FTC Staff Comment to the Hon. Jake Garn Concerning S. 1908, the Consumer Lease and Lease-Purchase Agreement Act

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F'"EDERAl TRADE COMMISSION
WASHINGTON. 0 C 	205S0
March 	10, 	1986
COMMISSI~
APPROVEI
P cf& "'tr .3 /
The 	Honorable 	Jake 	Garn, 	Chairman
Committee 	on 	Banking, 	Housing 	and
Urban 	Affairs
United 	States 	Senate
Washington, 	D.C. 	20510
Dear 	Mr. 	Chairman:
The 	Federal 	Trade 	Commission 	is 	pleased 	to 	respond 	to 	your
request 	for 	comment 	on 	S. 	1908, 	the 	·Consumer 	Lease 	and 	Lease-
Purchase 	Agreement 	Act W ("bill W ). 	Our 	comments 	address 	both 	the
goal 	of 	Consumer 	Leasing 	Act 	("Act") 	simplification 	and 	the
specific 	provisions 	in 	the 	bill 	that 	we 	believe 	will 	significantly
affect 	compliance.
1. 	Consumer 	Leasing 	Act 	Simplification
The 	Commission 	sup?Orts 	simplification 	of 	the 	Consumer 	Leasin(
Act 	disclosures. 	We 	support 	the 	bill's 	focus 	on 	those 	items 	of
information 	that 	are 	most 	important 	to 	consumers 	when 	comparison
shopping, 	such 	as 	total 	lease 	costs, 	payment 	terms, 	and 	the 	amount£
due 	at 	the 	beginning 	and 	end 	of 	the 	lease 	term. 	Moreover, 	we 	-
believe 	that 	the 	Act's 	purpose 	of 	assuring 	meaningful 	disclosure 	of
lease 	terms 	can 	be 	served 	more 	effectively 	by 	reducing 	the 	number
of 	required 	disclosures. 	The 	current 	Act 	requires 	the 	disclosure
of 	as 	many 	as 	21 	items 	of 	information 	for 	consumer 	leases. 	Many 	of
these 	in 	turn 	require 	the 	disclosure 	of 	additional 	components. 	The
bill 	would 	reduce 	the 	number 	of 	required 	lease 	disclosures 	to 	13
for 	open-end 	leases 	and 	to 	12 	for 	closed-end 	leases. 	It 	would
eliminate 	many 	of 	the 	detailed 	disclosures 	that 	are 	customarily
spelled 	out 	in 	the 	lease 	contract 	(~, 	default 	provisions 	and
maintenance 	responsibilities) 	and, 	thus, 	are 	likely 	to 	be 	provided
whether 	or 	not 	the 	Act 	mandates 	their 	disclosure. 	Hence, 	we
support 	the 	bill's 	reduction 	in 	the 	number 	of 	required 	lease
disclosures.
We 	also 	concur 	with 	the 	proposal 	to 	reduce 	from 	three 	to 	two
the 	number 	of 	terms 	that 	trigger 	additional 	disclosure 	in 	a
consumer 	lease 	advertisement. 	Lessors 	have 	complained 	that 	the
current 	advertising 	scheme 	makes 	advertising 	too 	costly 	and
burdensome. 	The 	bill 	would 	streamline 	the 	required 	advertising
disclosures 	so 	that 	they 	are 	easier 	to 	display 	and 	understand.
Reducing 	the 	number 	of 	required 	disclosures 	and 	requiring
disclosure 	of 	the 	most 	useful 	information 	encourage 	lease
advertising 	and, 	thus, 	provide 	useful 	information 	for 	consumers.

The 	Honorable 	Jake 	Garn, 	Chairman 	-2-
While 	the 	Commission 	agrees 	in 	principle 	with 	the 	objective 	of
simplifying 	Consumer 	Leasing 	Act 	disclosures, 	we 	note 	the 	absence
of 	empirical 	data 	to 	support 	the 	choice 	of 	specific 	disclosures
that 	the 	bill 	would 	require 	for 	consumer 	leases 	and 	consumer 	lease
advertising. 	Furthermore, 	we 	know 	of 	no 	study 	of 	the 	compliance
costs 	that 	the 	bill 	might 	impose 	on 	lessors. 	However, 	the 	1982
survey 	of 	Truth 	in 	Lending 	compliance 	costs 	for 	mortgage 	lenders
conducted 	for 	the 	Commission 	revealed 	that 	legislative 	and
regulatory 	simplifications 	that 	reduce 	the 	burden 	of 	compliance 	can
involve 	transition 	costs 	to 	industry 	members 	in 	the 	form 	of 	legal
fees, 	employee 	training, 	and 	revised 	forms.
2. 	Lease-Purchase 	Agreements
The 	bill 	would 	bring 	an 	additional 	class 	of 	transactions,
"lease-purchase 	agreements," 	under 	the 	Act's 	coverage. 	These 	are
defined 	to 	be 	rental 	agreements 	for 	an 	initial 	period 	of 	four
months 	or 	less 	that 	are 	automatically 	renewable 	with 	each 	payment
and 	permit 	the 	consumer 	to 	become 	the 	owner 	of 	the 	property.
The 	Commission 	does 	not 	have 	specific 	data 	on 	the 	frequency 	of
lease-purchase 	agreements 	or 	abuses 	by 	lessors. 	However, 	we 	are
aware 	that 	these 	transactions 	are 	becoming 	increasingly 	popular 	and
that 	a 	growing 	number 	of 	state 	and 	local 	jurisdictions 	have 	taken
action 	to 	bring 	them 	under 	the 	coverage 	of 	their 	laws. 	This 	has
resulted 	in 	some 	jurisdictions 	treating 	lease-purchase 	transactions
as 	if 	they 	were 	consumer 	leases, 	while 	others 	consider 	them 	to 	be
credit 	sales 	subject 	to 	the 	Truth 	in 	Lending 	Act. 	Industry 	members
have 	complained 	to 	us 	about 	the 	disparate 	treatment 	these
transactions 	have 	received. 	If 	the 	legislation 	provides 	for
greater 	preemption 	of 	state 	and 	local 	laws, 	the 	uniformity 	in
disclosures 	under 	the 	federal 	law 	would 	benefit 	both 	lessors 	and
consumers, 	as 	it 	would 	result 	in 	lower 	compliance 	costs 	for 	lessors
and 	consequent 	savings 	to 	consumers. 	The 	disclosures 	required 	by
the 	proposed 	legislation 	would 	also 	facilitate 	comparison 	of 	lease-
purchase 	transactions 	with 	leases 	and 	credit 	sales, 	thus 	affording
consumers 	additional 	savings.
The 	Com~ission notes 	that 	the 	proposed 	definition 	of 	"lease-
purchase 	agreement" 	covers 	all 	rental 	agreements 	involving 	a
purchase 	option. 	Thif. 	includes 	both 	those 	agreements 	that 	permit
ownership 	to 	transfer 	for 	little 	or 	no 	consideration 	after 	a
specified 	number 	of 	payments 	have 	been 	made 	and 	those 	that 	have
only 	a 	"buyout" 	feature 	(an 	option 	to 	purchase 	the 	goods 	outright
at 	some 	time 	during 	the 	rental 	for 	a 	designated 	price). 	We 	support
covering 	all 	such 	agreements 	to 	avoid 	the 	possibility 	of 	lessors
modifying 	their 	rental 	agreements 	to 	evade 	the 	Act'~ coverage.

The 	Honorable 	Jake 	Garn, 	Chairman
3. 	Federal 	Preemption
-3-
Section 	l3l(a) 	of 	the 	bill 	provides 	for 	federal 	preemption 	of
"inconsistent" 	state 	law. 	Under 	this 	provision, 	an 	inconsistency
would 	arise 	only 	if 	it 	were 	impossible 	to 	comply 	with 	state 	law
without 	violating 	the 	federal 	law. 	This 	standard 	is 	even 	narrower
than 	the 	current 	Act, 	which 	authorizes 	preemption 	of 	inconsistent
state 	law 	unless 	the 	state 	law 	provides 	"greater 	protection 	and
benefit 	to 	the 	consumer."
The 	Commission 	cannot 	support 	the 	proposed 	preemption 	standard
because 	we 	believe 	federal 	law 	should 	provide 	for 	broader
preemption 	of 	state 	laws, 	with 	respect 	to 	consumer 	lease 	and 	lease-
purchase 	disclosure 	requirements, 	than 	either 	the 	bill 	or 	current
law 	provides. 	The 	kind 	of 	preemption 	scheme 	contai~ed in 	the
Magnuson-Moss 	Warranty 	-- 	Federal 	Trade 	Commission 	Improvement 	Act,
15 	U.S.C. 	§ 	2301 	(1982), 	is, 	in 	our 	opinion, 	better 	suited 	to 	lease
and 	lease-purchase 	agreement 	disclosure 	requirements. 	The
Magnuson-Moss 	scheme 	expressly 	preserves 	state-created 	rights 	and
remedies 	not 	provided 	by 	federal 	laws, 	but 	requires 	adherence 	to
federal 	labeling 	or 	disclosure 	requirements. 	This 	results 	in
uniformity 	in 	disclosures 	to 	consumers, 	a 	condition 	that 	permits
consumers 	to 	better 	compare 	the 	value 	of 	a 	product's 	warranty.
Similarly, 	uniformity 	in 	lease 	disclosure 	requirements 	would
help 	consumers 	compare 	the 	costs 	and 	terms 	of 	leases 	and 	lease-
purchase 	agreements 	offered 	by 	different 	lessors. 	In 	addition,
uniformity 	would 	avoid 	confusion 	among 	lessors 	as 	to 	what 	must 	be
disclosed. 	Finally, 	lessors 	would 	be 	spared 	the 	possibly
burdensome 	cost 	of 	printing 	different 	disclosure 	forms 	or 	contracts
for 	each 	state 	in 	which 	they 	do 	business. 	Therefore, 	we 	recommend
that 	the 	federal 	disclosure 	requirements 	preempt 	state 	disclosure
requirements, 	and 	that 	the 	Federal 	Reserve 	Board 	be 	responsible 	for
determining 	whether 	state-required 	disclosures 	cover 	the 	same
content 	or 	subject 	matter 	as 	federal 	requirements 	and 	thus 	are
preempted.
4. 	Consumer's 	Liability 	at 	the 	End 	of 	the 	Lease 	Term
The 	bill 	conforms 	to 	current 	law 	in 	limiting 	the 	potential
balloon 	payment 	at 	the 	end 	of 	an 	"open-end 	lease"; 	that 	is, 	a 	lease
in 	which 	the 	consumer's 	liability 	at 	the 	end 	of 	the 	lease 	term 	is
based 	on 	the 	lessor's 	predetermined 	estimate 	of 	the 	residual 	value
of 	the 	property. 	The 	bill 	creates 	a 	rebuttable 	presumption 	that
the 	estimated 	residual 	value 	is 	unreasonable 	to 	the 	extent 	that 	it
exceeds 	the 	actual 	residual 	value 	by 	more 	than 	three 	times 	the
amount 	of 	the 	average 	monthly 	payment. 	The 	lessor 	may 	recover 	this
excess 	amount 	only 	by 	bringing 	a 	successful 	court 	action 	proving
that 	the 	estimate 	was 	reasonable.

The 	Honorable 	Jake 	Garn, 	Chairman 	-4-
The 	current 	Act 	requires 	the 	lessor 	to 	pay 	the 	lessee's
attorney's 	fees 	even 	if 	the 	lessor 	prevails. 	However, 	the 	bill
would 	require 	the 	lessor 	to 	pay 	the 	lessee's 	attorney's 	fees 	and
court 	costs 	only 	if 	the 	lessor 	failed 	to 	rebut 	the 	presumption 	that
the 	"excess 	liability" 	was 	unreasonable. l 	The 	Commission 	supports
this 	change 	because 	it 	apportions 	litigation 	costs 	more 	equitably
between 	the 	lessor 	and 	the 	lessee. 	Moreover, 	it 	recognizes 	the
unfairness 	of 	penalizing 	the 	lessor 	in 	those 	cases 	where 	excess
liabi11ty 	occurs 	because 	of 	factors 	beyond 	the 	lessor's 	control;
for 	example, 	where 	market 	conditions, 	such 	as 	the 	price 	of
gasoline, 	cause 	a 	decline 	in 	a 	car's 	value.
5. 	Civil 	Liability/Liability 	of 	Assignees
The 	bill's 	civil 	liability 	provisions 	are 	generally 	the 	same
as 	current 	law 	and 	reflect 	many 	of 	the 	changes 	made 	in 	the 	Truth 	in
Lending 	Simplification 	and 	Reform 	Act 	of 	1980. 	Among 	these 	are 	the
limitation 	of 	damage 	awards 	in 	21ass 	actions 	and 	the 	provisions
relating 	to 	multiple 	consumers. 	The 	legislation 	also 	changes 	the
statute 	of 	limitations 	for 	all 	actions 	to 	one 	year 	from 	the
occurrence 	of 	the 	violation, 	whereas 	current 	law 	permits 	all
actions 	to 	be 	brought 	within 	one 	year 	after 	the 	end 	of 	the 	lease.
However, 	the 	bill 	does 	preserve 	the 	consumer's 	right 	to 	bring 	an
action 	with 	respect 	to 	end-of-term 	liability 	within 	one 	year 	of 	the
end 	of 	the 	lease 	term, 	because 	this 	liability 	will 	not 	be
determined 	until 	the 	lease 	has 	expired.
The 	Commission 	endorses 	these 	provisions 	because 	they 	would
reconcile 	potential 	civil 	liability 	under 	the 	Consumer 	Leasing 	Act
with 	the 	amended 	Truth 	in 	Lending 	Act, 	thus 	furthering 	the 	goal 	of
statutory 	simplification. 	The 	proposed 	changes 	would 	accomplish
this 	task 	without 	sacrificing 	the 	consumer's 	private 	right 	of
1 	Neither 	the 	rebuttable 	presumption 	nor 	the 	provision 	for
attorney'~ fees 	applies 	under 	the 	bill 	or 	current 	law 	to 	the
extent 	th~ 	"excess 	liability" 	is 	due 	to 	unreasonable 	or 	excessive
wear 	or 	use.
2 	However, 	the 	bill 	does 	not 	limit 	st~tutory penalties 	to
certain 	required 	disclosures 	only, 	as 	is 	the 	case 	with 	the 	credit
provisions 	of 	the 	amended 	Truth 	in 	Lending 	Act. 	Unlike 	Truth 	in
Lending, 	which 	has 	experienced 	a 	great 	deal 	of 	litigation
involving 	"technical" 	violations 	of 	the 	Act's 	credit 	require-
ments, 	there 	has 	been 	no 	similar 	experience 	under 	the 	Consumer
Leasing 	Act. 	Hence, 	limiting 	the 	leasing 	disclosures 	that 	are
subject 	to 	statutory 	penalty 	does 	not 	appear 	warranted.

The 	Honorable 	Jake 	Garn, 	Chairman 	-5-
enforcement. 	It 	is 	difficult, 	however, 	to 	ascertain 	the 	precise
civil 	liability 	standards 	that 	should 	apply 	to 	consumer ·leasing.
There 	have 	been 	no 	class 	actions 	and 	virtually 	no 	litigation 	under
the 	Act 	since 	it 	became 	effective 	in 	March, 	1977,3 	d~spite reports
of 	dramatic 	growth 	in 	the 	consumer 	leasing 	industry. 	Hence, 	there
is 	no 	record 	on 	which 	to 	judge 	the 	value 	of 	the 	proposed 	standards.
Nevertheless, 	to 	the 	extent 	that 	the 	risk 	of 	substantial 	liability
prior 	to 	Truth 	in 	Lending 	Simplification 	may 	have 	resulted 	in
overdeterrence, 	the 	proposed 	liability 	provisions 	may 	correct 	the
problem.
The 	bill 	provides 	that 	civil 	actions 	under 	the 	Act 	may 	be
brought 	against 	assignees 	only 	for 	violations 	that 	are 	"apparent 	on
the 	face 	of 	the 	disclosure 	statement". 	This 	is 	consistent 	with 	the
current 	Act. 	The 	Commission 	supports 	this 	approach 	because 	it
relieves 	assignees 	of 	responsibility 	for 	violations 	of 	which 	they
have 	no 	reason 	to 	be 	aware 	while 	preserving 	the 	consumer's 	rights
against 	the 	original 	lessor. 	Additionally, 	by 	clarifying 	who 	is 	a
"lessor" 	for 	purposes 	of 	enforcement, 	the 	bill 	will 	eliminate
potential 	overcompliance.
The 	Commission 	appreciates 	this 	opportunity 	to 	comment 	on 	the
Consumer 	Lease 	and 	Lease-Purchase 	Agreement 	Act.
By 	direction 	of 	the 	Commission
3 	To 	our 	knowledge, 	only 	one 	reported 	private 	action 	has 	been
brought 	against 	a 	lessor 	for 	true 	Consumer 	Leasing 	Act
violations: 	Thomka 	v. 	A. 	Z. 	Chevrolet, 	619 	F.2d 	246 	(3rd 	Cir.
1980) .
4 	See, 	for 	example, 	Automotive 	News 	(June 	3, 	1985), 	at 	E-16.