STATES OF AMERICA
Office of the Secretary
March 20, 1997
William W. Wiles, Secretary
Re: Docket No. R-0961
Dear Mr. Wiles:
The Federal Trade Commission ("Commission") appreciates this opportunity to comment on the Federal Reserve Board's ("Board") proposed revisions to the Official Staff Commentary to Regulation M.(1) The Board's proposal provides guidance on various aspects of Regulation M, addresses issues raised by public response to the prior version of the proposed Commentary ("proposed 1995 Commentary"),(2) and solicits views on all aspects of the current proposal.
The Commission supports the Board's continuing efforts to update and furnish guidance on federal lease requirements. This work is critical in view of rapid changes occurring in the lease marketplace. Lease transactions are continuing to increase, particularly in the motor vehicle industry.(3) Increasing numbers of auto dealerships and other lessors around the nation are also promoting consumer leases as alternatives to financing or cash purchases of products and services. As a result, clear guidance with illustrative examples in the Commentary is needed to facilitate compliance by lessors and advertisers with Regulation M and foster informed decisionmaking and meaningful comparison shopping by consumers in this important field. Indeed, because many consumers, and some newer lessors, are less conversant with leases than financing, such guidance is crucial.(4)
The Commission's comments address several issues in the proposed changes to the Commentary. In general, the Commission also continues to recommend that the Board conduct and/or utilize consumer research in interpreting and "fleshing out" the format and content of Regulation M's lease disclosures and model forms.
I. Definitions - 213.2 of proposed Commentary
A. Advertisement - 213.2(b)-1 of proposed Commentary
The Board proposes to incorporate into the Commentary examples of types of advertisements (such as those formerly listed in 213.2(a)(2) of current Regulation M) and to indicate that the term encompasses electronic messages. The Commission supports this approach and particularly supports explicit coverage of electronic advertisements. In recent years, as consumers have gained greater access to the Internet, the Commission has seen a dramatic increase in lease advertising in that medium. On the World Wide Web portion of the Internet, where messages may easily be obscured on deeply "nested" screens and otherwise, advertisers must be aware of their obligation to comply with Regulation M, and especially, to make critical lease terms in promotions clear and conspicuous and/or equally prominent, as applicable. While revised Regulation M provides that the term "advertisement" covers commercial messages "in any medium"(5) (thus encompassing any promotional format), and both revised and current Regulation M refer to inclusion of print media (of which on-line communications are a component), the Commission believes that consumers and the industry would benefit by an express reference to this medium.
However, the Commission suggests that the Board consider using the phrase, "on-line ads, including messages on the Internet," in lieu of the narrower proposed phrase "messages on the Internet," to describe the variety of on-line communications that constitute consumer lease advertisements. In addition, the Commission suggests that the Board retain from the current Commentary the phrase, "The list of examples in the definition is not exhaustive."(6) This phrase would further clarify in the Commentary that even those forms of advertisements not expressly enumerated are covered by revised Regulation M. Such an approach is important due to the rapid changes in technology now occurring, which could lead to new forms of advertisements in the near future.
B. Consumer Lease - 213.2(e) of proposed Commentary
1. Period of Time - 213.2(e)-2 of proposed Commentary
This provision states that a lease with a penalty for not continuing beyond the first four months is considered to have a term of more than four months and is subject to Regulation M. The provision also states that a month-to-month lease with a penalty for terminating before one year, such as the forfeiture of a security deposit, is a "consumer lease" and that a three-month lease extended on a month-to-month basis and terminated after one-year is not a "consumer lease."
This section provides useful information about which leases are covered by Regulation M. The Commission suggests, however, that the Board clarify the requirements pertaining to what constitutes a "penalty." The meaning of this term is crucial in defining a "consumer lease" and determining coverage under Regulation M. It is especially important for consumers in rent-to-own transactions and telephone lease obligations, which are essentially short-term leases that may convert to month-to-month obligations and which may (or may not) impose an additional charge for cancellation of the obligation and may (or may not) be subject to Regulation M. More specifically, is there significance to the reference to a one-year time frame in this provision regarding forfeitures of security deposits? Or, does the term "penalty" encompass anything that would transform a month-to-month agreement into a mandatory lease obligation with more than four installments? If so, it would be useful to restate the example, perhaps as follows:
A month-to-month lease with a penalty that effectively causes the lease to extend beyond four months, such as the forfeiture of a security deposit for terminating before five (or more) months, is subject to the regulation.
If, on the other hand, the Board intends another concept regarding the term "penalty" and the use of a "one-year" time frame, it would be useful to amplify that requirement.
2. Total Contractual Obligation - 213.2(e)-3 of proposed Commentary
a. Nature of Charges
This provision provides guidance to lessors on how to compute the "total contractual obligation" by stating explicitly that such term excludes residual value amounts, purchase option prices, and amounts collected by the lessor but paid to a third party, such as taxes and license and registration fees. The Commission believes that this guidance is useful but encourages the Board also to describe the items that are included in the "total contractual obligation" figure. Accurate computation of this amount is critical in determining coverage under revised Regulation M. The Commission's staff has received inquiries from lessors about the specific categories of charges that should be part of the calculation. To ensure that lessors understand that a variety of charges are included, the Board could include certain examples, prefaced by the phrase "including but not limited to" such amounts. Thereafter, the Board might state the examples of charges that are excluded from the term, contained in items "i" and "ii" of the proposed comment.
b. Dollar Limitation
Both revised and current Regulation M contain a jurisdictional limitation such that only leases whose "total contractual obligation" does not exceed $25,000 are covered.(7) In the past two decades, prices of consumer goods, including leased items such as automobiles, have risen substantially. Because the dollar amount in this jurisdictional limitation 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 provision could, therefore, severely limit utility of the law's important consumer protections. The Commission recognizes that the Board may be reluctant to raise this ceiling (through Regulation M or the Commentary), in view of the statutory limitation. If so, the Commission urges the Board to consider this issue for the future, with a view toward possible recommendation to Congress of an amendment to the CLA to increase the $25,000 limitation.
3. Leases of Property Incidental to Service - 213.2(e)-7 of proposed Commentary
The Commission supports the Board's incorporation of examples to provide guidance on what types of leases of property are deemed "incidental to service," and therefore outside of Regulation M's scope (e.g., certain equipment for home entertainment systems, security alarm systems, and propane gas service). The Commission also supports the Board's statement in the text of the Federal Register Notice accompanying issuance of the proposed Commentary ("proposed Commentary Notice") that "[t]he leasing of a cellular telephone is not incidental to obtaining cellular service and is, thus, covered under the regulation."(8) However, the text of the proposed Commentary Notice will not accompany reprints of the Commentary in either the CFR or the Commentary booklets printed by the Board. Thus, it may not be available as guidance to many lessors and consumers in the future. Because of the rapidly increasing use of cellular service, the Commission, therefore, suggests including the Board's statement on cellular telephones in the Commentary itself.
C. Consummation - No proposed provision
The proposed "Definitions" section contains no explanation of the term "consummation." Instead, guidance regarding this term is provided in 213.4(b) of the proposed Commentary.(9) "Consummation" plays a substantial role under Regulation M: it is the trigger point for lessors' responsibility to provide written lease disclosures to consumers, and it also affects the meaning of various mandatory disclosures.(10) Because the term appears in several provisions in revised Regulation M as well as the proposed changes to revised Regulation M, the Commission urges the Board to move the explanation of this term to the "Definitions" section, where it can be readily located.(11)
II. General Disclosure Requirements - 213.3 of proposed Commentary
A. General Requirements - 213.3(a) of proposed Commentary
1. Clear and Conspicuous Standard - 213.3(a)-2 of proposed Commentary
The proposed definition of "clear and conspicuous" for written disclosures retains the "reasonably understandable" standard from the current Commentary as well as the mandate that disclosures not be presented in a manner that obscures the relationship of the terms to each other.(12) The proposed comment also incorporates the new requirement that written disclosures "be legible, whether typewritten, handwritten, or printed by computer."
The Commission strongly supports the requirement that lessors provide consumers with clear, readable, and understandable written disclosures. Such disclosures enhance consumers' ability to understand lease terms and make informed choices. In the past, some consumers have had difficulty locating important information on their lease contracts, and some may have received complex information presented in a confusing manner. The Commission believes that the clear and conspicuous requirement will enhance consumers' understanding of their lease obligation before signing the lease contract.
2. Number of Transactions - 213.3(a)-4 of proposed Commentary
In this provision, the proposed Commentary permits lessors to utilize various options for disclosure. The provision states that a lessor may disclose: 1) two leased items as one or two transactions; 2) a lease that includes insurance or other incidental services as a single lease transaction or as a lease and a credit sale transaction; and 3) a prior "refinanced" or "rolled over" loan or lease balance as part of the lease transaction or as a credit transaction (separate from the lease transaction).
The Commission understands that this provision was intended to allow flexibility to lessors.(13) However, allowing disclosure of insurance or a prior loan or lease balance (items "2" and "3" above) as a separate transaction from the primary lease transaction may conflict with important provisions and aims of the revised Regulation. First, 213.4(e) of revised Regulation M mandates disclosure of the "total of payments," broadly described as "the amount you will have paid by the end of the lease."(14) Indeed, many consumers may likely believe that the "total of payments" -- based on the plain meaning of that term -- includes insurance payments or payments for other incidental services, as well as the prior loan or lease balance. Armed with this disclosure statement, consumers wishing to comparison shop or fully understand the offered lease may not realize that they must look to other documents to reflect the total cost of a particular transaction. In addition, the possibility of consumer confusion increases if some lessors include such amounts on the lease contract, but others do not. Moreover, because "other incidental services," as used in this provision of the Commentary, is an undefined term, lessors may attempt to describe a wide range of items as "incidental" and exclude them from the primary lease disclosure.(15)
In sum, the Commission believes that to avoid the possibility of consumer deception, the lease contract should, where possible, reflect the consumer's total obligation regarding a transaction. The Commission urges the Board to reconsider this provision or, at a minimum, to limit the circumstances in which lessors may disclose components of a transaction separately from the primary lease obligation to preclude deceptive practices, such as lessors' splitting a single transaction into an unrecognizable array of separate agreements. If the Board permits lessors to provide separate transactions in any of the three situations stated in the proposed Commentary, the Commission also recommends adding a requirement to the provision that the disclosures must describe accurately the obligations of each transaction in a manner not confusing or misleading to a reasonable consumer. In addition, the Board may wish to consider requiring lessors to provide a reference on each disclosure to the other related disclosures to more clearly apprise consumers that the transaction involves several forms.
B. Use of Estimates (Standard) - 213.3(d)(1) of proposed Commentary
1. Time of Estimated Disclosure - 213.3(d)(1)-1 of proposed Commentary
Section 213.3(d)(1)-1 of the proposed Commentary
explains that lessors may use estimates where necessary
information is "unknown or unavailable at the time
disclosures are made." Section 213.3(d)(2) of
revised Regulation M provides that these estimates must
be made "on the basis of the best information
reasonably available," requiring the lessor to
"act . . . in good faith [and] exercise due
The Commission supports allowing use of estimates in the circumstances stated. However, the Commission suggests that this provision more closely track the approach of the correlative provision in Regulation M.(16) More specifically, the Commission recommends revising the proposed language to more clearly limit its applicability to bona fide situations, as follows:
The lessor may use estimates to make disclosures if necessary information is unknown or unavailable at the time disclosures are made, after reasonable efforts have been made to ascertain the information.
2. Residual Value of Leased Property at Termination - 213.3(d)(1)-3 of proposed Commentary
Under this provision, when the lessee's liability at the end of the lease term is based on the residual value of the leased property as determined at consummation, the residual value estimate must be reasonable and based on the best information reasonably available to the lessor. In making this calculation, a lessor "may use a generally accepted trade publication listing estimated current or future market prices for the lease property or may rely on other information, its experience, or reasonable belief if those sources provide the better information."
The Commission supports the use of generally accepted trade publications as a reliable source for deriving the estimate of the residual value. Similarly, consumers may be more likely to trust estimates based on these trade publications because they can independently verify the estimates. The Commentary does not, however, provide specific guidelines for lessors who utilize the language in this provision and rely on "other information, [their] experience, or reasonable belief" to derive the estimated residual value because those approaches "provide better information." Without further discussion or concrete examples, the provision could permit lessors to rely on these terms for even patently unfounded estimates. Therefore, some clarification is needed to ensure that the estimates provided by lessors have a reasonable basis. For this reason, the Commission recommends that the Board provide more guidance for lessors relying on sources of information other than generally accepted trade publications. One approach may be to specify that the estimated residual value should be based upon general industry standards or the lessor's demonstrated course of business, if reasonable. The Board may also wish to consider adding a provision that the burden remains on the lessor to show that any sources it utilizes in determining the residual value are at least as predictive as generally accepted trade publications.
3. Retail or Wholesale Value - 213.3(d)(1)-4 of proposed Commentary
This provision permits lessors to choose "either a retail or wholesale value in estimating the value of leased property at termination, provided the choice is consistent with the lessor's general practice or intention when determining the value of the property at the end of the lease term" (emphasis added). The meaning of the term "intention" may be unclear, and this provision could permit lessors to utilize a skewed value selected for any one transaction. To provide more concrete guidance to industry members, the Commission suggests that the Board clarify this term by including examples or by substituting the phrase "demonstrated course of business, if reasonable" for "intention."
III. Content of Disclosures - 213.4 of proposed Commentary
A. Amount Due at Lease Signing - 213.4(b)-2 of proposed Commentary
This provision states that, for purposes of written disclosure requirements, the term "amount due at lease signing" does not include fees payable upon delivery when delivery occurs after consummation. Instead, fees paid upon delivery must be disclosed as taxes and fees under 213.4(n) or as other charges under 213.4(d).(17) Although the Commission understands that this language is, in part, drawn from statutory mandates,(18) this provision appears inconsistent with the treatment of inception fees in the advertising provisions of the revised CLA (now reflected in proposed changes to revised Regulation M and correlative provisions of the proposed Commentary).
More specifically, under the revised CLA, advertisers must disclose the amount due "on or before consummation of the lease or delivery of the property, whichever is later," whenever certain triggering terms are stated in the promotion (emphasis added).(19) The proposed changes to 213.7(d)(2)(ii) of revised Regulation M include this same language. However, as noted above, with respect to the written disclosure rules, the disclosure of front-end charges payable by the consumer is labelled the "amount due at lease signing" (emphasis added) under revised Regulation M,(20) and, based upon the above provision of the Commentary, this amount specifically excludes any amount, including taxes and fees, payable at delivery. To avoid confusion to consumers and lessors, the Commission believes these disclosures should be consistent. If the Board believes it cannot harmonize these disclosures based upon current statutory requirements, it may wish to consider recommending to Congress an amendment to the CLA.(21)
B. Early Termination (Method) - 213.4(g)(1)-2 of proposed Commentary
Under 213.4(g) of revised Regulation M, lessors must disclose various information pertinent to early termination of the lease. Section 213.4(g)(1)-2 of the proposed Commentary makes clear that lessors have the responsibility to clarify, inter alia, the amount or method of determining the amount of any penalty or other charge for early termination, which must be reasonable. This Commentary section provides various guidance regarding early termination disclosures for lessors who choose to disclose the method of determining the amount of any early termination charge rather than the dollar amount itself, including stating that lessors must provide "[a] full description of the method . . ." The Commentary cautions, as well, that if lessors refer to a named method of computing early termination charges (e.g., constant yield or sum of the digits), they must provide a written explanation of that method if requested by the consumer, and they may provide that explanation (at their option) as a matter of course in, or accompanying, the other lease disclosures. Some of these requirements are demonstrated through the Model Forms to Regulation M ("Model Forms").(22)
However, while the Model Forms contain helpful illustrations about early termination disclosures, the Commission notes that no examples are included that provide descriptions of early termination "methods" used to determine the penalty or other charge amount. The Board may wish to consider providing at least one example through the Model Forms of an appropriate description of an early termination method that would comply with 213.4(g)(1) of revised Regulation M and 213.4(g)(1)-2 of the proposed Commentary on this issue. Such methods can involve exceedingly complex formulas and procedures. Indeed, early termination disclosures pertaining to the "method" of calculation have, over the years, spawned litigation (under both current Regulation M and various state laws). Hence, guidance on this issue could be beneficial to both lessors and consumers.
C. Maintenance Responsibilities - 213.4(h) of proposed Commentary
Revised Regulation M requires various disclosures about lessors' and lessees' maintenance responsibilities under the lease, including charges for excess wear and use. Disclosure of a lessee's liability for excess wear and use is extremely important because such charges can be substantial.(23) The proposed Commentary offers some guidance in this area. However, the Commission recommends clarification of the Commentary provisions to eliminate any possible confusion among lessors and consumers.
More specifically, under 213.4(h)(2) of revised Regulation M, lessors must provide a statement of the lessor's standards for wear and use (if any), which must be reasonable.(24) The proposed Commentary offers no guidance on what constitutes an adequate description of such "standards," and there are considerable differences in lessors' practices on this issue. The Commission's staff has seen some wear and use disclosures that state specific benchmarks in categories, upon which lessors and lessees can readily determine whether "excess" wear and use has occurred.(25) Other lessors simply state that a lessee may be liable for "excess wear and tear and excess mileage," a more subjective description. Further, some lessors have apprised the Commission's staff that they do not believe this provision applies to their circumstances at all because the industry, rather than they (the lessors), sets the standards. The Commission believes both that specific guidelines on what constitutes excess wear and use, and clarification that all lessors who charge consumers for such items must provide the required disclosures, are important to apprise consumers of the condition in which their vehicle must be maintained to avoid further charges on this topic. If the Board so agrees, the Commission strongly recommends clarifying in the Commentary that this approach is required. The Commission also recommends providing examples of language that would be acceptable for compliance with this requirement.(26)
It is also unclear whether 213.4(h) of revised Regulation M requires disclosure of the cost of excessive wear, or only of the substantive standard upon which such cost is based.(27) Section 213.4(h)(2) of revised Regulation M, which requires disclosures pertaining to both excessive wear as well as excessive use, focuses only on disclosure of the "standards" for these items. Section 213.4(h)(3) of revised Regulation M requires a special notice alerting consumers that they may have substantial wear and use liability, including a statement specifying the amount or method of determining any excess mileage charges.(28) Although the general alert to consumers contained in the 213.4(h)(3) notice focuses on both wear and use liability, the cost disclosure aspect of the requirement addresses only excessive mileage, thereby apparently excluding excess wear.(29) The proposed Commentary offers no explanation on this issue. The Commission believes that the costs, as well as the substantive standards, for excess wear and use should be clearly disclosed to consumers, in view of the substantial liability that these items can add to the consumer's mandatory responsibilities and strongly recommends that the Commentary clarify this point.(30)
In addition, if the Board intends that lessors must provide a cost disclosure for excess wear (as well as excess use), it would be useful to clarify through the Commentary the manner in which those disclosures should be made. For example, some lessors apprise consumers that they may charge "up to $2,000 for excess wear," and this type of statement may not be sufficient to apprise consumers of the relevant costs. If the Board believes that the costs of excess wear (and use) must be stated, and if it determines that lessors must disclose the "amount or method of determining any charge for excess wear" (as they must clearly do for excess mileage), it would be helpful to provide examples explaining how that cost disclosure should be made. Would the "up to" language, described above, be sufficient for those lessors who chose to provide a specific monetary figure? For those lessors who choose to provide a statement of the method of determining the charge (rather than the amount), would a statement referencing the "fair market value" or "replacement cost" be sufficient or is a more specific formula envisioned?
D. Purchase Option - 213.4(i) of proposed Commentary
1. Purchase Option Fee - 213.4(i)-3 of proposed Commentary
Section 213.4(i) of revised Regulation M addresses disclosures regarding the consumer's purchase option. Section 213.4(i)-3 of the proposed Commentary explains that lessors must, in this regard, disclose the existence of any fee imposed for exercise of the purchase option.
However, under this provision, lessors may disclose this fee separately or as part of the purchase option price. This may lend confusion to the disclosure and foster disparate lessor practices. Generally, revised Regulation M and the proposed Commentary emphasize full disclosure of all major lease costs and fees to consumers. It seems unlikely that, when provided a purchase option amount by lessors, consumers would be aware of the inclusion of such a fee. In addition, when comparing different leases, it may be useful for a consumer to be aware of the purchase option price separately from any lessor charge to facilitate comparison shopping and informed decisionmaking. Accordingly, to ensure that consumers are aware of both the existence and amount of this fee, the Commission suggests that the Board require lessors to separately list the amount of a purchase option fee, or, at a minimum, apprise consumers of its inclusion in the purchase option price. This approach should also be used if the lessor permits a purchase option upon early termination of the lease.
2. Purchase Option Price - 213.4(i)-5 of proposed Commentary
Under 213.4(i)-5 of the proposed Commentary, lessors must disclose the purchase option price as a sum certain or a sum certain to be determined at a future date by reference to an independent source. Although this section mandates that the disclosure provide sufficient information so that the lessee will be able to determine the actual price when the option becomes available, it does not require that the source be readily available. Thus, this provision could permit lessors to reference an independent source that consumers might not be able to consult because it is not readily available to them. The Commission recommends, therefore, that the Board consider modifying this comment to require lessors to reference an independent source that is reasonably accessible or to indicate a place where consumers could locate that source.
E. Right of Appraisal - 213.4(l)-1 of proposed Commentary
Under 213.4(l) of revised Regulation M, if the lessee's liability at early termination or the end of lease term is based on the realized value of the property, the lessor must disclose that the lessee may obtain at his or her expense a professional appraisal by an independent third party (agreed upon jointly by lessee and lessor) of the value that could be realized at sale of the property.(31) However, 213.4(l)-1 of the proposed Commentary states that if the lessee is liable for unreasonable wear or use, but not for the residual value of the property, the lessor need not disclose the lessee's right to an independent appraisal. The provision then states that lessors can reasonably expect lessees to return an undented car with four good tires at lease end and that even though the lessee is held liable for damage to these or other items, it need not disclose the lessee's appraisal right.(32)
This Commentary provision focuses on the issue of disclosure, although it also indirectly discusses the substantive issue of whether the consumer has an independent appraisal right at all. From the "plain language" of the provision, which addresses disclosure "of the appraisal right," it appears that consumers may have such an independent appraisal right regarding "wear and use" liability (regardless of the type of transaction), but that the lessor need not disclose that right.(33) If true, such a right could be beneficial to consumers, as "wear and use" liability can add thousands of dollars to consumers' lease obligations (and consumers' contracts may not fully amplify the terms).(34) However, based upon discussions between the Board and Commission staffs, the Commission's understanding is that this appraisal right may only be available in leases where the consumer retains liability for the residual vehicle value (such as open-end lease transactions).
It is important to clarify whether consumers have a substantive right to an independent appraisal in all transactions. If the Board intends that all consumers have the right to utilize an independent third party appraisal, at the consumer's expense, to resolve disputes that may arise concerning these charges, such a substantive right should be expressly stated. Conversely, if the Board intends, by this provision, that no such right applies (and, hence, that lessors have no applicable disclosure mandate), that point should also be stated explicitly.
F. Fees and Taxes - 213.4(n)-1 (and other provisions) of proposed Commentary
Under Section 213.4(n) of revised Regulation M, as revised by proposed changes to that provision, lessors must disclose the total dollar amount of all taxes that the consumer must pay in connection with the lease.(35) Although this provision seems absolute on its face, the interrelation between this provision and others under revised Regulation M regarding taxes raise complex issues that are not addressed by the proposed Commentary. The Commission's staff has received telephone inquiries about the proper treatment of taxes under revised Regulation M both from lessors and consumers, and the Commission believes that clarification of these issues is important.
Section 213.4(n)-1 of the proposed Commentary provides that taxes payable by lessors that are passed on to consumers and reflected in the lease documentation or sticker or tax affixed to leased property must be disclosed under 213.4(n) of revised Regulation M. However, no specific examples of included taxes are provided. Moreover, this provision states that taxes payable by the lessor and absorbed as a cost of doing business need not be disclosed. The absence of any examples of included taxes -- particularly in view of the "cost of doing business" exclusion -- may be confusing for lessors and consumers.
More specifically, are taxes that are incorporated into the "agreed upon value of the vehicle" and its related disclosure, the "gross capitalized cost," in 213.4(f) of revised Regulation M,(36) and then passed on to the consumer through the sale price, considered part of the "cost of doing business" and excluded under 213.4(n)-1 of the proposed Commentary? No provision of the Commentary clarifies this point. In addition, are all taxes in the "lease documentation . . " as referenced by this provision of the Commentary included in the 213.4(n) disclosure? For example, are taxes that are part of the purchase option price so included?(37)
Further, 213.4(c)-1 of the proposed Commentary states that the "periodic payments," required to be disclosed under 213.4(c) of revised Regulation M, include taxes and maintenance and insurance charges. The Model Form disclosure for this item,(38) shows an itemization of the "base monthly payment" and the "monthly sales/use tax" (and a line for other items in monthly payment). However, revised Regulation M does not mandate an itemization of the monthly payment, and presumably, the itemization in the Model Form is optional (albeit recommended by the Board and useful to consumers), although the Commentary does not address this issue. In addition, it is unclear whether and what taxes, if any, are included in the base monthly payment, instead of the "monthly sales/use tax" portion of that itemization on the Model Form. Again, are taxes that are capitalized as part of the "agreed upon value of the vehicle" and the "gross capitalized cost," and thus treated as part of the amortized amounts, indirectly included in the "base monthly payment?" Conversely, are they instead included in the "monthly sales/use tax" item? In the alternative, is the "monthly sales/use tax" item only to be utilized for taxes that are "add-ons" to the monthly payments (on a periodic basis) and that are excluded from the "agreed upon value of the vehicle" and "gross capitalized cost" (and thus not subject to yield or the lease rate).(39)
The Commission recommends clarification of these issues. Lessors need clear direction about proper treatment of these charges. Similarly, tax payments can add substantial amounts to the consumer's obligation, and some consumers may not be aware of their obligation for the payments in a lease transaction.(40) Additional guidance on these points is, therefore, crucial.
IV. Advertising - 213.7 of proposed Commentary
A. Usually and Customarily Available - 213.7(a)-2 of proposed Commentary
Under 213.7(a) of revised Regulation M, lease promotions may only offer specific amounts or terms that are "usually and customarily" available. Section 213.7(a) of the proposed Commentary provides guidance on the term "usually and customarily."(41) The Commission believes that this requirement is critical for truthful advertising and supports inclusion of Commentary explanation regarding this requirement.
The Commission's staff has received inquiries from advertisers and consumers about lease advertisements that may not be "usually and customarily" available. For example, car lease ads often prominently offer low or no amounts "down" ("$0 down") and/or a low monthly payment ("$199 a month"). These offers may attract consumers to automobile dealerships where salespeople may charge consumers higher amounts to lease the advertised vehicle. Both consumer groups and industry associations have expressed some concern about the bait-and-switch aspect of such types of advertisements and expressed interest in further guidance on the mandates of this provision.
The Commission believes that advertisers must have a reasonable basis for specific lease offers included in advertisements. The Commission also believes that advertisers should retain some flexibility in meeting that standard. For example, in addition to other possible situations, an advertiser could have a "reasonable basis" for a particular lease offer advertised in the following examples: 1) where an automobile dealer advertises terms that are, in fact, sponsored by a finance company lessor; 2) where an advertiser states terms that reflect a continuing course of dealing by the lessor (i.e., terms that the lessor has recently offered and is reasonably expected to continue to offer); or 3) where a lessor sets competitive lease terms based on current market conditions and offers such terms for a reasonable time. Although the specifics of the "reasonable basis" may raise issues that the Board wishes to consider over time, the Commission believes that the standard itself is one that currently undergirds the "availability" requirement of 213.7 of revised Regulation M. Accordingly, the Commission suggests that the Board consider adding the "reasonable basis" language to that provision.
B. Clear and Conspicuous Requirement - 213.7(b)-1 of proposed Commentary
In 213.7(b)-1 of the proposed Commentary, the Board has proposed incorporating a "reasonably understandable" rule in defining the requirement that advertising disclosures must be "clear and conspicuous." The Commission strongly supports this standard. Regulation M's required advertising disclosures are intended to facilitate comparison lease shopping and to prevent advertisers from making misleading offers by emphasizing only the most attractive terms of the offer. For consumers to use this information, they must, at a minimum, be able to read (or hear) and understand the mandatory disclosures. This standard is also consistent with the reasonably understandable standard for written disclosures under 213.3(a)-2 of the proposed Commentary. The Commission believes that this standard will provide useful guidance to the industry and help ensure that consumers can read (or hear) and understand the required disclosures.
The Commission also believes that additional guidance regarding these requirements may be useful. Because revised Regulation M incorporates many new advertising disclosure requirements and these rules have changed considerably from prior mandates, the Commission suggests that the Commentary expressly explain that the "reasonably understandable" standard applies to all media: print (including on-line messages), as well as television and radio. Similarly, because an advertiser is permitted to make reduced disclosures within a television or radio advertisement under revised Regulation M, it is important that the Commentary clarify that the full disclosures provided through the toll-free telephone number or the print advertisement must also be provided in a clear and conspicuous manner to facilitate understanding of this information.
In addition, the Commission urges the Board to make explicit that consumers must be able to both read (or hear) and comprehend the required disclosures. While consumers may be able to read the text, unless the message is also understandable, the disclosures could be meaningless.(42)
Accordingly, the Commission recommends the following changes to this provision:
Each disclosure required in an advertisement, including all references to a toll-free number or print advertisement in television and radio advertising, and each disclosure required to be provided in a toll-free number under 213.7(f)(1), must be reasonably understandable. For example, very fine print in a television or print advertisement or detailed and rapidly stated information in a radio advertisement or a toll-free number does not meet the clear and conspicuous standard if consumers cannot see and read (or hear) and comprehend the information required to be disclosed.
Finally, the Commission suggests clarification of one issue in the Federal Register Notice ("revised Commentary Notice") that will accompany issuance of the revised Commentary. In the proposed Commentary Notice pertaining to 213.7(b), the Board states that it deleted the reference in its proposed 1995 Commentary to the fact that lease disclosures must appear on a television screen for at least five seconds.(43)
The Commission strongly supports this change. As previously noted in the 1996 Commission Comments, and given the disclosures required under Regulation M and the CLA, the Commission believes that a five-second requirement is insufficient to assure clarity of mandatory lease information.(44) Indeed, due to the varied nature of lease advertising in the market today, establishing a specific duration for lease disclosures presented in televised promotions is not practical and would not address other factors that affect clarity and conspicuousness. For example, a five-second disclosure provided in type too small for consumers to read or obscured by movement behind the disclosure would not be helpful to consumers. As a result, in recent years, the Commission has instead focused on a number of specific considerations that are critical in ensuring clear and conspicuous disclosures, such as: 1) placement; 2) size; 3) length; 4) contrast; and 5) timing.
Accordingly, the Commission suggests that the Board clarify in its Notice accompanying issuance of the revised Commentary that a five-second rule would not be (instead of "may not be") an adequate test to determine whether required disclosures are clear and conspicuous.
C. Amount Due at Lease Signing - 213.7(b) of proposed Commentary
1. Itemization - 213.7(b)(1)-1 of proposed Commentary
Consistent with the advertising requirements of the revised CLA (and proposed changes to revised Regulation M), 213.7(b)(1) of the proposed Commentary explains that only the total of the amounts due at lease signing -- rather than an itemization of components -- is required in lease advertisements. However, some advertisers are nonetheless continuing to provide this itemization in their promotions. To avoid misleading offers, the Commission recommends that the Board clarify that advertisers that include such an itemization of inception fees must not use such itemization to obscure the total amount of such fees or make it difficult for consumers to read and understand the latter mandated disclosure.
2. Prominence Rule - 213.7(b)(1)-2 of proposed Commentary
Under 213.7(b)(1) of revised Regulation M, advertisers must not state any affirmative or negative reference to a charge that is part of the total amount due at lease signing (except for the periodic payment) more prominently than disclosure of the total amount due at lease signing. Section 213.7(b)(1)-2 of the proposed Commentary explains that neither oral nor written references to such components may be more prominent than disclosure of the total amount.
This provision adds useful guidance regarding this important requirement. However, because the prominence rule is a new rule for lease advertisements, the Board may wish to expand its explanation of this mandate in the Commentary. More specifically, it would be useful if the Commentary set out factors for advertisers to consider in determining "prominence," such as whether the terms involve the same or similar typesize, shade, background, duration, proximity, and/or manner (audio or video) as the trigger term.
D. Triggering Terms in Ads - Additional Terms - 213.7(d)(2) of proposed Commentary
1. No Payment Required at Lease Signing - No proposed provision
The Commission notes that the revised CLA requires disclosure of "the total amount of any initial payments required on or before consummation of the lease or delivery of the property, whichever is later."(45) The Board in its proposed changes to Regulation M implementing this provision, however, requires that advertisers disclose not only "the total amount due at lease signing or delivery, whichever is later," but also "that no payment is required." It is unclear whether the Board will retain this additional requirement when it finalizes Regulation M.(46) However, to provide adequate guidance to lease advertisers, if the requirement is retained, clarification in the Commentary that the Board is retaining this requirement would be useful.
2. Third-Party Fees That Vary by State - 213.7(d)(2)-1 of proposed Commentary
The proposed Commentary requires a lessor: 1) to disclose the fact that third-party fees, such as taxes and license and registration fees are excluded from the total due at lease signing provided in an advertisement or 2) to provide a total due at lease signing that includes such third-party fees, using the fees from one state, and to disclose that such state's fees are included and that fees may vary by state. This approach is reasonable for both advertisers and consumers. In the Commission staff's experience, advertisers in a national advertisement may have difficulty disclosing the amounts of such taxes and fees for each state in a short advertisement. Nevertheless, because such fees can add significant amounts to the total a consumer must pay at lease inception, it is important that consumers are aware that the fees are mandatory.
The Commission suggests two minor clarifications in this provision. First, the provision specifically references options for a "lessor." Because 213.7(a)-1 of the proposed Commentary makes explicit that advertisers (including persons other than lessors) are required to comply with the Regulation M's advertising provisions, this provision should reference "advertisers" instead of "lessors."
Second, the Commission recognizes -- as did the Board -- that advertisers need some flexibility in making these disclosures, where multiple states are involved. However, if advertisers select a state's fees that vary considerably from the true amount of the actual charges, consumers may be misled about these fees. To balance these considerations, the Board may wish to consider including in the Commentary provisions to minimize the potential for misrepresentation of these costs. For example, for companies that do business primarily in one state -- although they may have some business elsewhere -- the Commentary could specify that advertisers should use the "primary state's fees" in the example. In addition, for companies whose business is regional or national, the Commentary could provide that a state in the "middle range" of fees -- not the highest or the lowest -- should be utilized.
3. Typical Example - No proposed provision
Currently, advertisers promoting credit offers involving one or more typical extensions of credit may utilize the "typical example" rule under Regulation Z.(47) For example, if a credit advertiser offers "Downpayments as low as $99," or "Latest models only $199 per month," a credit advertisement may meet the disclosure requirements of 226.24 of Regulation Z by providing an example.(48) In the Commission's experience, many credit advertisers utilize this rule to comply with Regulation Z's advertising requirements.
The Commission believes that a clear statement of this rule would be extremely useful in lease advertising as well.(49)
Indeed, in some ads, it may be virtually impossible to comply with Regulation M without it because the promotions involve an offer applicable to many vehicles, such as "$500 downpayment." The Commission believes this provision should be clearly incorporated in the proposed Commentary, utilizing the type of language included in Regulation Z and its Commentary. This information would facilitate compliance with the disclosure requirements by lease advertisers without impairing needed information to consumers.(50)
E. Alternative Disclosures (Toll-free Number or Print Ad -- Multiple Purpose Number) - 213.7(f)(1)-3 of proposed Commentary
In this provision, the proposed Commentary explains that lessors who use a "multi-purpose number" should provide the disclosures "early in the telephone message to ensure that the option to request disclosures is not obscured by other information." This discussion provides useful guidance to lessors and advertisers on how to comply with the new alternative disclosure options.
However, not all lessors (e.g., smaller automobile dealers), may choose to invest in a toll-free number that provides several options to consumers. Instead, they may provide only one message, without options, when a consumer calls.(51) To ensure that all consumers calling a toll-free number under the alternative disclosures receive the disclosures early in the message, we urge the Board to add the following sentence at the conclusion of the proposed comment:
Even if the toll-free number does not provide the consumer with several options, the lease disclosures should be provided early in the telephone message to ensure that the required information is not obscured or unreasonably delayed by the presentation of other information.
The Commission appreciates your consideration of these views and looks forward to working with the Board on any continuing issues in its review of Regulation M and the Commentary.
By direction of the Commission.
Donald S. Clark
1. In this letter, Regulation M now in effect, 12 C.F.R. 213 ("current Regulation M"), is referred to by the CFR citation or through a provision of current Regulation M, e.g., 12 C.F.R. 213.2 or 213.2 of current Regulation M. The revisions to Regulation M issued by the Board last fall, 61 Fed. Reg. 52246 (Oct. 7, 1996) ("revised Regulation M") are referred to through a provision of that proposal, e.g., 213.2 of revised Regulation M. The Board's proposed revisions to revised Regulation M, 62 Fed. Reg. 62 (Jan. 2, 1997) ("proposed changes to revised Regulation M"), designed to implement changes to the Consumer Leasing Act, 15 U.S.C. 1667-1667e ("CLA") mandated by the Economic Growth and Regulatory Paperwork Reduction Act of 1996, Pub. L. 104-208, 110 Stat. 3009 (Sept. 30, 1996) ("revised CLA"), are referred to through a provision of that proposal, e.g., proposed changes to 213.7 of revised Regulation M. Statements about a nonspecific version of Regulation M are made by reference to "Regulation M."
The Board's proposed Official Staff Commentary for Regulation M, 62 Fed. Reg. 7363 (Feb. 19, 1997) ("proposed Commentary"), which would implement both revised Regulation M and the proposed changes to revised Regulation M, is referred to through a provision of that proposal, e.g., 213.7 of proposed Commentary. The Commentary to current Regulation M now in effect, 12 C.F.R. 213, Supp. 1 ("current Commentary"), is referred to by reference to the CFR citation or through a provision of the current Commentary, e.g., 12 C.F.R. 213.2-1, Supp. 1 or 213.2-1 of the current Commentary. Statements about a nonspecific version of the Commentary are made by reference to the "Commentary."
The Commission enforces the CLA, an amendment to the Truth in Lending Act ("TILA"), 15 U.S.C. 1601 et seq., Regulation M, and the Commentary for automobile dealers, independent leasing companies, finance companies, and the vast majority of other nonfederally chartered or nonfederally insured lessors across the nation. See Section 108(c) of the TILA, 15 U.S.C. 1607(c).
2. See 60 Fed. Reg. 48752 (Sept. 20, 1995). The Commission also submitted comments on that proposal. See Letter to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System from the Commission (Jan. 16, 1996) ("1996 Commission Comments").
3. Lease transactions now provide over thirty percent of new car deliveries. Banks, credit unions, and independent finance companies are seeking to expand their business in this area, and some auto manufacturers plan to expand leasing to fifty percent of their deliveries. "Lure of Leasing: Experts See Market Growing as Makers Have a Tough Time Cutting Subsidies," Automotive News (Jan. 27, 1997) at 10I.
4. The Commission's staff has received telephone inquiries in which automobile dealers and others who have recently begun offering leases expressed concern about their lack of familiarity with many aspects of these complex transactions. The Commission's staff is working on education projects to enhance both consumer and industry understanding of lease transactions and is participating in the Board's Lease Education Forum, which is developing various materials about leases.
5. See 213.2(b)(2) of revised Regulation M.
6. See 213.2(a)(2)-1 of the current Commentary. This phrase was deleted in the proposed Commentary.
7. Section 213.2(e)(1) of revised Regulation M; 213.2(a)(6) of current Regulation M. These limitations implement a statutory requirement under the CLA. 15 U.S.C. 1667(1).
8. See 62 Fed. Reg. 7364.
9. Section 213.4(b)-1 of the proposed Commentary provides that: (1) the term "consummation" refers to the time when a contractual relationship is created; and (2) that such time is determined under state or other applicable law.
10. See 213.3(a)(3) of revised Regulation M (lease disclosures must be provided prior to consummation); 213.2(n) of revised Regulation M (residual value is amount estimated or assigned at consummation); 213.3(e) of revised Regulation M (if event occurring after consummation renders a required disclosure inaccurate, such inaccuracy is not a violation); and proposed changes to 213.7 of revised Regulation M (advertising requirements).
11. This change would also be consistent with Regulation Z, 12 C.F.R. 226, which implements the TILA. For credit transactions, the term "consummation" is explained in the "Definitions" section of Regulation Z and the Official Staff Commentary for Regulation Z, 12 C.F.R. 226, Supp. 1 ("Regulation Z Commentary"), rather than in the substantive disclosure rules. See 12 C.F.R. 226.2(a)(13) and 12 C.F.R. 226.2(a)(13)-1, Supp. 1, respectively.
12. Section 213.4(a)(1)-1 of the current Commentary.
13. Additionally, regarding the treatment of prior lease or loan balances that are refinanced or rolled over, the provision was intended to address the possibility that the prior balance may, under state law, constitute a credit sale, rather than a lease.
14. See also the text of the Federal Register Notice accompanying issuance of revised Regulation M ("revised Regulation M notice") regarding 213.4(e) of revised Regulation M, where the Board states that this disclosure was adopted as a tool for comparing leases and that "the disclosure includes all payments the consumer is obligated to make under the lease . . ." 61 Fed. Reg. at 52250.
15. For example, lessors might separately state as "incidental charges" amounts that would otherwise be disclosed as "other fees" on the primary lease form.
The proposed alternatives could also complicate, and increase the costs of, enforcement of Regulation M. Enforcement agencies would likely have to review a lessor's credit as well as lease transactions to assess compliance with Regulation M.
16. Section 213.3(d)(1) of revised Regulation M is more narrow. It refers to items that are "unknown or unavailable after reasonable efforts have been made to ascertain the information." Only in that situation may lessors use a reasonable estimate based on the best information available to the lessor that is clearly identified as an estimate and is not used to circumvent or evade any required disclosures.
17. Section 213.4(b)-2 of the proposed Commentary.
18. Under the CLA, lessors must disclose, inter alia, the amount of any payment by the lessee required at the inception of the lease. See 15 U.S.C. 1667a(2).
19. See 184(a) of the revised CLA.
20. See 213.4(b) of revised Regulation M.
21. 15 U.S.C. 1667a(2).
22. See, e.g., Appendix A-2 to the proposed changes to revised Regulation M.
23. See e.g., "Wear and Tear Can Dent Car Lease Budget," Ft. Lauderdale Sun-Sentinel (Jan. 30, 1997) at 8B.
24. This disclosure is "nonsegregated," i.e., it is placed outside of the segregated disclosures that appear on the primary lease form. See 213.3(a)(2) of revised Regulation M.
25. For example, some lessors may impose liability on lessees who fail to maintain the vehicle as follows: 1) at least 3/4 inch treads on all tires; 2) all tires must be part of a matching set; 3) no visible scratches or nicks on vehicle exterior, including body and windshield; and 4) no stains or tears in upholstery.
26. It would also be useful to clarify to which regulatory provision 213.4(h)-1 of the proposed Commentary relates. As drafted, it appears to apply generally to 213.4(h) of revised Regulation M, encompassing both 213.4(h)(2) and (3). However, the term "standards" is primarily used in 213.4(h)(2) of revised Regulation M, and application of the Commentary provision to 213.4(h)(3) is confusing and could be read to limit lessors' disclosure responsibilities under that subsection. If, as it appears, this provision is intended to interpret only 213.4(h)(2) of revised Regulation M, the Board might clarify that point by enumerating the "standards" provision as " 213.4(h)(2)-1" of the Commentary. This same approach might be utilized regarding 213.4(h)-2 of the proposed Commentary, which appears to apply only to 213.4(h)(3) of revised Regulation M. That provision might be enumerated as " 213.4(h)(3)-1" of the Commentary, for clarification.
27. Section 182(5) of the CLA, on which this provision is based, requires disclosure of the "amount or method of determining the amount of any liabilities the lease imposes upon the lessee at the end of the term." The plain language of this provision appears to envision providing cost information to consumers.
28. This information is part of the critical, segregated disclosures provided on the primary lease form. See 213.3(a)(2) of revised Regulation M.
29. Indeed, some lessors have expressed the view to the Commission's staff that because 213.4(h)(2) refers only to "standards" (and 213.4(h)(3) mandates a specific cost disclosure only for excess wear), it appears that no monetary disclosure is required for excess wear.
30. If the Board believes that no cost disclosures are required for excess use, this point should be made clear in the Commentary.
31. Charges for unreasonable wear and use are, at least indirectly, based on the residual value of the vehicle in both closed-end and open-end leases. Thus, whether intended or not, this provision can be read to broadly cover all types of leases not just those where the consumer's obligation is based upon the residual value of the entire vehicle.
32. This provision is carried over from 213.4(g)(14)-1 of the current Commentary. However, the increasing use of leases by consumers means that the provision may now have significantly greater impact.
33. Similarly, the nonsegregated disclosure for "early termination" in the Model Form for Closed-End Leases (Appendix A-2) (Item "c" on page 2 of the form under "Early Termination") of the proposed changes to revised Regulation M also appears to confer upon consumers an absolute right to appraisal. This disclosure commences with the clause, "[t]o the extent these charges take into account the value of the vehicle at termination . . ." Again, wear and use charges are, of course, at least partially based upon this factor.
34. As noted above, see note 23, supra, charges for excess wear and use can be substantial. Also, the average car is now driven over 15,000 miles per annum, yet some lease contracts mandate charges to consumers for mileage exceeding 10,000 or 12,000 miles. See "Personal Business Consumer Watch: Opinions Vary Widely About Leasing an Auto; Experts Debate the Advantages, Pitfalls," The Atlanta Journal/Constitution (Feb. 17, 1997) at E2.
35. Section 213.4(n) of revised Regulation M originally required disclosure, inter alia, of all "taxes required to be paid to the lessor in connection with the lease" (emphasis added). The proposed changes to this provision of revised Regulation M deleted the phrase "to the lessor."
36. Under 213.4(f)(1)-1 of the proposed Commentary, lessors "may" include taxes (and certain items, such as license fees) in the "agreed upon value of the vehicle." Use of the term "may" rather than "shall" appears to mean that such inclusions are discretionary by the lessor. However, if the lessor chooses not to include taxes in the "agreed upon value of the vehicle," and if taxes are nonetheless amortized and if the lessor's yield (or lease rate) is, in part, based on these amounts, where would these amounts be included in the lease terms and disclosures? Additional guidance on this issue would be useful. For example, it may be useful to state (as the Commission understands is the Board's intent) that if the lessor capitalizes these amounts (and calculates yield on those sums), they should be included in the "agreed upon value of the vehicle."
37. Taxes regarding the purchase option are addressed in 213.4(i)-4 of the Commentary. However, it is unclear whether these taxes are also part of "taxes and fees" disclosure under 213.4(n) of revised Regulation M. Although purchase option taxes may not be "required to be paid to the lessor in connection with the lease" in 213.4(n) of revised Regulation M, the lease contract may directly or indirectly reference these amounts because they are related to the purchase option price. As a result, such taxes may be included in the "lease documentation" -- a component of the test for coverage of "taxes and fees" in 213.4(n)-1 of the proposed Commentary. If the Board does not intend coverage of this item, some clarification is recommended.
38. See Appendix A-2 to proposed changes to revised Regulation M. The Model Forms do not, however, resolve the issues raised regarding taxes. Indeed, the line-by-line instructions for the forms contained in current Regulation M and the current Commentary were eliminated in revised Regulation M and the proposed Commentary.
39. Annual personal property taxes that are collected by the lessor and "passed-through" to the state or county tax authority might be included in this category. In some transactions, these taxes are paid annually by the consumer to the lessor; in others, the consumer pays annual tax on a monthly basis to the lessor (similar to an escrow account), and the lessor forwards the payment annually to the state or local entity.
Another issue arises where the consumer pays taxes (primarily personal property taxes) on an annual basis either to the lessor or to the tax authority directly. Are these taxes required to be disclosed as a separate payment stream under the "periodic payment" disclosure? That is, must lessors disclose multiple payment streams: 1) the first stream for regular lease payments; and 2) the second stream solely for annualized taxes? Multiple payment stream disclosures for tax purposes would cause complex disclosures and do not appear to be envisioned by either 213.4(c)-1 of the proposed Commentary or the Model Form disclosure for this item. Yet, some consumers may be unaware of their responsibility to make annual personal property tax payments because they are leasing, rather than purchasing the vehicle.
40. The Commission notes that one provision in the Commentary is particularly clear and should help clarify some disclosures. Section 213.4(d)-3 of the proposed Commentary counsels lessors that third party fees or charges collected by the lessor on behalf of third parties, such as taxes, are not disclosed as "other charges" under 213.4(d) of revised Regulation M. The Commission's understanding is this provision means that no taxes are to be disclosed under 213.4(d) of revised Regulation M. Proposed changes to revised Regulation M regarding the "Appendices" also help clarify this point, as the Board has proposed deleting the phrase "Annual Tax" from the "Other Charges" disclosure on the Model Forms. See Appendices A-1 and A-2 to the proposed changes to revised Regulation M. Numerous lessors have asked the Commission's staff about whether any taxes must be disclosed under this provision, and hence the Board's comment should be of considerable assistance.
41. This provision is carried over from 213.5(a)-2 of the current Commentary.
42. For example, consumers could read, but may not reasonably understand, required disclosures made using technical abbreviations, including "CCR" (capitalized cost reduction), "acq fee" (acquisition fee), and "sec dep" (security deposit).
43. 62 Fed. Reg. 7366.
44. See 1996 Commission Comments at 40-44.
45. Section 184(a)(2) of the revised CLA.
46. The Commission's recent lease advertising cases track the revised CLA and do not currently mandate this disclosure. However, these cases also incorporate various requirements of revised Regulation M, as amended. Hence, the companies would be required to provide this disclosure if the Board adopts the requirement as proposed. See General Motors Corp., FTC Docket No. C-3710 (Feb. 6, 1997); American Honda Motor Co., Inc., FTC Docket No. C-3711 (Feb. 6, 1997); Mitsubishi Motor Sales of America, Inc., FTC Docket No. C-3713 (Feb. 6, 1997); American Isuzu Motors Inc., FTC Docket No. C-3712 (Feb. 6, 1997); Mazda Motor of America, Inc., FTC Docket No. C-3714 (Feb. 6, 1997); and Herb Gordon Auto World, Inc., FTC File No. 942-3114 (Jan. 17, 1997).
47. See 12 C.F.R. 226.24, Footnote 49.
48. See also the Regulation Z Commentary for this provision for further explanation. 12 C.F.R. 226.24(c)(2)-4, Supp. 1.
49. Section 213.7(d)(1)-1 of the proposed Commentary allows use of "an example of typical leases with a statement of all the terms applicable to each." However, this provision does not indicate that advertisers may utilize this approach to provide all the required disclosures nor does it provide guidance on the manner of using such a rule.
In contrast, 226.24(c)(2)-4 of the Regulation Z Commentary, entitled "Use of examples," expressly explains:
Some lease advertisers are utilizing a "typical example" rule using the Regulation Z provision by analogy. Less sophisticated lease advertisers are unaware of this approach and some advertisers -- as well as trade associations -- have raised this issue with the Commission's staff as recently as this month. In any event, the absence of a clear "typical example" provision renders compliance with Regulation M more complex.
50. The Commentary could specify, for example, that Regulation M permits a lease advertiser offering a "$250 downpayment" to satisfy the disclosure requirements by utilizing a "typical example" based on an available vehicle to which those terms are applicable. However, the Commentary should clarify that where an advertiser places several different monthly payment amounts in the advertisement, different examples would be necessary if the same disclosures are not applicable to each payment offer.
51. In this situation, the consumer becomes a "captive listener." This fact may be attractive to lessors who intend to include a promotional message before providing the required disclosures.