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Federal R eserve Bank

D. M c T E E R , J R .

p re s id e n t



7 5 2 6 5 -5 9 0 6

February 26, 1997

Notice 97-20


The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

Proposal to Revise the Official Staff
Commentary to Regulation M
(Consumer Leasing)
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.
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 (


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,


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

12CFR Part 213
[Regulation M; Docket No. R -0961]

Consumer Leasing

Board of Governors of the
Federal Reserve System.
ACTION: Proposed official staff

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

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
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
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
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
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


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.

§ 213.2(a)(2) and to indicate that the
term “advertisement” includes
electronic messages.

Closed-end Lease

Proposed comment 2(d)— provides
general guidance on the definition of a
closed-end lease.

2(e) Consumer Lease
Current comments 1-3,1— and 1-6
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
Proposed comment 2(e)-3 provides
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
statutory definition of agricultural
2(a)(2)— .. 2(b)— and -2 ; including text purpose in section 103(s) of the TILA.
from former §213.2(a)(2).
Comment 2(e)-7, current comment
2(a)(2)-2 .. 2(b)—
2(a)(6)-6, would be revised to add
2(d)— new.
another example of a lease deemed
2(a)(4)— .. 2(h)— includes text from former
incidental to a service. The narrow list
of exceptions is exhaustive, rather than
2(a)(4)-2 .. 2(h)—
illustrative. Questions have arisen about
2(a)(4)-3 .. 2(h)—
2(a)(6)-1 .. 2(e)—
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.
service providers typically offer
2(a)(6)— .. 2(e)—
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.
2(a)(6)-6 .. 2(e)—
leasing of a cellular telephone is not
2(f)— new.
incidental to obtaining cellular service
2(a)(7)-1 .. 2(g)—
and is, thus, covered under the
2(a)(8)— .. 2(h)—
2(a)(9)— ..
and -2.
and -4.


2(j)-1 ■
2(l)— ■
2(m)-1 and -2.

2(o)-1; includes text from former
§ 213.2(a)(15).
Deleted as unnecessary.
Deleted as unnecessary.

Proposed comment 2(f)— provides
guidance on what type of fees are
included or excluded from the gross
capitalized cost disclosure in
§ 213.4(f)(1).

Deleted as unnecessary.

2(b) Advertisement
Comment 2(b)-l, current comment
2(a)(2)-l, would be revised to include
examples of advertisements formerly in


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(b)— .....
2(b)— .....

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)—
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
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
3(a) General Requirements


4(a)— .....
4(a)-2 .....
4(a)-3 .....
4(a)— .....
4(a)(1)— ..
4(a)(1)-2 ..
4(a)(2)-1 ..
4(a)(2)— ..

Moved to §213.3(f).
Deleted as unnecessary.
3(a)-2 and -3.
Deleted as unnecessary.
3(a)(1)— new.
Deleted as unnecessary.
3(a)(1 )-5.
3(a)(2)— through -3 new.
Deleted as unnecessary, see re­
vised §213.3(a)(4).
Deleted as unnecessary, see re­
vised §213.3(a)(4).
3(d)(1)— through -5.

4(a)(2)-3 ..
4(a)(2)-4 ..
4(a)(2)-5 ..
4(a)(4)— ..
4(a)(4)-2 ..
4(b)— .....
4(c)— .....
4(e)— and

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(a)— would be revised to provide
guidance on disclosing a prior lease or
loan balance added to a lease
3(a)(1) Form of Disclosures
Proposed comment 3(a)(1)— provides
guidance on disclosing the lessor’s
Comment 3(a)(l)-5, current comment
4(a)(2)— would be revised to provide
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
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
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
be revised by adding clarifying language
and by deleting the second sentence.
3(d) Use of Estimates
Comment 3(d)(1)— current comment
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
4(g)— .....
4 (g )- 2 .....
4(g)(1)— ..
4(g)(2)— ..
4(g)(2)-2 ..
4(g)(2)-3 ..

4(g)(3)— ..
4(g)(3)-2 ..
4(g)(4)— ..
4(g)(5)— ..
4(g)(5)-2 ..
4(g)(5)-3 ..
4(g)(5)— ..

4(a)— new.
Deleted as unnecessary.
moved to §213.3(a)(1).
Deleted as unnecessary.
Deleted as unnecessary.
comment 2(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
lease deleted.
4(d)— and -2.
Deleted as unnecessary; see
4(d)-3 new.
4(d)— new.
4(e)— new.
4(f)— new.
4(f)(1)-1 and -2 new.
4(f)(2)— new.


4(g)(6)— ..
4(g)(6)-2 ..
4(g)(8)— ..
4(g)(9)— ..
4 (g )(io )-i
4(g )(i1)—
4 (g )(i4 )-i
4 (g )(i5 )-i

4(f)(8)— new.
4(o)-1 new.
4(p)-1 through -3.
4(h)-2 new.
4(q)-1 through -5.
4(i)-1 through -3.
4(i)— and -5 new.
4(g)(1)— the word “capitalized”
is deleted.
4 (g )(i)-i.
4(g)(1)— new.
4(j)-1 new.
4(l)-1 through -3.
4(m)-1 new.
4(m)(1)-1 new.
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
4(b) Total Amount Due at Lease
Comment 4(b)— would incorporate
the first sentence of current comment
2(b)— on consummation.
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
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
4(d) Other Charges
Comment 4(d)-l, current comment
4(g)(5)-!, would be revised to provide


flexibility in making the “other charges”
Proposed comment 4(d)— clarifies
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
4(f) Payment Calculation
Proposed comment 4(f)— clarifies
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
guidance on disclosing the agreed upon
value of a leased motor vehicle.
Proposed comment 4(f)(1)— provides
guidance on providing the itemization
of the gross capitalized cost.
4(f)(2) Capitalized Cost Reduction
Proposed comment 4(f)(2)— provides
guidance on the amounts not included
in the capitalized cost reduction
4(f)(8) Lease Term
Proposed comment 4(f)(8)— clarifies
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
that lessors may not disclose a
description of the method used for
calculating excess mileage charges if a
specific amount for excess mileage is
4(i) Purchase Option
Proposed comment 4(i)— provides
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


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
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
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
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
regulation. For example, the definitions
of a renegotiation and an extension have 7(b) Clear and Conspicuous Standard
Proposed comment 7(b)— provides
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
television screen for at least five
seconds has been deleted. The comment
4(h)-1 ..... 5-1.
was intended as guidance on the clear
to and conspicuous standard. It did not
4(h)— ..... First
§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).
the clear and conspicuous standard.
4(h)-4 ..... Moved to §213.5(b).
Section 213.5—Renegotiations,
Extensions, and Assumptions

4(h)— .....


5(b)— new.
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
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
Proposed comment 5(b)— also
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


Fees and Taxes

Proposed comment 4(n)-l provides
guidance on what taxes are disclosed
under § 213.4(n).


Comment 4(p)-l, current comment
4(g)(7)— would be revised to provide
further guidance on identifying
warranties under § 213.4(p), when
lessors provide a comprehensive list of
warranties to lessees.

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).

5(a)-1 .....
5(a)-2 .....
5(b)— and
5(c)— .....
5(c)-2 .....
5(d)— .....

7(c)— and 2.
7(d)(1)— 1
7(d)(2)-1 new.
7(e)— new.
7(f)(1)— through -4 new.

7(b)(1) Amount Due at Lease Signing
Proposed comment 7(b)(1)— clarifies
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
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
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
Proposed comment 7(f)(1)— clarifies
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
guidance on establishing a number for

Federal Register / Vol. 62, No. 33 / W ednesday, February 19, 1997 / Proposed Rules
consumers to call for disclosure
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
Section 213.8 Record Retention



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
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:


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
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



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
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
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—

Section 213.1—A uthority, Scope, Purpose,
and E nforcem ent
1. Foreign applicability. Regulation M
applies to all persons (including branches of


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
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
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
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
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
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
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
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
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:
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
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
4. N um ber o f transactions. Lessors have
flexibility in handling lease transactions that
may be viewed as m ultiple transactions. For
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
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
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

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
3. Substantially similar. See com mentary
to appendix A of this part.
3(b) A dd itio n a l inform ation; nonsegregated
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
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
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


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
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


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”
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
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
4(g) Early termination.
4(g)(1) Conditions and disclosure of
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
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.
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:
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
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
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


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
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,


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
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
7(e) A lternative disclosures— m erchandise
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
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
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
vii. A dding num eric or alphabetic
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


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102