Consumer Leasing Act (Regulation M)
Leasing is an alternative to buying personal property with cash or on credit. A lease is a contract between a lessor (the property owner) and a lessee (the person who leases and uses the property) for the use of personal property. The lease has stated terms and limitations, is made for a specified period of time, and requires a specified lease payment.
The Consumer Leasing Act (15 U.S.C. § 1667 et seq.) (CLA) was passed in 1976 so consumers get meaningful and accurate disclosure of lease terms before they enter into a contract. With this information, consumers can more easily compare one lease with another, and compare the cost of leasing with the cost of buying on credit or the opportunity cost of paying cash. In addition, the CLA limits balloon payments due at the end of the lease, and regulates advertising for leasing transactions.
The CLA was Part E of the Truth in Lending Act, originally implemented by Regulation Z. When Regulation Z was revised in 1981, Regulation M was issued, governing consumer leases.
On November 9, 2007, amendments to Regulation M and the official staff commentary were issued to simplify the regulation and provide guidance on the electronic delivery of disclosures consistent with the Electronic Signatures in Global and National Commerce Act (E-Sign Act), 15 U.S.C. §§ 7001 et seq.
The Dodd-Frank Act gave the Consumer Financial Protection Bureau (CFPB) authority to make rules under the CLA. For entities under its jurisdiction, the CFPB also enforces compliance with the CLA and its implementing regulation. The CFPB restated the implementing regulation at 12 CFR Part 1013 in December 2011 (76 Fed. Reg. 78500).
NOTE: NCUA Rules and Regulations § 714 provides additional standards and requirements a federal credit union must follow when engaged in the leasing of personal property.
You can find the full text of the CLA here.
You can find the full text of Regulation M here.
You can find the full text of § 714 of NCUA Rules and Regulations here.
Associated Risks
Compliance risk can occur when the credit union fails to implement the necessary controls to comply with the CLA and Regulation M.
Reputation risk can occur when the credit union incurs decreased member confidence as a result of failures resulting from leases, or incurs fines and penalties.
Strategic risk occurs when the board of directors fails to perform necessary due diligence in reviewing existing and prospective products and services for compliance.
Examination Objectives
- To assess the quality of the credit union’s compliance management system for the CLA.
- To determine whether lessees of personal property are given meaningful and accurate disclosures of lease terms.
- To determine if the limits of liability are clearly indicated to lessees and correctly enforced by the credit union.
- To ensure that the credit union provides accurate disclosures in all consumer lease advertising.
Examination Procedures
General Disclosure Requirements
- Review the credit union’s procedures for providing disclosures to ensure that there are adequate compliance controls and procedures.
- Review the disclosures provided by the credit union.
- Are the disclosures clear and conspicuous and provided in writing in a form the consumer may keep? For disclosures provided electronically (other than in advertising), are they provided in compliance with the consumer consent and other applicable provisions of the E-Sign Act? For advertisements accessed in electronic form, are the disclosures required by § 1013.7 provided in electronic form in the advertisement? (§ 1013.3(a))
- Are disclosures dated and in the prescribed format? (§ 1013.3(a)(1))
- Is the information required by § 1013.4(b) through (f), (g)(2), (h)(3), (i)(1), (j), and (m)(1) segregated, and in a form substantially similar to the model in Appendix A? (§ 1013.3(a)(2))
- Are the disclosures timely? (§ 1013.3(a)(3))
- If there is more than one lessee, are the disclosures provided to any lessee who is primarily liable? (§ 1013.3(c))
- If additional information is provided, is it provided in a manner that does not mislead or confuse the lessee? (§ 1013.3(b))
- Are all estimates clearly identified and reasonable? (§ 1013.3(d))
- Are the disclosures accurate and do they contain the information required by § 1013.4(a) through (t)?
- Are disclosures given to lessees when they "renegotiate" or "extend" consumer leases? (§ 1013.5)
Lessee Liability
- Review the lease estimates and calculations to ensure that there is no unreasonable balloon payment expected in the following circumstances:
- At early termination:
- Does the lessor disclose the conditions under which the lease may be terminated early, and the amount and method of determining any early termination charges? (§ 1013.4(g)(1))
- Are any early termination charges reasonable? (§ 1013.4(g)(1), (q))
- At lease end:
- If the lessor sets standards for wear and use of a leased vehicle, are the amounts or method of determining any charge for excess mileage disclosed? (§ 1013.4(h)(3))
- Are standards for wear and use reasonable? (§ 1013.4(h)(2))
- At lease end (for open-end leases):
- Does the lessor disclose limitations on the lessee’s liabilities at the end of the lease term? (§ 1013.4(m)(2))
- Are the lessee and lessor permitted to make a mutually agreeable final adjustment regarding excess liability? (§ 1013.4(m)(3))
- In default or late payment:
- At early termination:
Advertising
- Review the credit union’s advertising policies and procedures to ensure adequate compliance controls and procedures.
- Review a sample of the credit union’s consumer leasing advertisements.
- Do the advertisements advertise terms that are usually and customarily available? (§ 1013.7(a))
- Are the disclosures in the advertisements clear and conspicuous? (§ 1013.7(b))
- Do catalogs, multiple page advertisements and electronic advertisements comply with the page reference requirements? (§ 1013.7(c))
- When triggering terms are used, do the advertisements contain the required additional information? (§ 1013.7(d))
- Do merchandise tags that use triggering terms refer to a sign or display that contains the required additional disclosures? (§ 1013.7(e))
- If television or radio advertisements use triggering terms but do not contain the additional terms required by § 1013.7(d)(2), do they use alternative disclosure methods (i.e., direct consumers to a toll-free number or written advertisement)? (§ 1013.7(f))
Miscellaneous
- Are records and other evidence of compliance (other than for advertising requirements under § 1013.7) retained for not less than two (2) years? (§ 1013.8)
Consumer Leasing Act (CLA)
(Regulation M)
Checklist
| Item | Description | YES | NO | N/A |
|---|---|---|---|---|
| 1 | Does the credit union engage in consumer leasing or purchase consumer leases from lessors? (§ 1013.2(h)) NOTE: If not, do no further work on Consumer Leasing. Otherwise, complete the checklist, answering Yes, No, or N/A for each item. |
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| 2 | Are disclosures made prior to consummation of consumer leases, i.e., when a binding order is made or the lease is signed? (§ 1013.3(a)(3)) | |||
| 3 | Are disclosures clear and conspicuous, and provided in writing in a form the consumer may keep? (§ 1013.3(a)) | |||
| 4 | Are electronic disclosures provided in compliance with the consumer consent and other applicable provisions of the E-Sign Act? (§ 1013.3(a)) | |||
| 5 | For an advertisement accessed by the consumer in electronic form, are the disclosures required by § 1013.7 provided to the consumer in electronic form in the advertisement? (§ 1013.3(a)) | |||
| 6 | Are the disclosures given in a dated statement and made either in (i) a separate statement that identifies the consumer lease transaction, (ii) the contract, or (iii) another document evidencing the lease? (§ 1013.3(a)(1)) | |||
| 7 | Is information required by § 1013.4(b) through (f), (g)(2), (h)(3), (i)(1), (j), and (m)(1) segregated, and in a form substantially similar to the model in Appendix A? (§ 1013.3(a)(2)) | |||
| 8 | If the lease involves more than one lessee, are disclosures provided to any lessee who is primarily liable? (§ 1013.3(c)) | |||
| 9 | If additional information is provided, is it provided in a manner such that it does not mislead or confuse the lessee? (§ 1013.3(b)) | |||
| 10 | Are disclosures provided to at least one lessee where there are multiple lessees, and by at least one lessor when there are multiple lessors? (§ 1013.3(c)) | |||
| 11 | Are all estimates clearly identified and reasonable? (§ 1013.3(d)) | |||
| 12 | Are the following disclosures made in the lease? | |||
| 12A | Description of property; (§ 1013.4(a)) | |||
| 12B | Amount due at lease signing or delivery; (§ 1013.4(b)) | |||
| 12C | Payment schedule and total amount of periodic payments; (§ 1013.4(c)) | |||
| 12D | Other charges; (§ 1013.4(d)) | |||
| 12E | Total of payments; (§ 1013.4(e)) | |||
| 12F | Regarding payment calculations: | |||
| 12Fi | Gross capitalized cost; (§ 1013.4(f)(1)) | |||
| 12Fii | Capitalized cost reduction; (§ 1013.4(f)(2)) | |||
| 12Fiii | Adjusted capitalized cost; (§1013.4(f)(3)) | |||
| 12Fiv | Residual value; (§ 1013.4(f)(4)) | |||
| 12Fv | Depreciation and any amortized amounts; (§ 1013.4(f)(5)) | |||
| 12Fvi | Rent charge; (§ 1013.4(f)(6)) | |||
| 12Fvii | Total of base periodic payments; (§ 1013.4(f)(7)) | |||
| 12Fviii | Lease payments; (§ 1013.4(f)(8)) | |||
| 12Fix | Base periodic payment; (§ 1013.4(f)(9)) | |||
| 12Fx | Itemization of other charges; (§ 1013.4(f)(10)) | |||
| 12Fxi | Total periodic payment. (§ 1013.4(f)(11)) | |||
| 12G | Regarding early termination: | |||
| 12Gi | Conditions under which the lessee or lessor may terminate the lease before the end of the lease term; (§ 1013.4(g)(1)) | |||
| 12Gii | The amount or description of the method for determining the amount of any penalty or other charges for early termination; (§ 1013.4(g)(1)) | |||
| 12Giii | In a form substantially similar to the sample; (§ 1013.4(g)(2)) | |||
| 12H | Regarding notice of wear and use: | |||
| 12Hi | Whether the lessor or the lessee is responsible for maintaining or servicing the leased property, with a description of the responsibility; (§ 1013.4(h)(i)) | |||
| 12Hii | The lessor’s standards for wear and use, which must be reasonable; (§ 1013.4(h)(2)) | |||
| 12Hiii | In a form substantially similar to the sample. (§ 1013.4(h)(3)) | |||
| 12I | Purchase option; (§ 1013.4(i)) | |||
| 12J | Statement referencing other non-segregated disclosures; (§ 1013.4(j)) | |||
| 12K | Liability between residual and realized values; (§ 1013.4(k)) | |||
| 12L | Right of appraisal; (§ 1013.4(l)) | |||
| 12M | M. For open-end leases: | |||
| 12Mi | The rent and other charges paid by lessee; (§ 1013.4(m)(1)) | |||
| 12Mii | Liability at end of lease term based on residual value and any excess liability; (§§ 1013.4(m) and (m)(2)) | |||
| 12Miii | Mutually agreeable final adjustment. (§ 1013.4(m)(3)) | |||
| 12N | Fees and taxes; (§ 1013.4(n)) | |||
| 12O | Regarding insurance: | |||
| 12Oi | Disclosure of the types and amounts of insurance that the lessee is required to have; (§ 1013.4(o)) | |||
| 12Oii | If the lessor provides insurance, are the types, amounts, and costs disclosed? (§ 1013.4(o)(1)) | |||
| 12P | Warranties or guarantees; (§ 1013.4 (p)) | |||
| 12Q | Penalties and other charges for late payments, delinquency, or default; (§ 1013.4(q)) | |||
| 12R | Security interest other than a security deposit; (§ 1013.4(r)) | |||
| 12S | Regarding any information on rates: | |||
| 12Si | Does the lessor use the term "annual percentage rate," "annual lease rate," or any equivalent term in the lease disclosure? (§ 1013.4(s)) | |||
| 12Sii | If so, does the statement "this percentage may not measure the overall cost of financing this lease" accompany the rate? (§ 1013.4(s)) | |||
| 13 | Are disclosures given to lessees when they "renegotiate" or "extend" their leases? (§ 1013.5) | |||
| 14 | Does the credit union advertise its leasing program? NOTE: If not, skip to end. If so, answer the questions below. |
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| 14A | Do the advertisements include terms that are usually and customarily available? (§ 1013.7(a)) | |||
| 14B | Are the advertisements clear and conspicuous? (§ 1013.7(b)) | |||
| 14Bi | Are any affirmative or negative references to a charge that is part of the disclosure required under paragraph (d)(2)(ii) less prominent than the disclosure (except for the statement of a periodic payment? (§ 1013.7(b)(1)) | |||
| 14Bii | Are advertised lease rates less prominent than any disclosure required by § 1013.4 (except the notice of the limitations on rate)? (§ 1013.7(b)(2)) | |||
| 14C | Do catalogs, multiple page advertisements and electronic advertisements comply with the page reference requirements? (§ 1013.7(c)) | |||
| 14D | If any triggering terms are used, are all the following disclosures made? (§ 1013.7(d)(2)) | |||
| 14Di | That the transaction advertised is a lease; | |||
| 14Dii | The total amount due prior to or at consummation or by delivery, if delivery occurs after consummation; | |||
| 14Diii | The number, amounts, and due dates or periods of scheduled payments under the lease; | |||
| 14Div | Whether or not a security deposit is required; | |||
| 14Dv | A statement that an extra charge may be imposed at the end of the lease term where the lessee’s liability is based on the difference between the residual value of the leased property and its realized value at the end of the lease term. | |||
| 15 | Do merchandise tags that use triggering terms refer to a sign or display containing the additional required disclosures? (§ 1013.7(e)) | |||
| 16 | Do television or radio advertisements that do not contain the additional information required by § 1013.4(d) direct consumers to a toll-free number or written advertisement for additional information when triggering terms are used? (§ 1013.7(f)) | |||
| 16A | Is the toll-free number listed along with a reference that the number may be used by the consumer to obtain the information? (§ 1013.7(f)(1)(i)) | |||
| 16B | Does the written advertisement in general circulation in the community served by the radio or TV station include the name and date of the publication, and is it published beginning at least three days before and ending at least 10 days after broadcast? (§ 1013.7(f)(1)(ii)) | |||
| 16C | Was the toll-free telephone number available for at least 10 days, beginning on the date of broadcast? (§ 1013.7(f)(2)(i)) | |||
| 16D | Does the lessor provide the information required by paragraph (d)(2) via the toll-free number orally, or in writing upon request? (§ 1013.7(f)(2)(ii)) | |||
| 17 | Are records and other evidence of compliance retained for at least two (2) years as required by the CLA? (§ 1013.8) |