FTC Supports Improved Lease Disclosure Requirements

The Federal Trade Commission has offered strong support in addition to several suggestions for better clarifying how companies leasing cars and other personal property must disclose important cost information to consumers in comments the Commission has filed with the Federal Reserve Board ("Board") regarding the Board's proposed changes to the Official Staff Commentary ("Commentary") on Regulation M. This regulation governs the disclosures consumers are to receive when leasing a car or other personal property, and the Commentary offers important guidance to the industry about complying with the regulation.

Recent FTC settlements with major automobile manufacturers and an automobile dealer require that the "clear and conspicuous" standard for advertising cost disclosures means that the disclosures are understandable to an ordinary consumer; the settlements also discuss issues such as placement, size, length, contrast and timing of disclosures in achieving the standard. The FTC said it supported the Board's decision to adopt a "reasonably understandable" standard for advertising disclosures' clarity and to drop a proposed "5-second" approach for advertisements, but suggested that the Board offer additional guidance similar to that in the FTC's settlements. The FTC also said it supports the Board's clarification that Internet advertising is covered by Regulation M and suggested broadening the definition so it would encompass new technological developments.

Regulation M implements the Consumer Leasing Act ("CLA"), which covers lease transactions for vehicles or other personal property where the contractual obligation does not exceed $25,000 and has a term of more than four months. Leases accounted for about one-third of all passenger car transactions in 1995, according to the Board. The FTC is the primary enforcement agency for consumer leasing requirements. The Fed adopted a revised Regulation M last fall and is considering some limited revisions to those changes to implement amendments to the CLA's advertising requirements by Congress in fall 1996; in February 1997, the Board requested comments on proposed changes to its Commentary. The final revised Regulation M and Commentary are expected to become optionally effective in April and mandatorily effective on Oct. 1, 1997.

In addition to the recommendations noted above, the FTC also suggested that the Board, among other things:

• make specific changes to limit the splitting of lease transaction disclosures into an array of multiple forms that could make it difficult for consumers to compare deals;
• better define what constitutes a "penalty," under the definition of "consumer lease," to clarify the circumstances when Regulation M may cover a month-to-month lease or a lease with four periodic payments or less;
• clarify the "estimated residual value" to ensure that lessors cannot rely on patently unfounded estimates of the value of the property;
• add guidelines to ensure lessors clearly disclose to consumers what constitutes excess wear and use, and require all lessors who charge for excess wear and use to clearly disclose this fact and how the amount will be determined;
• require lessors to list separately the amount of a fee that must be paid for a purchase option or, at a minimum, to apprise consumers of its inclusion in the purchase option price;
• ensure that consumers can locate the "independent source" of a purchase option price;
• clarify whether consumers have a right to an independent appraisal when they are not responsible for the residual value of a car, but where they are liable for wear and use; and
• clarify how various tax payments -- which can add substantial amounts to consumers' costs -- are to be treated in various disclosures.

The Commission vote to file these comments with the Federal Reserve Board was 5-0.

Copies of the comments as well as news releases on recent FTC cases alleging violations of Regulation M by car manufacturers and dealers are available from the FTC's web site at http://www.ftc.gov and also 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 Matter No. P934806)