[Federal Register Volume 62, Number 33 (Wednesday, February 19, 1997)]
[Proposed Rules]
[Pages 7363-7373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3955]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 62, No. 33 / Wednesday, February 19, 1997 / 
Proposed Rules

[[Page 7363]]



FEDERAL RESERVE SYSTEM

12 CFR Part 213

[Regulation M; Docket No. R-0961]


Consumer Leasing

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed official staff interpretation.

-----------------------------------------------------------------------

SUMMARY: 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.

FOR FURTHER INFORMATION CONTACT: Kyung H. Cho-Miller or Obrea Otey 
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. For users of 
Telecommunications Devices for the Deaf (TDD) only, contact Dorothea 
Thompson, at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    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 is implemented by the Board's Regulation M 
(12 CFR part 213). An official staff commentary (Supplement I-CL-1 to 
12 CFR part 213) provides guidance to lessors in applying the 
regulation to specific transactions. The CLA requires lessors to 
provide consumers with uniform cost and other disclosures about 
consumer lease transactions. The act 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.
    In September 1996, the Board approved a final rule revising 
Regulation M, after a review of the regulation and consumer leasing 
generally. The review was conducted under the Board's Regulatory 
Planning and Review Program which calls for the periodic review of 
Board regulations with four goals in mind: To clarify and simplify 
regulatory language; to determine whether regulatory amendments are 
needed to address technological and other developments; to reduce undue 
regulatory burden on the industry; and to delete obsolete provisions.
    The Board began the review of Regulation M in November 1993, with 
the publication of an advance notice of proposed rulemaking (58 FR 
61035, November 19, 1993). In September 1995, the Board published a 
proposal revising the regulation and the staff commentary (60 FR 48752, 
September 20, 1995; comment period extended, 60 FR 62349 December 6, 
1995). The proposal contained substantive revisions to the regulation, 
including new disclosure requirements.
    The September 1996 final rule includes new disclosures to 
supplement the act's requirements (61 FR 52246, October 7, 1996). The 
major changes primarily affect motor-vehicle leasing. They include a 
mathematical progression on how scheduled payments are derived (using 
figures such as the gross capitalized cost of a lease, the vehicle's 
residual value, the amount of depreciation, and the rent charge) and a 
warning statement about charges for terminating a lease early. General 
changes in the format of the disclosures require that certain lease 
disclosures be segregated from other information. A lessor is not 
required to disclose the cost of a lease expressed as a percentage 
rate; however, if a rate is disclosed or advertised, a special notice 
must accompany the rate stating that it may not measure the overall 
cost of financing the lease. Further, a rate in an advertisement cannot 
be more prominent than any other Regulation M disclosure.
    The final rule also implements amendments to the CLA contained in 
the Riegle Community Development and Regulatory Improvement Act of 1994 
(Pub. L. 103-325, 108 Stat. 2160), allowing 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) and makes other changes to the advertising rules. The 
CLA's advertising rules were amended and streamlined on September 30, 
1996 when the Congress enacted the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996 (Pub. L. 104-208, 110 Stat. 3009). The 
Board issued a proposal to implement those changes. (62 FR 62, January 
2, 1997.)
    The Board is now publishing an updated proposal to the commentary. 
This proposal includes material that was published for comment in 
September 1995, incorporates guidance on the September 1996 final rule, 
and addresses certain questions raised following public review of the 
final rule. It is contemplated that the proposed revisions to the 
Regulation M commentary will be adopted in final form in April 1997.

[[Page 7364]]

II. Discussion of Proposed Revisions

    The following discussion covers the proposed revisions to the 
Regulation M commentary section-by-section. Most of the discussion 
focuses on new comments and significant revisions to existing comments.

Introduction

    Current comments I-3, I-4, and I-6 would be deleted as obsolete or 
unnecessary. Comments I-1, I-2, and I-5 would be redesignated 
accordingly.

Section 213.1--Authority, Scope, Purpose, and Enforcement

------------------------------------------------------------------------
                  Current                             Proposed          
------------------------------------------------------------------------
1-1.......................................  1-1.                        
1-2.......................................  Deleted as unnecessary (see 
                                             Appendix C).               
------------------------------------------------------------------------

Section 213.2--Definitions

2(a)  Definitions

------------------------------------------------------------------------
                  Current                             Proposed          
------------------------------------------------------------------------
2(a)(2)-1.................................  2(b)-1 and -2; including    
                                             text from former Sec.      
                                             213.2(a)(2).               
2(a)(2)-2.................................  2(b)-3.                     
                                            2(d)-1 new.                 
2(a)(4)-1.................................  2(h)-1; includes text from  
                                             former Sec.  213.2(a)(4).  
2(a)(4)-2.................................  2(h)-4.                     
2(a)(4)-3.................................  2(h)-2.                     
2(a)(6)-1.................................  2(e)-1.                     
2(a)(6)-2.................................  2(e)-2.                     
                                            2(e)-3 new.                 
2(a)(6)-3.................................  2(e)-6.                     
2(a)(6)-4.................................  2(e)-4.                     
                                            2(e)-5 new; includes text   
                                             from former Sec.           
                                             213.2(a)(3).               
2(a)(6)-5.................................  2(e)-8.                     
2(a)(6)-6.................................  2(e)-7.                     
                                            2(f)-1 new.                 
2(a)(7)-1.................................  2(g)-1.                     
2(a)(8)-1.................................  2(h)-3.                     
2(a)(9)-1.................................  2(j)-1.                     
2(a)(12)-1................................  2(l)-1.                     
2(a)(14)-1 and -2.........................  2(m)-1 and -2.              
2(a)(14)-3 and -4.........................  2(m)-3.                     
2(a)(14)-5................................  2(m)-4.                     
2(a)(14)-6................................  4(l)-2.                     
2(a)(15)-1................................  2(o)-2.                     
2(a)(15)-2................................  2(o)-1; includes text from  
                                             former Sec.  213.2(a)(15). 
2(a)(15)-3................................  2(o)-3.                     
2(a)(17)-1 through -5.....................  Deleted as unnecessary.     
2(a)(18)-1 through -3.....................  Deleted as unnecessary.     
2(b)-1....................................  Deleted as unnecessary.     
2(b)-2....................................  4(b)-1.                     
------------------------------------------------------------------------

2(b)  Advertisement
    Comment 2(b)-1, current comment 2(a)(2)-1, would be revised to 
include examples of advertisements formerly in Sec. 213.2(a)(2) and to 
indicate that the term ``advertisement'' includes electronic messages.
2(d)  Closed-end Lease
    Proposed comment 2(d)-1 provides general guidance on the definition 
of a closed-end lease.
2(e)  Consumer Lease
    Comment 2(e)-2, current comment 2(a)(6)-2, would be revised to 
clarify that leases with penalties for not continuing beyond an initial 
four months are covered under the regulation.
    Proposed comment 2(e)-3 provides guidance on the total contractual 
obligation for purposes of determining whether a lease is covered under 
the regulation, and indicates that the total contractual obligation may 
be different from the total of payments disclosed under Sec. 213.4(e).
    Proposed comment 2(e)-5 incorporates former Sec. 213.2(a)(3), the 
statutory definition of agricultural purpose in section 103(s) of the 
TILA.
    Comment 2(e)-7, current comment 2(a)(6)-6, would be revised to add 
another example of a lease deemed incidental to a service. The narrow 
list of exceptions is exhaustive, rather than illustrative. Questions 
have arisen about Regulation M coverage of cellular phones leased in 
conjunction with obtaining cellular service. Cellular service providers 
typically offer customers the opportunity to lease or purchase cellular 
telephones when subscribing for cellular service. The leasing of a 
cellular telephone is not incidental to obtaining cellular service and 
is, thus, covered under the regulation.
2(f)  Gross Capitalized Cost
    Proposed comment 2(f)-1 provides guidance on what type of fees are 
included or excluded from the gross capitalized cost disclosure in 
Sec. 213.4(f)(1).
2(h)  Lessor
    Comment 2(h)-1, current comment 2(a)(4)-1, would be revised to 
include the definition of the phrase ``arrange for leasing of personal 
property'' in former Sec. 213.2(a)(4).
2(m)  Realized Value
    Comment 2(m)-3 provides guidance on what is included or what may be 
excluded from the realized value, combining current comments 2(a)(14)-3 
and -4. The second and third sentences of current comment 2(a)(14)-4 
are deleted as unnecessary.
2(o)  Security Interest and Security
    Comment 2(o)-1, current comment 2(a)(15)-2, would be revised to 
include examples of a security interest formerly in Sec. 213.2(a)(15).
    Questions have arisen about whether interest on a security deposit 
meets the definition of a security interest for purposes of this 
regulation and thus required to be disclosed. Such interest is required 
to be disclosed if it is considered a security interest under state or 
other applicable law.

Section 213.3--General Disclosure Requirements

3(a)  General Requirements

------------------------------------------------------------------------
                  Current                             Proposed          
------------------------------------------------------------------------
4(a)-1....................................  3(a)-1.                     
4(a)-2....................................  Moved to Sec.  213.3(f).    
4(a)-3....................................  3(a)(1)-1.                  
4(a)-4....................................  3(a)-4.                     
4(a)-5....................................  Deleted as unnecessary.     
4(a)(1)-1.................................  3(a)-2 and -3.              
4(a)(1)-2.................................  Deleted as unnecessary.     
4(a)(2)-1.................................  4(b)-1.                     
4(a)(2)-2.................................  3(a)(1)-2.                  
                                            3(a)(1)-3 new.              
4(a)(2)-3.................................  3(a)(1)-4.                  
4(a)(2)-4.................................  Deleted as unnecessary.     
4(a)(2)-5.................................  3(a)(1)-5.                  
                                            3(a)(2)-1 through -3 new.   
4(a)(4)-1.................................  Deleted as unnecessary, see 
                                             revised Sec.  213.3(a)(4). 
4(a)(4)-2.................................  Deleted as unnecessary, see 
                                             revised Sec.  213.3(a)(4). 
4(b)-1....................................  3(b)-1.                     
4(c)-1....................................  3(c)-1.                     
4(d)-1 through -5.........................  3(d)(1)-1 through -5.       
4(d)-6....................................  Deleted as unnecessary.     
4(e)-1 and -2.............................  3(e)-1 and -2.              
                                            3(e)-3 new; text from       
                                             footnote 1 of former       
                                             regulation.                
------------------------------------------------------------------------

3(a)  General Requirements
    Comment 3(a)-1, current comment 4(a)-1, would be revised to clarify 
that leasing disclosures must reflect the terms of the legal 
obligation.
    Comment 3(a)-4, current comment 4(a)-4, would be revised to provide 
guidance on disclosing a prior lease or loan balance added to a lease 
transaction.
3(a)(1)  Form of Disclosures
    Proposed comment 3(a)(1)-3 provides guidance on disclosing the 
lessor's address.
    Comment 3(a)(1)-5, current comment 4(a)(2)-5, 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.

[[Page 7365]]

3(a)(2)  Segregation of Certain Disclosures
    Proposed comment 3(a)(2)-1 provides general guidance on the 
location of the segregated disclosures referenced in Sec. 213.3(a)(2).
    Proposed comment 3(a)(2)-2 restates the general rule on including 
additional information among the segregated disclosures referenced in 
Sec. 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)-1, current comment 4(b)-1, 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)-4, 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 of Disclosures

------------------------------------------------------------------------
                  Current                             Proposed          
------------------------------------------------------------------------
                                            4(a)-1 new.                 
4(g)-1....................................  Deleted as unnecessary.     
4(g)-2....................................  3(a)(1)-3; date requirement 
                                             moved to Sec.  213.3(a)(1).
4(g)(1)-1.................................  Deleted as unnecessary.     
4(g)(2)-1.................................  Deleted as unnecessary.     
4(g)(2)-2.................................  4(b)-1 (incorporates current
                                             comment 2(b)-2)).          
4(g)(2)-3.................................  4(b)-2.                     
                                            4(b)-3 new (incorporated    
                                             from the instructions to   
                                             the model form in former   
                                             appendix C-2).             
                                            4(b)-4 through -6 new.      
4(g)(3)-1.................................  Deleted as unnecessary.     
4(g)(3)-2.................................  4(c)-1; reference to open-  
                                             end lease deleted.         
4(g)(4)-1.................................  4(n)-1.                     
4(g)(5)-1.................................  4(d)-1 and -2.              
4(g)(5)-2.................................  Deleted as unnecessary; see 
                                             Sec.  213.3(a)(2).         
                                            4(d)-3 new.                 
4(g)(5)-3.................................  4(d)-4.                     
4(g)(5)-4.................................  4(d)-5.                     
                                            4(d)-6 new.                 
                                            4(e)-1 new.                 
                                            4(f)-1 new.                 
                                            4(f)(1)-1 and -2 new.       
                                            4(f)(2)-1 new.              
                                            4(f)(8)-1 new.              
                                            4(o)-1 new.                 
4(g)(6)-1.................................  4(o)-2.                     
4(g)(6)-2.................................  4(o)-3.                     
4(g)(7)-1 through -3......................  4(p)-1 through -3.          
4(g)(8)-1.................................  4(h)-1.                     
                                            4(h)-2 new.                 
4(g)(9)-1.................................  4(r)-1.                     
4(g)(10)-1 through -5.....................  4(q)-1 through -5.          
4(g)(11)-1 through -3.....................  4(i)-1 through -3.          
                                            4(i)-4 and -5 new.          
4(g)(12)-1................................  4(g)(1)-3; the word         
                                             ``capitalized'' is deleted.
4(g)(12)-2................................  4(g)(1)-4.                  
4(g)(12)-3................................  4(g)(1)-1.                  
                                            4(g)(1)-2 new.              
                                            4(j)-1 new.                 
4(g)(14)-1 through -3.....................  4(l)-1 through -3.          
                                            4(m)-1 new.                 
4(g)(15)-1................................  4(m)(2)-1.                  
4(g)(15)-2................................  deleted.                    
                                            4(m)(1)-1 new.              
4(g)(15)-3................................  deleted.                    
4(g)(15)-4................................  4(m)(2)-2.                  
4(g)(15)-5................................  deleted.                    
4(g)(15)-6................................  4(m)(2)-3.                  
                                            4(s)-1 new.                 
------------------------------------------------------------------------

4(a)  Description of Property
    Proposed comment 4(a)-1 clarifies that the description of leased 
property cannot be among the segregated disclosures.
4(b)  Total Amount Due at Lease Signing
    Comment 4(b)-1 would incorporate the first sentence of current 
comment 2(b)-2 on consummation.
    Proposed comment 4(b)-3 incorporates a definition of ``capitalized 
cost reduction'' from the instructions in former appendix C-1 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 
agreed-upon trade-in value.
    Proposed comment 4(b)-5 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 another.
4(d)  Other Charges
    Comment 4(d)-1, current comment 4(g)(5)-1, would be revised to 
provide flexibility in making the ``other charges'' disclosure.
    Proposed comment 4(d)-3 clarifies that third-party charges are not 
disclosed under Sec. 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)-1 explains the additional statement in the 
total of payments disclosure for open-end leases.
4(f)  Payment Calculation
    Proposed comment 4(f)-1 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)-1 provides guidance on disclosing the 
agreed upon value of a leased motor vehicle.
    Proposed comment 4(f)(1)-2 provides guidance on providing the 
itemization of the gross capitalized cost.
4(f)(2)  Capitalized Cost Reduction
    Proposed comment 4(f)(2)-1 provides guidance on the amounts not 
included in the capitalized cost reduction disclosure.
4(f)(8)  Lease Term
    Proposed comment 4(f)(8)-1 clarifies the meaning of the phrase 
``lease term'' referenced under Sec. 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)-2 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 available.
4(i)  Purchase Option
    Proposed comment 4(i)-5 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)(11)-3, would be revised to allow lessors 
flexibility in disclosing fees associated with a purchase-option price. 
Further, with the September 1996

[[Page 7366]]

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 Sec. 213.4(i) and not Sec. 213.4(d).
4(j)  Statement Referencing Nonsegregated Disclosures
    Proposed comment 4(j)-1 clarifies that inapplicable information may 
be deleted from the Sec. 213.4(j) disclosure, which references and 
alerts consumers to read CLA required disclosures not included among 
the segregated disclosures.
4(l)  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 Sec. 213.4(g)(15), 
for clarity. The commentary has been similarly reformatted.
    Proposed comment 4(m)-1 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 Sec. 213.4(m), even if those actions are 
decided in favor of the lessor.
4(n)  Fees and Taxes
    Proposed comment 4(n)-1 provides guidance on what taxes are 
disclosed under Sec. 213.4(n).
4(o)  Insurance
    Proposed comment 4(o)-1 provides that Sec. 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)-2, is revised to provide 
additional guidance on the disclosure of mechanical breakdown 
insurance.
4(p)  Warranties or Guarantees
    Comment 4(p)-1, current comment 4(g)(7)-1, would be revised to 
provide further guidance on identifying warranties under Sec. 213.4(p), 
when lessors provide a comprehensive list of warranties to lessees.
4(s)  Limitation on Rate Information
    Proposed comment 4(s)-1 clarifies that a lease rate may not be 
included among the segregated disclosures referenced in 
Sec. 213.3(a)(2).

Section 213.5--Renegotiations, Extensions, and Assumptions

    Section 213.5, formerly Sec. 213.4(h), contains the disclosure 
rules governing leases that are renegotiated, extended, or assumed. 
Many of the commentary provisions have been moved to the regulation. 
For example, the definitions of a renegotiation and an extension have 
been included in the regulation. This change parallels the approach 
under Regulation Z for refinancings and assumptions, 12 CFR 226.20.

------------------------------------------------------------------------
                  Current                             Proposed          
------------------------------------------------------------------------
4(h)-1....................................  5-1.                        
4(h)-2....................................  First sentence moved to Sec.
                                              213.5(a); second sentence 
                                             deleted; third sentence    
                                             moved to 5-1.              
4(h)-3....................................  Moved to Sec.  213.5(d).    
4(h)-4....................................  Moved to Sec.  213.5(b).    
4(h)-5....................................  5(b)-1.                     
                                            5(b)-2 new.                 
4(h)-6....................................  Deleted as unnecessary.     
4(h)-7....................................  Moved to Sec.  213.5(d)(6). 
4(h)-8....................................  Moved to Sec.  213.5(d)(2). 
4(h)-9....................................  Moved to Sec.  213.5(c).    
------------------------------------------------------------------------

5(b)  Extension
    Comment 5(b)-1, current comment 4(h)-5, would be revised to clarify 
that if a consumer lease is extended on a month-to-month basis for more 
than six months, new disclosures are required at the beginning of the 
seventh month, and also at the start of each seventh month thereafter. 
This revision incorporates into the commentary a longstanding 
interpretation originally issued under leasing provisions that were a 
part of Regulation Z (Truth in Lending) prior to 1982.
    Proposed comment 5(b)-2 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-to-month nature of the 
transaction.

Section 213.7--Advertising

------------------------------------------------------------------------
                  Current                             Proposed          
------------------------------------------------------------------------
5(a)-1....................................  7(a)-1.                     
5(a)-2....................................  7(a)-2.                     
5(b)-1 and 2..............................  7(c)-1 and 2.               
5(c)-1....................................  7(b)-1.                     
5(c)-2....................................  7(d)(1)-1.                  
                                            7(d)(2)-1 new.              
5(d)-1....................................  Deleted.                    
                                            7(e)-1 new.                 
                                            7(f)(1)-1 through -4 new.   
------------------------------------------------------------------------

    The CLA advertising provisions were amended on September 30, 1996 
by the Economic Growth and Regulatory Paperwork Reduction Act of 1996. 
The final rule revising the commentary will reference the revised 
provisions in the regulation that implement the statutory changes.
7(b)  Clear and Conspicuous Standard
    Proposed comment 7(b)-1 provides guidance on the clear and 
conspicuous standard. A comment in the September 1995 proposal which 
provided that lease disclosures must appear on a television screen for 
at least five seconds has been deleted. The comment was intended as 
guidance on the clear and conspicuous standard. It did not provide a 
safe harbor, as the ``five second'' rule may be inadequate as a test 
for determining full compliance with the clear and conspicuous 
standard.
7(b)(1)  Amount Due at Lease Signing
    Proposed comment 7(b)(1)-1 clarifies that an itemization of the 
amount due at lease signing or delivery is not required under 
Sec. 213.7(b)(1).
    Proposed comment 7(b)(1)-2 provides general guidance on the 
prominence rule in Sec. 213.7(b)(1).
7(b)(2)  Advertisement of a Lease Rate
    Proposed comment 7(b)(2)-1 provides guidance on the location of the 
statement that must accompany any percentage rate stated in an 
advertisement.
7(d)  Advertisement of Terms That Require Additional Disclosure
7(d)(2)  Additional Terms
    Commenters requested clarification on how third-party fees that 
vary by jurisdiction such as taxes, licenses and registration fees 
should be reflected in the total amount due at lease signing disclosure 
under Sec. 213.7(d)(2)(ii). Comment 7(d)(2)-2 provides lessors 
flexibility in disclosing such fees.
7(e)  Alternative Disclosures--Merchandise Tags
    Proposed comment 7(e)-1 provides general guidance on disclosing 
multiple item leases with merchandise tags.
7(f)  Alternative Disclosures--Television or Radio Advertisements
7(f)(1)  Toll-Free Number or Print Advertisement
    Proposed comment 7(f)(1)-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)-2 provides guidance on establishing a 
number for

[[Page 7367]]

consumers to call for disclosure information.
    Proposed comment 7(f)(1)-3 provides guidance on the use of a multi-
function toll-free number to provide disclosures.
    Proposed comment 7(f)(1)-4 provides general guidance on the 
statement that must accompany a toll-free number instructing consumers 
to call the number for details about costs and terms.

Section 213.8  Record Retention

------------------------------------------------------------------------
              Current                              Proposed             
------------------------------------------------------------------------
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    Section 213.8 of the regulation was formerly Sec. 213.6.

Section 213.9  Relations to State Laws

    Section 213.9 of the regulation combines and simplifies former 
Secs. 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-1 would be revised to indicate that changes to 
the headings, format, and the content of the segregated disclosures 
should be minimal. Also the definition of a closed-end lease in comment 
app. A-3 would be deleted because a definition has been added in the 
regulation.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-0961 and, when 
possible, should use a standard courier typeface with a type size of 10 
or 12 characters per inch. This will enable the Board to convert the 
text to machine-readable form through electronic scanning, and will 
facilitate automated retrieval of comments for review. Also, if 
accompanied by an original document in paper form, comments may be 
submitted on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any IBM-
compatible 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 
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.

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, 12 CFR part 213 is 
proposed to be amended 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. Supplement I to Part 213--Official Staff Commentary to 
Regulation M would be revised to read as follows:
    Supplement I to Part 213--Official Staff Commentary to Regulation M

Introduction

    1. Official status. The commentary in this supplement I is the 
vehicle by which 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 compliance with this 
commentary affords protection from liability under section 130(f) of 
the Truth in Lending Act (15 U.S.C. 1640f). Section 130(f) protects 
lessors from civil liability for any act done or omitted in good 
faith in conformity with any interpretation issued by a duly 
authorized official or employee of the Federal Reserve System.
    2. Procedures for requesting interpretations. Under appendix C 
of Regulation M, anyone may request an official staff 
interpretation. Interpretations that are adopted will be 
incorporated in this commentary following publication in the Federal 
Register. No official staff interpretations are expected to be 
issued other than by means of this commentary.
    3. Comment designations. Each comment in the commentary is 
identified by a number and the regulatory section or paragraph that 
it interprets. The comments are designated with as much specificity 
as possible according to the particular regulatory provision 
addressed. For example, some of the comments to Sec. 213.4(f) are 
further divided by subparagraph, such as comment 4(f)(1)-1 and 
comment 4(f)(2)-1. In other cases, comments have more general 
application and are designated, for example, as comment 4(a)-1. This 
introduction may be cited as comments I--1 through I--3. An appendix 
may be cited as comment app. A--1.

Section 213.1--Authority, Scope, Purpose, and Enforcement

    1. Foreign applicability. Regulation M applies to all persons 
(including branches of foreign banks or leasing companies located in 
the United States) that offer consumer leases to residents 
(including resident aliens) of any state as defined in 
Sec. 213.2(p). The regulation does not apply to a foreign branch of 
a U.S. bank or to a leasing company leasing to a U.S. citizen 
residing or visiting abroad or to a foreign national abroad.

Section 213.2--Definitions

    2(b) Advertisement.
    1. Coverage. The term advertisement includes messages inviting, 
offering, or otherwise generally announcing to prospective customers 
the availability of consumer leases, whether in visual, oral, print 
or electronic media. Examples include:
    i. Messages in newspapers, magazines, leaflets, catalogs, and 
fliers.
    ii. Messages on radio, television, and public address systems.
    iii. Direct mail literature.
    iv. Printed material on any interior or exterior sign or 
display, in any window display, in any point-of-transaction 
literature or price tag that is delivered or made available to a 
lessee or prospective lessee in any manner 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 written communications 
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 
mandates that specific information be displayed and only the 
mandated information is included in the notice.
    iv. News articles controlled by the news medium.
    v. Market research or educational materials that do not solicit 
business.
    3. Persons covered. See the commentary to Sec. 213.7(a).
    2(d) Closed-end lease.
    1. General. In closed-end leases, sometimes referred to as 
``walk-away'' leases, the lessee is not responsible for the residual 
value of the leased property at the end of the lease term.
    2(e) Consumer lease.
    1. Primary purposes. A lessor must determine in each case if the 
leased property will be used primarily for personal, family, or 
household purposes. If a question exists as to the primary purpose 
for a lease, the fact that a lessor gives disclosures is not 
controlling on the question of whether the transaction was exempt. 
The primary purpose of a lease is determined before or at 
consummation and a lessor need not provide Regulation M disclosures 
where there is a subsequent change in primary usage.
    2. Period of time. To be a consumer lease, the initial term of 
the lease must be more than four months. Thus, a lease of personal 
property for four months, three months or on a month-to-month or 
week-to-week basis (even though the lease actually extends beyond 
four months) is not a consumer lease and is not subject to the 
disclosure

[[Page 7368]]

requirements of the regulation. However, a lease that imposes a 
penalty for not continuing a lease beyond four months is considered 
to have a term of more than four months. To illustrate:
    i. A month-to-month lease with a penalty, such as the forfeiture 
of a security deposit for terminating before one year, is subject to 
the regulation.
    ii. A three-month lease extended on a month-to-month basis and 
terminated 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 payments 
disclosed under Sec. 213.4(e). The total contractual obligation 
includes nonrefundable amounts a lessee is contractually obligated 
to pay to the lessor. The term excludes:

i. Residual value amounts or purchase-option prices;
ii. Amounts collected by the lessor but paid to a third party, such 
as taxes, license and registration fees.

    4. Credit sale. The regulation does not cover a lease that meets 
the definition of a credit sale in Regulation Z, 12 CFR 
226.2(a)(16), which is defined, in part, as ``a bailment or lease 
(unless terminable without penalty at any time by the consumer) 
under which the consumer:

i. Agrees to pay as compensation for use a sum substantially 
equivalent to, or in excess of, the total value of the property and 
services involved; and
ii. Will become (or has the option to become), for no additional 
consideration or for nominal consideration, the owner of the 
property upon compliance with the agreement.''

    5. Agricultural purpose. Agricultural purpose means a purpose 
related to the production, harvest, exhibition, marketing, 
transportation, processing, or manufacture of agricultural products 
by a natural person who cultivates, plants, propagates, or nurtures 
those agricultural products, including but not limited to the 
acquisition of personal property and services used primarily in 
farming. Agricultural products include horticultural, viticultural, 
and dairy products, livestock, wildlife, poultry, bees, forest 
products, fish and shellfish, and any products thereof, including 
processed and manufactured products, and any and all products raised 
or produced on farms and any processed or manufactured products 
thereof.
    6. Organization. A consumer lease does not include a lease made 
to an organization such as a corporation or a government agency or 
instrumentality. Such a lease is not covered by the regulation even 
if the leased property is used (by an employee, for example) 
primarily for personal, family or household purposes, or is 
guaranteed by or subsequently assigned to a natural person.
    7. Leases of personal property incidental to a service. The 
following leases of personal property are deemed incidental to a 
service and thus are not subject to the regulation:
i. Home entertainment systems requiring the consumer to lease 
equipment that enables a television to receive the transmitted 
programming.
ii. Security alarm systems requiring the installation of leased 
equipment intended to monitor unlawful entries into a home.
iii. Propane gas service where the consumer must lease a propane 
tank to receive the service.
    8. Safe deposit boxes. The lease of a safe deposit box is not a 
consumer lease under Sec. 213.2(e).
    2(f) Gross capitalized cost.
    1. Charges paid at lease signing. The gross capitalized cost 
figure includes only those fees, charges, and other items, such as a 
prior unpaid lease balance, that are capitalized or amortized 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 of a lease. To ``arrange'' for the lease of personal 
property means to provide or offer to provide a lease that is or 
will be extended by another person under a business or other 
relationship pursuant to which the person arranging the lease (a) 
receives or will receive a fee, compensation, or other consideration 
for the service or (b) has knowledge of the lease terms and 
participates in the preparation of the contract documents required 
in connection with the lease. To illustrate:
    i. An automobile dealer who, pursuant to a business 
relationship, completes the necessary lease agreement before 
forwarding it to the leasing company (to whom the obligation is 
payable on its face) for execution is ``arranging'' for the lease.
    ii. An automobile dealer who, receiving no fee for the service, 
refers a customer to a leasing company that will prepare all 
relevant contract documents is not ``arranging'' for the lease.
    2. Consideration. The term ``other consideration'' as used in 
comment 2(h)-1 refers to an actual payment corresponding to a fee or 
similar compensation and not to intangible benefits, such as the 
advantage of increased business, which may flow from the 
relationship between the parties.
    3. Assignees. An assignee may be a lessor for purposes of the 
regulation in circumstances such as those described in Ford Motor 
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 Truth in Lending Act and Regulation Z because of its 
substantial involvement in the credit transaction.
    4. Multiple lessors. See the commentary to Sec. 213.3(c).
    2(j) Organization.
    1. Coverage. The term organization includes joint ventures and 
persons operating under a business name.
    2(l) Personal property.
    1. Coverage. Whether property is personal property depends on 
state or other applicable law. For example, a mobile home or 
houseboat may be considered personal property in one state but real 
property in another.
    T32(m) Realized value.
    1. General. Realized value refers to the value of the leased 
property at early termination or at the end of the lease term. It is 
not a required disclosure. It may be either the retail or wholesale 
value. Realized value is relevant only to leases in which the 
lessee's liability at early termination or at the end of the lease 
term is the difference between 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 
determining the lessee's liability at the end of the lease term or 
at early termination in one of the three ways stated in 
Sec. 213.2(m). If the lessor sells the property prior to making that 
determination, the price received for the property is the realized 
value. If the lessor does not sell the property prior to making that 
determination, the lessor may choose either the highest offer or the 
fair market value as the realized value.
    3. Determination of realized value. Disposition charges are 
included in determining the realized value but amounts attributable 
to taxes may be excluded.
    4. Offers. In determining the highest offer for disposition, the 
lessor may disregard offers that an offeror has withdrawn or is 
unable or unwilling to perform.
    5. Lessor's appraisal. See commentary to Sec. 213.4(l).
    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 company and takes assignments of consumer 
leases generated by that company 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 must be disclosed only if it is considered a security 
interest under state or other applicable law. The term includes, but 
is not limited to, security interests under the Uniform Commercial 
Code; real property mortgages, deeds of trust and other consensual 
or confessed liens whether or not recorded; mechanic's, 
materialman's, artisan's, and other similar liens; vendor's liens in 
both real and personal property; liens on property arising by 
operation of law; and any interest in a lease when used to secure 
payment or performance of an obligation.
    3. Insurance exception. The lessor's right to insurance proceeds 
or unearned insurance premiums is not a security interest for 
purposes of this regulation.

Section 213.3--General Disclosure Requirements

    3(a) General requirements.
    1. Basis of disclosures. Disclosures must reflect the terms of 
the legal obligation between the parties. For example:
    i. In a three-year lease with no penalty for termination after a 
one-year minimum term,

[[Page 7369]]

disclosures should be based on the full three-year term of the 
lease. The one-year minimum term is only relevant to the early 
termination provisions of Secs. 213.4(g)(1), (k) and (l).
    2. Clear and conspicuous standard. The clear and conspicuous 
standard requires that disclosures be reasonably understandable. For 
example, the disclosures must be presented in a way that does not 
obscure the relationship of the terms to each other. Appendix A of 
this part contains model forms that meet this standard. In addition, 
although no minimum typesize is required, the disclosures must be 
legible, whether typewritten, handwritten, or printed by computer.
    3. Multipurpose disclosure forms. A lessor may use a 
multipurpose disclosure form that enables the lessor to designate 
the specific disclosures applicable to a given transaction, 
consistent with the requirement that disclosures be clearly and 
conspicuously provided.
    4. Number of transactions. Lessors have flexibility in handling 
lease transactions that may be viewed as multiple transactions. For 
example:
    i. When a lessor leases two items to the same lessee on the same 
day, the lessor may disclose the leases as either one or two lease 
transactions.
    ii. When a lessor sells insurance or other incidental services 
in connection with a lease, the lessor may disclose in one of two 
ways: a single lease transaction or a lease and a credit sale 
transaction.
    iii. When a lessor includes an outstanding lease or loan balance 
in a lease transaction, the lessor may disclose the prior loan or 
lease balance as part of a single lease transaction or may disclose 
it as a separate credit transaction.
    3(a)(1) Form of 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 of parties. While disclosures must be made 
clearly and conspicuously, lessors are not required to use the word 
``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. Multiple lessors and lessees. In transactions involving 
multiple lessors and multiple lessees, a single lessor may make all 
the disclosures to a single lessee as long as the disclosure 
statement identifies all the lessors and lessees.
    5. Lessee's signature. The regulation does not require that the 
lessee sign the disclosure statement, whether disclosures are 
separately provided or are part 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 the disclosure statement or an acknowledgement of receipt, may 
place disclosures that are included in the lease documents above the 
lessee's signature, or may include instructions alerting a lessee to 
read the disclosures prior to signing the lease.
    3(a)(2) Segregation of certain disclosures.
    1. Location. The segregated disclosures referred to in 
Sec. 213.3(a)(2) may be provided on a separate document and the 
other required disclosures may be provided in the lease contract, so 
long as all disclosures are given at the same time.
    2. Additional information among segregated disclosures. The 
disclosures required to be segregated may contain only the 
information required or permitted to be included among the 
segregated disclosures (see comments to Sec. 213.4 for guidance on 
additional information in the segregated disclosures).
    3. Substantially similar. See commentary to appendix A of this 
part.
    3(b) Additional information; nonsegregated disclosures.
    1. State law disclosures. A lessor may include among the 
nonsegregated disclosures any state law disclosures that are not 
inconsistent with the act and regulation under Sec. 213.9, as long 
as they are not used or placed to mislead or confuse or detract from 
any disclosure required by the regulation in accordance with the 
standard set forth in Sec. 213.3(b) for additional information.
    3(c) Multiple lessors or lessees.
    1. Multiple lessors. If a single lessor provides disclosures to 
a lessee on behalf of several lessors, all disclosures for the 
transaction must be given, even if the lessor making the disclosures 
would not otherwise have been obligated to make a particular 
disclosure.
    3(d) Use of estimates.
    3(d)(1) Standard.
    1. Time of estimated disclosure. The lessor may use estimates to 
make disclosures if necessary information is unknown or unavailable 
at the time the disclosures are made. For example:
    i. Section 213.4(n) requires the lessor to disclose the total 
amount payable by the lessee during the lease term for official and 
license fees, registration, certificate of title fees, or taxes. If 
these amounts 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 time of the disclosure.
    2. Basis of estimates. Estimates must be made on the basis of 
the best information reasonably available at the time 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 might look 
to the consumer to determine the purpose for which leased property 
will be used, to insurance companies for the cost of insurance, or 
to an automobile manufacturer or dealer for the date of delivery.
    3. Residual value of leased property at termination. When the 
lessee's liability at the end of the lease term is based on the 
residual value of the leased property as determined at consummation, 
the estimate of the residual value must be reasonable and based on 
the best information reasonably available to the lessor (see 
Sec. 213.4(m)). A lessor may use a generally accepted trade 
publication listing estimated current or future market 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 three-year 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 wholesale value 
derived from a generally accepted trade publication listing current 
wholesale values, if the trade publication is the best information 
available.
    ii. Same facts as above, except that the lessor discloses an 
estimated 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 estimated values quoted in trade publications based on the 
lessor's experience or reasonable belief that the values will be 
understated or overstated.
    4. Retail or wholesale value. The lessor may choose either a 
retail or a wholesale value in estimating the value of leased 
property at termination, provided the choice is consistent with the 
lessor's general practice or intention when determining the value of 
the property at the end of the lease term. The lessor should 
indicate whether the value disclosed is a retail or wholesale value.
    5. Labelling estimates. Generally, only the disclosure for which 
the exact information is unknown is labelled as an estimate. 
Nevertheless, when several disclosures are affected because of the 
unknown information, the lessor has the option of labelling as an 
estimate every affected disclosure or only the disclosure primarily 
affected.
    3(e) Effect of subsequent occurrence.
    1. Subsequent occurrences. Examples of subsequent occurrences 
include:
    i. An agreement between the lessee and lessor to change from a 
monthly to a weekly payment schedule.
    ii. An increase in official fees or taxes.
    iii. An increase in insurance premiums or coverage caused by a 
change in the law.
    iv. Late delivery of an automobile caused by a strike.
    2. Redisclosure. When a disclosure becomes inaccurate because of 
a subsequent occurrence, the lessor need not make new disclosures 
unless new disclosures are required under Sec. 213.5.
    3. Lessee's failure to perform. The lessor does not violate the 
regulation if a previously given disclosure becomes inaccurate when 
a lessee fails to perform obligations under 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 performed obligations contracted for in the lease is not a 
violation of the regulation.

Section 213.4--Content of Disclosures

    4(a) Description of property.
    1. Placement of description. Although the description of leased 
property may not be included among the segregated disclosures, a

[[Page 7370]]

lessor may choose to place the description directly above the 
segregated disclosures.
    4(b) Amount due at lease signing.
    1. Consummation. When a contractual relationship is created 
between the lessor and the lessee is a matter to be determined under 
state or other applicable law.
    2. Fees payable upon delivery. This paragraph does not apply to 
fees paid at delivery, when delivery occurs after consummation. For 
example, if the lessee agrees to pay registration fees, sales taxes, 
and a delivery charge on the date the automobile is delivered 
sometime after consummation, none of these charges is an initial 
payment under Sec. 213.4(b). The registration fees and sales taxes 
are disclosed under Sec. 213.4(n), and the delivery charge is 
disclosed as an ``other charge'' under Sec. 213.4(d).
    3. Capitalized cost reduction. A capitalized cost reduction is a 
payment in the nature of a downpayment that reduces the amount of 
the leased property to be capitalized over the term of the lease. 
This amount does not include any amounts included in a periodic 
payment paid at lease signing.
    4. ``Negative'' equity trade-in allowance. If an amount owed on 
a prior lease or loan exceeds an agreed upon trade-in value, the 
difference is not reflected as a negative trade-in allowance under 
Sec. 213.4(b). The lessor may disclose the trade-in allowance as 
zero, not applicable, or leave a blank line.
    5. Rebates. Only rebates applied toward an amount due at lease 
signing are required to be disclosed under Sec. 213.4(b).
    6. Balance sheet approach. In motor vehicle leases, the total 
for the column labeled ``total amount due at lease signing'' must 
equal the total for the column labeled ``how the amount due at lease 
signing will be paid.''
    4(c) Payment schedule and total amount of periodic payments.
    1. Periodic payments. The phrase ``number, amount, and due dates 
or periods of payments'' requires the disclosure of all payments 
made periodically, including taxes, maintenance and insurance 
charges. In addition, the lessor must disclose the total of the 
periodic payments.
    4(d) Other charges.
    1. Coverage. Section 213.4(d) requires the disclosure of charges 
that are anticipated by the parties as incident to the normal 
operation of the lease agreement. If a lessor is unsure whether a 
particular fee is an ``other charge,'' the lessor may disclose the 
fee as such without violating Sec. 213.4(d) or the segregation rule 
under Sec. 213.3(a)(2).
    2. Excluded charges. This section does not require disclosure of 
charges that are imposed when the lessee terminates 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 fees and charges. Third-party fees or charges 
collected by the lessor on behalf of third parties, such as taxes, 
are not disclosed under Sec. 213.4(d).
    4. Relationship to other provisions. The other charges mentioned 
in this paragraph are charges that are not required to be disclosed 
under another provision of Sec. 213.4. To illustrate:
    i. A delivery charge that is paid after consummation is 
disclosed as an ``other charge.'' A delivery charge that is paid at 
consummation, however, is disclosed as part of the amount due at 
lease signing under Sec. 213.4(b), not as an ``other charge.''
    ii. Occasionally, the price of a mechanical breakdown protection 
(MBP) contract is disclosed as an ``other charge.'' More often, the 
price of MBP is reflected in the periodic payment disclosure under 
Sec. 213.4(c), in which case it is not disclosed as an ``other 
charge.'' In states where MBP is regarded as insurance, however, the 
cost should be disclosed in accordance with Sec. 213.4(o), not as an 
``other charge.''
    5. Lessee's liabilities at the end of the lease term. 
Liabilities that the lease imposes upon the lessee at the end of the 
scheduled lease term and that must be disclosed under this section 
include disposition and ``pick-up'' charges.
    6. Optional ``disposition'' charges. Disposition charges (and 
similar charges) that are anticipated by the parties as an incident 
to the normal operation of the lease agreement must be disclosed 
under Sec. 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, under 
Sec. 213.4(d), the lessor must disclose the highest amount charged. 
In such circumstances, 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 imposed 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 under Sec. 213.4(q).
    4(e) Total of payments.
    1. Open-end lease. An additional statement is required under 
Sec. 213.4(e) for open-end leases because, with some limitations, a 
lessee is liable for the difference between the residual and 
realized values of the leased property.
    4(f) Payment calculation.
    1. Motor-vehicle lease. Whether leased property is a motor 
vehicle is determined by state or other applicable law.
    4(f)(1) Gross capitalized cost.
    1. Agreed upon value of the vehicle. The agreed upon value of a 
motor vehicle is the amount for the vehicle agreed upon by the 
lessor and lessee for purposes of the lease. This includes the 
amount 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 maintenance 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. Itemization of the gross capitalized cost. The lessor may 
choose to provide the itemization of the gross capitalized cost as a 
matter of course or only on request. In either case, the itemization 
must be provided at the same time as the other disclosures required 
by Sec. 213.4. The itemization may not be included among the 
segregated disclosures.
    4(f)(2) Capitalized cost reduction.
    1. Amounts not included. The capitalized cost reduction does not 
include periodic payments paid at lease signing.
    4(f)(8) Lease term.
    1. Definition. Under Sec. 213.4(f)(8) the ``lease term'' refers 
to the number of periodic payments.
    4(g) Early termination.
    4(g)(1) Conditions and disclosure of charges.
    1. Reasonableness of charges. See the commentary to 
Sec. 213.4(q).
    2. Description of the method. A full description of the method 
of determining an early termination charge is required by the 
regulation. Lessors should attempt to provide consumers with clear 
and understandable descriptions of their early termination charges. 
Descriptions that are full, accurate, and not intended to be 
misleading will comply with the regulation, even if complex. In 
providing a full description of an early termination method, a 
lessor may use the name of a generally accepted method of computing 
the unamortized cost portion (also known as the ``adjusted lease 
balance'') of its early termination charges. For example, a lessor 
may state that the ``constant yield'' method will be utilized in 
obtaining the adjusted lease balance, but must specify how that 
figure, and any other term or figure, is used in computing the total 
early termination charge imposed upon the consumer. Additionally, if 
a lessor refers to a named method in this manner, the lessor must 
provide a written explanation of that method if requested by the 
consumer. The lessor has the option of providing the explanation as 
a matter of course in the lease documents or on a separate document.
    3. Default. When default is also a condition for early 
termination of a lease, default charges must be disclosed under 
Sec. 213.4(g)(1). See the commentary to Sec. 213.4(q).
    4. Lessee's liability at early termination. When the lessee is 
liable for the difference between the unamortized cost and the 
realized value at early termination, the amount or the method of 
determining the amount of the difference must be disclosed under 
Sec. 213.4(g)(1).
    4(h) Maintenance responsibilities.
    1. Standards for wear and use. No disclosure is required if a 
lessor does not impose standards for wear and use (such as excess 
mileage).
    2. Amount or method of determining excess mileage charges. In a 
motor vehicle lease, a description of the method for calculating 
excess mileage charges may not be disclosed if a specific amount for 
excess mileage has been established.
    4(i) Purchase option.
    1. Mandatory disclosure of 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 must

[[Page 7371]]

disclose affirmatively that the lessee has no option to purchase the 
leased property when the purchase option is inapplicable.
    2. Existence of purchase option. Whether a purchase option 
exists is determined by state or other applicable law. The lessee's 
right to submit a bid to purchase property at termination of the 
lease is not an option to purchase under Sec. 213.4(i) if the lessor 
is not required to accept the lessee's bid and the lessee does not 
receive preferential treatment.
    3. Purchase-option fee. A purchase-option fee must be disclosed 
under Sec. 213.4(i), not Sec. 213.4(d). The fee may be separately 
itemized or disclosed as part of the purchase-option price.
    4. Official fees and taxes. The existence of official fees such 
as those for taxes, licenses, and registration charged in connection 
with the exercise of a purchase option may be disclosed under 
Sec. 213.4(i) in several ways. The fees may be disclosed as part of 
the purchase-option price (with or without a reference to their 
inclusion in that price) or may be separately disclosed and itemized 
by category. Alternatively, a lessor may provide a statement such as 
fees for tags, taxes, and registration are not included in the 
purchase price.
    5. Purchase-option price. Lessors must disclose the purchase-
option price as a sum certain or a sum certain to be determined at a 
future date by reference to an independent source. The reference 
should provide sufficient information so that the lessee will be 
able to determine the actual price when the option becomes 
available. Statements of a purchase price as the ``negotiated 
price'' or the ``fair market value'' do not comply with the 
requirements of Sec. 213.4(i).
    4(j) Statement referencing nonsegregated disclosures.
    1. Content. A lessor may delete inapplicable items from the 
disclosure. For example, if a lease contract does not include a 
security interest, that reference may be deleted.
    4(l) Right of appraisal.
    1. Disclosure inapplicable. When the lessee is liable at the end 
of the lease term or at early termination for unreasonable wear or 
use, but not for the residual value of the leased property, the 
lessor need not disclose the lessee's right to an independent 
appraisal. For example:
    i. The automobile lessor may reasonably expect a lessee to 
return an undented car with four good tires at the end of the lease 
term. Even though it holds the lessee liable for the difference 
between a dented car with bald tires and the value of a car in 
reasonably good repair, the lessor is not required to disclose the 
lessee's appraisal right.
    2. Lessor's appraisal. The lessor may obtain an appraisal of the 
leased property to determine its realized value. Such an appraisal, 
however, is not the one addressed in section 183(c) of the act, and 
the lessor still must disclose the lessee's independent right to an 
appraisal under Sec. 213.4(l). In addition, a lessor must indicate 
whether the wholesale or retail appraisal value will be used.
    3. Time restriction on appraisal. The regulation does not 
specify a time period in which the lessee must exercise the 
appraisal right. The lessor may require a lessee to obtain the 
appraisal within a reasonable time after termination of the lease.
    4(m) Liability at end of lease term based on residual value.
    1. Open-end leases. Section 213.4(m) applies only to open-end 
leases.
    2. Lessor's payment of attorney's fees. Section 183(a) of the 
act requires that the lessor pay the lessee's attorney's fees in all 
actions brought by the lessor under Sec. 213.4(m), whether 
successful or not.
    4(m)(1) Rent and other charges.
    1. General. This disclosure is intended to represent the cost of 
financing an open-end lease based on charges and fees that the 
lessor requires the lessee to pay. Examples of disclosable charges, 
in addition to the rent charge, include acquisition, disposition, or 
assignment fees. Charges imposed by a third party whose services are 
not required by the lessor are not included in the Sec. 213.4(m)(1) 
disclosure such as official fees and voluntary insurance.
    4(m)(2) Excess liability.
    1. Coverage. The disclosure limiting the lessee's liability for 
the value of the leased property does not apply at early 
termination.
    2. Leases with a minimum term. If a lease has an alternative 
minimum term, the disclosures governing the liability limitation are 
not applicable for the minimum term. See the commentary to 
Sec. 213.3(a).
    3. Charges not subject to rebuttable presumption. The limitation 
on liability applies only to liability that is based on the residual 
value of the property at the end of the lease term. The regulation 
does not preclude a lessor from recovering other charges from the 
lessee at the end of the lease term. Examples of such charges 
include:
    i. Disposition charges.
    ii. Excess mileage charges.
    iii. Late payment and default charges.
    iv. Amounts by which the unamortized cost exceeds the residual 
value that have accrued in simple interest accounting leases because 
the lessee has not made timely payments.
    4(n) Fees and taxes.
    1. Taxes. If a tax payable by the lessor is passed on to the 
consumer and is reflected in the lease documentation or a sticker or 
tag affixed to the leased property, the tax must be disclosed under 
Sec. 213.4(n). However, a tax payable by the lessor and absorbed as 
a cost of doing business need not be disclosed.
    4(o) Insurance.
    1. Coverage. A lessor must disclose information on the type and 
amount of insurance coverage, whether voluntary or required, as well 
as the cost if the insurance is obtained through the lessor.
    2. Lessor's insurance. Insurance purchased by the lessor 
primarily for its own benefit, and absorbed as a business expense 
and not separately charged to the lessee, need not be disclosed 
under Sec. 213.4(o) even if it provides an incidental benefit to the 
lessee.
    3. Mechanical breakdown protection. Whether mechanical breakdown 
protection (MBP) purchased in conjunction with a lease should be 
treated as insurance is determined by state or other applicable law. 
In states that do not treat MBP as insurance, the lessor need not 
make Sec. 213.4(o) disclosures. In such cases the lessor may, 
however, disclose the Sec. 213.4(o) information in accordance with 
the additional information provision in Sec. 213.3(b). For MBP 
insurance contracts not capped by a dollar amount, lessors may 
describe coverage by referring to a limitation by mileage or time 
period, for example, the mechanical breakdown contract insures parts 
of the automobile for up to 100,000 miles.
    4(p) Warranties or guarantees.
    1. Brief identification. The statement 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, manufacturer's warranties may be 
identified simply by a reference to the standard manufacturer's 
warranty. If a lessor provides a comprehensive list of warranties to 
the lessee, the lessor must indicate which Sec. 213.4(p) warranties 
apply or, alternatively, which warranties do not apply.
    2. Warranty disclaimers. Although a disclaimer of warranties is 
not required by the regulation, the lessor may give a disclaimer as 
additional information in accordance with Sec. 213.3(b).
    3. State law. Whether an express warranty or guaranty exists is 
determined by state or other law.
    4(q) Penalties and other charges for delinquency.
    1. Collection costs. The automatic imposition of collection 
costs or attorney fees upon default must be disclosed under 
Sec. 213.4(q). Collection costs or attorney fees that are not 
imposed automatically, but are contingent upon expenditures in 
conjunction with a collection proceeding or upon the employment of 
an attorney to effect collection, need not be disclosed.
    2. Charges for early termination. When default is a condition 
for early termination of a lease, default charges must also be 
disclosed under Sec. 213.4(g)(1). The Sec. 213.4(q) and (g)(1) 
disclosures may be combined. Examples of combined disclosures are 
provided in the model lease disclosure forms in appendix A of this 
part.
    3. Simple-interest leases. In a simple-interest accounting 
lease, the additional rent charge that accrues on the lease balance 
when a periodic payment is made after the due date does not 
constitute a penalty or other charge for late payment. Similarly, 
continued accrual of the rent charge after termination 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 normal rent charge, the 
lessor must disclose the amount of or the method of determining the 
additional charge under Sec. 213.4(q).
    4. Extension charges. Extension charges that exceed the rent 
charge in a simple-interest accounting lease or that are added 
separately are disclosed under Sec. 213.4(q).
    5. Reasonableness of charges. Pursuant to section 183(b) of the 
act, penalties or other charges for delinquency, default, or early 
termination may be specified in the lease but only in an amount that 
is reasonable in light of the anticipated or actual harm caused by 
the delinquency, default, or early termination, the difficulties of 
proof of loss,

[[Page 7372]]

and the inconvenience or nonfeasibility of otherwise obtaining an 
adequate remedy.
    4(r) Security interest.
    1. Disclosable security interests. See Sec. 213.2(o) and 
accompanying commentary to determine what security interests must be 
disclosed.
    4(s) Limitations on rate information.
    1. Segregated disclosures. A lease rate may not be included 
among the segregated disclosures referenced in Sec. 213.3(a)(2).

Section 213.5--Renegotiations, Extensions and Assumptions

    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 with an initial term of four 
months or less, because such leases are not covered by the 
definition of consumer lease in Sec. 213.2(e). Whether and when a 
lease is satisfied and replaced by a new lease is determined by 
state or other applicable law.
    5(b) Extensions.
    1. Time of extension disclosures. If a consumer lease is 
extended for a specified term greater than six months, new 
disclosures are required at the time the extension is agreed upon. 
If the lease is extended on a month-to-month basis and exceeds six 
months, new disclosures are required at the commencement of the 
seventh month and at the commencement of each seventh month 
thereafter. If a consumer lease is extended for several terms, one 
of which will exceed six months beyond the originally scheduled 
termination date of the lease, new disclosures are required at the 
commencement of the term that will exceed six months beyond the 
originally scheduled termination date.
    2. Content of disclosures for month-to-month extensions. The 
disclosures for a lease extended on a month-to-month basis for more 
than six months should reflect the month-to-month nature of the 
transaction.

Section 213.7--Advertising

    7(a) General rule.
    1. Persons covered. All ``persons'' must comply with the 
advertising provisions in this section, not just those that meet the 
definition of a lessor in Sec. 213.2(h). Thus, automobile dealers, 
merchants, and others who are not themselves lessors must comply 
with the advertising provisions of the regulation if they advertise 
consumer lease transactions. Pursuant to section 184(b) of the act, 
however, owners and personnel of the media in which an advertisement 
appears or through which it is disseminated are not subject to civil 
liability for violations under section 185(b) of the act.
    2. ``Usually and customarily.'' Section 213.7(a) does not 
prohibit the advertising of a single item or the promotion of a new 
leasing program, but prohibits the advertising of terms that are not 
and will not be available. Thus, an advertisement may state terms 
that will be offered for only a limited period or terms that will 
become available at a future date.
    7(b) Clear and conspicuous standard.
    1. Standard. The disclosures in an advertisement must be 
reasonably understandable. For example, very fine print in a 
television advertisement or detailed and very rapidly stated 
information in a radio advertisement does not meet the clear and 
conspicuous standard if consumers cannot see and read or comprehend 
the information required to be disclosed.
    7(b)(1) Amount due at lease signing.
    1. Itemization not required. The regulation requires only a 
total of amounts due at lease signing or delivery, not an 
itemization of its component parts. Such an itemization is provided 
in any transaction-specific disclosures provided under Sec. 213.4.
    2. Prominence rule. Except for a periodic payment, oral or 
written references to components of the total due at lease signing 
or delivery (for example, a reference to a capitalized cost 
reduction, where permitted) may not be more prominent than the 
disclosure of the total amount due at lease signing or delivery.
    7(b)(2) Advertisement of a lease rate.
    1. Location of statement. The notice required to accompany a 
percentage rate stated in an advertisement must be located in close 
proximity to the rate without any other intervening language or 
symbols. For example, a lessor may not state a rate with an asterisk 
and make the disclosure in a different location in the 
advertisement. In addition, with the exception of the notice 
required by Sec. 213.4(s), the rate cannot be more prominent than 
any Sec. 213.4 disclosure stated in the advertisement.
    7(c) Catalogs and multi-page advertisements.
    1. General rule. The multiple-page advertisements referred to in 
Sec. 213.7(c) are advertisements consisting of a series of numbered 
pages--for example, a supplement to a newspaper. A mailing 
comprising several separate flyers or pieces of promotional material 
in a single envelope is not a single multiple-page advertisement.
    2. Cross-references. A multiple-page advertisement is a single 
advertisement (requiring only one set of lease disclosures) if it 
contains a table, chart, or schedule clearly stating sufficient 
information for the reader to determine the disclosures required 
under Sec. 213.7(d)(2) (i) through (vi). If one of the triggering 
terms listed in Sec. 213.7(d)(1) appears in a catalog or other 
multiple-page advertisement, the page on which the triggering term 
is used must clearly refer to the specific page where the table, 
chart, or schedule begins.
    7(d)(1) Triggering terms.
    1. Triggering terms. When any triggering term appears in a lease 
advertisement, the additional terms enumerated in Sec. 213.7(d)(2) 
(i) through (vi) must also appear. An example of one or more typical 
leases with a statement of all the terms applicable to each may be 
used. The additional terms must be disclosed even if the triggering 
term is not stated explicitly, but is readily determinable from the 
advertisement.
    7(d)(2) Additional terms.
    1. Third-party fees that vary by state. In disclosing the total 
amount due at lease signing a lessor may:

i. Exclude third-party fees, such as taxes, license, and 
registration fees and disclose that fact; or
    ii. Provide a total that includes third-party fees based on a 
particular state as long as that fact and that fees may vary by 
state are disclosed.

    7(e) Alternative disclosures--merchandise tags.
    1. Multiple item leases. Multiple item leases that utilize 
merchandise tags requiring additional disclosures may use the 
alternate disclosure rule.
    7(f) Alternative disclosures--television or radio 
advertisements.
    7(f)(1) Toll-free number or print advertisement.
    1. Publication in general circulation. A referral to a written 
advertisement appearing in a newspaper circulated nationally, for 
example, USA Today or the Wall Street Journal, may satisfy the 
general circulation requirement in Sec. 213.7(f)(1)(ii).
    2. Toll-free number, local or collect calls. In complying with 
the disclosure requirements of Sec. 213.7(f)(1)(i), a lessor must 
provide a toll-free number 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 number that allows a consumer to 
call for information and reverse the phone charges.
    3. Multi-purpose number. When calling an advertised toll-free 
number, if a consumer obtains a recording that provides several 
dialing options--such as providing directions to the lessor's place 
of business--the option allowing the consumer to request lease 
disclosures should be provided early in the telephone message to 
ensure that the option to request disclosures is not obscured by 
other information.
    4. Statement accompanying toll free number. Language must 
accompany a telephone number indicating that disclosures are 
available by calling the toll-free number, such as ``call 1-800-000-
000 for details about costs and terms.''

Section 213. 8--Record Retention

    1. Manner of retaining evidence. A lessor must retain evidence 
of having performed required actions and of having made required 
disclosures. Such records may be retained on microfilm, microfiche, 
or computer, or by any other method designed to reproduce records 
accurately, as well as paper form. The lessor need retain only 
enough information to reconstruct the required disclosures or other 
records.
    Appendix A--Model Forms.
    1. Permissible changes. Although use of the model forms is not 
required, lessors using them properly will be deemed to be in 
compliance with 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 without losing 
the act's protection from liability. For example, the model form 
based on monthly periodic payments may be modified for single-

[[Page 7373]]

payment lease transactions or other periodic payments. The content, 
format, and headings for the segregated disclosures must be 
substantially similar to those contained in the model forms; 
therefore, any changes should be minimal. The changes to the model 
forms should not be so extensive as to affect the substance and the 
clarity of the disclosures.
    2. Examples of 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'' requirements.
    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 permit use of multi-purpose standard forms).
    vi. Adding language or symbols to indicate estimates.
    vii. Adding numeric or alphabetic designations.
    viii. Rearranging the disclosures into vertical columns, except 
for Sec. 213.4(b) through (e) disclosures.
    3. Model closed-end or net vehicle lease disclosure. Model A-2 
is designed for a closed-end or net vehicle lease. Under the ``Early 
Termination and Default'' provision a reference to the lessee's 
right to an independent appraisal of the leased vehicle under 
Sec. 213.4(l) is included for those closed-end leases in which the 
lessee's liability at early termination is based on the vehicle's 
estimated value.
    4. Model furniture lease disclosures. Model A-3 is a closed-end 
lease disclosure statement designed for a typical furniture lease. 
It does not include a disclosure of the appraisal right at early 
termination required under Sec. 213.4(l) because few closed-end 
furniture leases base the lessee's liability at early termination on 
the estimated 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 under delegated 
authority, February 12, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-3955 Filed 2-13-97; 2:20 pm]
BILLING CODE 6210-01-P