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Inactive Financial Institution Letters


[Federal Register: April 1, 1997 (Volume 62, Number 62)]
[Rules and Regulations]
[Page 15364-15372]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01ap97_dat-4]

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FEDERAL RESERVE SYSTEM

12 CFR Part 213

[Reg. M; Docket No. R-0952]


Consumer Leasing

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final Rule.

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SUMMARY: The Board is publishing revisions to Regulation M, which
implements the Consumer Leasing Act. The act requires lessors to
provide uniform cost and other disclosures about consumer lease
transactions. The revisions primarily implement amendments to the act
contained in the Economic Growth and Regulatory Paperwork Reduction Act
of 1996, which streamline the advertising disclosures for lease
transactions. In addition, the final rule makes the disclosure of
upfront costs in connection with a specific lease agreement parallel
statutory changes to the advertising rules disclosing upfront costs--
which now include total amounts due by lease signing or delivery, if
delivery occurs later. Several technical amendments also have been made
to the regulation.

DATES: Effective date. April 1, 1997. Compliance date. Compliance is
optional until October 1, 1997.

FOR FURTHER INFORMATION CONTACT: Kyung H. Cho-Miller or Obrea O.
Poindexter, Staff Attorneys, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, Washington,
DC 20551, at (202) 452-2412 or 452-3667. Users of Telecommunications
Device for the Deaf only may contact Diane Jenkins, at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background on the Consumer Leasing Act and Regulation M

    The Consumer Leasing Act (CLA), 15 U.S.C. 1667-1667e, was enacted
into law in 1976 as an amendment to the Truth in Lending Act (TILA), 15
U.S.C. 1601 et seq. The CLA generally applies to consumer leases of
personal property in which the contractual obligation does not exceed
$25,000 and has a term of more than four months. An automobile lease is
the most common type of consumer lease covered by the act. Under the
act, lessors are required to provide uniform cost and other information
about consumer lease transactions.
    The Board was given rulewriting authority, and its Regulation M (12
CFR part 213) implements the CLA. An official staff commentary
interprets the regulation.
    The Board recently completed a review of Regulation M, pursuant to
its policy of periodically reviewing its regulations, and approved a
final rule in September 1996 substantially revising the regulation to
update the disclosure requirements and to carry out more effectively
the purposes of the Act (61 FR 52246, October 7, 1996).

II. Revised Regulatory Provisions

    In the September 1996 final rule, the advertising provisions
implemented amendments to the CLA contained in the Riegle Community
Development and Regulatory Improvement Act of 1994 (Pub. L. 103-325,
108 Stat. 2160); the amendments allow a toll-free number or a print
advertisement to substitute for certain lease disclosures in radio
commercials (which was expanded in the final rule to television
commercials).
    The advertisement provisions were amended and streamlined on
September 30, 1996, by the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (Pub. L. 104-208, 110 Stat. 3009)(the 1996 Act).
The Board issued a proposal in December 1996 (62 FR 62, January 2,
1997). Nineteen comments were received. Based on the comments and
further analysis, the Board's final rule implements the statutory
changes. The final rule also revises the requirement to disclose
``upfront costs'' to parallel the statutory change made to a similar
advertising disclosure--now requiring the total amount due by lease
signing to include amounts due by delivery, whichever occurs later. The
open- and closed-end model lease forms have been amended to reflect
this change. This final rulemaking also contains some technical
amendments to the regulation. For example, the model clause for
providing a description of the leased property is added and the example
of an annual charge as an other charge is deleted on the open- and
closed-end vehicle lease model forms. Although a limited number of
comments were received, generally all the commenters supported the
proposed amendments. The final rule is discussed in detail in the
section-by-section analysis below.

III. Revisions to Regulation M

Section 213.2  Definitions

2(f) Gross Capitalized Cost
    Based on comments on the proposed revisions to the Official Staff
Commentary published in February 1997, the Board is replacing the
reference in Sec. 213.2(f) to an outstanding ``loan'' balance with the
broader term

[[Page 15365]]

``credit'' to encompass both loan and credit sale balances. Consistent
revisions have also been made to Sec. 213.4(f)(1) and the open- and
closed-end vehicle lease model forms.

Section 213.4  Content of Disclosures

4(b) Amount Due at Lease Signing or Delivery
    The 1996 Act revised the advertising disclosure of upfront fees to
include amounts due by delivery, if delivery occurs after consummation,
but the Congress did not enact a conforming change to the transaction
disclosure. The Board did not propose to amend that transaction
disclosure to make it consistent with the statutory change to the
advertising rules. Several commenters (including two Reserve Banks, a
lease trade association representing mostly independent lessors, and an
association of state attorneys general) urged the Board to reconsider
this issue, suggesting the disclosure of upfront fees in advertising
and those given for specific transactions should be consistent to avoid
consumer confusion. Major trade associations, consumer interest
representatives, and the Federal Trade Commission, responding to the
proposed revisions to the Official Staff Commentary, also strongly
recommended the revision. Consumers would not normally distinguish
between charges paid at lease signing and by delivery, if delivery
occurs later. Under the current rules any charges payable after a lease
is executed would have to be disclosed as ``other charges.'' A
consistent rule on the disclosure of upfront fees to include amounts
due at delivery would not require lessors to retrain their personnel to
think of these post-consummation fees as ``other charges'' and not
``upfront fees,'' thus reducing the potential for technical violations
of the law that could give rise to civil liability.
    The Board believes that having a consistent rule for the
advertising and the transaction disclosures would benefit both
consumers and lessors. Consumers would have in one place the total sum
necessary to take possession of the leased property, and the risk of
making technical errors would be reduced for lessors. Pursuant to its
authority under section 105(a) of the TILA and section 187 of the CLA,
the Board is revising the disclosure of the total amount due at or
prior to consummation to include amounts due at delivery, when delivery
occurs after consummation, to parallel the changes that the Congress
made to the advertising disclosure. The open- and closed-end vehicle
lease model forms also reflect this change. Section 105(a) of the TILA
provides that the Board's regulations ``may contain such
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for any class of transactions, as
the judgment of the Board are necessary or proper to effectuate the
purposes of (the CLA), to prevent circumvention or evasion thereof, or
to facilitate compliance therewith.''
4(f) Payment Calculation
4(f)(1) Gross Capitalized Cost
    As discussed in Sec. 213.2(f), ``loan'' is replaced by ``credit''
in Sec. 213.4(f)(1).
4(n) Fees and Taxes
    In the September 1996 final rule, Sec. 213.4(n) stated that the
lessor must disclose the total dollar amount of all official and
license fees, registration, title, or taxes required to be paid ``to
the lessor'' in connection with the lease. Adding ``paid to the
lessor'' narrowed the scope of the disclosure from the previous
requirement. No substantive change to the requirement was intended.
Thus, the phrase ``to the lessor'' has been deleted from this section.
4(o) Insurance
    The Board has revised the captions for paragraph 4(o)(1) and (2) to
change the focus from voluntary and required insurance. The new
captions more accurately reflect the requirement for the insurance
disclosure--that insurance obtained through the lessor or through a
third party, regardless of whether it is required or voluntary, must be
disclosed.
4(t) Gross Capitalized Cost and Residual Value
    The final rule required the disclosure of the gross capitalized
cost and residual value for motor vehicle open-end leases in place of
the previous requirements to disclose the value at consummation, the
total lease obligation, and other related disclosures pursuant to
section 182(10) of the statute. Although such consumer leases are
extremely rare, similar disclosures are required for non-motor vehicle
open-end leases in order to comply with the CLA. Section 213.4(t)
includes that requirement.

Section 213.5  Renegotiations, Extensions, and Assumptions

5(d) Exceptions
    Under Regulation M, new disclosures generally are required where a
covered lease transaction is renegotiated or extended; however, under
paragraph 5(d)(1) new disclosures are not required if the ``lease
charge'' is reduced in a renegotiation or an extension of an existing
lease. This exception was moved from the official staff commentary to
the regulation in the final rule approved in September 1996. Two
commenters objected to the use of the term ``rent'' stating that the
term implies the entire lease payment and not a portion of the lease
payment. The Board believes that it is defined differently by the
regulation and noted as such on the open- and closed-end vehicle lease
model forms. For clarity and consistency in terminology throughout the
regulation, the Board has replaced the term ``lease charge'' with the
term ``rent charge.''

Section 213.7  Advertising

    Prior to the 1996 Act, the advertising provisions required
additional disclosure if an advertisement stated any of the following
terms: the amount of any payment; the number of required payments; or a
statement of any capitalized cost reduction or other payment required
prior to or at consummation, or that no payment is required. Under the
amendments to the CLA contained in the 1996 Act, an advertisement that
states the number of required payments would no longer trigger
additional disclosures.
    The 1996 Act also makes changes in all but one of the items that
must be disclosed when a triggering term is stated in an advertisement,
as follows:

    (1) That the transaction advertised is a lease. No change was
made in this disclosure.
    (2) The total amount due at lease signing, or that no payment is
required. This disclosure has been expanded to include amounts due
at delivery if delivery occurs after consummation. The requirement
to state that no payment is required has been eliminated.
    (3) The number, amounts, due dates or periods of scheduled
payments, and total of such payments under the lease. The total of
scheduled payments has been eliminated as a required disclosure.
    (4) A statement of whether or not the lessee has the option to
purchase the leased property, and where the lessee has the option to
purchase at the end of the lease term, the purchase-option price.
This disclosure has been eliminated entirely.
    (5) A statement of the amount, or the method for determining the
amount, of the lessee's liability (if any) at the end of the lease
term. This disclosure has been eliminated entirely.
    (6) For an open-end lease, a statement of the lessee's liability
(if any) for the difference between the residual value of the leased
property and its realized value at the end of the lease term. This
disclosure has been simplified to require a short statement that an
additional charge may be imposed.

[[Page 15366]]

    The 1996 Act adds an additional disclosure requirement: a statement
of whether or not a security deposit is required. The final rule
implements the statutory changes.
7(b) Clear and Conspicuous Standard
7(b)(1) Amount Due at Lease Signing or Delivery
    The general rule in this paragraph states that any reference to a
charge that is part of the total amount due at lease signing or
delivery may not be more prominent than the disclosure of the total
amount due at lease signing or delivery. The amount of any capitalized
cost reduction (or no capitalized cost reduction) provided as an
example of an amount that is a part of the total amount due at lease
signing or delivery has been deleted. The example will be included in
the Official Staff Commentary.
7(d) Advertisement of Terms That Require Additional Disclosure
7(d)(1) Triggering Terms
    Pursuant to the 1996 Act, the Board has deleted paragraph
7(d)(1)(ii). Merely stating in an advertisement the number of required
lease payments, for example, ``36 payments,'' no longer ``triggers''
the additional disclosures in paragraph 7(d)(2). Paragraph 7(d)(1)(iii)
has been redesignated as paragraph 7(d)(1)(ii).
7(d)(2) Additional Terms
    An advertisement stating any item listed in paragraph 7(d)(1) is
required to state the additional disclosures in paragraph 7(d)(2), as
applicable. As discussed previously, the 1996 Act amends many of the
required additional disclosures in this paragraph. The following
changes implement the statutory amendments.
    The 1996 Act expands the disclosure of the total amount due at
lease signing in paragraph 7(d)(2)(ii) to include ``amounts paid at
delivery, whichever occurs later.'' Prior to the amendments, a delivery
charge paid after consummation was not included in the total amount due
at lease signing in Sec. 213.4(b) or in this section. Under the changes
to implement the statutory amendment, the delivery charge is included
in the total even if it is paid after consummation.
    The requirement to disclose under paragraph 7(d)(2)(ii) that no
upfront payment is required was deleted by the 1996 Act. This
requirement, inadvertently retained in the proposal, has been
eliminated from paragraph 7(d)(2)(ii).
    The total of scheduled payments disclosure from paragraph
7(d)(2)(iii), all of paragraph 7(d)(2)(iv), and all of paragraph
7(d)(2)(v) have been deleted. A statement of whether or not a security
deposit is required is added by the statute and is contained in
paragraph 7(d)(iv). For an open-end lease, the amended statute requires
a statement that an extra charge may be imposed at the end of the lease
term; the regulatory provision is redesignated as paragraph 7(d)(2)(v).
    Few comments were received on the statutory changes to the
advertising provisions. One commenter, however, requested that the
Board retain the disclosure on lease end charges in paragraph
7(d)(2)(v), based on a belief that deletion of paragraph 7(d)(2)(v)
could lead to deceptive advertisements where certain costs are shifted
from the beginning to the end of the lease so that a low monthly
payment or low upfront costs can be advertised and not any significant
fee required at the end of the lease. Although the commenter raises a
valid concern, the Board believes that retaining paragraph 7(d)(2)(v)
would not be consistent with the congressional intent to streamline the
advertising disclosures. Paragraph 7(d)(2)(v) is deleted as proposed.
7(f) Alternative Disclosures--Television or Radio Advertisements
7(f)(1) Toll-free Number or Print Advertisement
    The 1996 Act deletes the ``total of scheduled payments'' as a
required additional disclosure under section 184(a), the general
advertising disclosures, but not for radio advertisements. The Board
proposed to delete the requirement for radio advertisements based on
its belief that in streamlining the advertising rules generally the
Congress did not intend to require more disclosures for radio
advertisements than advertisements through other media. Pursuant to the
Board's exception authority under section 105(a), the Board is adopting
as proposed a final rule to delete the disclosure of the ``total of
scheduled payments'' for radio advertisements as well.

Appendices

    Lessors are required to provide a description of leased property
under the CLA and Sec. 213.4(a) of Regulation M. The Board has amended
the model forms for open- and closed-end vehicle leases disclosures to
add among the nonsegregated disclosures a model clause for describing
leased property.
    The Board has amended the model forms for open- and closed-end
vehicle leases by deleting ``annual tax'' as an example of an other
charge. Third-party fees or charges paid to the lessor but not retained
by the lessor such as taxes are not included in the ``other charges''
disclosure.
    As discussed in Sec. 213.2(f), ``loan'' is replaced by ``credit''
in the disclosure of the gross capitalized cost on the open- and
closed-end vehicle lease model forms.

IV. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 603), the Board's Office of the Secretary has reviewed the
amendments to Regulation M. Overall, the amendments are not expected to
have any significant impact on small entities. The regulatory
revisions, primarily required to implement the 1996 Act, ease
compliance by streamlining the advertising provisions.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506 et seq.), the Board reviewed the final rule under the authority
delegated to the Board by the Office of Management and Budget. 5 CFR
part 1320 Appendix A.1.
    The respondents are individuals or businesses that regularly lease,
offer to lease, or arrange for the lease of personal property under a
consumer lease. The purpose of the disclosures associated with
Regulation M is to ensure that lessees of personal property receive
meaningful information that enables them to compare lease terms with
other leases and, where appropriate, with credit transactions. Records
required to evidence compliance with the regulation must be retained
for twenty-four months. The revisions to the collection of information
requirements in this proposed rule are found in 12 CFR 213.4, 213.5,
and 213.7 and appendices A-1 and 2.
    Regulation M applies to all types of financial institutions, not
just state member banks. Under the Paperwork Reduction Act, however,
the Federal Reserve accounts for the paperwork burden associated with
Regulation M only for state member banks. Any estimates of paperwork
burden for institutions other than state member banks affected by the
amendments would be provided by the federal agency or agencies that
supervise those lessors. The Federal Reserve has found that few state
member banks engage in consumer leasing and that while the prevalence
of leasing has increased in recent years, it has not increased
substantially among state member banks. It also has found that among
state member banks that engage in consumer

[[Page 15367]]

leasing, only a very few advertise consumer leases.
    The revisions to Secs. 213.4 and 213.5 are estimated to have no
effect on the hour burden that the regulation imposes. The revisions to
Sec. 213.7, while more substantive, are expected to have no net effect
on the hour burden.
    The current hour burden for state member banks, as of the September
1996 final rule, is estimated to be eighteen minutes for the
disclosures and twenty-five minutes for advertising. It is estimated
that there will be 310 respondents and an average frequency of 120
responses per respondent each year. The total amount of annual hour
burden at all state member banks is estimated to be 11,179 hours.
Start-up cost burden associated with the September 1996 final rule was
estimated to be $12,000 per respondent, amounting to a total of
$3,720,000 for state member banks. The Federal Reserve estimates that
this amount is sufficient to cover any costs of the final rule. These
estimates are the same as those included in the notice of proposed
rulemaking since no comments specifically addressing the burden
estimate were received.
    The disclosures made by lessors to consumers under Regulation M are
mandatory (15 U.S.C. 1667 et seq.). Consumer lease information in
advertisements is available to the public. Disclosures of the costs,
liabilities, and terms of consumer lease transactions relating to
specific leases are not publicly available. Because the Federal Reserve
does not collect any information, no issue of confidentiality under the
Freedom of Information Act normally arises. If the Board were to obtain
information through examination of a supervised institution, the
information would be kept confidential. 5 U.S.C. 552(b)(8).
    An agency may not conduct or sponsor, and an organization is not
required to respond to, this information collection unless it displays
a currently valid OMB control number. The OMB control number is 7100-
0202.
    The Federal Reserve has a continuing interest in members of the
public's opinions of our collections of information. At any time,
comments regarding the burden estimate, or any other aspect of this
collection of information, including suggestions for reducing the
burden, may be sent to: Secretary, Board of Governors of the Federal
Reserve System, 20th and C Streets, NW., Washington, DC 20551; and to
the Office of Management and Budget, Paperwork Reduction Project (7100-
0202), Washington, DC 20503.

List of Subjects in 12 CFR Part 213

    Advertising, Federal Reserve System, Reporting and recordkeeping
requirements, Truth in Lending.

    For the reasons set forth in the preamble, the Board amends 12 CFR
part 213 as follows:

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. Section 213.1 is amended by revising paragraph (a) to read as
follows:

Sec. 213.1  Authority, scope, purpose, and enforcement.

    (a) Authority. The regulation in this part, known as Regulation M,
is issued by the Board of Governors of the Federal Reserve System to
implement the consumer leasing provisions of the Truth in Lending Act,
which is Title I of the Consumer Credit Protection Act, as amended (15
U.S.C. 1601 et seq.). Information collection requirements contained in
this regulation have been approved by the Office of Management and
Budget under the provisions of 44 U.S.C. 3501 et seq. and have been
assigned OMB control number 7100-0202.
* * * * *
    3. Section 213.2 is amended by revising the first sentence of
paragraph (f) to read as follows:

Sec. 213.2  Definitions.

* * * * *
    (f) Gross capitalized cost means the amount agreed upon by the
lessor and the lessee as the value of the leased property and any items
that are capitalized or amortized during the lease term, including but
not limited to taxes, insurance, service agreements, and any
outstanding prior credit or lease balance. * * *
* * * * *
    4. Section 213.4 is amended as follows:
    a. Paragraph (b) is revised;
    b. Paragraph (f)(1) is revised.
    c. Paragraph (n) is revised;
    d. The headings of paragraphs (o)(1) and (o)(2) are revised; and
    e. New paragraph (t) is added.
    The revisions and additions read as follows:

Sec. 213.4  Content of disclosures.

* * * * *
    (b) Amount due at lease signing or delivery. The total amount to be
paid prior to or at consummation or by delivery, if delivery occurs
after consummation, using the term ``amount due at lease signing or
delivery.'' The lessor shall itemize each component by type and amount,
including any refundable security deposit, advance monthly or other
periodic payment, and capitalized cost reduction; and in motor-vehicle
leases, shall itemize how the amount due will be paid, by type and
amount, including any net trade-in allowance, rebates, noncash credits,
and cash payments in a format substantially similar to the model forms
in appendix A of this part.
* * * * *
    (f) Payment calculation. * * *
    (1) Gross capitalized cost. The gross capitalized cost, including a
disclosure of the agreed upon value of the vehicle, a description such
as ``the agreed upon value of the vehicle [state the amount] and any
items you pay for over the lease term (such as service contracts,
insurance, and any outstanding prior credit or lease balance),'' and a
statement of the lessee's option to receive a separate written
itemization of the gross capitalized cost. If requested by the lessee,
the itemization shall be provided before consummation.
* * * * *
    (n) Fees and taxes. The total dollar amount for all official and
license fees, registration, title, or taxes required to be paid in
connection with the lease.
    (o) Insurance. * * *
    (1) Through the lessor. * * *
    (2) Through a third party. * * *
* * * * *
    (t) Non-motor vehicle open-end leases. Non-motor vehicle open-end
leases remain subject to section 182(10) of the act regarding end of
term liability.
    5. Section 213.5 is amended by revising paragraph (d)(1) to read as
follows:

Sec. 213.5  Renegotiations, extensions, and assumptions.

* * * * *
    (d) Exceptions. * * *
    (1) A reduction in the rent charge;
* * * * *
    6. Section 213.7 is amended as follows:
    a. Paragraph (b)(1) is revised;
    b. Paragraph (d)(1)(i) is revised, paragraph (d)(1)(ii) is removed,
and paragraph (d)(1)(iii) is redesignated as (d)(1)(ii) and
republished;
    c. Paragraphs (d)(2)(ii) and (d)(2)(iii) are revised, paragraph
(d)(2)(iv) is removed, paragraphs (d)(2)(v) and (d)(2)(vi) are revised
and redesignated as paragraphs (d)(2)(iv) and (d)(2)(v), and paragraph
(d)(2)(i) is republished respectively.
    The revisions and republications read as follows:

[[Page 15368]]

Sec. 213.7  Advertising.

* * * * *
    (b) Clear and conspicuous standard. * * *
    (1) Amount due at lease signing or delivery. Except for the
statement of a periodic payment, any affirmative or negative reference
to a charge that is a part of the disclosure required under paragraph
(d)(2)(ii) of this section shall not be more prominent than that
disclosure.
* * * * *
    (d) Advertisement of terms that require additional disclosure--(1)
Triggering terms. An advertisement that states any of the following
items shall contain the disclosures required by paragraph (d)(2) of
this section, except as provided in paragraphs (e) and (f) of this
section:
    (i) The amount of any payment; or
    (ii) A statement of any capitalized cost reduction or other payment
required prior to or at consummation or by delivery, if delivery occurs
after consummation.
    (2) Additional terms. An advertisement stating any item listed in
paragraph (d)(1) of this section shall also state the following items:
    (i) That the transaction advertised is a lease;
    (ii) The total amount due prior to or at consummation or by
delivery, if delivery occurs after consummation;
    (iii) The number, amounts, and due dates or periods of scheduled
payments under the lease;
    (iv) A statement of whether or not a security deposit is required;
and
    (v) A statement that an extra charge may be imposed at the end of
the lease term where the lessee's liability (if any) is based on the
difference between the residual value of the leased property and its
realized value at the end of the lease term.
* * * * *
    7. Appendix A to part 213 is amended by revising Appendix A-1 and
Appendix A-2 to read as follows:

BILLING CODE 6210-01-P

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    By order of the Board of Governors of the Federal Reserve System,
March 27, 1997.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 97-8200 Filed 3-31-97; 8:45 am]
BILLING CODE 6210-01-C
Last Updated 07/17/1999 communications@fdic.gov