Compliance: Fed Proposal Clarifies Consumer Leasing Rules Regarding

Looking to provide guidance on new consumer leasing rules, the Federal Reserve Board has proposed a staff commentary explaining how to disclose the cost and terms of leases.

The proposal explains how to calculate the fair market value of a car; how to determine early termination penalties; how to advertise lease rates; and how to decide what products are covered by the rules.

"This provides welcome guidance," said Nessa E. Feddis, senior federal counsel at the American Bankers Association. "The earlier amendments to the regulation were fairly comprehensive. This will help to clarify the regulation."

The proposal explains that lessors are required to include all capitalized costs, such as charges for accessories, delivery, taxes, and title fees, in the price of the car. This price is then included on a form detailing the cost of the lease.

Lessors, however, may exclude the cost of maintenance contracts, insurance, or balances rolled over from existing loans or leases.

The proposal also details how to value the car when the lease expires. The company either must specify the value when the lease is signed, or it must reference an independent source of pricing data, such as the so-called Blue Book.

Lessors also must provide a "clear and understandable" description of all early termination penalties, including the name of the method used to produce the adjusted lease balance.

The Fed commentary also explains how leases may be advertised. For example, broadcast ads must give consumers enough time to understand all the disclosures.

"Very fine print in a television advertisement or detailed and very rapidly stated information in a radio advertisement do not meet the 'clear and conspicuous' standard," the Fed said.

The Fed dropped an earlier proposal that would have required all disclosures to appear on the screen for at least five seconds.

Print advertisements that include an annual interest rate also must prominently disclose all the terms and conditions of the lease, the proposal states. "The rate cannot be more prominent than any disclosure stated in the advertisement," the Fed said.

The rules cover leases for property used primarily for personal, family, or household purposes. The lease must be for at least four months; deals that extend month-to-month, even if they eventually exceed four months, are not covered, the Fed said.

While the rules primarily target auto leases, the Fed said cellular phones are covered, too.

Services exempt from the rules include: safe-deposit boxes, security alarms, propane gas canisters, and home entertainment systems that require a consumer to lease a product to receive television programming.

Comments are being accepted through March 13; the Fed is expected to finalize the proposal in April.

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