Consumer Leasing

Question 1

What is a lease?

Answer 1

Contract between lessor (property owner) and a lessee (property user) for the use of property subject to stated terms and limitations for a specified period and specified payment.

Question 2

What does the Consumer Leasing Act apply to?

Answer 2

To consumer leases of personal property.

Question 3

What is a lessee?

Answer 3

Person who enters in or is offered a consumer lease

Question 4

What is a lessor?

Answer 4

Person or organization who regularly leases, offers to lease, or arranges for the lease of personal property under a consumer lease. (A person who leases/offers to lease 5+ times in preceding or current calendar year)

Question 5

What criteria must a lease meet to be considered a Consumer Lease under CLA/Reg M? (4)

Answer 5

Contract between lessor and lessee:

-for use of personal property by individual
-to be used primarily for personal, family, or household purposes
-for more than 4 months (week to week and month to month leases excluded)
-with total contractual cost no more than $58,300 as of January 2021.

Question 6

What types of leases are specifically excluded from coverage? (4)

Answer 6

Leases for:

-businesses, agriculture, or made to org/gov
-real property
-personal property that is incidental to real property
-for credit sales (bail money)

Question 7

What are the two categories of consumer leases?

Answer 7

Open-end
Closed-end

Question 8

What is Realized value? (3 options)

Answer 8

-The price received by the lessor of the leased property at disposition
-the highest offer for disposition of the leased property, or
-the fair market value of the leased property at the end of the lease term.

Question 9

What is Residual Value?

Answer 9

The value of the leased property at the end of the lease, as estimated or assigned at consummation of the lease by the lessor.

Question 10

What is an open-end lease?

Answer 10

Lease where the amount owed at end of lease term is based on:

residual value-realized value

And the consumer may pay all or part or may get a refund depending on the difference being positive or negative.

RV greater-RV less= Pay
RV less-RV greater= refund

Question 11

What is a closed-end lease?

Answer 11

Lease other than an open-end. Allows the consumer to walk away at end of contract with no payment obligation - unless property was damaged.

Question 12

What is the gross capitalized cost?

Answer 12

Amount agreed upon by lessor and lessee as value of the leased property, plus any items capitalized or amortized during lease term. Like taxes, insurance, service agreements, outstanding prior credit balance.

Question 13

What is a capitalized cost reduction?

Answer 13

Total amount of rebate, cash payment, net trade-in allowance, and noncash credit that reduced the gross capitalized cost. (down-payment)

Question 14

What is the adjusted capitalized cost?

Answer 14

Gross capitalized cost - capitalized cost + amt base periodic payment.

Question 15

When are applicable consumer disclosures required to be provided under CLA? (3)

Answer 15

Before lease signing
Renegotiation of Lease
Extension of Lease

Question 16

What are the trigger terms for advertising disclosures? (4)

Answer 16

Payment amount
statement of capitalized cost reduction (down-payment)
Payment required prior to lease signing
no payment required

Question 17

What must ads disclose if trigger terms are present? (6)

Answer 17

-Transaction is for a lease
-Total amount due prior to or at lease signing/delivery
-number, amts, due dates, periods of scheduled payments
-if security deposit is required
-statement that extra charge may be imposed at end of lease term where the lessee’s liability is based on difference between residual value and realized value
-any rates cannot be more prominent than other disclosures and include statement that “this percentage does not measure the overall cost of financing this lease”

Question 18

What terms cannot be used if a rate is disclosed? (2)

Answer 18

Annual percentage rate
Annual Lease rate

Question 19

What are the record retention requirements of CLA?

Answer 19

Maintain evidence of compliance (other than ads) for no less than 2 years after date of disclosures.

Question 20

How are disclosures required to be provided?

Answer 20

Clear and conspicuous and provided in writing in a form the consumer can keep

Can be electronic as long as E-sign requirements are met

Question 21

During what phases of a lease should examiners review lease estimates for unreasonable balloon payments? (4)

Answer 21

At early termination
At end of lease term for wear and use
At end of lease term for open ended leases
in delinquency, default, or late payment

Question 22

In which types of documents can disclosures be provided? (3)

Answer 22

In a dated statement:

-separate statement that identifies the lease transaction
-in the lease contract
-other document evidencing the lease

Question 23

What information is required to be segregated on the model form? (in their own boxes) (10)

Answer 23

-Amount due at Lease signing or delivery
-Payment schedule and total amount of periodic payments
-Other charges
-Total of Payments
-Payment Calculation (Gross capitalized cost, Capitalized Cost reduction, adjusted capitalized cost, residual value, Depreciation/Amortization, Rent charge, Total of base periodic payments)
-early termination notice
- Maintenance responsibilities notice of wear and use standard
-purchase option at end of lease term
-Statement referencing nonsegregation disclosures
-Liability at end of lease term based on residual value (rent and other charges)

Question 24

If there is more than one lessor who receives disclosures?

Answer 24

Lessors may provide the disclosures to any lessee who is primarily liable on the lease

Question 25

True or false: Lessors can disclose items based on estimates?

Answer 25

True, If the amount needed to comply with the required disclosure is unknown or unavailable, the lessor may use a reasonable estimate based on the best information available.

Question 26

What minor variations can be disregarded when making disclosures? (4)

Answer 26

-Payments must be collected in whole cents
-Dates of payments may vary based on scheduled day not including a business day
-that months have different number of days
-leap years

Question 27

What is required to be disclosed under the description of property?

Answer 27

A brief description of the leased property sufficient to identify for the lessee or lessor

Question 28

What should be disclosed under the Amount due at lease signing or delivery? (4)

For auto leases? (8)

Answer 28

Total amount to be paid prior to or at consummation/delivery.

Lessor must itemize each item by type and amount: Sum of the following
-refundable security deposit
-Advance monthly/periodic payment
-capitalized cost reduction (down payment)
-any applicable fees to be paid upfront (title fees, delivery/set up fees, registration fees, etc)

Itemize by type and amount: less the following for auto leases
-net trade in allowance (non negative)
-rebates
-non-cash credits
-cash payments

Question 29

What should be disclosed under payment schedule and total amount of periodic payments?

Answer 29

number, amount, due dates, or periods of periodic payments scheduled under the lease

total amount of periodic payments.

ex: rent, capitalized or amortized amounts, depreciation, taxes, maintenance, and insurance.

Question 30

What should be disclosed under other charges?

Answer 30

Total amount of other charges payable to lessor itemized by type and amount that are not included in periodic payments.

ex: amount of liability at end of lease term, potential difference between residual and realized values

Question 31

What should be disclosed under total of payments?

Answer 31

“the amount you will have paid by the end of the lease”

amount due at lease signing (less refundable amounts) + total periodic payments (less any paid at lease signing) + other payments

In an open-end lease, a description such as “you will owe an additional amount if the actual value of the vehicle is less than the residual value” shall accompany the disclosure.

Question 32

What must be disclosed under the payment calculation section? (10)

Answer 32

-Gross Capitalized Cost
-Capitalized cost reduction
-Adjusted Capitalized cost
-Residual value
-Depreciation/Amortized amounts
-rent charge
-Total of base periodic payments
- Number of Lease payments
-Base periodic payment
-Other charges

Question 33

What is disclosed as part of the gross capitalized cost?

Answer 33

“the agreed upon value of the vehicle and any items you pay over the lease term”

ex: service contracts, insurance, prior credit/lease balance)

Question 34

What is disclosed as part of capitalized cost reduction?

Answer 34

“the amount of any net trade-in allowance, rebate, noncash credit, or cash you pay that reduces the gross capital cost.”

Question 35

What is disclosed as part of adjusted capitalized cost?

Answer 35

“the amount used in calculating your base periodic payment”

gross capitalized cost-capitalized cost reduction

Question 36

What is disclosed as part of residual value?

Answer 36

“the value of the vehicle at the end of the lease used in calculating your base periodic payment”

Question 37

What is disclosed under depreciation and any amortized amounts?

Answer 37

“the amount charged for the vehicle’s decline in value through normal use and for any other items paid over the lease term”

Adjusted capital cost - residual value

Question 38

What is disclosed under the rent charge?

Answer 38

“the amount charged in addition to the depreciation and any amortized amounts”

total base periodic payments over lease term - depreciation and amortized amounts

Question 39

What is the total of base periodic payments?

Answer 39

Depreciation and amortized amounts + rent charge

Question 40

What is the base periodic payment?

Answer 40

Total base periodic payments/number of payment periods in lease

Question 41

What is the total periodic payment?

Answer 41

Base periodic payment + other charges

Question 42

What needs to be disclosed regarding Early Termination?

Answer 42

Conditions and disclosure of charges
Early Termination Notice

Question 43

What is disclosed as part of the Conditions and disclosure of charges under the Early termination disclosures?

Answer 43

Conditions under which the lessee or lessor may terminate the lease prior to end of lease term.
Amount of early termination penalty or charges

Question 44

What is disclosed under the early termination notice?

Answer 44

Notice that lessee may have to pay a substantial charge if the lease is ended early.

That the charge may be up to several thousand dollars and will depend on when the lease is terminated.

The earlier the lease is ended the greater the charge is likely to be.

Question 45

What needs to be disclosed under maintenance responsibilities? (3)

Answer 45

Statement of responsibilities
Wear and use standard
Notice of wear and use standard

Question 46

What is disclosed under the notice of wear and use standard?

Answer 46

Excessive wear and use. You may be charged for excessive wear based on our standards of normal use.

Amount or method of determining any charge for excess mileage

Question 47

What is disclosed under the purchase option?

Answer 47

Purchase prices at:

End of lease term
During Lease term and method for determining price

Question 48

What is disclosed under the statement referencing nonsegregated disclosures?

Answer 48

Lessee should refer to the lease docs for additional info on early termination, purchase options, maintenance responsibilities, warranties, late and default charges, insurance, and security interests.

Question 49

What is disclosed regarding the Liability between residual and realized values?

Answer 49

Statement of lessee’s liability, if any, at early termination or at end of lease term for difference between the residual value and realized value of the leased property.

Rent and other charges
Excess liability
Mutually agreeable final adjustment

Question 50

What is disclosed under excess liability?

Answer 50

Statement that if at the end of the lease term the residual value is unreasonable and not in good faith (residual value exceeds realized by more than 3x avg payment in a monthly period) the lessor cannot collect the excess amount unless through a successful court action.

Question 51

What charges are exempt from a excess liability presumption (balloon payment)?

Answer 51

Any charge that is not based on the difference between the residual value and realized value.

Ex: Disposition charges, excess mileage charges, late payment and default charges.

Question 52

What is a mutually agreeable final adjustment?

Answer 52

Lessee and lessor are permitted after termination of the lease to make any mutually agreeable final adjustment regarding excess liability.

Question 53

What is disclosed under fees and taxes?

Answer 53

Dollar amount for all license fees, registration, title, or taxes.

Question 54

Disclosed under insurance?

Answer 54

Identification of insurance through the lessor or through a third party.

Question 55

Disclosed under warranties or guarantees?

Answer 55

All warranties or guarantees through manufacturer or lessor.

Question 56

Disclosed under penalties and other charges for delinquency?

Answer 56

Amount or method for determining penalty or charge for delinquency, default, late payments.

Question 57

What is disclosed under the security interest?

Answer 57

description of any security interest other than a security deposit, that is held or retained by the lessor. And identified property that the security interest relates to.

Question 58

What is disclosed under limitations on rate information?

Answer 58

If a rate is included in documents evidencing the lease transaction, a statement that “this percentage rate may not measure the overall cost of financing the lease”

Cannot use term APR or annual lease rate

Question 59

What is a renegotiation?

Answer 59

When a consumer lease is satisfied and replaced by a new lease undertaken by the same consumer. (kinda like a refinance)

Requires new disclosures.

Question 60

What is an extension?

Answer 60

Continuation of an existing consumer lease beyond originally scheduled end.

Extension exceeding 6 months requires new disclosures.

An extension the result of a renegotiation is an exception.

Question 61

What is an assumption?

Answer 61

When a consumer lease is assumed by a new person.

New disclosures are not required.

Question 62

What scenarios do not require new disclosures, despite being renegotiations or extensions? (6)

Answer 62

-Reduction in rent charge
-Payment deferral
-Extension less than 6mo on month to month basis
-Substitution of leased property for property that has equivalent or greater economic value (no other lease terms changed)
-Addition, deletion, sub of lease property on multi item lease (periodic payment cannot change more than 25%)
-Agreement from court proceeding

Question 63

Of the required disclosures, which disclosures are specifically required for open end leases only? (3)

Answer 63

Rent and other charges
Liability at end of lease term based on residual value and excess liability
Mutually agreeable final adjustment.

Question 64

In 2004, Jane Doe paid $200 per month to lease a Ford. the residual value of which was calculated to be $11,000. But by the time the lease was up in 2007, the car was only worth $9,000.

What is the balloon payment Jane is facing?

Is the balloon payment a legal amt?

Answer 64

Jane is facing a $2,000 balloon payment.

Residual value - realized value

11K-9K=2K balloon payment

This balloon payment is in violation of Reg M because of the three payment rule. A balloon payment is deemed unreasonable if it amounts to more than 3 times the regular periodic payment. $200 x 3 = $600 the balloon payment cannot be greater than $600.

Jane may NOT be held liable for any more than $600 unless the lessor can prove in court that the $11k residual value was a reasonable estimate at the time AND the lessor pays jane’s attorney’s fees.