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Consumer Leasing Act (Regulation M)

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

  1. Review the credit union’s procedures for providing disclosures to ensure that there are adequate compliance controls and procedures.
  2. Review the disclosures provided by the credit union.
    1. 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))
    2. Are disclosures dated and in the prescribed format? (§ 1013.3(a)(1))
    3. 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))
    4. Are the disclosures timely? (§ 1013.3(a)(3))
    5. If there is more than one lessee, are the disclosures provided to any lessee who is primarily liable? (§ 1013.3(c))
    6. If additional information is provided, is it provided in a manner that does not mislead or confuse the lessee? (§ 1013.3(b))
    7. Are all estimates clearly identified and reasonable? (§ 1013.3(d))
    8. Are the disclosures accurate and do they contain the information required by § 1013.4(a) through (t)?
    9. Are disclosures given to lessees when they "renegotiate" or "extend" consumer leases? (§ 1013.5)

Lessee Liability

  1. Review the lease estimates and calculations to ensure that there is no unreasonable balloon payment expected in the following circumstances:
    1. At early termination:
      1. 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))
      2. Are any early termination charges reasonable? (§ 1013.4(g)(1), (q))
    2. At lease end:
      1. 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))
      2. Are standards for wear and use reasonable? (§ 1013.4(h)(2))
    3. At lease end (for open-end leases):
      1. Does the lessor disclose limitations on the lessee’s liabilities at the end of the lease term? (§ 1013.4(m)(2))
      2. Are the lessee and lessor permitted to make a mutually agreeable final adjustment regarding excess liability? (§ 1013.4(m)(3))
    4. In default or late payment:
      1. Does the lessor disclose penalties or other charges for default or late payments? (§ 1013.4(q))
      2. Are the penalties or charges reasonable? (§ 1013.4(q))

Advertising

  1. Review the credit union’s advertising policies and procedures to ensure adequate compliance controls and procedures.
  2. Review a sample of the credit union’s consumer leasing advertisements.
    1. Do the advertisements advertise terms that are usually and customarily available? (§ 1013.7(a))
    2. Are the disclosures in the advertisements clear and conspicuous? (§ 1013.7(b))
    3. Do catalogs, multiple page advertisements and electronic advertisements comply with the page reference requirements? (§ 1013.7(c))
    4. When triggering terms are used, do the advertisements contain the required additional information? (§ 1013.7(d))
    5. Do merchandise tags that use triggering terms refer to a sign or display that contains the required additional disclosures? (§ 1013.7(e))
    6. 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

  1. 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
Item
1
Description
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.
YES
 
NO
 
N/A
 
Item
2
Description
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))
YES
 
NO
 
N/A
 
Item
3
Description
Are disclosures clear and conspicuous, and provided in writing in a form the consumer may keep? (§ 1013.3(a))
YES
 
NO
 
N/A
 
Item
4
Description
Are electronic disclosures provided in compliance with the consumer consent and other applicable provisions of the E-Sign Act? (§ 1013.3(a))
YES
 
NO
 
N/A
 
Item
5
Description
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))
YES
 
NO
 
N/A
 
Item
6
Description
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))
YES
 
NO
 
N/A
 
Item
7
Description
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))
YES
 
NO
 
N/A
 
Item
8
Description
If the lease involves more than one lessee, are disclosures provided to any lessee who is primarily liable? (§ 1013.3(c))
YES
 
NO
 
N/A
 
Item
9
Description
If additional information is provided, is it provided in a manner such that it does not mislead or confuse the lessee? (§ 1013.3(b))
YES
 
NO
 
N/A
 
Item
10
Description
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))
YES
 
NO
 
N/A
 
Item
11
Description
Are all estimates clearly identified and reasonable? (§ 1013.3(d))
YES
 
NO
 
N/A
 
Item
12
Description
Are the following disclosures made in the lease?
YES
 
NO
 
N/A
 
Item
12A
Description
Description of property; (§ 1013.4(a))
YES
 
NO
 
N/A
 
Item
12B
Description
Amount due at lease signing or delivery; (§ 1013.4(b))
YES
 
NO
 
N/A
 
Item
12C
Description
Payment schedule and total amount of periodic payments; (§ 1013.4(c))
YES
 
NO
 
N/A
 
Item
12D
Description
Other charges; (§ 1013.4(d))
YES
 
NO
 
N/A
 
Item
12E
Description
Total of payments; (§ 1013.4(e))
YES
 
NO
 
N/A
 
Item
12F
Description
Regarding payment calculations:
YES
 
NO
 
N/A
 
Item
12Fi
Description
Gross capitalized cost; (§ 1013.4(f)(1))
YES
 
NO
 
N/A
 
Item
12Fii
Description
Capitalized cost reduction; (§ 1013.4(f)(2))
YES
 
NO
 
N/A
 
Item
12Fiii
Description
Adjusted capitalized cost; (§1013.4(f)(3))
YES
 
NO
 
N/A
 
Item
12Fiv
Description
Residual value; (§ 1013.4(f)(4))
YES
 
NO
 
N/A
 
Item
12Fv
Description
Depreciation and any amortized amounts; (§ 1013.4(f)(5))
YES
 
NO
 
N/A
 
Item
12Fvi
Description
Rent charge; (§ 1013.4(f)(6))
YES
 
NO
 
N/A
 
Item
12Fvii
Description
Total of base periodic payments; (§ 1013.4(f)(7))
YES
 
NO
 
N/A
 
Item
12Fviii
Description
Lease payments; (§ 1013.4(f)(8))
YES
 
NO
 
N/A
 
Item
12Fix
Description
Base periodic payment; (§ 1013.4(f)(9))
YES
 
NO
 
N/A
 
Item
12Fx
Description
Itemization of other charges; (§ 1013.4(f)(10))
YES
 
NO
 
N/A
 
Item
12Fxi
Description
Total periodic payment. (§ 1013.4(f)(11))
YES
 
NO
 
N/A
 
Item
12G
Description
Regarding early termination:
YES
 
NO
 
N/A
 
Item
12Gi
Description
Conditions under which the lessee or lessor may terminate the lease before the end of the lease term; (§ 1013.4(g)(1))
YES
 
NO
 
N/A
 
Item
12Gii
Description
The amount or description of the method for determining the amount of any penalty or other charges for early termination; (§ 1013.4(g)(1))
YES
 
NO
 
N/A
 
Item
12Giii
Description
In a form substantially similar to the sample; (§ 1013.4(g)(2))
YES
 
NO
 
N/A
 
Item
12H
Description
Regarding notice of wear and use:
YES
 
NO
 
N/A
 
Item
12Hi
Description
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))
YES
 
NO
 
N/A
 
Item
12Hii
Description
The lessor’s standards for wear and use, which must be reasonable; (§ 1013.4(h)(2))
YES
 
NO
 
N/A
 
Item
12Hiii
Description
In a form substantially similar to the sample. (§ 1013.4(h)(3))
YES
 
NO
 
N/A
 
Item
12I
Description
Purchase option; (§ 1013.4(i))
YES
 
NO
 
N/A
 
Item
12J
Description
Statement referencing other non-segregated disclosures; (§ 1013.4(j))
YES
 
NO
 
N/A
 
Item
12K
Description
Liability between residual and realized values; (§ 1013.4(k))
YES
 
NO
 
N/A
 
Item
12L
Description
Right of appraisal; (§ 1013.4(l))
YES
 
NO
 
N/A
 
Item
12M
Description
M. For open-end leases:
YES
 
NO
 
N/A
 
Item
12Mi
Description
The rent and other charges paid by lessee; (§ 1013.4(m)(1))
YES
 
NO
 
N/A
 
Item
12Mii
Description
Liability at end of lease term based on residual value and any excess liability; (§§ 1013.4(m) and (m)(2))
YES
 
NO
 
N/A
 
Item
12Miii
Description
Mutually agreeable final adjustment. (§ 1013.4(m)(3))
YES
 
NO
 
N/A
 
Item
12N
Description
Fees and taxes; (§ 1013.4(n))
YES
 
NO
 
N/A
 
Item
12O
Description
Regarding insurance:
YES
 
NO
 
N/A
 
Item
12Oi
Description
Disclosure of the types and amounts of insurance that the lessee is required to have; (§ 1013.4(o))
YES
 
NO
 
N/A
 
Item
12Oii
Description
If the lessor provides insurance, are the types, amounts, and costs disclosed? (§ 1013.4(o)(1))
YES
 
NO
 
N/A
 
Item
12P
Description
Warranties or guarantees; (§ 1013.4 (p))
YES
 
NO
 
N/A
 
Item
12Q
Description
Penalties and other charges for late payments, delinquency, or default; (§ 1013.4(q))
YES
 
NO
 
N/A
 
Item
12R
Description
Security interest other than a security deposit; (§ 1013.4(r))
YES
 
NO
 
N/A
 
Item
12S
Description
Regarding any information on rates:
YES
 
NO
 
N/A
 
Item
12Si
Description
Does the lessor use the term "annual percentage rate," "annual lease rate," or any equivalent term in the lease disclosure? (§ 1013.4(s))
YES
 
NO
 
N/A
 
Item
12Sii
Description
If so, does the statement "this percentage may not measure the overall cost of financing this lease" accompany the rate? (§ 1013.4(s))
YES
 
NO
 
N/A
 
Item
13
Description
Are disclosures given to lessees when they "renegotiate" or "extend" their leases? (§ 1013.5)
YES
 
NO
 
N/A
 
Item
14
Description
Does the credit union advertise its leasing program?

NOTE: If not, skip to end. If so, answer the questions below.
YES
 
NO
 
N/A
 
Item
14A
Description
Do the advertisements include terms that are usually and customarily available? (§ 1013.7(a))
YES
 
NO
 
N/A
 
Item
14B
Description
Are the advertisements clear and conspicuous? (§ 1013.7(b))
YES
 
NO
 
N/A
 
Item
14Bi
Description
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))
YES
 
NO
 
N/A
 
Item
14Bii
Description
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))
YES
 
NO
 
N/A
 
Item
14C
Description
Do catalogs, multiple page advertisements and electronic advertisements comply with the page reference requirements? (§ 1013.7(c))
YES
 
NO
 
N/A
 
Item
14D
Description
If any triggering terms are used, are all the following disclosures made? (§ 1013.7(d)(2))
YES
 
NO
 
N/A
 
Item
14Di
Description
That the transaction advertised is a lease;
YES
 
NO
 
N/A
 
Item
14Dii
Description
The total amount due prior to or at consummation or by delivery, if delivery occurs after consummation;
YES
 
NO
 
N/A
 
Item
14Diii
Description
The number, amounts, and due dates or periods of scheduled payments under the lease;
YES
 
NO
 
N/A
 
Item
14Div
Description
Whether or not a security deposit is required;
YES
 
NO
 
N/A
 
Item
14Dv
Description
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.
YES
 
NO
 
N/A
 
Item
15
Description
Do merchandise tags that use triggering terms refer to a sign or display containing the additional required disclosures? (§ 1013.7(e))
YES
 
NO
 
N/A
 
Item
16
Description
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))
YES
 
NO
 
N/A
 
Item
16A
Description
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))
YES
 
NO
 
N/A
 
Item
16B
Description
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))
YES
 
NO
 
N/A
 
Item
16C
Description
Was the toll-free telephone number available for at least 10 days, beginning on the date of broadcast? (§ 1013.7(f)(2)(i))
YES
 
NO
 
N/A
 
Item
16D
Description
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))
YES
 
NO
 
N/A
 
Item
17
Description
Are records and other evidence of compliance retained for at least two (2) years as required by the CLA? (§ 1013.8)
YES
 
NO
 
N/A