Fed Overhauls Rules On Leases, Keying On Cost Disclosures

The Federal Reserve Board on Wednesday overhauled its consumer leasing rules, requiring companies to make new disclosures including the total cost of the lease.

Leasing companies also must explain how monthly payments are calculated and reveal any penalty charged if consumers end the lease early.

The changes, which will take effect Oct. 1, 1997, are the first major revisions in 20 years to the Consumer Leasing Act rules. They come at a critical time for the leasing business. Auto leases have exploded - nearly one-third of new cars delivered to consumers in 1995 were leased. But leasing companies also are being deluged by lawsuits accusing them of charging unreasonable fees.

Banks financed approximately 30% of the $67 billion in car leases made in 1995, according to CNW Marketing/Research in Bandon, Ore. Finance companies owned by automakers control roughly half the leasing market; independent finance companies make up the balance.

"The changes to the consumer leasing regulations are quite significant," said Griffith L. Garwood, the Fed's director of Consumer and Community Affairs. "They will give consumers a much better chance at understanding these complex transactions ... without significantly increasing regulatory burden."

Industry officials supported the new rule.

Dick Schliesmann, executive vice president and group manager for Wells Fargo Bank's auto finance group, said the new rules ought to take effect sooner. "It makes the format standard for all market makers and I think that makes sense," he said. "It ... brings leasing into the '90s."

"This is a much tougher, better disclosure for the consumer and it is something the industry can live with," said Joe Belew, president of the Consumer Bankers Association.

Most of the new disclosures must be listed on a single form. Companies may design their own or copy from several models released by the Fed.

The required disclosures differ by the type of lease. Closed-end auto leases, for example, must state the amount due at the lease signing, the monthly payment, other fees, and the total paid during the life of the lease. Other sample forms cover open-ended vehicle leases and furniture leases.

Currently, leasing companies may bury disclosures in the contract, a practice that consumer groups have criticized because few people read the lengthy legal documents.

To make leasing costs clear, companies will be required to disclose the total amount due over the life of the lease. This figure must include all payments and fees except for refundable security deposits and the first month's payment. The disclosure must be accompanied by the phrase: "The amount you will have paid by the end of the lease."

The disclosure also must detail how the company determined the monthly lease payment, including the agreed upon value of the car, the amount deducted for rebates or trade-in allowances, the residual value of the car at the end of the lease, any extra charges, and taxes. These figures are totaled and then divided by the number of lease payments to produce the monthly payment.

The Fed also is requiring leasing companies to include the following warning: "You may have to pay a substantial charge if you end this lease early. The charge may be up to several thousand dollars. The actual charge will depend upon when the lease is terminated. The earlier you end this lease, the greater this charge is likely to be."

The Fed, which has been working on Reg M since November 1993, did drop a plan to require disclosure of a lease charge, which would be comparable to the annual percentage rate disclosed on consumer loans.

Former Fed Vice Chairman Alan Blinder had advocated the lease charge, saying it would allow consumers to compare leasing with buying a car. But according to a Fed staff memo, lease charges could mislead consumers because companies could manipulate the rate by adjusting the car's residual value.

The Fed also eased restrictions on broadcast advertising. A legal description of the value of a lease will not be required in television and radio advertising, as long as consumers can call a toll-free number to hear the disclosures.

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