The Federal Trade Commission has endorsed Federal Reserve Board ("Board") plans to simplify and clarify the disclosures required in consumer lease transactions. "Access to leasing information is critical to consumers," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "Leasing is on the rise today -- especially for automobiles. Before consumers decide whether to buy or lease, they should have the facts. These revisions to consumer leasing regulations will help consumers be smarter shoppers by making disclosures simpler, clearer and more meaningful," she said. The Commission's comment recommends that the Board consider conducting consumer research to most effectively fashion the format and content of required lease disclosures and the model forms.
The FTC enforces the Consumer Leasing Act (CLA) (an amendment to the Truth in Lending Act) and its implementing Regulation M and the Federal Reserve Board's Official Staff Commentary ("Commentary") to Regulation M, for most nonbank lessors. The Commission's comments were made in response to the Board's notice of proposed rulemaking, regarding changes to both Regulation M and the Commentary.
In supporting the Board's decision to revise Regulation M and the Commentary, the FTC notes that the action is particularly important because of changes in the lease industry and transactions in the marketplace since the inception of federal lease requirements. For example, the Commission cites statistics indicating that leasing currently contributes more than 30 percent of retail vehicles deliveries -- twice the rate in 1991.
The FTC's comment supports proposed changes in the lease requirements, including those concerning the definitions used in Regulation M, and states that the changes would help lessors, advertisers and consumers. The Commission's comment also supports the new requirement that major lease cost items be segregated from other information disclosed to consumers in writing prior to lease signing, citing consumer complaints about difficulties in locating important information in lease contracts. "Indeed, some consumers have not understood that the document they signed was, in fact, a lease transaction," the comment says. "Other consumers have inquired why their lease contract is so complicated and essential information is buried' in fine print. These concerns have been raised particularly in the automobile area. The Commission believes that segregation of lease disclosures would help consumers better understand the lease obligation."
The Commission's comment also supports requiring written disclosure of certain new items, including "gross cost" and "estimated lease charge" and expanding the disclosure of other currently-required terms, such as "early termination charges." However, the Commission notes that additional information regarding the items included in the gross cost disclosure could be useful to consumers. The Commission also emphasizes that such information could impose additional costs on lessors, and it, therefore, suggests various possible manners to expand consumer awareness of the costs included in this category. Additionally, regarding early termination fees, the Commission's comment states that "[b]ecause early termination costs can be substantial, disclosures regarding these costs and terms are critical to consumers."
The Commission also supports revising requirements for lease advertising, stating in its comment, "[t]he advertising changes . . . are designed to clarify and simplify both the substance and format of the advertising rules for all types of lease promotions." The FTC comment notes that "[t]he amendments seek to ensure . . . 'meaningful and accurate disclosures of lease terms' in a format useful to consumers, the primary purpose of the CLA." In particular, it supports the "clear and conspicuous" and "equal prominence" rules which require that important disclosures be conspicuously displayed in advertisements and that certain critical elements of required disclosures be equally prominent.
"A television lease advertisement, for example, may prominently inform consumers of a low . . . downpayment due at signing, repeating the claim several times in both the audio and video portions of the advertisement while burying information about other . . . fees and the total amount due at lease signing in smaller, at times unreadable, print," the statement says. "Such advertisements can lead consumers to invest considerable time and effort visiting dealerships regarding advertised offers, based on an expectation of low or non-existent front-end fees, only to discover that significant inception fees exist."
The Commission also recommends in its comment that the Board require lease advertisers to disclose that the transaction being promoted is, in fact, a lease (in addition to the other required information) whenever the equal prominence rule is applicable to ensure that consumers are aware of the type of obligation offered. Further, the Commission recommends that the Board require that the monthly payment amount (in addition to any lease inception fees, which was proposed by the Board) also trigger applicability of the equal prominence rule. Many lease advertisements today focus on low monthly payment amounts, and they may fail to adequately disclose the front-end lease charges, which may be substantial.
The comment recommends additional changes to assure clarity and conspicuousness of lease advertising disclosures required by the proposed revisions. For example, it suggests that the Board require that all lease advertising disclosures must be "reasonably understandable" -- a standard established by the proposed revisions for written lease disclosures provided to consumers prior to lease consummation. In addition, the Commission recommends that the Board provide advertisers with specific guidance to assure clarity of lease disclosures, such as rules concerning the placement, size, length and timing of required information. For televised and videotaped lease advertisements, the Commission suggests that the required disclosures should appear on the screen in a size, shade, contrast, prominence and location, and for a duration, as to be readily noticeable, readable and comprehensible to an ordinary consumer. According to the Commission, this approach would provide lease advertisers with standards and needed guidance but would not be overly restrictive in format and presentation of information to consumers.
The Commission's comment suggests several other modifications to the proposed revisions and urges the Board to review the limit of the regulation to transactions under $25,000. "Because the prices of consumer goods, including leased items such as automobiles, have risen substantially over the last two decades, this . . . amount could significantly limit the utility of important consumer protections established by Regulation M," the FTC comment says. "Because the dollar amount has not been increased since the CLA's enactment in 1976, this provision alone could cause increasing numbers of leases, formerly governed by Regulation M, to now escape its requirements," the statement says.
Finally, the FTC commented on, and suggested revisions to, model forms proposed by the Board as guides for lessors to use in their lease contracts.
The Commission vote to approve the comments was 5-0.
Copies of the Commission comments are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web site at: http://www.ftc.gov
(FTC File No. P934806)