recovering other the requirem ents of § 213.4(i). charges from the lessee at the end of the lease 4(j) Statem ent referencing nonsegregated term. Examples of such charges include: disclosures. i. D isposition charges. 1. Content. A lessor may delete ii. Excess mileage charges. inapplicable items from the disclosure. For iii. Late paym ent and default charges. exam ple, if a lease contract does not include iv. A mounts by w hich the unam ortized a security interest, that reference may be cost exceeds the residual value that have deleted. accrued in simple interest accounting leases 4(1) Right of appraisal. because the lessee has not m ade timely 1. Disclosure inapplicable. W hen the lessee payments. is liable at the end of the lease term or at 4(n) Fees and taxes. early term ination for unreasonable w ear or 1. Taxes. If a tax payable by the lessor is use, but not for the residual value of the passed on to the consum er and is reflected leased property, the lessor need not disclose in the lease docum entation or a sticker or tag the lessee’s right to an independent affixed to the leased property, the tax m ust appraisal. For example: be disclosed un d er § 213.4(n). However, a tax 1. The automobile lessor m ay reasonably payable by the lessor and absorbed as a cost expect a lessee to return an undented car of doing business need not be disclosed. w ith four good tires at the end of the lease 4(o) Insurance. term. Even though it holds the lessee liable 1. Coverage. A lessor m ust disclose for the difference between a dented car w ith inform ation on the type and am ount of b ald tires and the value of a car in reasonably insurance coverage, w hether voluntary or good repair, the lessor is not required to required, as well as the cost if the insurance disclose the lessee’s appraisal right. is obtained through the lessor. 2. Lessor’s appraisal. The lessor may obtain 2. Lessor’s insurance. Insurance purchased an appraisal of the leased property to by the lessor prim arily for its ow n benefit, determ ine its realized value. Such an and absorbed as a business expense and not appraisal, however, is n ot the one addressed separately charged to the lessee, need not be in section 183(c) of the act, and the lessor disclosed und er § 213.4(o) even if it provides still m ust disclose the lessee’s independent an incidental benefit to the lessee. right to an appraisal under § 213.4(1). In 3. M echanical breakdown protection. addition, a lessor m ust indicate w hether the W hether m echanical breakdow n protection w holesale or retail appraisal value w ill be (MBP) purchased in conjunction w ith a lease used. should be treated as insurance is determ ined 3. Tim e restriction on appraisal. The by state or other applicable law. In states that regulation does not specify a tim e period in do not treat MBP as insurance, the lessor w hich the lessee m ust exercise the appraisal need not make § 213.4(o) disclosures. In such 7371 cases the lessor may, however, disclose the § 213.4(o) inform ation in accordance w ith the additional inform ation provision in § 213.3(b). For MBP insurance contracts not capped by a dollar am ount, lessors may describe coverage by referring to a lim itation by mileage or tim e period, for example, the mechanical breakdow n contract insures parts of the automobile for up to 100,000 miles. 4(p) W arranties or guarantees. 1. B rief identification. The statem ent identifying warranties may be brief and need not describe or list all warranties applicable to specific parts such as for air conditioning, radio, or tires in an automobile. For example, m anufacturer’s w arranties may be identified sim ply by a reference to the standard m anufacturer’s warranty. If a lessor provides a com prehensive list of warranties to the lessee, the lessor m ust indicate w hich § 213.4(p) w arranties apply or, alternatively, w hich w arranties do not apply. 2. W arranty disclaimers. A lthough a disclaim er of warranties is not required by the regulation, the lessor may give a disclaim er as additional inform ation in accordance w ith § 213.3(b). 3. State law. W hether an express w arranty or guaranty exists is determ ined by state or other law. 4(q) P enalties an d other charges fo r delinquency. 1. Collection costs. The automatic im position of collection costs or attorney fees upon default m ust be disclosed under § 213.4(q). Collection costs or attorney fees that are not im posed automatically, bu t are contingent u p on expenditures in conjunction w ith a collection proceeding or upon the em ploym ent of an attorney to effect collection, need not be disclosed. 2. Charges fo r early term ination. W hen default is a condition for early term ination of a lease, default charges m ust also be disclosed und er § 213.4(g)(1). The § 213.4(q) and (g)(1) disclosures may be combined. Examples of com bined disclosures are provided in the m odel lease disclosure forms in appendix A of this part. 3. Sim ple-interest leases. In a simpleinterest accounting lease, the additional rent charge that accrues on the lease balance w hen a periodic paym ent is m ade after the due date does not constitute a penalty or other charge for late paym ent. Similarly, continued accrual of the rent charge after term ination of the lease because the lessee fails to return the leased property does not constitute a default charge. In either case, if the additional charge accrues at a rate higher than the norm al rent charge, the lessor m ust disclose the am ount of or the m ethod of determ ining the additional charge under § 213.4(q). 4. Extension charges. Extension charges that exceed the rent charge in a simpleinterest accounting lease or th at are added separately are disclosed u nd er § 213.4(q). 5. R easonableness o f charges. Pursuant to section 183(b) of the act, penalties or other charges for delinquency, default, or early term ination may be specified in the lease but only in an am ount that is reasonable in light of the anticipated or actual harm caused by the delinquency, default, or early term ination, the difficulties of proof of loss, 7372 Federal Register / Vol. 62, No. 33 / W ednesday, February 19, 1997 / Proposed Rules and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. 4(r) Security interest. 1. D isclosable security interests. See § 213.2(o) and accom panying com mentary to determ ine w hat security interests m ust be disclosed. 4(s) Limitations on rate information. 1. Segregated disclosures. A lease rate may not be included among the segregated disclosures referenced in § 213.3(a)(2). Section 213.5—Renegotiations, E xtensions a nd A ssum ptions 1. Coverage. Section 213.5 applies only to existing leases that are covered by the regulation. It therefore does not apply to the renegotiation or extension of leases w ith an initial term of four m onths or less, because such leases are n ot covered by the definition of consum er lease in § 213.2(e). W hether and w hen a lease is satisfied and replaced by a new lease is determ ined by state or other applicable law. 5(b) Extensions. 1. Tim e o f extension disclosures. If a consum er lease is extended for a specified term greater than six m onths, new disclosures are required at the tim e the extension is agreed upon. If the lease is extended on a m onth-to-m onth basis and exceeds six m onths, new disclosures are required at the com m encem ent of the seventh m onth and at the com m encem ent of each seventh m onth thereafter. If a consum er lease is extended for several terms, one of w hich will exceed six m onths beyond the originally scheduled term ination date of the lease, new disclosures are required at the com m encem ent of the term that w ill exceed six m onths beyond the originally scheduled term ination date. 2. C ontent o f disclosures fo r m onth-tom onth extensions. The disclosures for a lease extended on a m onth-to-m onth basis for more than six m onths should reflect the month-tom onth nature of the transaction. Section 213.7—A dvertising 7(a) General rule. 1. Persons covered. All “persons” m ust com ply w ith the advertising provisions in this section, not just those that m eet the definition of a lessor in § 213.2(h). Thus, automobile dealers, merchants, and others w ho are not them selves lessors m ust comply w ith the advertising provisions of the regulation if they advertise consum er lease transactions. Pursuant to section 184(b) of the act, however, ow ners and personnel of the m edia in w hich an advertisem ent appears or through w hich it is dissem inated are not subject to civil liability for violations under section 185(b) of the act. 2. “U sually and custom arily.” Section 213.7(a) does not prohibit the advertising of a single item or the prom otion of a new leasing program, but prohibits the advertising of terms that are not and w ill not be available. Thus, an advertisem ent may state terms that w ill be offered for only a lim ited period or terms that w ill become available at a future date. 7(b) Clear and conspicuous standard. 1. Standard. The disclosures in an advertisem ent m ust be reasonably understandable. For example, very fine print in a television advertisem ent or detailed and very rapidly stated inform ation in a radio advertisem ent does not m eet the clear and conspicuous standard if consum ers cannot see and read or com prehend the inform ation required to be disclosed. 7(b)(1) A m o u n t due at lease signing. 1. Item ization n ot required. The regulation requires only a total of am ounts due at lease signing or delivery, not an item ization of its com ponent parts. Such an item ization is provided in any transaction-specific disclosures provided u nd er § 213.4. 2. Prom inence rule. Except for a periodic paym ent, oral or w ritten references to com ponents of the total due at lease signing or delivery (for example, a reference to a capitalized cost reduction, w here permitted) may not be more prom inent than the disclosure of the total am ount due at lease signing or delivery. 7(b)(2) A d vertisem ent o f a lease rate. 1. Location o f statem ent. The notice required to accom pany a percentage rate stated in an advertisem ent m ust be located in close proxim ity to the rate w ithout any other intervening language or symbols. For example, a lessor may not state a rate w ith an asterisk and make the disclosure in a different location in the advertisement. In addition, w ith the exception of the notice required by § 213.4(s), the rate cannot be more prom inent th an any § 213.4 disclosure stated in the advertisement. 7(c) Catalogs and m ulti-page advertisem ents. 1. General rule. The m ultiple-page advertisem ents referred to in § 213.7(c) are advertisem ents consisting of a series of num bered pages—for example, a supplem ent to a new spaper. A mailing com prising several separate flyers or pieces of prom otional m aterial in a single envelope is not a single multiple-page advertisement. 2. Cross-references. A multiple-page advertisem ent is a single advertisem ent (requiring only one set of lease disclosures) if it contains a table, chart, or schedule clearly stating sufficient inform ation for the reader to determ ine the disclosures required un der § 213.7(d)(2) (i) through (vi). If one of the triggering term s listed in § 213.7(d)(1) appears in a catalog or other m ultiple-page advertisement, the page on w hich the triggering term is used m ust clearly refer to the specific page w here the table, chart, or schedule begins. 7(d)(1) Triggering terms. 1. Triggering terms. W hen any triggering term appears in a lease advertisement, the additional terms enum erated in § 213.7(d)(2) (i) through (vi) m ust also appear. An example of one or more typical leases w ith a statem ent of all the terms applicable to each may be used. The additional terms m ust be disclosed even if the triggering term is not stated explicitly, but is readily determ inable from the advertisement. 7(d)(2) A dd itio na l terms. 1. Third-party fe e s that vary b y state. In disclosing the total am ount due at lease signing a lessor may: i. Exclude third-party fees, such as taxes, license, and registration fees and disclose that fact; or ii. Provide a total that includes third-party fees based on a particular state as long as that fact and that fees may vary by state are disclosed. 7(e) A lternative disclosures— m erchandise tags. 1. M ultiple item leases. M ultiple item leases that utilize m erchandise tags requiring additional disclosures may use the alternate disclosure rule. 7(f) A lternative disclosures— television or radio advertisem ents. 7(f)(1) Toll-free num ber or print advertisem ent. 1. Publication in general circulation. A referral to a w ritten advertisem ent appearing in a new spaper circulated nationally, for example, USA Today or the Wall Street Journal, may satisfy the general circulation requirem ent in § 213.7(f)(l)(ii). 2. Toll-free num ber, local or collect calls. In complying w ith the disclosure requirem ents of § 213.7(f)(l)(i), a lessor m ust provide a toll-free num ber for nonlocal calls made from an area code other than the one used in the lessor’s dialing area. Alternatively, a lessor may provide any telephone num ber that allows a consum er to call for inform ation and reverse the phone charges. 3. M ulti-purpose num ber. W hen calling an advertised toll-free number, if a consum er obtains a recording that provides several dialing options—such as providing directions to the lessor’s place of business—the option allowing the consum er to request lease disclosures should be provided early in the telephone message to ensure that the option to request disclosures is no t obscured by other information. 4. Statem ent accom panying toll free num ber. Language m ust accom pany a telephone num ber indicating that disclosures are available by calling the toll-free number, such as “call 1-800-000-000 for details about costs and term s.” Section 213. 8— Record Retention 1. M anner o f retaining evidence. A lessor m ust retain evidence of having performed required actions and of having made required disclosures. Such records m ay be retained on microfilm, microfiche, or com puter, or by any other m ethod designed to reproduce records accurately, as w ell as paper form. The lessor need retain only enough inform ation to reconstruct the required disclosures or other records. A ppendix A—M odel Forms. 1. Permissible changes. A lthough use of the m odel forms is not required, lessors using them properly w ill be deem ed to be in com pliance w ith the regulation. Generally, lessors may make certain changes in the format or content of the forms and may delete any disclosures that are inapplicable to a transaction w ithout losing the act’s protection from liability. For example, the m odel form based on m onthly periodic paym ents may be m odified for single- Federal Register / Vol. 62, No. 33 / Wednesday, February 19, 1997 / Proposed Rules paym ent lease transactions or other periodic paym ents. The content, format, and headings for the segregated disclosures m ust be substantially sim ilar to those contained in the m odel forms; therefore, any changes should be minim al. The changes to the m odel forms should not be so extensive as to affect the substance and the clarity of the disclosures. 2. E xam ples o f acceptable changes. i. Using the first person, instead of the second person, in referring to the lessee. ii. Using “lessee,” “lessor,” or names instead of pronouns. iii. Rearranging the sequence of the nonsegregated disclosures. iv. Incorporating certain state “plain English” requirem ents. v. Deleting inapplicable disclosures by blocking out, filling in “N /A ” (not applicable) or “0,” crossing out, leaving blanks, checking a box for applicable items, or circling applicable items. (This should perm it use of m ulti-purpose standard forms). vi. A dding language or symbols to indicate estimates. vii. A dding num eric or alphabetic designations. viii. Rearranging the disclosures into vertical columns, except for § 213.4(b) through (e) disclosures. 3. M odel closed-end or n et vehicle lease disclosure. M odel A -2 is designed for a closed-end or net vehicle lease. U nder the “Early T erm ination and Default” provision a reference to the lessee’s right to an in dependent appraisal of th e leased vehicle un der § 213.4(1) is included for those closedend leases in w hich the lessee’s liability at early term ination is based on th e vehicle’s estim ated value. 4. M odel fu rniture lease disclosures. Model A -3 is a closed-end lease disclosure statem ent designed for a typical furniture lease. It does not include a disclosure of the appraisal right at early term ination required un der § 213.4(1) because few closed-end furniture leases base the lessee’s liability at early term ination on the estim ated value of the leased property. Of course, the disclosure should be added, if it is applicable. By order of the Board of Governors of the Federal Reserve System, acting through the Secretary of the Board u nder delegated authority, February 12,1997. W illiam W. Wiles, Secretary o f the Board. [FR Doc. 97-3955 Filed 2-13-97; 2:20 pm] BILLING CODE 6 2 10 -01 -P 7373