Working draft

9/30/00

ROBERT H. CORNELL, 350 Cambridge Avenue, Suite 100, Palo Alto, CA 94036, Co-Chair

JUSTIN L. VIGDOR, 2400 Chase Square, Rochester, NY 14604, Co-Chair

JERRY L. BASSETT, Legislative Reference Service, 613 Alabama State House, 11 S. Union Street, Montgomery, AL 36130, Committee on Style Liaison

PAMELA G. CHIN, 100 W. Walnut Street, T-1102, Legal Department, Pasadena, CA 91124

JACK DAVIES, 687 Woodridge Drive, Mendota Heights, MN 55118

PATRICK C. GUILLOT, Suite 250, 2929 Carlisle Street, Dallas, TX 75204

NEAL OSSEN, Suite 201, 21 Oak Street, Hartford, CT 06106

H. KATHLEEN PATCHEL, Indiana University School of Law, 735 W. New York Street, Indianapolis, IN 46202-5194

MARK H. RAMSEY, Room 309, State Capitol Building, Oklahoma City, OK 73105

WILLIS E. SULLIVAN, III, P.O. Box 359, 1423 Tyrell Lane, Boise, ID 83701, Enactment Plan Coordinator

CHARLES J. TABB, University of Illinois College of Law, 504 E. Pennsylvania Avenue, Champaign,

IL 61820

RALPH J. ROHNER, Columbus School of Law, The Catholic University of America, Cardinal Station,

Washington, DC 20064, Reporter

JOHN L. McCLAUGHERTY, P.O. Box 553, Charleston, WV 25322, President

DAVID D. BIKLEN, Law Revision Commission, Room 509A, State Capitol, Hartford, CT 06106,

Division Chair

MICHELLE HUGHES, One Columbus Center, Virginia Beach, VA 23462

FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road, Norman,

OK 73019, Executive Director

WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus

ARTICLE 1
SHORT TITLE; DEFINITIONS; GENERAL PROVISIONS

SECTION 101. SHORT TITLE. 1

SECTION 102. DEFINITIONS. 1

SECTION 103. SCOPE; EXCLUSIONS; SALE INCIDENT TO LEASE. 11

SECTION 104. CHARACTERIZATION OF LEASE; TRANSACTION SUBJECT TO ACT BY AGREEMENT. 14

SECTION 105. SUPPLEMENTAL PRINCIPLES OF LAW APPLICABLE. 16

SECTION 106. WAIVER; AGREEMENT TO FORGO RIGHTS IN SETTLEMENT OF CLAIM. 17

SECTION 107. LIMITATION ON CHOICE OF APPLICABLE LAW AND FORUM. 18

SECTION 108. OBLIGATION OF GOOD FAITH. 20

SECTION 109. UNCONSCIONABILITY. 20

ARTICLE 2
ADVERTISING; DISCLOSURE OF INFORMATION

SECTION 201. ADVERTISING. 23

SECTION 202. PRE-LEASE AVAILABILITY OF SAMPLE FORM. 24

SECTION 203. DISCLOSURE; FORM OF CONSUMER LEASE; COPY TO LESSEE. 25

SECTION 204. INSURANCE; INSURANCE DISCLOSURES. 29

SECTION 205. NOTICE TO GUARANTOR. 32

SECTION 206. INFORMATION DURING TERM OF LEASE; SATISFACTION OF LEASE. 34

ARTICLE 3
LIMITATIONS ON TERMS AND PRACTICES

SECTION 301. PAYMENT OR TRADE-IN PENDING APPROVAL OF LEASE; REFUND OR RETURN. 38

SECTION 302. PROHIBITED LEASE TERMS. 40

SECTION 303. SECURITY INTEREST RESTRICTED; SECURITY DEPOSIT. 41

SECTION 304. DELINQUENCY AND DEFAULT CHARGES. 44

SECTION 305. ASSIGNMENT OF LEASE; PRESERVATION OF LESSEE'S CLAIMS AND DEFENSES. 47

SECTION 306. SUBLEASE. 48

SECTION 307. OPEN-END LEASE. 50

SECTION 308. WARRANTIES OF QUALITY AND TITLE. 51

SECTION 309. REBATE OR DISCOUNT FOR REFERRALS. 51

SECTION 310. LIMIT ON INSURANCE CHARGES; TERMINATION OR REPLACEMENT OF INSURANCE. 52

ARTICLE 4
LEASE TERMINATION

SECTION 401. LIABILITY FOR GAP AMOUNT ON TOTAL LOSS OF GOODS. 55

SECTION 402. LESSEE'S DEFAULT; RIGHT TO CURE. 58

SECTION 403. REPOSSESSION; APPLICATION OF REALIZED VALUE. 60

SECTION 404. DETERMINING REALIZED VALUE. 62

SECTION 405. EARLY TERMINATION LIABILITY. 66

SECTION 406. EXCESS WEAR AND TEAR; EXCESS MILEAGE. 74

ARTICLE 5
PENALTIES; ENFORCEMENT; ADMINISTRATION

SECTION 501. PRIVATE REMEDIES. 80

SECTION 502. CLASS ACTIONS. 82

SECTION 503. LIMITATIONS ON PRIVATE REMEDIES. 83

SECTION 504. ASSIGNEE LIABILITY. 86

SECTION 505. EFFECT OF VIOLATION ON RIGHTS OF PARTIES; ELECTION OF REMEDIES.
87

SECTION 506. ADMINISTRATIVE ENFORCEMENT. 87

SECTION 507. ADMINISTRATION OF [ACT]. 88

ARTICLE 6
MISCELLANEOUS PROVISIONS

SECTION 601. SEVERABILITY. 90

SECTION 602. EFFECTIVE DATE. 90

SECTION 603. TRANSITION. 90

SECTION 604. REPEALS AND AMENDMENTS. 90

Over recent decades the leasing of consumer goods, particularly motor vehicles, has become an increasingly popular alternative to credit sales. Federal law has imposed disclosure requirements on consumer leases since 1976. Consumer Leasing Act, 15 U.S.C. §§ 1667-1667f. UCC Article 2A introduced a legal framework for leases of goods, but did not deal extensively with consumer protection issues. Cf., F. Miller, Consumer Leases Under Uniform Commercial Code Article 2A, 39 Ala. L. Rev. 957 (1988). By the early 1990s only a handful of States had consumer protection legislation in place affecting consumer leases; some of this was by virtue of the limited treatment of leases in the Uniform Consumer Credit Code of 1974.

The Executive Committee appointed a Study Committee, chaired by Chancellor Gerald Bepko of Indiana University, which submitted its Report in July 1995. The Study Committee had compiled an extensive canvass of the literature, popular and scholarly, on consumer leasing, and had conducted a national survey of persons knowledgeable about leasing practices. In its Report the Study Committee recommended the establishment of a Drafting Committee to prepare a Uniform Consumer Leases Act. The Drafting Committee's "first attention" was directed to "substantive issues in an effort to provide a balance of interests between lessors and lessees of consumer goods." The Drafting Committee was also urged to monitor developments under the federal Consumer Leasing Act, then undergoing review. The Study Committee suggested that the Drafting Committee should exclude short-term leases, but at least consider "points of comparability" involving rent-to-own transactions.

The Drafting Committee members and Reporter were appointed in late 1995, and the Committee had its first meeting in March 1996. The Drafting Committee has met semi-annually since then, at each meeting considering a wholly revised draft. The draft submitted to the Conference for second reading is the tenth iteration.

Members of the Committee on Style offered informal critiques on earlier versions, and thorough editings in April 1999 and February 2000. Virtually all of those emendations are incorporated in the current draft. Where a suggested style change appeared to modify the substance of the draft, the Drafting Committee's language is retained.

The draft Uniform Consumer Leases Act had its first reading before the Conference in July 1999 in Denver.

1. State of the law. UCC Article 2A is a baseline legal structure for leases of goods, but its principal emphasis is on commercial rather than consumer leases; its provisions addressing consumer leases do not purport to be comprehensive consumer protection. At the same time, the federal Consumer Leasing Act specifies disclosure requirements for consumer leases, and establishes a general "reasonableness" standard for charges in connection with default or termination, but does not regulate other aspects of the lease relationship. In the past half-decade a number of States have enacted laws dealing with consumer leases of motor vehicles. These laws vary from State to State, tend to be fairly bare-bones in their coverage, and do not deal with leases of goods other than motor vehicles.

The draft Act seeks to fill the consumer protection vacuum between the coverage of UCC Article 2A and the federal CLA, and to do so in a more comprehensive and coordinated manner than existing state laws. In that respect the draft Act may be compared to a state retail installment sales act; i.e., regulating certain lease terms and practices. But the draft Act seeks to preserve contract flexibility for the parties and so does not impose price controls analogous to usury ceilings.

2. Desirability of uniformity. With a virtually uniform state law on basic leasing relationships in UCC Article 2A, and national standards for consumer lease disclosure in the federal CLA, it is sensible that further regulation of consumer leases also be uniform. Leases are often marketed across state lines, and it would seem undesirable for consumers to have more or less protection depending on where they live or were their lessors are located. The differences in the existing state laws on motor vehicle leases suggest compliance problems for lessors operating on a regional or nationwide basis. Leasing of goods other than motor vehicles is emerging, some of it through electronic marketing on the Internet. All of these considerations, we believe, support the desirability of uniform legal rules for consumer leases.

3. Coverage of the draft Act. The Act would apply to leases of consumer goods, but not other forms of personal or real property. A covered lease must be for a term longer than four months, for a total obligation not exceeding $150,000, and the leased goods must be intended for the personal, family or household purposes of the lessee. The draft Act does not deal with rent-to-own contracts.

4. Substantive Content. The draft Act has four substantive "Articles." (Article 1 is definitions and general provisions; Article 6 deals with interpretation and transition.)

Article 2 addresses informational responsibilities of lessors. It adopts the federal disclosure rules for all leases covered by the draft Act. It entitles lease customers to a copy of the lease form beforehand, specifies certain informational content for the lease itself, and requires lessors to furnish statements of account and payoff information on request. A special disclosure to "guarantors" (co-signers) is also provided.

Article 3 imposes restraints on certain terms and practices, to prevent over-reaching and to assure that consumers are not unwittingly subjected to unfairness. Many of these have analogues in the law applicable to credit sales. For example, under Section 301, a lessor must promptly return a trade-in and refund payments received if the lessee's application is disapproved; absent such a rule, consumers are vulnerable in "spot delivery" situations. Section 303 precludes a lessor from taking a broad security interest in the lessee's property in addition to its residual interest in the leased goods themselves. Section 305(b) preserves a lessee's claims and defenses against an assignee of the lease; this is standard protection for consumer buyers on credit. Section 310 constrains the lessor's ability to overcharge in connection with force-placed insurance coverages.

Article 4 deals with issues at the termination stage. It prohibits the imposition of so-called "gap liability" on consumer lessees when the leased goods are lost or destroyed. It establishes a right of the lessee to "cure" delinquent payments before repossession. Controls are placed on the manner of establishing the realized value of leased goods as a premise for fixing the lessee's termination liability. Sections 405 and 406 establish minimum standards, and safe harbors, for assessing early termination charges and excess wear-and-tear charges on lessees.

Article 5 creates an enforcement structure. This includes enforcement by designated public officials, and also private enforcement by lessees. As incentives for private enforcement, lessees may recover statutory damages for certain violations, and court costs and attorneys fees for all violations.

The draft Act is not based on the law of any particular State. It draws content from many sources, including the existing state laws on motor vehicle leases and long-standing state and federal laws regulating credit sales.

5. Reasons for adoption by the States. The federal Consumer Leasing Act and its implementing Regulation M, as revised in 1996, handle disclosure for consumer leases, but do not impose specific restraints on lease terms or practices. Leases involve terminology, pricing structures, and risk allocations that are different from credit sales, and often difficult for consumers to evaluate. Yet the two forms of transaction compete for the consumer's investment. There are broad, long-standing, and significant restraints on credit sales, but, until now, no parallel structures in the lease markets. Uniform adoption of the draft Act would assure a level playing field for lessors, and respectable but not intrusive protections for consumer lessees for all forms of consumer goods in transactions conducted face-to-face and at a distance.

A number of issues in the draft were controversial, and several provisions are bracketed or set out as options pending action by the Conference, or for optional enactment by the states:

1. Disclosure of "annual lease rate" [Section 203(d)]. Consumers support this disclosure; industry strongly opposes the proposed authorization to disclose a lease rate. Also, federal law now restricts use of an "annual lease rate" term, so it is uncertain whether the proposed provision could be implemented without approval from the Federal Reserve Board.

2. Bar on "gap liability" [Section 401]. Leases often contractually allocate the risk of loss of the leased goods to the lessee, enabling the lessor to sell "gap" insurance or waivers to protect against that risk. Industry therefore opposes the draft Act provision that prohibits such risk shifting.

3. Early termination liability [Section 405]. Federal law permits lease provisions, in the nature of liquidated damages, that impose liability on a lessee who terminates early, so long as the early termination charge is "reasonable." The draft Act amplifies on that standard by setting an absolute cap [Section 405(c)], and also provides a "safe harbor" formulation for early termination charges [Section 405(d)]. At least some industry sentiment opposes the first of these, and some industry observers would prefer to have the unadorned federal standard with no state law elaboration.

4. Excess wear and tear [Section 406]. Same issues as in 3.

5. Private remedies [Section 501]. Industry observers oppose exposure to statutory damages (including class actions) for what may be harmless or technical violations.

6. Administration of the Act [Section 507]. The Drafting Committee proposes Section 507 as an option for States to enact. Some administrative monitoring and interpretation of the Act can facilitate compliance; but that function entails possibly significant operating costs.

SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Consumer Leases Act.

1. This Act is promulgated for uniform enactment by the States. Leasing has become a mainstream part of the process for marketing and financing the use of consumer goods. The purpose of this Act, therefore, is to encourage the nationwide development and innovation of consumer lease products and practices, but subject to baseline protections for consumers in those transactions. Uniform adoption of this Act establishes a framework of permissible or proscribed lease terms and practices, thereby providing greater certainty for both lessees and lessors as to their rights and responsibilities in lease transactions.

2. While this Act provides an array of restrictions and authorizations concerning consumer leases, it is not comprehensive or exclusive coverage of those transactions. It is meant to harmonize with the federal Consumer Leasing Act and its implementing regulation (Regulation M) with respect to disclosure of lease terms and limitations on charges for default and termination, and to complement UCC Article 2A [Leases] with respect to the basic rights and remedies of the parties to consumer leases.

SECTION 102. DEFINITIONS.

(a) In this [Act]:

(1) "Authenticate" means to:

(A) execute or adopt a symbol, or encrypt a record in whole or in part, with present intent to identify the authenticating party, and adopt, accept, or establish the authenticity of a record or term; or

(B) sign.

10/00 Update: Re-align (a) and (b), per StyleCom.

4/00 Update: Slightly reorganized per StyleCom. "Sign" moved from first line of (1) to new paragraph (1)(B).

(2) "Consumer lease" means a lease in which:

(A) the lessee is obligated for a term of more than four months and for a total contractual obligation of $150,000 or less, excluding residual value, payments for options to renew or purchase, and payments to persons other than the holder, whether or not the lessee has the option to purchase or otherwise become the owner of the goods at the expiration of the lease; and

10/00 Update: No change.

4/00 Update: StyleCom suggests using "consumer lease" as the basic term throughout. So "lease" is now defined as in UCC 2A [see 102(a)(9), below] here. This definition therefore shrinks by dropping some of the former first two lines.

(B) when the lease is consummated, the goods are intended by the lessee primarily for personal, family, or household purposes.

(3) "Consummation" of a consumer lease occurs when the lessee authenticates a record evidencing the lessee's contractual obligation under the lease. A lessee may consummate a consumer lease even if it is subject to subsequent credit or other approval by the lessor or an assignee of the lessor.

(4 ) "Expiration" of a consumer lease occurs at the scheduled end of the time period covered by the lease.

10/00 Update: "scheduled" added per Committee instruction.

4/00 Update: (4) is new; suggested by StyleCom, along with "termination," below.

(5) "Federal Consumer Leasing Act" means Chapter 5 of Title I of the Consumer Credit Protection Act, 15 U.S.C. Section 1667 [, as amended,] and includes Regulations issued by the Board of Governors of the Federal Reserve System pursuant to that Act, Regulation M, 12 C.F.R. Part 213 [, as amended].

10/00 Update: Reference to "FRB Commentary" moved to Reporter's Notes.

Legislative Note: This Act incorporates by reference certain definitions, disclosure requirements and other provisions of the federal Consumer Leasing Act and its implementing Regulation M. For States where incorporation of present and future federal law is permissible, the phrase "as amended" should be retained so that the incorporation of federal law remains current. For States in which incorporation of future provisions of federal law is constitutionally impermissible, the phrase "as amended" should be omitted. It will then be necessary for those States to re-enact this definition periodically, i.e., whenever changes occur in the federal law.

(6) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing.

(7) "Goods" means all things that are movable at the time of identification to a lease, or are fixtures. The term does not include money, documents, instruments, accounts, chattel paper, investment property, general intangibles, or minerals or the like, including oil and gas, before extraction.

10/00 Update: No change.

4/00 Update: Per 7/99 suggestion: "investment property" added to exclusions; cross-referenced to UCC definition in (b), below..

(8) "Holder" means a lessor or, if the lessor's interest is assigned, the assignee for the period of the assignee's ownership of the interest.

10/00 Update: "or" instead of "and" in first line, per Committee. See Query in Reporter's Note 8 re applicability in securitizations.

(9) "Lease" means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. Unless the context clearly indicates otherwise, the term includes a sublease.

10/00: No change.

4/00 Update: Per StyleCom suggestion: Former definition of "lease" as meaning "consumer lease" discarded. This new definition is from UCC Art. 2A. Putting it here allows streamlining of definition of "consumer lease," above. Q: Is it better to repeat the 2A definition here, or simply incorporate it by reference via § 102(b)?

(10) "Lessee" means an individual who enters into, applies for, or is offered a consumer lease. The term does not include a guarantor on a consumer lease.

4/00 Update: Q.: Is this definition sufficiently broad that we can drop the phrase"prospective lessee" elsewhere in the Act?

(11) "Lessor" means a person who has leased or offered to lease goods under a consumer lease more than five times in the preceding calendar year or more than five times in the current calendar year.

10/00 Update: Phrase "arranged to lease" deleted per 4/00 Committee vote 6-2.

4/00 Update: Changes in definition of "consumer lease" and "lease" eliminate circularity problem here. 7/99: a commissioner suggested clarifying this "five times" rule. How? StyleCom also suggested possibly putting this five-times rule in the next section (103) on "Exclusions." I've left it here, the better to track Reg. M.

(12) "Motor vehicle" means a device required by law to be registered under [insert citations to appropriate vehicle registration laws of the State].

(13) "Realized value" means a valuation of the goods at the time the holder assesses liability on the lessee in connection with termination of the lease, as determined under Section 404.

(14) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

10/00 Update: "used as a noun" deleted.

4/00 Update: StyleCom says define this word only as a noun, and change sentence structures elsewhere to eliminate use as an adjective.

(15) "Sign" means to identify a record by means of a signature, mark, or other symbol with intent to authenticate it.

(16) "Single payment lease" means

Option A: a consumer lease for which a single payment, other than for recurring official fees such as taxes or registration, is required for the scheduled term of the lease.

Option B: a consumer lease for which the lessee makes a single payment to the lessor for depreciation and rent charge for the scheduled term of the lease.

10/00 Update: Committee asked for clarification that "single payment" refers only to basic rent and not to incidental periodic fees. Two options provided.

(17) "State" means a State of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.

10/00 Update: Revised per StyleCom.

(18) "Termination" of a consumer lease occurs when the lessee's right to continued use of the goods ends, either by expiration of the lease or by earlier election of one of the parties as provided in the lease.

10/00 Update: "one of" added in third line, per Committee.

4/00 Update: New. StyleCom suggestion. There is also a definition in UCC § 2A-103(1)(z), but maybe not suitable.

(b) The following terms used in this [Act] have the meanings ascribed in the [Uniform Commercial Code]:

"Conspicuous" [UCC] § 1-201(10)

"Computer information" [New UCC § 2A-102(a)(5)]

"Contract" [UCC] § 1-201(11)

"Finance lease" [UCC] § 2A-103(1)(g)

"Investment property" [UCC] New § 9-102(a)(49)]

"Lien" [UCC] § 2A-103(1)(r)

"Person" [UCC] § 1-201(30)

"Security interest" [UCC] § 1-201(37)

"Send" [UCC] § 1-201(38)

"Supplier" [UCC] § 2A-103(1)(x)

Legislative Note: Some of these cross-referenced definitions are from UCC Article 2A: i.e., "finance lease," "lien," and "supplier." If a State has not adopted UCC Article 2A, it should add comparable definitions in this Act.

(c) The following terms used in this [Act] have the meanings ascribed in the federal Consumer Leasing Act:

"Capitalized cost reduction"

"Gross capitalized cost"

"Periodic payment"

"Rent charge"

"Residual value".

10/00 Update: With the deletion of lease rate disclosure and computation of it [former § 207], we don't need others of the Reg. M definitions. But we do use the terms listed.

1. "Authenticate." Increasingly, consumer and business transactions are being marketed, negotiated and consummated by electronic communications, without use of paper documentation or written signatures on paper. The term "authenticate" refers to the act by which a party identifies itself and expresses assent to or acceptance of the "record" being authenticated. (See definition of "record," infra.) This may be by electronic signature, an encrypted symbol or code, a PIN, or equivalent action. The term should be construed consistently with the same term in the Uniform Commercial Code and the Uniform Electronic Transactions Act.

2. "Consumer lease."

a. A transaction covered by this Act must in fact be a lease. See the definition of "lease," infra. A "consumer lease" therefore incorporates the baseline definition of lease from UCC Article 2A [Section 2A-103(1)(j)], which excludes a transaction that is in reality a sale or security interest [cf. UCC § 1-201(37)].

b. Under subparagraph (A), a transaction is not a "consumer lease" if the contractual term of the lease obligation is four months or less. This refers to the period of use of the goods for which the lessee is obligated to pay rent. Thus where a consumer leases goods for a 12-month period but makes a single lump-sum payment at the outset (i.e., a single-payment lease), the transaction is covered. Similarly, a lease of goods for a four month (or shorter) period is not covered even if the consumer makes rent payments over a time period of more than four months. The "more than four months" requirement excludes from this Act short term transactions such as weekend car or tool rentals, and also transactions such as "rent to own" contracts where the consumer is not contractually obligated to renew beyond the initial weekly or monthly term.

c. A transaction is also not a "consumer lease" if the "total contractual obligation" exceeds $150,000. Leases above this magnitude are either generally non-consumer in purpose, or likely to be carefully negotiated between parties of sophistication, probably with professional advice. The sum used to measure coverage is not necessarily the same as the total of payments (disclosed under the federal Consumer Leasing Act). It includes non-refundable amounts a lessee is contractually obligated to pay to the lessor, but excludes items such as:

i. Residual value amounts or purchase option prices;

ii. Amounts collected by the lessor but paid to third parties, such as taxes, license and registration fees.

d. The "consumer purposes" part of this definition [subparagraph (B)], in conjunction with the definition of lessee as an "individual," excludes from this Act a lease to an organization, which includes all forms of entities other than individuals, and any lease for a non-consumer purpose. Thus a lease of artwork by a law firm (an organization) is excluded even though the firm's employees and guests gain personal enjoyment from it. A lease of a diagnostic computer to a doctor (an individual) is excluded because its use is for business. A lease of a combine to a farmer is excluded on account of the agricultural purpose.

e. The determination of consumer purpose is made at the time the lease is consummated, and by reference to the lessee's intentions. A statement in or contemporaneous with the lease as to intended purpose should normally be considered conclusive on the point. Subsequent changes in the purpose for which the goods are used do not affect coverage by this Act.

3. "Consummation." The federal Consumer Leasing Act uses the term "consummation" to determine the timing of disclosures, but defers to the state law of contract formation. This Act incorporates those federal disclosures (and thus the "consummation" trigger), and also uses "consummation" to measure the timeliness of other actions. This definition therefore complements the federal Act by specifying as consummation the time when the consumer expresses a formal commitment to the lease by authenticating a record, which may be the lease itself or a purchase order or similar obligation. In "spot delivery" situations, a lessor may condition the agreement on approval of the lessee's credit or other contingency, but "consummation" for purposes of this Act nonetheless occurs when the lessee becomes committed.

4. "Expiration" refers to the scheduled end of the lease term. If a lease is extended or renegotiated there is a new expiration point.

5. "Federal Consumer Leasing Act." References to this Act include the relevant Federal Reserve Board regulations (Regulation M) and the Official Staff Commentary to that regulation.

6. "Good faith." The standard includes both subjective honesty and more objectively measured standards of fair dealing. Section 108 applies this standard to all parties to consumer leases.

7. "Goods." This Act covers all "goods," intending that term to be construed consistently with UCC Article 2A. Goods do not include assets that are essentially contractual obligations, payment media, or intellectual property.

8. "Holder."

a. Consumer leases are frequently sold or assigned by the original lessor to secondary financers who hold the leases for the duration of their terms. Whoever is the current owner of the lease is the "holder" under this definition. As holder, that person may have responsibilities and liabilities under this Act, for example with respect to post-consummation disclosures, and lease termination or foreclosure.

b. A person with a security interest in a lease as chattel paper is not a "holder" by virtue of the security interest alone, even if that person is an assignee with possession of the lease. But that person becomes de facto the "holder" of the lease when it undertakes collection, either by agreement or on default by the grantor of the security interest.

c. Securitized pools of leases present unique issues, especially for leases of motor vehicles where there must be a titled and registered owner of the vehicle under the motor vehicle laws. This owner is usually the original lessor or an initial assignee, either of which may then securitize its lease portfolio for sale into the securities markets. For purposes of this definition the "holder" is the special purpose entity, trustee, or other entity that [administers or services the securitized leases] holds title to the leased goods, and not the securities investors who have only beneficial or nominal ownership interests.

10/00 Update: A question was raised about the adequacy of this treatment of lease securitizations. Should not the "holder," for purposes of this Act, be whatever entity owns the leased goods and not merely a servicing agent. The owner/holder can delegate or contract with the servicer to perform duties under this Act, but for purposes of responsibility and liability, the owner of the goods should be on the hook. If we delete the bracketed language and add the bolded phrase, have we fixed it?

9. "Lease." This replicates the baseline definition of 'lease' from UCC Article 2A.

10. "Lessee."

a. This Act protects lease customers at various stages of the lease transaction, including advertising, solicitation and application processes as well as under the resulting lease contract. The term "lessee" is used to identify that customer or prospective customer in those various settings. Only an "individual" - i.e., a natural person rather than an organization - is a lessee under this definition.

b. Private trust arrangements are sometimes used for estate planning and other forms of financial management, and may include assets held in trust for the benefit or use of an individual. If such a trust is a party to a lease of goods, the trust is the lessee. And if the goods are intended for the personal, family, or household purposes of the individual beneficiary, the lease is then a consumer lease under this Act.

c. An individual is not considered a "lessee" if that person is merely a guarantor of the obligation. Often more than one individual will execute a lease, and the lease either will not distinguish the capacity in which they sign, or will identify them simply as co-lessees. The lessor in such cases may treat them as co-lessees and need not inquire into or investigate any private agreement between those signers as to use of the goods or payment responsibility. If, however, an individual is clearly identified on the lease as a guarantor, that individual is not a lessee. Cf. Section 205, requiring special disclosure to guarantors.

11. "Lessor."

a. Both the federal Consumer Leasing Act and the UCC Article 2A definitions of "consumer lease" state coverage by whether the lessor "regularly" engages in consumer leasing. Regulation M refines that federal rule by adopting a bright-line test which counts the number of specific lease transactions the leasing entity has made or arranged in the prior or current year. This Act follows Regulation M. This excludes truly casual or isolated lease transactions, even if made by a commercial entity otherwise engaged in distributing goods.

b. The person who enters into the contractual lease arrangement with a consumer is the "lessor" even though it may be understood, or pre-arranged, that the lease will promptly be assigned to a financing institution. This Act does not include as a lessor a person who merely "arranges" leases, such as a broker or other intermediary. In this respect this Act differs from the federal CLA which retains the "arranger" subdefinition. Since the compliance duties under this Act always rest with the contractual lessor or subsequent holder, there is no consumer protection advantage in also treating "arrangers" as lessors.

c. The phrase "offered to lease" refers to discrete offers to individual customers, and not, for example, to a single advertisement that may reach a larger audience.

12. "Motor vehicle." Certain provisions of this Act apply only to motor vehicle leases, and the general intention is to cover those vehicles requiring registration and titling for use on public roads. Rather than attempt a universal definition of motor vehicle that could be applied in all States, this definition incorporates by reference the types of vehicles subject to specific state motor vehicle laws.

13. "Realized value." Based on Regulation M definition. See Section 404 for computation.

14. "Record." This is a generic term to describe the recordation of information in paper or electronic form. It includes a writing, and any form of electronic communication which is retained and can be read. The term is to be construed consistently with the same term in the UCC.

15. "Sign." . . .

16. "Single payment lease." A lease may call for a single payment to cover its full term. It is a "single payment lease" whether that payment is required at consummation or at some later time. The single payment refers to the depreciation and rent charge obligation of the lessee; it remains a "single payment lease" even if the lessee must make certain payments to third parties from time to time.

17. "State"...

18. "Termination"....

SECTION 103. SCOPE; EXCLUSIONS; SALE INCIDENT TO LEASE.

(a) Except as otherwise provided in subsection (b), this [Act] applies to a consumer lease.

(b) This [Act] does not apply to:

(1) a computer information transaction;

10/00 Update: UCITA terminology used.

(2) a lease of goods that is incidental to a transaction that is predominantly:

(A) a contract for the sale of goods or services; or

(B) a computer information transaction;

(3) a lease of goods that is incidental to a lease of real property and provides that:

(A) the lessee has no liability for the value of the goods at the end of the lease term except for abnormal wear and tear; and

(B) the lessee has no option to purchase the goods; and

(4) a lease of a safe-deposit box.

(c) If a consumer lease includes an incidental sale of goods, services, computer information, or other benefits, including accessories, insurance, an extended warranty, a maintenance agreement, or a service contract, and the lease aspects of the transaction predominate, the incidental sale is not subject to [insert citations to state credit sales laws].

10/00 Update: Revised to mention "maintenance agreement" and to use the UCITA phrase "computer information."

(d) A provision in a consumer lease for payment of governmental, license, or registration fees, taxes related to the lease, or an amount necessary to discharge a security interest in, a lien on, or a debt with respect to, property traded in, or to satisfy an obligation owed on a previous lease, does not make the payment subject to [insert citations to laws of this State governing small loans or other forms of consumer financing].

1. Certain transactions are outside the coverage of this Act, whether or not they meet the definition of "consumer lease" in the prior section. Thus software licenses and other forms of transfers of intellectual property or rights to use information are not covered by this Act, even if the licensing transaction is characterized in lease terms. [Need to say more about fit with UCITA, especially as to leased computers.]

2. Under paragraph (b)(2), if a lease of goods is merely an "incidental" component in a transaction that is predominantly a sale of goods or services, it is excluded from this Act. Cf., Regulation M Commentary ¶ 2(e)-7. Examples are home entertainment systems, security alarm systems, or propane gas service, where the consumer leases certain component devices in order to receive the specified service. In these cases where the primary purpose of the transaction is to provide services (cable or satellite dish programming, security monitoring) or to sell other products (propane gas), the transaction as a whole is treated as a sale and no part of it is subject to this Act.

3. Paragraph (b)(3), based on Regulation M § 213.2(e)(3), excludes the furniture and appliance portion of a lease of a furnished home or apartment where the consumer must surrender the goods at the end of the lease term. The primary rental property is the real estate, to which this Act does not apply; the "goods" items are secondary or incidental.

4. Paragraph (b)(4) excludes leases of safe deposit boxes. The real rental is of secure space within the financial institution, not the "box" itself.

5. Under subsection (c) purchases incidental to a lease - accessories or service contracts, for example - are subsumed in the lease, and are therefore not subject to piecemeal coverage by laws applicable to "credit sales" of those products. Thus where a lessee buys and "capitalizes" a service contract on leased goods, the lessor may treat the price of the service contract as part of the capitalized cost in the lease, and need not provide separate disclosures for it as a credit sale. Similarly if the lessee buys a vehicle accessory, e.g., a trailer hitch, as part of the lease transaction, that price may be capitalized in the lease and incorporated in lease payment calculations and disclosures. This "incidental sale" rule does not affect the substantive regulation of the price, terms or quality of such incidental items under other law which is not expressly excluded under subsection (b) or (c). Thus insurance remains fully subject to state insurance codes as to policy coverages, premium rates, agent licensing and the like.

6. "Predominance" is the test generally used by courts to determine whether hybrid transactions are sales under UCC Article 2 or leases under UCC Article 2A. Predominance relates to the core purpose of the transaction and is not necessarily always measured by the relative cost of the "lease" and "sale" components. For example, a lease of a home computer remains a lease even though, over time, the lessee may pay more for delivery, installation, software and upgrades, and servicing than for the use of the computer itself.

SECTION 104. CHARACTERIZATION OF LEASE; TRANSACTION SUBJECT TO ACT BY AGREEMENT.

(a) A consumer lease may not be characterized as a credit sale, loan, computer information transaction, or security interest to make the transaction subject to coverage by other law of this State.

10/00 Update: Phrase "under this Act" deleted per StyleCom. Q: Do we need to include "computer information transaction" to accommodate UCITA? Is the fit with UCITA trickier than this makes it seem?

(b) The parties to a lease that is not subject to this [Act] may agree in the lease, or in a contemporaneous record, that this [Act] applies to the lease.

1. Subsection (a) limits the authority of courts, and of the parties to a lease, to characterize the transaction as something other than a lease so as to bring it under the coverage of other law of this State. For example, a contractual agreement between the parties to a consumer lease that they will treat it as a sale or license is unenforceable.

2. The parties to consumer lease transactions should expect that courts will respect the integrity of those transactions, and the adequacy of consumer protections accorded under this Act (and the federal Consumer Leasing Act). Thus the characterization of a transaction as a lease is to be controlled by its contractual terms and the circumstances at the time the lease is executed, and should not be subject to judicial or administrative re-characterization. The definitions in this Act, and the related definitions of "lease" and "security interest" in the UCC, provide sufficient guidance for identifying lease transactions. The basic test under those definitions is whether, by the terms of the parties' contract, there will be significant "residual value" in the goods at the expiration of the lease term.

3. Projecting the future value of consumer goods, and thus the lessor's "residual value," is inherently uncertain. Market forces or technological innovation may produce unexpected rates of depreciation or obsolescence. The lessee's use and maintenance of leased goods will also inevitably affect their future value. The mere fact that during the lease term or at lease end the goods have less residual value than projected does not justify [courts] re-characterizing the transaction as a credit sale or security interest. It is impossible at that point for the lessor to reconstruct the transaction in accordance with laws applicable to credit sales or loans. [So long as the lease projects a residual value and/or purchase option price that are reasonable at the time the lease is executed, the transaction remains a lease.] Fraudulent or deceptive practices, such as mis-characterizing as a lease a transaction that is not a lease, can be adequately policed under state fraud or deceptive practices laws outside of this Act, or under the advertising provisions of this Act.

10/00 Update: A question was raised in April whether the bracketed sentence is accurate or necessary. Maybe just delete? Q. - add the word "courts" to clarify purpose of this provision?

4. Subsection (b) permits the parties to a lease to stipulate to coverage by this Act even if the lease is not for a consumer purpose, or where the "purpose" is unclear, such as in a small business or agricultural context, or where it is uncertain whether the lease is within the dollar threshold for coverage. This provision permits lessors to establish a safe-harbor legal framework for leases at the margins of coverage. To minimize disputes about the parties' agreement, the stipulation to coverage by this Act must either be part of the lease at the time of consummation or in a contemporaneous record.

5. Merely because a lease is documented in apparent or attempted conformity with this Act does not, in and of itself, make the lease a consumer lease. For example, an auto dealer may use the same lease forms and disclosures for consumer and small business leases. The business leases are not covered by this Act (absent a stipulation or record agreement to that effect).

SECTION 105. SUPPLEMENTAL PRINCIPLES OF LAW APPLICABLE. The principles of law and equity supplement this [Act], except to the extent those principles are displaced by or inconsistent with the particular provisions of this [Act].

4/00 Update: Substantially shortened, per StyleCom. Laundry list of what is swept up in "principles..." is moved to Comment. See Reporter's Note 1, below.

Legislative Note: This Act does not contain a general proscription of unfair or deceptive acts or practices in connection with consumer leases, as this is often covered by a more general consumer fraud act. See, e.g., Uniform Consumer Sales Practices Act § 2(1) ["lease" included in definition of "consumer transaction"]. An enacting State should therefore ensure that its statutory treatment of unfair and deceptive acts and practices includes consumer lease transactions. Similarly, this Act does not provide a cooling-off period for leases solicited door-to-door or otherwise consummated off the dealer's premises. Cf., Uniform Consumer Credit Code §§ 3.501-3.505. An enacting State should therefore consider amending its existing door-to-door (or off-premises) sales law to cover consumer leases.

1. Like UCC Section 1-103, this section confirms that this Act does not completely occupy the field for the transactions it covers. In particular, consumer leases remain subject to UCC Article 2A (Leases) for such matters as contract formation, performance responsibilities, priority as to third parties, and basic remedies for breach. Common law or statutory proscriptions concerning unfair or deceptive acts or practices relating to consumer transactions also continue to apply, including the Uniform Commercial Code, the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, unfair or deceptive acts or practices, or other validating or invalidating cause.

2. Other principles of law and equity apply unless "displaced by" or "inconsistent" with this Act. These can be two different forms of nullification. For example, Section 305(b) [Preservation of Lessee's Claims and Defenses] would displace any common law or statutory right to invoke a waiver of defense clause. By contrast, Section 406(b) [Early Termination Liability] states factors for early termination liability somewhat different from those in UCC Article 2A-504. In a given case these may lead to inconsistent answers on permissible lease terms. The answer dictated by this Act controls.

3. Many consumer leases covered by this Act are also covered by the federal Consumer Leasing Act and Federal Reserve Board's Regulation M, principally with respect to disclosure. That federal law applies on the constitutional basis of federal supremacy and is not merely "supplemental" within the meaning of this section. By virtue of the "relation to state laws"provision in the federal act [Consumer Leasing Act § 186; Regulation M § 213.7], it preempts any state law (including this Act) to the extent the state law is inconsistent with it. No such inconsistencies are intended in this Act.

SECTION 106. WAIVER; AGREEMENT TO FORGO RIGHTS IN SETTLEMENT OF CLAIM.

(a) Except as otherwise permitted by this [Act], a lessee may waive or agree to forgo rights, benefits, or remedies under this [Act] only in settlement of a bona fide dispute or collection claim.

10/00 Update: Committee voted 8-0 in April to add "or remedies."

(b) A settlement in which a lessee agrees to forgo a right, benefit, or remedy under this [Act] is invalid if the court finds the settlement was unconscionable when made.

10/00 Update: Phrase "or remedy" added. Per Committee vote 8-1, "Matters relevant..." sentence removed from statute and put in Reporter's Note 2 below.

1. Subsection (a) generally invalidates a consumer's contractual waiver of rights under this Act, either in the lease agreement or otherwise. But disputed claims by or against a consumer, or collection claims, may be settled unless unconscionable.

2. The unconscionability test for the validity of a settlement agreement involving waiver of rights under this Act should be applied consistently with the general unconscionability rule in Section 109 of this Act. Matters relevant to the possible unconscionability of a settlement agreement include the lessee's sophistication and familiarity with lease practices, any deception or coercion practiced upon the lessee, the nature and extent of legal advice received by the lessee, and the value of the consideration.

3. This Act takes no position on the validity of a provision in a consumer lease that some or all claims be resolved through arbitration or other alternative dispute mechanism. Such a provision does not per se constitute a waiver of rights or remedies under this Act. There is no necessary reason why an arbitral or other ADR forum cannot give full effect to the protections afforded by this Act and the remedies available to lessees for non-compliance. In this context, limitations on the suitability of ADR for class claims do not constitute deprivation of rights, benefits, or remedies under this Act.

10/00 Update: Note 3 is expanded to add last two sentences, but my notes are unclear whether Committee actually wanted to say this.

SECTION 107. LIMITATION ON CHOICE OF APPLICABLE LAW AND FORUM.

(a) If the law chosen by the parties to a consumer lease is that of a jurisdiction other than a jurisdiction in which the lessee resides at the time the lease agreement becomes enforceable or within 30 days thereafter or in which the goods are to be used, the choice of law is not enforceable.

(b) If the judicial forum chosen by the parties to a consumer lease [for an action against the lessee] is a forum that would not otherwise have jurisdiction over the lessee, the choice of forum is not enforceable.

10/00 Update: Per Committee instruction, subsections (a) and (b) are verbatim from UCC § 2A-106. I would add the bracketed phrase to keep this subsection distinct from (c), below.

(c) Option A: The parties to a consumer lease may not agree that a lessee may not maintain an action against a holder in a forum that otherwise has personal jurisdiction over the holder.

Option B: A lessee may maintain an action against a holder in any judicial forum that otherwise has jurisdiction over the holder, and an agreement limiting lessee's choice of forum is unenforceable.

10/00 Update: Option A is the original version. Option B is meant to say the same thing, but in a style that better tracks subsections (a) and (b).

1. Absent a choice of law clause in the lease and as a matter of territorial application this Act is presumptively controlling for leases made [and] [or] performed in this State. This includes leases involving lessees who are not residents of this State. The normal choice-of-law rules of a judicial forum will determine whether the law of this or another state applies in a particular case.

10/00 Update: Second sentence of prior Note 1 deleted, and new thoughts added. Do they accurately reflect Committee discussion?

2. The parties may contract for coverage by the law of another jurisdiction, and that choice will be respected if the law chosen satisfies subsection (a). I.e., the jurisdiction selected must be that of the consumer's residence when the lease is executed, or the consumer's expected residence within 30 days thereafter. Or it may be the jurisdiction where the goods are to be used, for example, the lease of furnishings for a summer vacation home. Absent this choice-of-law limitation, there is a danger that a lessor may induce a consumer lessee to agree that the applicable law will be a jurisdiction that has little effective consumer protection.

3. For actions against the consumer lessee, subsection (b) nullifies a choice of forum clause unless the consumer is otherwise subject to the jurisdiction of that forum. That is, the choice of forum clause does not establish jurisdiction over the lessee by consent. Conversely, subsection (c) preserves the lessee's right to sue in any forum having jurisdiction over the lessor or holder notwithstanding a protective choice of forum clause for such actions.

10/00 Update: No change in Notes 2 and 3.

4/00 Update: In Denver (7/99) a commissioner questioned § 107(a) as too limited. I.e., it restricts choice-of-law clauses to the lessee's residence.

SECTION 108. OBLIGATION OF GOOD FAITH. Every contract or duty subject to this [Act] imposes an obligation of good faith in its performance or enforcement.

1. As under the Uniform Commercial Code, all parties to a consumer lease are held to a standard of good faith with respect to their rights and responsibilities under this Act. The definition of "good faith" [Section 102(a)(6)] has a dual aspect: subjective honesty and conformance to reasonable commercial standards of fair dealing.

2. A finding of lack of good faith by a party to a lease does not negate that party's rights under the lease or this Act, but may, as determined by the court, preclude or estop the party from enforcing those rights.

SECTION 109. UNCONSCIONABILITY.

(a) If the court as a matter of law finds a consumer lease or any term of a consumer lease to have been unconscionable at the time it was made the court may refuse to enforce the lease, or it may enforce the remainder of the lease without the unconscionable term, or it may so limit the application of any unconscionable term as to avoid any unconscionable result.

(b) With respect to a consumer lease, if the court as a matter of law finds that the lease or any term of the lease has been induced by unconscionable conduct or that unconscionable conduct has occurred in the collection of a claim arising from the lease, the court may grant appropriate relief.

(c) Before making a finding of unconscionability under subsection (a) or (b), the court, on its own motion or that of a party, shall afford the parties a reasonable opportunity to present evidence as to the setting, purpose, and effect of the consumer lease or term thereof, or of the conduct.

(d) In an action in which the lessee claims unconscionability with respect to a consumer lease:

(1) If the court finds unconscionability under subsection (a) or (b), the court shall award reasonable attorney's fees to the lessee.

(2) If the court does not find unconscionability and the lessee claiming unconscionability has brought or maintained an action the lessee knew to be groundless, the court shall award reasonable attorney's fees to the party against whom the claim of unconscionability is made.

10/00 Update: Suggest adding "of unconscionability" in last line of (2), to clarify that "claim" is referring to an assertion of unconscionability, and is not meant to distinguish between a lessee as plaintiff or defendant in the litigation. In either posture, a lessee can assert unconscionability.

(3) In determining the reasonableness of attorney's fees, the amount of the recovery on behalf of the claimant under subsections (a) and (b) is not controlling.

10/00 Update: This is former Option B, verbatim the same as UCC § 2A-108 except that "consumer lease" is substituted for "lease contract."

1. This section replicates UCC § 2A-108. It is repeated here for two reasons. One is to assure that the unconscionability principle is applicable under this Act even if the State has not enacted UCC Article 2A or has omitted or modified § 2A-108. The second reason is to confirm that the remedial provisions within this section (and UCC § 2A-108) operate in conjunction with the private remedies in Section 501 of this Act, and are not displaced by that section.

SECTION 201. ADVERTISING.

(a) In this section, "advertisement" means a commercial message in any medium that directly or indirectly promotes a consumer lease.

10/00 Update: Word "transaction" deleted at end.

This definition, taken almost verbatim from Reg. M, seems necessary so that the term means the same thing for leases over $25,000 as for leases in lesser amounts. I.e., Reg. M only applies up to $25,000, while this section applies to ads for leases up to $150,000.

(b) An advertisement must comply with the federal Consumer Leasing Act's requirements for advertising, even if the advertised lease is not subject to that Act.

(c) A person may not publish, broadcast, or distribute a false, deceptive, or misleading advertisement.

10/00 Update: Phrase "for a consumer lease" deleted after "advertisement" in both (b) and (c).

(d) This section does not apply to a person acting solely as [who is] an owner or employee of a medium in which an advertisement appears or through which it is disseminated.

10/00 Update: Committee asked that this be re-drafted so as not to exempt a media person who also happens to be a lessor. Does this slight word change do it? The federal CLA § 184(b) simply provides "No owner or employee of an entity that serves as a medium in which an advertisement appears. . . . shall be liable under this section." See also Reporter's Note 3, below.

1. For any consumer lease advertisement, subsection (a) makes compliance with the federal Regulation M a state law rule as well. This extends the substance of the Regulation M advertising rules to transactions outside Regulation M's scope (i.e., over $25,000) but within the scope of this Act (up to $150,000).

2. Subsection (c) is a general "false advertising" proscription in the leasing context. It applies to any "person" who advertises, not just lessors. Thus a manufacturer advertising lease arrangements through its franchised dealers would be covered. The terms "false, deceptive, or misleading" are to be interpreted consistently with the broad body of law on advertising practices developed under the Federal Trade Commission Act and comparable laws of this state.

3. Subsection (d), based on Section 184(b) of the federal Consumer Leasing Act, shields from liability persons who own and operate the advertising media when acting in that capacity.

SECTION 202. PRE-LEASE AVAILABILITY OF SAMPLE FORM. Before consummation of a consumer lease, a lessor shall on request of a prospective lessee give a copy or reproduction of its current consumer lease form to the prospective lessee at the lessor's place of business. If a lessor contracts with lessees by mail, the lessor shall make available on mail request a copy or reproduction by mail. If a lessor contracts with lessees electronically, the lessor shall make available on electronic request a copy or reproduction by mail or electronically. If a lessor uses more than one consumer lease form, the lessor satisfies this section by providing a form the lessor has reason to believe is pertinent to the type of lease about which the prospective lessee has inquired.

10/00 Update: "Before consummation . . ." phrase moved to beginning of first sentence.

4/00 Update: Second and third sentences re-written separately to permit mail response to electronic request . (Former version would require mail/mail or web/web responses; new language also permits web/mail).

1. Lease documents may be lengthy and complex, and their terminology and standard provisions are sometimes unfamiliar to consumers. When the completed lease form, including its disclosures, is given only at consummation, this may not adequately permit or encourage consumers to study or review the lease documentation ahead of time, or to compare one lessor's form with another's. This section therefore requires a lessor to give a prospective customer a copy of the lease form on request, without charge.

2. The copy may be a "reproduction," as by photocopy, computer print-out, or otherwise, rather than an original of transaction documents, and it may be a blank copy without transaction details filled in. It may be accessed by computer terminal, so long as the consumer may print and retain a hard copy. A lessor must provide forms at each of the lessor's business establishments where it consummates leases, and if the lessor enters into consumer leases by mail or electronically, as by exchange of facsimile documents or over the Internet, it must provide copies either by mail or in the medium the prospective customer uses to inquire. If a lessor does not enter into contracts with customers by mail or electronically, i.e., if all of its leases are consummated at a lessor's premises, this section does not obligate that lessor to mail sample forms in response to telephone, mail, or electronic inquiries.

3. Lessors may use a number of different lease forms, for different lease products or goods, or anticipating transfer to various assignees. The lessor is required under this section to provide only one sample, and is expected to use reasonable judgment to provide, or allow the consumer to select, one suited to the prospective customer's interests.

SECTION 203. DISCLOSURE; FORM OF CONSUMER LEASE; COPY TO LESSEE.

(a) Before consummation of a consumer lease, the lessor shall make the disclosures required by the federal Consumer Leasing Act, even if the lease is not subject to that Act.

(b) Subsection (a) applies to a renegotiation of a consumer lease, but not to an extension of a consumer lease for a period of six months or less, or an extension of a consumer lease for a period of more than six months if the amount of the base periodic payment is reduced. A renegotiation occurs when a consumer lease is satisfied and replaced by a new consumer lease undertaken by the same lessee.

(c) At consummation a consumer lease must be evidenced by a record, and:

10/00 Update: Intro phrase re-written simply to require a record. Authentication & delivery are dealt with in subsection (e).

4/00 Update: Pursuant to 9/99 instruction, (c) recast to state lessor duty to put lease in a record and authenticate it, and then add on disclosure components.

(1) clearly indicate at the beginning of the record that it is a lease; (2) contain in a location close to the lessee's authentication a notice substantially as follows:

(A) if the lease contains a purchase option:

NOTICE TO THE LESSEE: This is a lease. You are not buying the [goods/vehicle], unless you exercise your option to purchase. Do not sign this lease before you read it. You are entitled to a completed copy of this lease when you sign it.; or

(B) if the lease does not contain a purchase option:

NOTICE TO THE LESSEE: This is a lease. You are not buying the [goods/vehicle]. Do not sign this lease before you read it. You are entitled to a completed copy of this lease when you sign it.;

(3) identify the place of business of the lessor and the residence of the lessee;

(4) identify any property traded in or applied as a capitalized cost reduction or similar credit; and

(5) itemize the gross capitalized cost by type and amount.

10/00 Update: In 4/00 Committee voted 6-0 to include a mandatory itemization of the gross capitalized cost, and in our August phone conference the Committee agreed this should track the federal Reg. M. I hope this can be done as succinctly as this paragraph (5) indicates.

Reg. M gives lessors an option: either give the itemization as a matter of course in every lease; or give customers a disclosure that the itemization is available on request. Our provision makes the itemization mandatory in all instances. Reg. M does not specify details of the itemization or its format, providing only (in the Commentary) that "The gross capitalized cost must be itemized by type and amount." Essentially that same language is used here. See Reg. M § 213.4(f)(1) and Commentary ¶ 213.4(f)(1)-2. And see Reporter's Note 3, below.

(d) A lessor may not present for the lessee's authentication an application for a consumer lease or a consumer lease that contains blank spaces to be filled in after it has been authenticated by the lessee but if the goods are to be specially ordered for future delivery to the lessee the due dates of periodic payments and specific identifying numbers, marks, or similar information concerning the goods may be inserted in the application or lease after its execution.

(e) Promptly after consummation of a consumer lease, the lessor shall furnish to the lessee a completed copy of the lease authenticated by the lessor and lessee and, if not previously furnished, a copy of all other records that the lessee has authenticated in connection with the transaction. As against a holder who took the lease without knowledge to the contrary, a lessee's authenticated acknowledgment of receipt of a copy of these records creates a presumption of delivery of the copy.

10/00 Update: Shouldn't it include "and lessee" too, as underlined words suggest?

By 4/00 Committee vote (5-4) former subsection (f), concerning disclosure of a lease rate is deleted (along with § 207 on lease rate computation).

1. Basic disclosures for consumer leases are provided under the federal Consumer Leasing Act, which in subsection (a) is adopted as state law as well, for all leases subject to this Act (i.e., up to $150,000). Subsection (b) is intended to track the federal law as to when new disclosures are required for refinancings or extensions. These disclosures must be made prior to "consummation" of the lease, as defined in Section 102(a)(3).

2. Beyond the disclosures made in accordance with federal law, subsection (c) requires certain formalities for a consumer lease: a record authenticated by both parties, clearly indicating the transaction is a lease, cautionary notices about the lessee's ownership of the goods, the parties' locations, a description of any trade-in, and an itemization of the gross capitalized cost. These requirements assume the parties have otherwise concluded an enforceable contract. Thus failure of a lessor to comply with these disclosure and formality rules subjects the lessor to the sanctions provided in Article 5 of this Act but does not in and of itself nullify or invalidate the consumer lease.

3. The federal Consumer Leasing Act, through its Regulation M, addresses itemization of the gross capitalized cost only in conjunction with motor vehicle leases. Vehicle lessors have an option to provide the itemization as a matter of course in all transactions, or disclose to the customer that the itemization is available on request. Most lessors find it expedient to furnish the itemization routinely and subsection (c)(5) makes that approach mandatory. This disclosure applies to all consumer leases, not just motor vehicles. The gross capitalized cost must be itemized by type and amount, consistently with Regulation M. This includes the agreed-upon value of the goods (which may include accessories and options, taxes, and title, and license or registration fees), and other charges and fees that are capitalized, such as insurance, a service or maintenance contract, or an outstanding balance on a prior lease or credit transaction. No precise format is required so long as the itemization presents the components of the gross capitalized cost individually or in reasonable categories.

4. Subsections (d) and (e) deal with potential problems at the lease-signing stage. A lessor may not take an uncompleted lease, except where certain information can only be supplied on delivery of the goods. Under subsection (e) a lessee is entitled to copies of the lease and any other records the lessee has authenticated as part of the lease transaction. The "promptly" constraint recognizes that it may not be possible to furnish some documentation instantaneously on the lessee's execution of the lease. While a copy of the lease would usually be provided at that point, it might require some delay to get the appropriate dealer authentication. If the transaction is conducted by mail or facsimile, there are inherent lag times for return messages. Or other transaction documents may need to be retrieved, copied and mailed. In most cases the time lag should be minimal.

SECTION 204. INSURANCE; INSURANCE DISCLOSURES.

(a) A consumer lease may require that casualty insurance on the leased goods, or liability insurance against personal injury or property damage caused to others, or both, be maintained in effect during the term of the lease. If a consumer lease requires either casualty or liability insurance, or both, and such insurance is not included in the lease for no additional charge:

10/00 Update: Per Committee direction: First sentence is new, to affirm that lessor may require insurance for any kind of lease. Second sentence and subsections (1) and (2) below replace former subsection (b). Instead of two parallel subsections, one for casualty and one for liability insurance, they are combined. These rules on customer option and disclosure now apply to all leased goods, not just motor vehicles.

4/00 Update: Language suggested to deal with possibility that insurance is part of lease package, without separate charge.

(1) the lessor shall disclose in a record that the lessee may purchase the required insurance from an insurer of the lessee's choice, subject to the lessor's right to reject that insurer for reasonable cause; and

(2) if the required insurance is not included in the lease, the lease must contain or be accompanied by a statement in a record substantially as follows:

No [describe types of required insurance coverage] is provided under this lease. You must obtain that insurance yourself.

10/00 Update: Text of disclosure modified to allow lessor to fill in type of insurance, i.e., either casualty, or liability, or both.

(b) If casualty insurance on the leased goods is neither required nor provided in a consumer lease, the lease must contain or be accompanied by a statement in a record substantially as follows:

No insurance coverage for physical damage to, or loss of, the leased goods is provided under this lease.

10/00 Update: This was formerly subsection (a), and deals with the case where the lessor doesn't require or provide any insurance, e.g., for a leased computer. The Committee had earlier said they still wanted to give a warning to that effect.

(c) If a lessor offers to provide credit life, accident, health, loss-of-income, or similar insurance in connection with the consumer lease:

4/00 Update: "in connection with" added.

(1) the lessor shall disclose in a record that the insurance is not required; and

(2) the lessee's election to purchase the insurance is effective only if the lessee separately authenticates a record requesting the insurance after receiving the disclosure.

(d) If a lessee becomes obligated to pay an amount for insurance provided by or through the lessor, the lessor shall furnish or arrange to have furnished to the lessee a copy of the policy or certificate of insurance.

1. Leases of consumer goods often involve insurance, which may be of several types. A lessor may require casualty insurance to be maintained on the goods to protect its residual ownership interest. Likewise, especially for a motor vehicle lease, a lessor may require that the lessee maintain liability insurance to protect the lessor against claims by third parties for damages caused by the leased goods. In either of these situations, the lessor may offer to provide the insurance itself or the lessee may be expected to obtain the insurance on the lessee's own. In many leases, the lessor may offer the lessee a variety of credit insurance options that cover the lessee's obligation under the lease in case of death, accident or disability, loss of income or similar occurrences. This section assures that the insurance variables and options are clearly disclosed. Note that, whenever insurance charges are included in the lease, disclosure about those charges is required under the federal Regulation M and Section 203(a) of this Act.

2. Subsection (a) authorizes lessors to require maintenance of casualty or liability insurance, or both. For either type of required insurance, and with respect to any kind of leased goods (not just motor vehicles) the lessor must give the lessee the option to obtain the coverage from an insurer of the lessee's choosing. If the lessee elects to buy the insurance outside the lease, the lessor must give the lessee an explicit reminder of lessee's responsibility to obtain the specified insurance coverages.

Where lessors require insurance, this is usually at the lessee's expense. That is, either the lessee buys the insurance outside the lease, or, if the lessee elects to buy the insurance from or through the lessor, the premium is added as a separate charge. Some lessors, however, build the insurance coverage into the lease price automatically, without separate charge to the lessee. Under subsection (a) no special disclosure is required in such cases.

3. For leases where casualty insurance is not required, and is not included in the lease as an option, the lessor must give the lessee a brief reminder of that fact. Thus a consumer who leases a home computer is alerted to seek coverage under a homeowner's or similar casualty policy. This does not apply to liability insurance.

4. The various kinds of credit insurance are of a different character. They do not protect the lessor's ownership interest as such, but rather the credit or payment risk that is inherent in the transaction (and that is itself largely protected by the lessor's right to repossess the goods). Credit insurance is also subject to "reverse competition" marketing where the lessor has little incentive to pass cost savings on to the lessee. Credit insurance therefore may only be offered on an optional basis, with the lessee's explicit authentication of a request for it.

SECTION 205. NOTICE TO GUARANTOR.

(a) In this section, "guarantor" means an individual who becomes obligated to perform under a consumer lease as an additional obligor because the original lessee either does not meet the lessor's credit standards or is in default under the lease.

10/00 Update: Phrase "to perform under" substituted for "with respect to".

4/00 Update: "either/or" construction used for clarity.

The term does not include:

(1) an individual who agrees or requests to become obligated as a co-lessee; or

(2) an assignor of a consumer lease.

(b) The obligation of a guarantor with respect to a consumer lease is not enforceable unless:

(1) before the guarantor authenticates a record evidencing the obligation, the lessor provides to the guarantor a clear and conspicuous notice in a record which identifies the obligation and the lessor and lessee and reasonably informs the guarantor of the nature of the obligation; and

(2) the lessor provides to the guarantor a copy of the authenticated record evidencing the guarantor's obligation.

4/00 Update: Former (d) becomes paragraph (2) here, per 9/99 instruction.

(c) A notice in substantially the following form complies with paragraph (b)(1):

You agree to pay the lease obligation identified below although you may not personally receive any goods. You may have to pay this obligation even if the person who receives the goods is able to pay. This Notice is not the contract that makes you responsible for the obligation. Read the lease for the exact terms of your obligation.

IDENTIFICATION OF OBLIGATION YOU MAY HAVE TO PAY:

4/00 Update: Former (d) combined into (b). New (d) added re presumption of receipt, per 9/99 instruction..

1. An individual may undertake to guarantee the obligation of a lessee in order to help the lessee qualify for the lease, or to forestall collection on a lease in default. That individual is typically a friend or relative of the lessee, without particular experience or knowledge about guarantor responsibilities. This provision therefore provides for a summary notice to the guarantor, in simple English, describing the nature of the obligation and risk they are assuming. The timely giving of this notice is a condition to the enforceability of the guaranty.

2. This notice must be given to true guarantors and not to persons who are themselves lessees. Often more than one consumer will apply for or sign the lease agreement, perhaps two spouses, or a parent and child. The lessor may assume that such customers are co-lessees, and need not inquire into any private arrangements between the customers as to use of the leased goods or payment responsibilities concerning the lease. But where for purposes of credit approval or collection forbearance the lessor explicitly requests an additional signatory, or the lessee offers to furnish one for those purposes, and that individual will be a voluntary surety for the lease obligation, the Notice required by this section must be given.

3. A guarantor does not include the original lessor when it assigns the lease to a subsequent assignee with recourse.

SECTION 206. INFORMATION DURING TERM OF LEASE; SATISFACTION OF LEASE.

(a) During the term of a consumer lease, the following rules apply:

4/00 Update: 'following rules apply" lead-in, per StyleCom.

(1) The holder shall furnish the lessee with a written receipt for any cash payment.

(2) If a lessee so requests in a record, the holder shall promptly furnish the lessee in a record:

4/00 Update: Old (2) and (3) combined into one list. Pure style.

(A) the dates and amounts of the periodic payments that have been received by the holder under the lease and the total amount of the remaining periodic payments;

(B) the lessee's total obligation due to satisfy the lease upon early termination, and a statement that the total obligation due to satisfy the lease upon early termination will be reduced by the realized value of the goods, if that is the case; and

10/00 Update: "a statement" added for grammar consistency with preamble.

(C) if the lease provides for a purchase option that may be exercised at the time of the lessee's request, the purchase option price.

4/00 Update: "that may be exercised" added for clarity in (C).

(3) An amount in a statement under paragraph (2) which is estimated must be so identified.

(4) A holder may not charge the lessee for furnishing one statement each 12-month period under paragraph (2). The holder may charge a reasonable fee for providing additional statements during the period.

10/00 Update: "during" replaces "in." Q. Paragraph 3 lists three distinct pieces of info the lessee might request, in subparagraphs (A), (B), and (C). Does this "one free statement a year" mean one free request under any of those subparagraphs, or one free under each? Should we clarify?

(b) When it appears from a holder's records that a lessee has discharged all of the lessee's obligations under the consumer lease, the holder shall promptly send to the lessee at the lessee's last known address a copy of the lease marked "satisfied," "paid in full," or similar term, or a separate record indicating satisfaction of the lease. The record of satisfaction does not release the lessee from liability under the lease for acts or events discovered by the holder after sending the record.

10/00 Update: Prior separate sentence re copy of the lease now stated as an alternative, with a "separate record" also sufficient to show payoff.

4/00 Update: 9/99: "under the lease" added in last sentence.

1. After a lease is consummated, the lessor or subsequent holder has certain common-sense responsibilities to provide further information to the lessee. These include receipts for cash payments, periodic statements of account, and "payoff" or "purchase option" figures during the lease term. The holder may charge a fee for the latter types of statements if requested more than once a year.

2. The lease payoff or "Total obligation...upon early termination" often takes into account the actual realized value of the goods when they are turned in. It is obviously impossible for a lessor or holder to know the condition or market value of the goods when responding to a lessee's inquiry about early termination. It would be risky, pure speculation, and potentially misleading to the lessee, for the lessor or holder to 'estimate' a net payoff figure before inspecting the goods. Thus subsection (a)(3)(A) contemplates that the lessor will tell the lessee the aggregate early termination obligation as a dollar figure, with the additional statement about application of the realized value.

10/00 Update re prior Section 207: By 5-4 vote of Committee in April '00, § 207 on computation of lease rate was deleted, subject to being re-opened if Connecticut experience finds solution to rate disclosure formula.

SECTION 301. PAYMENT OR TRADE-IN PENDING APPROVAL OF LEASE; REFUND OR RETURN.

(a) If a lessee's application for a consumer lease is not approved on the terms submitted, the following rules apply:

4/00 Update: "for a consumer lease" added for clarity. Also, "following rules apply" construction used, per StyleCom.

(1) Except as otherwise provided in paragraphs (2) and (3), the lessor:

(A) within one business day after disapproval of the application, shall return any goods traded in, and

(B) promptly, but in no event more than five business days after disapproval of the application, shall refund any payment received other than an application fee.

(2) If the lessee has taken delivery of the goods before the disapproval of the lessee's application, the lessor may withhold the refund or return under paragraph (1) until the lessee returns the goods, and the lessee may retain the goods until any goods traded in are returned to the lessee.

4/00 Update: Style Committee changes. In (2), "returned" used for consistency with (a)(1)(A). Also, "to the lessee" added at end, for clarity.

(3) In the case of a consumer lease of a motor vehicle in which the vehicle is delivered to the lessee pending approval of the lessee's application and the application is not approved, the lessor may impose a mileage charge for the lessee's use of the vehicle, at an amount not exceeding the mileage rate authorized for deduction under [state tax laws], if the fact and amount of that charge are disclosed to, and separately acknowledged by, the lessee in a record at the time of delivery. The lessor may offset the amount of the charge against any refund due the lessee.

Legislative Note: The bracketed reference to state tax laws should cite the appropriate state income tax law that authorizes a deduction or adjustment for vehicle mileage. If there is no such state law, the reference should be to the federal Internal Revenue Code provision on deductable mileage.

10/00 Update: Legislative Note added.

(b) A lessor under a consumer lease may not sell or otherwise dispose of any goods traded in until the lessee's application is approved.

10/00 Update: "under a consumer lease" added.

(c) If a lessor contracts to purchase property from a prospective lessee separately from a consumer lease, the lessor may not withhold or otherwise condition payment for the property pending consummation of a consumer lease.

1. Lessors sometimes take lease applications and signed leases from customers but reserve the right to disapprove or cancel the lease if the customer's credit is not approved or other contingencies arise. The customer may have surrendered a trade-in, made front-end lease payments, and taken delivery of the leased goods. This "spot delivery" practice enhances lease marketing, and can also be a convenience for the customer as it avoids delays in delivery and return trips to the dealership. But the consumer is left in a very vulnerable position if the application is disapproved. If a vehicle lessor, for example, disapproves the lease application, and is unwilling or slow to return the trade-in or refund the advance payment, the consumer has no old car, no new car, and is out of pocket the advance payment. The lessee may feel pressured to agree to whatever adjusted terms the lessor may offer. Recognizing that such retainages can be abused, subsection (a)(1) requires the lessor in these circumstances to return any trade-in within one business day after the disapproval and refund any advance payment within 5 days. If the lessee has taken delivery of the goods, lessor and lessee have reciprocal responsibilities at this point: the lessee must return the goods and lessor must return the trade-in and refund lessee's payments. Subsection (a)(2) states reciprocal obligations, and permits each party to withhold its performance pending the other's performance.

2. When there is spot delivery of a motor vehicle pending approval of the lessee's credit, the vehicle may depreciate with the lessee's use of it. Therefore, under subsection (a)(3) a motor vehicle lessor may impose a mileage charge for the interim period (between delivery and return of the vehicle) if it is disclosed and separately agreed to by the customer. Other than offsetting this charge, the motor vehicle lessor may not withhold return of the trade-in or refund of payments.

3. In any case, under subsection (b), the lessor may not dispose of the trade-in until approval of the customer's application is assured. This reinforces the lessor's incentive to get prompt credit approval, and allows the parties to be restored to the status quo ante when the lessee's application is disapproved.

4. Occasionally a customer will agree, in advance of any lease agreement, to sell existing goods to a leasing dealer. This separate sale, from customer to dealer, may occur for a number of reasons. For example, the consumer may want to dispose of an old car before shopping for a new one. Or the customer may want to maximize the value of the old car while waiting for a new model year or a new car with custom features. Under subsection (c) the prospective lessor cannot hold the agreed purchase price hostage until the customer agrees to a lease from that dealer.

SECTION 302. PROHIBITED LEASE TERMS.

(a) A consumer lease may not:

(1) authorize the holder to accelerate the maturity of all or part of the amount owing on the lease whenever the holder deems itself insecure;

4/00 Update: StyleCom: "authorize" instead of "permit."

(2) require the lessee to execute a cognovit, power of attorney, or other authorization to confess judgment, or an assignment of wages; or

(3) authorize the holder or another person to enter upon the lessee's premises or to commit a breach of the peace in the repossession of the goods.

(b) An agreement or provision prohibited by this section is unenforceable but does not otherwise affect the validity of the lease.

1. While this Act generally allows the parties broad freedom of contract with respect to the terms of a lease, particularly its pricing, there are certain contractual provisions that are historically recognized as unfair and against public policy in a consumer credit transaction. These include provisions permitting (i) acceleration based merely on felt "insecurity," (ii) various forms of "confessed judgments"or wage assignments, and (iii) repossession involving trespass or breach of the peace. There is no contemporary justification for these provisions, and they are per se prohibited. Cf., UCCC §§ 3.305, 3.306; FTC Credit Practices Rule, 16 C.F.R. § 444.2(a)(1) & (3).

SECTION 303. SECURITY INTEREST RESTRICTED; SECURITY DEPOSIT.

(a) Except as otherwise provided in subsection (b), a consumer lease or other record authenticated by the lessee in connection with the lease may not provide for the creation of a security interest in personal or real property of the lessee to secure the payment of obligations arising from the lease. A security interest created in violation of this section is unenforceable but does not otherwise affect the validity of the lease.

4/00 Update: Former subsections (a) and (b) flipped in order, per Style Com. suggestion.

(b) A consumer lease may provide for:

(1) a security deposit, advance lease payment, or other prepayment;

(2) a security interest in unearned insurance premiums or rebates of charges for a service contract, extended warranty, or maintenance agreement; and

10/00 Update: Revised to include rebates from extended warranty or maintenance agreements.

(3) a security interest in the proceeds or benefits of insurance, or of a service contract, extended warranty, or maintenance agreement on the leased goods, except to the extent the proceeds or benefits represent reimbursement to the lessee for expenses incurred.

10/00 Update: "extended warranty" added, to track (b)(2).

4/00 Update: In (3), "or maintenance agreement" added.

(c) This section does not preclude a holder from making a permissive financing statement filing under [Article 9 of the Uniform Commercial Code].

(d) A holder is not required to pay interest on a security deposit, advance lease payment, or other prepayment, but shall promptly account to the lessee in a record on the application of a security deposit.

4/00 Update: In (d), "accounting" obligation limited to security deposits, on theory that other prepayments are earmarked and don't need accounting. [Is this true?]

1. Historically, creditors sometimes took sweeping security interests in all of a consumer debtor's household goods or other property to secure a particular extension of credit. The purpose of the security interest was often more for its in terrorem effect than for its liquidation value. Now, state law [e.g., UCCC § 3.301], and the FTC Credit Practices Rule, 16 CFR § 444.2, essentially limit sale creditors to purchase-money security interests. In the lease context, the lessor retains comparable 'ownership' rights in the leased goods from the nature of the lease arrangement, reinforced by UCC Article 2A, and should not need to encumber other real or personal property of the lessee. Subsection (b) therefore generally prohibits a lessor from taking a security interest - separate from its leasehold interest - in the debtor's property.

2. Despite the general prohibition just noted, subsection (b) permits a lease to contain certain "security"provisions. Security deposits, advance lease payments or other prepayments are permitted, without limitation as to amount. It is implicit that such payments are or will be applied against the lessee's obligations under the lease, or returned to the lessee. The holder need not accrue or pay interest on such prepayments, nor must those funds be segregated or maintained in separate accounts. The economic effect of these prepayments, like the front-end payment in a single payment lease, is to reduce the lessor's risk and, ultimately, the lessee's cost. The holder must, under subsection (d), account to the lessee when a security deposit is applied.

3. A lease and a security interest are mutually exclusive characterizations under UCC §§ 2A-103(1)(j) and 1-201(37). A lessor cannot simultaneously hold a security interest in the leased goods. Subsection (c) confirms, however, that the lessor/holder may file a UCC Article 9 financing statement as a protective measure under UCC Section 9-505. Such a permissive filing does not itself make the lease a security interest. Similarly a lessor may include conditional security interest language in the lease as a precaution against the possibility that a court may later interpret the agreement as a security interest.

4. Some leases, particularly for motor vehicles, include insurance coverages or service contracts for all or part of the duration of the lease, and the charges for these items are typically financed as part of the lease and built into the payment schedule. If such a lease is terminated early, some portions of those charges may be "unearned" and rebated as cash payments or credits. Subsection (b)(2) allows the lessor to claim a security interest in such funds. This would not apply to rebates from insurance policies or service contracts paid for by the lessee outside the lease.

5. Similarly, under subsection (b)(3), if claims or benefits are payable under insurance or a service or maintenance contract financed under the lease, the lease may claim a security interest in those proceeds. But this security interest may not extend to reimbursements due the lessee. For example, the lessee of a motor vehicle may have paid for repairs after an accident, or have paid for substitute transportation during repairs. If the insurer owes the lessee for those expenses, its disbursement belongs to the lessee free of any "security interest" claim by the lease holder.

SECTION 304. DELINQUENCY AND DEFAULT CHARGES.

(a) A consumer lease may impose on the lessee charges for the lessee's delinquency or default but only at an amount that is reasonable in light of the anticipated or actual harm caused by the delinquency or default, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy.

10/00 Update: Phrase "penalties or other" deleted per Committee instruction, even though this language is from federal CLA. Intent is to confirm that this Act does not allow penalty provisions even if the federal Act might. See Reporter's Note 1, below.

4/00 Update: New second sentence carves out special treatment for "early termination" and "excess wear and tear" charges.

(b) [Except as otherwise provided in subsection (c)], a consumer lease may impose on the lessee a late charge on a periodic payment that is delinquent for ten days or more in an amount specified in the lease but not to exceed the greater of $10 or five percent of the unpaid portion of the late periodic payment. A late fee in excess of this limit is [unreasonable] [uncollectible].

4/00 Update: Committee said to make this a cap, not just a safe harbor; does second sentence do so? Since this is now a cap on late charges, and not a safe harbor, isn't "uncollectible" a better word? Also, I don't think we need the "Except as otherwise...." clause at the beginning; paragraph (3) deals with multiple late charges, not the amount of them.

(c) A consumer lease may not impose a late charge on a current periodic payment if the only delinquency in the current payment is an amount equal to or less than unpaid late charges imposed on earlier periodic payments, but the lease may impose an additional late charge if all or part of a periodic payment remains delinquent through an additional payment period.

(d) A consumer lease may impose charges for collection and court costs on default by the lessee, but attorney's fees are collectible only on referral of the matter to an attorney who is not an employee of the holder.

(e) If a consumer lease provides for recovery of attorney's fees by the holder, a lessee who successfully defends a collection action is entitled to recover reasonable attorney's fees from the holder.

10/00 Update: At April meeting Committee voted 4-3 not to cap attorney's fees at 15% of balance payable. Also Committee voted 7-0 to make attorney's fees reciprocal, i.e., if there is an attorney's fees clause in the lease, then a successful consumer litigant may also recover attorney's fees. New subsection (e) addresses this.

4/00 Update: "collectible only" phrasing, suggested by Committee.

1. Subsection (a) replicates the rule stated in Section 183(b) of the federal Consumer Leasing Act, recognizing that specified charges imposed by the lessor or holder for the lessee's default and delinquency are in the nature of liquidated damages and so must be reasonable in light of the stated factors. This means that while an appropriate charge is related to actual damages, it is not confined to that sum and may reflect other ingredients or purposes, such as permitting ease of calculation and discouraging breach. The language in this provision omits the reference in the federal Consumer Leasing Act to "penalties," and should not be read to authorize a charge that has no justification other than as a penalty for breach. As for the relationship between this measure and the liquidated damages provision in UCC § 2A- 504, it is the intention of this Act to be at least as restrictive, on behalf of the consumer lessee, as the UCC provision. Thus default charges that are not reasonable under UCC § 2A-504 are not reasonable under this Act either.

2. This "reasonableness" standard applies to any charge that may be imposed on the lessee for breach of terms of the lease, including late payment or default charges, collection costs, and charges for incidental breaches such as remitting payment by a check that bounces. This section does not apply to charges in connection with early termination (section 405) or for excess wear and tear (section 406).

3. Late charges specified in the lease must comply with subsection (b). This requires a ten day grace period, and the amount of the late charge cannot exceed the larger of $10.00 or 5.0% of the late payment. Thus if a $150.00 payment is due on April 1, a late charge of $10.00 could be imposed on April 11. If the missed April 1 payment were $400.00, a $20.00 late charge could be imposed on April 11. But if, when a $400.00 payment is due, the consumer remits $200.00, the late charge is limited to $10.00 (5% of the unpaid $200.00 portion).

4. Subsection (c) prohibits the pyramiding of late charges, i.e., imposing a new late charge merely because the consumer has not paid a previously imposed late charge. In the example in Note 3, if the lessee remits the April payment of $ 400 on April 20, a late charge may properly be imposed. If the lessee then remits the May payment of $ 400 on time, but does not pay the $ 20 April late charge, the holder may not impose an additional late charge on grounds the May payment is not fully paid. At the same time, this subsection does not prohibit the imposition of successive late charges if a scheduled payment (e.g., a periodic lease payment of $400.00) itself remains unpaid in subsequent payment periods. Again in the example in Note 3, if the lessee had still not made the $400.00 April 1 payment by May 11(the May due date plus the ten day grace period), then the holder could assess another late charge on the missing April 1 payment.

5. Under subsection (d), a lease may impose on the lessee the costs of collection after default, either as actual costs incurred, a fixed dollar figure, or as a percentage of the unpaid obligation. This of course is subject to the "reasonableness" standard in subsection (a). For example, a default charge of 15% of the unpaid balance may not be reasonable if default occurs early in the lease and the charge would far exceed the actual costs of collection. Collection costs may include court costs, and attorney's fees where the matter is referred to a non-employee attorney.

6. Since consumer lessees are rarely in a position to bargain for modifications in the leases they enter, most leases authorize the holder to collect attorney's fees as part of a default remedy but provide no reciprocal right to attorney's fees if the consumer lessee successfully defends a collection action. Subsection (e) adds that balance, as a matter of statutory reciprocity, as if the lease itself authorized attorney's fees to the successful litigant in the collection lawsuit. This is limited to the collection setting, and would not apply otherwise.

SECTION 305. ASSIGNMENT OF LEASE; PRESERVATION OF LESSEE'S CLAIMS AND DEFENSES.

(a) Until thirty days after a lessee has been sent notice in a record that the consumer lease has been assigned or transferred, the lessee may make payments to the last known holder of the lease. If otherwise timely, such a payment to the last known holder is not subject to a late charge.

(b) Except as otherwise provided in Section 504, notwithstanding any provision in a consumer lease, a holder is subject to all claims and defenses arising from the lease which the lessee could assert against a prior holder and, in the case of a finance lease, the supplier. A lessee's recovery from a holder under this subsection may not exceed amounts paid by the lessee to a holder under the lease.

10/00 Update: Phrase "to a holder" added in last sentence. See Reporter's Note 2, below.

1. Lessors commonly assign their leases to financial institutions, and those institutions may assign the leases (or their servicing) yet again, as through a securitization. Subsection (a) protects a lessee who remits payment to a holder until 30 days after notice that the lease has been assigned. Either the assignor or assignee may send the notice, and no particular format is required. But until the 30 day period has run, the lessee may not be assessed a late fee for payments otherwise timely made to the prior holder.

2. By state law (e.g., UCCC §§ 3.307, 3.404, 3.405) and by FTC Rule (Preservation of Consumers' Claims and Defenses, 16 C.F.R. Part 433), "holder in due course" protections for assignees of consumer credit contracts have effectively been abolished for more than 20 years. Subsection (b) states the parallel proposition that there can be no "holder in due course" of a consumer lease. This rule permits a lessee to defeat a holder's collection efforts by proving defenses such as breach of warranty, failure of consideration, or fraud that could have been asserted against the original lessor. It also permits the lessee to assert against the assignee claims against the lessor, i.e., the lessee may recover affirmatively from the holder up to the total of amounts paid under the lease (whether paid to the original lessor or to a subsequent holder). For example, after several months a leased vehicle proves to be a lemon, and the lessee properly revokes acceptance under UCC Section 2A-517. Lessee has a claim to recover all monies paid on the lease to that point from the holder, including capitalized cost reductions paid in the first instance to the original lessor. Recovery is limited to sums paid to a holder and would not include money paid directly to a third party such as a taxing authority.

3. The "claims and defenses" assertable against an assignee must be generated out of the lease relationship between lessee and lessor. For example, if the lessee has a dispute with the lessor over a separate lease or purchase transaction, the lessee may not interpose claims or defenses from that transaction against the assignee in the current lease transaction. In the case of a finance lease, under UCC 2A-209 the supplier's warranties flow through to the lessee, and the consumer lessee may assert a breach of the supplier's warranty against the finance lessor (usually a bank or other financial institution). Cf. UCC § 2A-407, Comment 2. Under this section, the consumer lessee may also assert claims or defenses arising from supplier warranties against an assignee of the finance lessor.

4. In many leases, as in sales of goods, the operative warranty to the consumer comes not from the seller or lessor (or supplier, in a finance lease), but from the manufacturer. This warranty obligation of the manufacturer exists independently of the contractual relationship between lessor and lessee. In Mercedes-Benz Credit Corp. v. Lotito, 306 N.J.Super. 25, 703 A.2d 288 (1997), an automobile was leased by a dealer and the lease was assigned to the "captive" finance company. The court held that because of the "close-connectedness" of dealer, financer and manufacturer, the financer was subject to the lessee's claims or defenses arising from breach of the manufacturer's warranty. This is a novel extension of assignee liability, on which this Act takes no position.

5. The general rule that assignees are subject to claims and defenses assertable against the lessor is subject to the limitations in Section 504. That is, where the lessee's claim or defense is based on a violation of this Act, the assignee has liability only if the violation is apparent on the face of documents assigned.

SECTION 306. SUBLEASE.

(a) Unless the lease provides otherwise, a lessee under a consumer lease with a term of one year or less may not sublease or assign the lessee's rights and interests without the holder's consent.

10/00 Update: "without the holder's consent " added at end.

(b) A lessee under a consumer lease with a term of more than one year may sublease or assign the lessee's rights and interests with the consent of the holder. A holder may

(1) withhold consent if the holder has a good faith belief that the sublease or assignment will jeopardize its rights under the lease; and

(2) impose a reasonable fee if consent is given.

10/00 Update: "(1)" and text of (2) are new, per Committee instruction.

(c) A provision in a consumer lease prohibiting or limiting a sublease or assignment, or making a sublease or assignment an event of default, must be specific and conspicuous.

4/00 Update: Subsection (c) is new, responding to suggestion to parallel UCC 2A-303(8).

(d) Unless otherwise agreed by the holder, the obligations of the lessee under a consumer lease are not affected by a sublease or assignment, and the original lessee and the sub-lessee or assignee are jointly and severally liable under the assigned lease.

1. A lessor and lessee are always free to negotiate and agree on a modification of the lease, including a "sublease" or "assignment" by the lessee - like an "assumption" of a mortgage. Under subsection (a), in short-term leases the lessee has no "right" to sublease unless the holder agrees to it in the lease or otherwise. For longer-term leases, while there is still no "right" to sublease, subsection (b) applies a good faith test to the holder's refusal to permit a sublease. The burden of proof is on the consumer to show the holder had no good grounds for refusing to consent to the sublease.

SECTION 307. OPEN-END LEASE.

(a) In this section, "open-end consumer lease" means a consumer lease in which the lessee's liability at the expiration of the lease is based on the difference between the residual value and the realized value of the leased goods.

(b) In an open-end consumer lease, the estimated residual value must be a reasonable approximation of the anticipated fair market value of the goods on expiration of the lease. The estimated residual value of the goods is presumed to be unreasonable and not in good faith to the extent that the estimated residual value exceeds the realized value by more than three times the average payment allocable to a monthly period under the lease. The holder may not collect from the lessee the amount presumed to be unreasonable unless the holder brings a successful action with respect to that amount. In all actions, the holder shall pay the lessee's reasonable attorney's fees.

(c) A presumption does not arise under subsection (b) to the extent the excess of estimated residual value over realized value is due to physical damage to the goods beyond reasonable wear and tear, or to excessive use, according to standards set under Section 406.

(d) This section does not preclude the a lessee, after expiration of the consumer lease, from agreeing to a final adjustment with respect to residual value.

10/00 Update: Subsection (d) re-phrased a bit; "willing" deleted before "lessee."

(d) Upon expiration of an open-end consumer lease, the lessee may obtain at the lessee's expense a professional appraisal of the leased goods by an independent third party agreed to by lessee and holder. The appraisal is final and binding on the parties.

4/00 Update: StyleCom emendations. No change of substance.

1. "Open-end lease" refers to one where the lessee's obligation at expiration depends on the realized value of the goods at that time. The lessee cannot simply return the goods and walk away, but rather must bear some or all of the depreciation risk. The concern is that an inflated estimate of residual value may leave the consumer subject to a substantial end-of-term liability if the goods depreciate more rapidly than expected. For example, the lease of a $25,000 vehicle may project a residual value of $15,000 at the end of the 24 month lease. But if the resale value of the car at lease end is only $9,000, the lessee would be obligated for the $6,000 difference. Some States have dealt with this problem by limiting the consumer's end-of-term liability to two or three monthly payments. See, e.g., UCCC § 3.401.

2. This section replicates the open-end lease rule from Section 183(a) of the federal Consumer Leasing Act. The federal Act effectively restricts the lessee's liability under an open-end lease to an amount no greater than three monthly payments, but does it through a "presumption" about what is a reasonable measure of liability. The effect of using the language of the federal act is to make the same three-monthly-payment cap applicable to all consumer leases covered by this Act, including those between $25,000 and $150,000.

[SECTION 308. WARRANTIES OF QUALITY AND TITLE. No text pending review of UCC Articles 2 and 2A].

10/00 Update: We have carried this section caption, without statutory text, for several years, pending the outcome of the UCC Articles 2 and 2A revisions. See the accompanying memorandum dealing with warranty and disclaimer matters.

SECTION 309. REBATE OR DISCOUNT FOR REFERRALS. A person may not induce or attempt to induce a lessee to consummate a consumer lease by offering a post-consummation rebate, discount, commission, or other consideration on the condition that the lessee provide information or assistance for the purpose of enabling a lessor or other person to lease or sell goods to another individual.

1. In the past consumers have proved vulnerable to sales tactics that offer the prospect of savings based on post-transaction referrals of other customers. For example, a merchant might promise a consumer a $25 rebate on the purchase price or lease obligation for each friend or neighbor whose name the consumer supplies if the friend or neighbor buys (or leases) goods from that merchant. Or perhaps the rebate only requires that the friend or neighbor visit the merchant's showroom. Whatever the promise, such referral-sales gimmicks are inherently misleading, as the customer is led to believe that significant savings will accrue when in fact they rarely materialize because few friends or neighbors take the bait. This section prohibits referral inducements in the marketing of leases.

2. What is prohibited is an inducement offered prior to lease consummation which depends on events occurring after lease consummation. If before lease consummation, a lessor solicits and pays or credits a customer for referrals, the practice is not unlawful. Similarly, if after lease consummation a lessor agrees to pay or credit the lessee for referrals, that too is not an unlawful practice.

3. The sanction for a lessor who violates this section includes statutory damages under Section 501(b). In an appropriate case a lessee might also recover actual damages based on the amount or range of savings promised or implied in the referral inducement.

SECTION 310. LIMIT ON INSURANCE CHARGES; TERMINATION OR REPLACEMENT OF INSURANCE.

(a) A charge for insurance included in a consumer lease or added under subsection (c) may not exceed the premium imposed by the insurer for the insurance. This subsection does not preclude:

(1) the imposition of rent charges on insurance charges capitalized in the lease; or

(2) the lessor's realization of commissions, experience rebates, or similar compensation from the insurer.

(b) If insurance included in a consumer lease or added under subsection (c) is canceled or terminated, a refund of unearned insurance premiums received by the holder in excess of one dollar, at the holder's option, may be:

(1) refunded to the lessee; or

(2) credited, together with the unearned portion of the rent charge applicable to the refunded premium, to the lessee's current obligation, to the final maturing periodic payments, or to the lessee's obligation upon termination of the lease.

4/00 Update: Intro language in (b), re "subject to ...security interest rights" deleted as unnecessary. If holder has SI in rebated fees, holder merely acts under paragraph (2), rather than paragraph (1). Some StyleCom clean-up through this subsection.

(c) If a lessee does not maintain insurance required under a consumer lease, the holder may purchase substitute insurance against substantially the same risks, covering the interests of the lessee and the holder or the interest of either of them.

10/00 Update: From prior draft, "against" replaces "for," and "covering" replaces second "for."

(d) An amount paid by the holder for substitute insurance under subsection (c) is subject to :

(1) a rent charge as if that amount were part of the adjusted capitalized cost, from the later of the effective date of the insurance or the date on which the holder notifies the lessee of the purchase of substitute insurance, its cost, and the effect on the payment schedule; and

(2) the repayment and default provisions of the lease.

(e) This section does not preclude the holder from pursuing any other remedy for default set forth in the lease or provided by law.

1. Subsection (a) prohibits "upcharges" on insurance premiums. Premium structures routinely provide compensation to the dealer through commissions or similar arrangements, and these are permitted. But the consumer ought not be enticed into providing the dealer with a double source of revenue in connection with insurance.

2. Where insurance included in the lease is canceled or terminated mid-term, the holder will typically receive a refund of unearned premiums. The question is who controls or is entitled to the refund? Since insurance included in the lease is often financed as part of the capitalized cost, a cash refund to the lessee is arguably a windfall. On the other hand, to the extent the lessor has agreed to finance that premium, it may be viewed as part of the credit to which the lessee is entitled and which the lessee remains obliged to repay. Subsection (b) allows the holder to apply the refund in various ways. If the holder applies the refund to the lessee's obligation, the holder must also credit the lessee with a rebate of unearned rent charges attributable to the refunded premium.

3. Subsection (c) permits the holder to "force place" insurance in substitution for required coverages the lessee has failed to maintain. The substitute coverage must be substantially the same as the original coverage required in the lease. For example, if the lease required liability insurance up to $300,000 and casualty insurance with a $500 deductible, the holder could not properly purchase substitute coverages with a $1 million liability cap and a $200 deductible. The cost of proper replacement insurance may, on notice to the lessee, be subject to a rent charge and otherwise added to the lessee's obligation under the lease. The adjustment of the lease obligation in this fashion is not a refinancing of the lease.

SECTION 401. LIABILITY FOR GAP AMOUNT ON TOTAL LOSS OF GOODS.

(a) In this section, "gap amount" means the amount that would be owed by the lessee if a total loss of the goods before expiration of the lease occasioned by theft, physical damage, or other occurrence resulting in total loss of the goods were considered an early termination of the lease, less the portion of the cash value of the goods received by the holder from the lessee's insurer or from any other source. The term does not include the deductible amount applicable to a casualty insurance policy on the goods, past due lease payments or any other unpaid amounts owed by the lessee under the lease at the time of the total loss of the goods, or amounts by which the insurance proceeds otherwise payable are reduced on account of past due premiums or the condition of the goods before the total loss occurred.

10/00 Update: Word changes for clarity: "the difference between" deleted in first line; "less" replaces "and"in fourth line.

(b) Except as otherwise provided in subsection (c), a consumer lease may not provide that the lessee is responsible for the gap amount. A provision in violation of this subsection is unenforceable.

(c) If a consumer lease so provides, the holder may recover from the lessee the portion of the gap amount attributable to:

4/00 Update: Phrase "portion of the" added for clarity.

(1) the lessee's failure to maintain in effect casualty insurance required under the lease, if the holder has not obtained substitute insurance under Section 310(c) at the time of the total loss; or

(2) the lessee's fraud, intentional wrongful act, or gross negligence, or forfeiture or confiscation of the goods under governmental authority.

10/00 Update: Reference to "forfeiture or confiscation..." added.

4/00 Update: StyleCom suggested rephrasing (2) [instead of "fraud, wrongful act or"].

1. When leased goods are destroyed, stolen, or otherwise become a total loss during the term of the lease, this event constitutes a de facto early termination of the lease. Although insurance will usually cover all or most of the current market value of the goods, there is often a "gap" between that sum and the amount due to terminate the lease at that point. Cf., Section 406 on Early Termination Liability. The question is whether the lease may shift that liability to the lessee, and whether lessors should therefore be able to charge the lessee for contractual protection against that liability. In the past some lessors have not imposed this gap liability on the consumer; instead the lessor protects itself through insurance or by absorbing these occasional losses internally. On the other hand, other lessors have contractually imposed this "gap liability" on the lessee, and used that as an opportunity to sell the consumer "gap liability waivers," "gap protection," or "gap insurance."

2. Subsection (b) mandates the former approach. This means that the risk of gap losses is absorbed and distributed through the holder's overall pricing structure, perhaps self-insured or covered by private insurance. With this restriction on gap liability, lessors lose the profit opportunity represented by sales of gap waivers. In a sense all lessees pay a bit more to cover the occasional losses that otherwise would be borne by lessors whose leased goods suffer casualty. On the other hand, casualty loss of the goods can occur at any time during the lease term, including in the early months when the "gap" between value and payoff figures is the greatest. The lessee does not plan to give up the goods at that point, and does not, once the goods are lost (and the gap is calculated), have the option to continue with the lease. It is altogether a forced, or fortuitous, early termination. Under this provision, the lessee's insurance will pay the policy limits toward the value of the goods; and the lessee will pay the holder any deductible, but have no further liability under the lease. Lessees thereby avoid possibly large and unexpected liabilities for gap amounts that would be due if they had not purchased gap coverage. Lessors may minimize some of the gap risk by requiring lessees to maintain adequate casualty insurance.

3. A prohibition on gap liability admittedly infringes somewhat on the parties' freedom to allocate the risk of loss by agreement. For leases generally (including both commercial and consumer leases) the general rule is that, absent agreement otherwise, the lessor retains title to the goods, and bears the risk of loss during the lease term. UCC Section 2A-219(1). If there is no contractual reallocation of risk, and the leased goods are destroyed without fault by the lessor or lessee, the consumer lease is "avoided." UCC Section 2A-221(a). Neither party would then have any further claim against the other; the holder could not seek further rent payments or other compensation from the lessee, nor does the lessee have a claim against the holder for nonperformance of the lease. Thus a lease provision that would impose gap liability on the lessee is a contractual reallocation of the underlying risk of loss in the lease. The judgement reflected in this section is that the profit opportunity created by selling gap coverage is an insufficient business justification for such a substantial risk reallocation in consumer leases. This provision also prevents surprise and possibly substantial liability for those lessors who might decline the gap coverage and then find themselves with a large gap responsibility if the goods are destroyed.

4. Under subsection (a) the determination of the gap amount begins by comparing two figures. One is the amount that the lessee would owe if the lease were considered to be terminated early, i.e., on the date of the loss. Cf. Section 406(b). The other figure is the amount the lessor or holder actually receives from the lessee's casualty insurer (or from a third party, such as a tortfeasor's liability insurer) as representing the cash value of the goods. The difference between these figures is the basic gap amount. Subsection (a) also clarifies that certain other items are not part of the gap amount. These include insurance deductible amounts, amounts owed under the lease independently from the loss of the goods, and insurance proceeds reductions resulting from delinquent premium payments or write-downs of the value of the goods prior to the total loss. This latter exclusion [subsection (a)(3)] would apply if, for example, the insurer determined that prior to the loss of a leased vehicle it had been driven substantially more miles than the average for such a model, and the insurance proceeds were reduced accordingly. In any case the lessee cannot be required to make periodic lease payments beyond the date of loss of the goods.

5. Subsection (c) adds two qualifications. Under paragraph (1) the lessee remains liable for the gap amount if the lessee has allowed required casualty insurance coverage to lapse, as by non-payment of premiums or other cancellation, and there is no substitute insurance in place. Paragraph (2) is the moral-hazard qualification. The general principle is that, although the basic risk of loss is the holder's, rather than the lessee's, the holder has a claim in the nature of subrogation against the person actually causing the loss. A lessee should not be able to avoid gap (i.e., early termination) liability by purposely destroying or "losing" the goods, or intentionally or by gross negligence allowing their destruction or loss. The burden is on the holder to show fraudulent, intentional or grossly negligent conduct by the lessee. This contemplates misconduct by the lessee that would support an independent action in tort for damages for the destruction or loss of the holder's ownership interest in the goods.

SECTION 402. LESSEE'S DEFAULT; RIGHT TO CURE.

(a) A provision of a consumer lease with respect to default by the lessee is enforceable only to the extent that:

(1) the lessee does not make a payment required by the lease; or

(2) the holder establishes that the prospect of payment, performance, or realization of the holder's interest in the goods is significantly impaired.

(b) A lessee may cure a default through the procedure in subsection (c) if the default is solely because the lessee did not make a payment required under the lease and the lessee has not voluntarily surrendered the leased goods to the holder. If the lessee has a right to cure, a holder may not accelerate, take judicial action to collect, or repossess the leased goods unless the lessee does not cure the default in a timely manner.

4/00 Update: Some re-writing of (b) per StyleCom. Clause in first sentence re "voluntary surrender" added, so that cure steps not needed in that case.

(c) The holder initiates the cure procedure by sending to the lessee, at any time after the lessee has been in default for ten days solely because the lessee has not made a payment required by the lease, a notice of right to cure the default. The notice must be in a record, contain a conspicuous statement that the lessee is entitled to cure the default, and set forth the monetary amount necessary to cure the default, the date by which the curative payment is due, and the name, address, and telephone number of the holder from which information may be obtained regarding the cure. The date by which payment is due may not be less than twenty days after the notice is sent.

4/00 Update: Some StyleCom changes. Also I've tried to make (b) and (c) "flow" better as a description of a process. Does it work?

(d) Within the period for cure stated in the notice under subsection (c), the lessee may cure the default by tendering the amount of all unpaid sums due at the time of the tender, including any unpaid delinquency or default charges, but without additional security deposit or prepayment of periodic payments not yet due. Cure restores the rights of holder and lessee under the lease as if the default had not occurred.

(e) A lessee may cure only once in any 12-month period during the term of the lease.

4/00 Update: StyleCom: "may" instead of "is entitled to the right to."

1. Default clauses in consumer leases may include a number of "events of default" in addition to failing to make payments due under the lease. Subsection (a)(2) restrains the holder from acting on such a default (i.e., other than failure to pay) unless the holder can establish that the breach is a serious one. To be an actionable default, the lessee's conduct must threaten the holder's expectation of "payment, performance, or realization of the holder's interest in the goods." An example of the first would be the lessee's arrest and imprisonment. "Performance" might be impaired if the lessee moved the leased goods out of State without permission. The holder's "realization" interest would be impaired if the lessee failed to maintain required casualty insurance. The "significant impairment" standard is to be judged from the perspective of a reasonable holder at the time of the default. A holder may act on a "significant impairment" breach immediately, as by repossession or judicial action.

2. Where the lessee's breach is solely monetary - i.e., a failure to make a payment - the lessee is entitled to an opportunity to "cure" the default before the holder can initiate any formal collection action. Lessees may occasionally miss a payment inadvertently, or because of a temporary financial bind, but be able to catch up those missed payments within a reasonable time. Subsection (b) restrains a holder from accelerating, suing, or repossessing until the "cure" period has run. If the lessee covers the delinquent, un-accelerated obligation within the cure period, the lease continues on its original terms.

3. The details and timing of the mechanism are important. The holder can take no judicial collection or foreclosure action until 10 days after a payment is "in default"; this means 10 days after the nominal due date plus any contractual grace period. The holder may then send a cure notice, whenever it wishes - immediately or later (perhaps only after a second or third missed payment). The cure notice sets a cure date, which must be no less than 20 days after sending and may be a longer time. If the lessee settles up by the due date, the lease is restored on its original terms, without penalty. If the lessee fails to cure, only then can the holder repossess or sue.

4. The "cure" amount is limited to obligations accrued under the lease to the date the lessee tenders the cure payment. The holder may not impose a surcharge, in the form of a security deposit or otherwise, as a component of the cure amount.

5. The right to cure is a legal concession to a lessee temporarily in arrears. A lessee is therefore entitled to cure only once in any twelve month period. Nothing in this section limits a holder's freedom to extend other accommodations to a lessee in default.

SECTION 403. REPOSSESSION; APPLICATION OF REALIZED VALUE.

(a) Subject to Section 402, on a lessee's default the holder may repossess the goods by judicial process or by self-help without a breach of the peace.

4/00 Update: Remove reference to voluntary surrender, which is a form of self-help. See Reporter's Note 1, below.

(b) After repossession of the goods on a lessee's default, the holder shall apply the realized value of the goods as provided in the lease or, absent a provision in the lease, in the following order:

4/00 Update: New language, "as provided...absent a provision in the lease" added, to permit application of proceeds pursuant to lease formula. At 9/99 meeting, there was a suggestion to compare this allocation order to that in UCC Art. 9; new § 9-608(a)(1) seems to follow this same progression. There is no "application of proceeds" rule in Art. 2A.

(1) default charges and collection costs imposed by the lease;

(2) obligations of the lessee that are due or in default under the lease; and

(3) the early termination liability of the lessee.

(c) Unless otherwise agreed, the lessee is liable for any deficiency after application of the realized value. The holder may apply to the deficiency a security deposit taken under Section 303(b)(1), but shall refund to the lessee any amount of the security deposit remaining after satisfaction of the deficiency.

1. On a default where the lessee is not entitled to cure and repossession is therefore proper,. Or the holder may proceed to recover the goods by judicial process. Alternatively, the lessee may of course surrender the goods voluntarily, or the holder may repossess by self-help subject to the "breach of the peace" constraint. This is based on, and intended to be interpreted consistently with, the similar authorization in UCC Article 9.

2. Technology may permit a form of electronic disabling of leased goods that amounts to a repossession. This is already possible with respect to computers, where a lessor or licensor may build self-destruct or self-cancellation capabilities into the program features or software. See: Uniform Computer Information Transactions Act § 815(b). Similar remote disabling may become feasible for other kinds of electronic devices, and even perhaps for motor vehicles. This Act does not directly address electronic disabling. In one sense, electronic disabling could be a good thing if it saves repossession costs and reduces instances of confrontation or breach of the peace. But it seems evident that such disabling could present unreasonable risks to lessees under some circumstances, for example if important computer records or programs were erased or rendered non-functional, if needed household appliances became unusable, or if vehicle ignitions could be made inoperable without regard to safety, weather or related considerations. Courts may deal with these problems if they emerge, by analogy to UCITA or otherwise, but legislative clarification may eventually become necessary.

3. Subsection (b) states how the "realized value" of the repossessed goods may be applied: as the lease provides, or in the stated order. In many cases "realized value" will represent the proceeds from the resale or other disposition of the goods, but actual disposition is not required. See Section 404. The lessee normally remains liable for any deficiency if the realized value does not cover all the lessee's obligations under the lease.

4. Analytically, a security deposit is the last amount to be applied to a lessee's default obligation. Subsection (c) confirms this, and requires refund to the lessee of any surplus. Otherwise the lessee is not entitled to any surplus of realized value over the lessee's default obligation.

SECTION 404. DETERMINING REALIZED VALUE.

(a) Subject to subsection (b), the amount of the realized value to be applied to the lessee's liability on termination of a consumer lease is:

10/00 Update: "Subject to subsection (b)" suggested to be added, since (b) permits a distinct way to determine realized value.

4/00 Update: Summary definition of "realized value" now is in § 102(a)(13).

(1) the amount of the rebate of premiums or charges for insurance, extended warranty, or service or maintenance contract to the extent the rebates are received and retained by the holder; and

10/00 Update: Paragraph (1) is new per Committee request to include these rebates in total of realized value. Former paragraphs (1) and (2) redesignated as (2)(A) and (2)(B), below. It seems easiest to put this new item first, and then add the sum from either (2)(A) or (2)(B), but it could be done in the other order.

(2) either:

(A) the price received by the holder for the leased goods at disposition; if the goods are re-leased, the realized value is the total of periodic payments under the new lease, reduced to present value, plus the residual value under the new lease; or

10/00 Update: Phrase "reduced to present value" aligned to modify periodic payments, but not residual value; "under the new lease" also added after "periodic payments" for clarity.

(B) if the goods are not disposed of, the higher of:

(i) the best offer for disposition of the goods; or

(ii) the fair market value of the goods.

(b) A lessee and holder may agree at the time of lease termination on the realized value of the goods, or may agree in the lease or at the time of lease termination on a method for determining it, and unless unreasonable the value so agreed upon or determined is the realized value. An agreed realized value is not unreasonable if the value is determined by an appraiser agreed to by the holder and lessee, or by reference to a generally accepted reference source for goods of the kind.

4/00 Update: First sentence revised to make timing rules clear. What is not allowed is agreeing in the lease that the goods will be worth $X in three years.

(c) If the realized value is determined under subsection (a)(2)(A), the disposition may be by public or private sale or re-lease, at any time and place, and on any terms. Every aspect of the disposition, including the method, manner, time, place, and terms must be commercially reasonable. Disposition in a wholesale market is not unreasonable.

4/00 Update: Last sentence, re wholesale market, added per Committee instruction.

(d) If a disposition under subsection (c) is by a private sale to an affiliate of the holder, or a person obligated to the holder under a recourse, repurchase, or similar agreement, the realized value is not less than the fair market value of the goods.

10/00 Update: Phrase "under subsection (c) added ; "holder" deleted per 4/00 suggestions below. Q. Shouldn't this be limited to private sale situations? If an affiliate of the holder bids in at a legitimate public auction, why should we worry about collusion or a low-ball price?

4/00 Update: Q. How can holder sell to itself when it is already the title owner? I'd drop "the holder." Let these left-hand-to-right-hand deals be handled under (b), above.

(e) If the court finds that a disposition is not commercially reasonable, the court shall establish the realized value by reference to the retail market value of goods of the kind and condition at issue.

10/00 Update: "as a penalty" deleted.

4/00 Update: Does (e) make sense if violation of this section subjects the holder to actual & statutory damages under § 501? Or do we want to borrow the special statutory damages measure from UCC Art. 9 [old 9-507(1): total finance charge + 10% of principal]?

1. When terminated early (voluntarily or upon default), most leases measure the lessee's termination liability by reference to the then-value of the goods. The same is generally true at the scheduled expiration of an "open-end lease." This section permits "realized value" to be measured in alternative ways. In all cases, the realized value includes rebates from insurance or other charges if the holder actually keeps that money.

2. Under subsection (a)(2)(A), when the holder disposes of the goods by sale or re-lease, the price received is the realized value. If the disposition is by re-lease, it is the present value of rent payments plus the estimated residual value under the new lease. If the holder retains the goods, under subsection (a)(2)(B) the realized value is the highest actual offer received or (if higher) the market value of the goods. In this context "fair market value" may be determined in any reasonable manner in the market in which the holder would otherwise dispose of the goods, usually a wholesale market.

3. As an alternative, subsection (b) permits "fair market value" to be set by agreement of the parties so long as the valuation is not unreasonable. This may be the preferable alternative for the parties where the holder either does not plan to, or cannot, dispose of the goods promptly. The second sentence provides a safe harbor for the holder if the fair market value is based on an agreed appraisal or a standard price guide as of the time of lease termination.

4. Subsections (c)-(e) address the standards for a proper sale or other disposition of the goods by the holder. This would apply to dispositions after default and repossession, after voluntary early termination, and also at the scheduled termination of an open-end lease. In subsection (c), the basic standard is "commercial reasonableness," as under UCC Article 9. Like UCC Article 2A (but unlike UCC Article 9), this section imposes on the holder no particular responsibilities either to notify the lessee of the time or manner of disposition of the goods or to provide a particular form of accounting for the proceeds. The utility of such mandatory notices in a lease setting is doubtful. The lessee has no right to redeem the collateral, nor any "equity interest" that may produce a surplus for the lessee, and it is unrealistic to think that lessees can effectively monitor the commercial reasonableness of what are usually private resales. If the holder pursues a deficiency claim, the holder will need to justify that claim in some manner.

5. Subsection (c) rejects the notion that the realized value must be measured by reference to a retail market. It is altogether impracticable in most cases for the holder to sell or re-lease at retail, and to do so would likely add resale expenses for which the lessee would be responsible, offsetting any theoretical gain from a retail valuation. Returned or repossessed goods are usually liquidated quickly in a wholesale market; a legitimate wholesale market price is a reasonable measure of value.

6. There is no prohibition in this section against the holder selling the goods to related parties, at either public or private sales. But where the holder disposes of the goods by private sale to an affiliate, or to the originating dealer under a recourse agreement, there may be less incentive to maximize the yield on that sale. In the past such "insider" sales at reduced prices have been suspect and may be suggestive of collusion. The approach in subsection (d) is not to prohibit such insider sales, which in fact may be expedient modes of disposition. Rather, in an insider sale the lessee must be credited with at least the fair market value as determined in the customary resale market for goods of the kind. Since the holder by definition owns the goods, a holder's purported sale of repossessed goods to itself is a non-event that should be disregarded in determining realized value.

7. Subsection (e) imposes a sanction on a holder whose disposition is not commercially reasonable. It directs a court to set realized value at retail market value if the holder has acted improperly. The difference between the yield from an improper disposition and retail value may be considered a form of actual damages, for which the holder is liable under Section 501(b). This may also be seen as an alternative to requiring the holder to "forfeit" the deficiency if an "absolute bar" rule were applied. Cf., UCC § 9-626(b). This is a special valuation rule for courts to apply retrospectively once it is determined that an actual disposition was not commercially reasonable; it gives no inference that retail valuation is required in other circumstances. See Reporter's Note 5, supra.

SECTION 405. EARLY TERMINATION LIABILITY.

(a) In connection with a consumer lease:

(1) "Constant yield method" means

(A) in the case of a periodic payment lease, the method described in paragraph (2) for determining the rent charge and capitalized cost reduction components of each base periodic payment; or

(B) in the case of a single payment lease, the method described in paragraph (3) for determining the periodic earning of the rent charge and capitalized cost recovery under the lease.

10/00 Update: "prescribed" changed to "described" in (A) and (B). Better word?

(2) In a periodic payment lease, the constant yield method is applied by:

(A) assuming that the rent charge for each computational period is earned in advance; and

(B) multiplying the constant periodic rate implicit in the lease times the balance subject to rent charge at the beginning of the period. At any point during the scheduled term of a periodic payment lease, the balance subject to rent charge is the difference between:

(C) . . . [and the total of these periodic calculations to the date of early termination represents the earned rent charge as of that date. ??]

(i) the adjusted capitalized cost; and

(ii) the sum of all depreciation amounts accrued through the preceding computational periods and the first base periodic payment.

10/00 Update: "(C)" inserted just as a flag. Seems to me something is missing here. Under (A) and (B), so you multiply rate times balance. Then what? What does this produce, and how is that resulting number used in assessing the earned and unearned rent charge? Is there a simple way to complete the thought?

(3) In a single payment lease, the constant yield method is applied by:

(A) assuming that the rent charge for each computational period is earned in advance; and

(B) multiplying the constant rate implicit in the lease times the balance subject to rent charge as it increases during the lease term. At any point during the term of a single payment lease, the balance subject to rent charge is determined by:

(i) subtracting from the residual value the total rent charge scheduled to be earned over the term of the lease; and

(ii) adding to the difference all rent charges accrued through the preceding computational periods.

(C) .....[same as above]

10/00 Update: "Conference Note" deleted (re open issue on early termination). Same question as to need for a paragraph (C) to complete thought?

4/00 Update: Definition has been streamlined for readability. Is it still accurate?

7/99: Several commissioners suggested this definition is dense, and arguably unnecessary in light of acceptance of this "or any other generally accepted actuarial method" in subsection (d)(3). Industry wants to keep a 'blessed' definition of constant yield. The "actuarial" method could be described generally in a Comment.

(b) A consumer lease may provide a measure or formula for the lessee's liability on early termination, but only at an amount reasonable in light of the anticipated or actual harm caused by the early termination, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. An early termination charge does not include:

10/00 Update: In April '00, the question was raised whether the UCC Article 2A standard for liquidated damages (§ 2A-504) might be interpreted or applied in a more consumer-friendly way than this standard taken from the federal CLA. I don't know how that can possibly be answered until there is case law to analyze. Might it be helpful to say in a Comment that this section should always be interpreted at least as generously to consumers as UCC § 2A-504? Or maybe put it that an ET charge that violates 2A-504 automatically violates this standard. ?? See draft Reporter's Note 1 to § 304, supra.

(1) unpaid periodic payments, or unpaid late, delinquency, or default charges, accrued through the date of early termination;

(2) if the early termination charge is not based on the realized value of the goods, charges provided under the lease for excess wear and tear or excess mileage; or

(3) other unpaid amounts for which the lessee is responsible under the lease.

4/00 Update: This was previously subsection (c). Former subsection (b), on credit reports, is moved to the end of this section,as (e), per StyleCom.

(c) An early termination charge may not exceed the sum of:

10/00 Update: Per Committee 7-0 decision [4/00], this subsection now purports to state a cap on early termination liability, without any safe-harbor feature.

I am worried that it is unworkable to treat this as an absolute cap. The critical mass of this cap is the assessment of unrecovered depreciation in paragraph (3); so how will this cap work for holders who don't use that formula or use other ETC components? E.g., suppose a tuba lease says simply: "If you terminate early you must pay 50% of the remaining payments". Does that violate this section? Is it "unreasonable"?

Or consider two identical leases: one uses the "constant yield method" and imposes a $500 termination charge; the other uses a true actuarial method (marginally more favorable to the consumer) and imposes only a $300 termination charge. Does the ETC in the first lease violate this section? Is it unreasonable? How can you tell?

Might it not be wiser to go back to treating this as a presumptive safe harbor, retain the absolute cap in subsection (d), and leave it at that?

(1) official fees and taxes imposed in connection with lease termination;

(2) the greater of:

(A) a reasonable disposition fee in a fixed amount disclosed in the lease; or

(B) the costs incurred in retaking, storing, preparing for disposition, and disposing of the goods;

(3) the amount by which the unamortized capitalized cost, calculated in accordance with the constant yield method or another generally accepted actuarial method, [plus the rent charge earned for the computational period in which the early termination occurs,] exceeds the realized value of the goods; and

(4) a reasonable prepayment charge disclosed in the lease.

4/00 Update: "Reasonableness" test retained for items (2)(A) and (4); the other components are objectively verifiable.

Q.: in (3), is the bracketed phrase necessary? Isn't the pre-earned rent charge accounted for in the definition of "constant yield method"?

(d) The sum of the amounts determined under paragraphs (c)(3) and (c)(4) may not exceed the total of the remaining periodic payments scheduled under the lease.

10/00 Update: Preamble and former (d)(1) deleted; "(2)" deleted and "does" changed to "must." Prior subsection (d) stated a quasi-safe harbor for an ET charge. Committee decided (4/00) to eliminate that feature, but retain the cap limited to amount of remaining payments.

(e) If a consumer lease is terminated before its scheduled expiration by mutual agreement of the holder and lessee, the holder may not report the early termination to a consumer reporting agency as a default unless the lessee does not satisfy the lessee's obligations under the lease within the time provided in the lease. This subsection does not preclude the holder from reporting to a consumer reporting agency other defaults by the lessee under the lease.

4/00 Update: Former (b), relocated per StyleCom.

1. Leases of goods are generally written to bind the lessee for the full term of the lease. Some leases may end in default and repossession, and are terminated early for that reason. In addition, holders will often agree to an early termination of the lease at the lessee's request, perhaps to facilitate the lessee's buying or leasing of new goods. Technically, a lessee who terminates early is breaching the lease and, under UCC Article 2A or other general law, would be liable for damages measured generally as the present value of the lessor's expectancy under the lease. UCC § 2A-528(1). Common practice in the consumer leasing markets, however, has been to include in the lease a formula or other measure for calculating the lessee's payoff figure, in the nature of liquidated damages. This section sets outside limits for the amount of such an early termination charge.

2. Subsection (b) states the basic rule that an early termination charge must be reasonable in light of the stated factors. This replicates Section 183(b) of the federal Consumer Leasing Act which puts these same substantive limits on early termination formulas, thus adopting the federal standard for all leases subject to this Act. The CLA and this section in effect authorize "liquidated damages" formulas in consumer leases, as does UCC Section 2A-504(1). This is in lieu of requiring a complex calculation of damages based on common law or UCC Section 2A-528. UCC Section 2A-528(1) states a lessor's basic measure of damages for lessee default as the current value of the lessor's expectancy under the lease. The "reasonableness" of an early termination formula, therefore, is ultimately measured by reference to that underlying measure of damages. This Act uses the liquidated damages language of the federal act, rather than UCC § 2A-504(1), in order to maintain consistency of language and interpretation between the federal and state consumer protection laws, but the intention is that any early termination charge that violates UCC § 2A-504 also violates this Act.

Certain charges that the lessee may owe at early termination are not attributable to that event and so are not part of the formula for a permissible early termination charge. This includes overdue periodic lease payments, late charges, or other charges that have accrued under the lease. Those charges are due and payable regardless of the early termination, and remain so. Likewise, in some cases the holder may not liquidate the leased goods (producing a "realized value") when they are returned early, but may impose excess wear and tear charges. This too is not an early termination charge within this section.

3. The baseline test is whether the aggregate early termination charge is reasonable in light of the stated factors. This test implicitly recognizes that in the often fast-paced and high volume consumer leasing markets (including securitizations) it is important for holders to be able to clear their books of terminated leases without undue complexity or delay, and that an early termination formula may properly reflect this objective.

4. Unlike usury laws, this Act does not regulate the amounts or manner of calculation of rents and related charges in consumer leases, and it is therefore not feasible to set precise dollar limits or formulas for calculating a maximum permissible "payoff" figure when a lease is terminated early. The test remains whether the early termination charge provided in the lease is reasonable as a form of liquidated damages. Subsection (c) enumerates the most likely categories of "payoff" components, and provides a limited safe harbor [???] for a lessor who computes the early termination charge in terms of those categories. Subsection (c)(1) refers to specific charges related to terminating the lease and payable to third parties. Subsection (c)(2) allows recovery of either a fixed disposition fee (generally related to the expected expense of retaking, storing and disposing of the goods), or the actual costs expended in repossessing and foreclosing after default. Thus, a lease might provide a uniform "disposition" fee in a sum certain, regardless how or when the goods is returned to the holder. Or the lease might provide, alternatively, that the holder may recover a sum equal to actual out-of-pocket expenses where repossession is necessary.

5. Subsection (c)(3) permits inclusion in the early termination charge of a sum comparable to the unpaid principal balance in a prepaid credit transaction. Part of each of the lessee's scheduled lease payments is attributable to depreciation, i.e., reducing the "adjusted capitalized cost" [Regulation M § 213.4(f)(3)], and part is attributable to the time-value of the lessee's right to defer payments for the use of the goods. This latter component is the "rent charge" [Regulation M § 213.4(f)(6)], which reflects an implicit interest rate structured into the lease. Together, the portions of "base periodic payments"covering depreciation plus the "rent charge" amortize the adjusted capitalized cost down to the "residual value" over the term of the lease. When a lease is terminated early, many leases fix the lessee's payoff obligation by ascertaining the unpaid adjusted capitalized cost, plus any rent charges accrued to the time of termination (but not rent charges thereafter). The analogue in credit transactions is the distinction between earned and unearned interest. This sum is then reduced by the realized value of the goods [Section 405(a)]. Subsection (c) (3) contemplates that the early termination charge will make this calculation by applying a generally accepted principal-reduction formula to determine what is the remaining unpaid adjusted capitalized cost. For purposes of this safe-harbor provision, the calculation method must be either the "constant yield method" or another "generally accepted actuarial method" if it is commonly used in the consumer leasing markets and is not otherwise unlawful. Actuarial calculations are generally the most favorable to consumers; thus formulas based on a sum-of-the-digits [Rule of 78s], straight-line, and other non-actuarial variations do not enjoy safe-harbor [??] protection. The lease of course must disclose the early termination charge methodology in accordance with Regulation M § 213.4(g).

An alternative way to state the intended effect of this subsection is as a "present value" calculation. When a lessee terminates the lease early, the holder is entitled to a figure that represents the remaining scheduled payment stream under the lease, reduced to present value by application of the actuarial rate implicit in the lease, plus the residual value stated in the lease.

Examples of calculation . . . . [?]

6. Subsection (c)(4) acknowledges that an explicit prepayment fee may be provided for in the lease. This permits a separate charge analogous to a "prepayment penalty" in a credit transaction, which generally compensates for the additional overhead and lost opportunity costs the holder incurs when an obligation is paid off early. In combination with paragraphs (1) through (3), the imposition of any such additional charge must assure that the total early termination charge remains reasonable.

7. Subsection (d) sets an absolute cap on that portion of the early termination charge that is based on the difference between unamortized adjusted capitalized cost and realized value. In no case may the lessee be charged more for this component than what the lessee would pay if the lessee made all scheduled payments to the end of the lease term. For example, assume a lessee terminates a 24 month auto lease in month 20, when four periodic payments of $300 per month are still scheduled under the lease ($1,200 total). But because of unexpected depreciation of the vehicle, and resulting low "realized value," the "difference" figure computed under subsection (d)(3) is $1,500. The lessee's maximum responsibility for this portion of the early termination charge is $1,200, not $1,500.

Contractually, in many closed-end leases, the holder bears the depreciation risk only at the scheduled termination of the lease, when the lessee can simply surrender the goods and walk away. By this view, at all intermediate points the lessee bears the depreciation risk, and the lessee's early termination liability should reflect that allocation of risk. Subsection (d) does not reject, but does qualify, this approach. The issue is whether the holder may use the occasion of an otherwise mutually agreeable early termination to shift dramatic depreciation risks to a lessee who may not appreciate how or why the payoff figure is so high. As a general proposition, the lessee can be held responsible for the difference between the full amount owing under the lease (adjusted to present value) less the current value of the goods. But if the goods have depreciated so dramatically as to leave a balance owing in excess of all remaining scheduled payments (toward depreciation and rent charge), the holder can collect no more than the amount of those remaining payments. In effect this allocates to the holder rather than to the consumer lessee a portion of the risk of bad judgment about depreciation at the time of early termination.

8. This Act takes no position on whether a holder's conduct in the course of repossession or disposition of leased goods justifies a bar or limitation on recovery of an early termination charge. This follows the policy choice reflected in revised UCC Article 9 [UCC § 9- ]. Whether a holder's misconduct in retaking or disposing of the leased goods justifies an "absolute bar" against recovery of any deficiency balance is left to the courts.

9. When a holder agrees to the lessee's request to terminate a lease early, in effect the holder waives the lessee's technical default in not letting the lease run to term. Subsection (e) recognizes this reality. In such a case of agreed-to early termination, and assuming the lessee is not otherwise in default, the holder may not report the early lease termination as a default or equivalent "derogatory" to a credit reporting agency if the lessee settles all obligations under the lease in a timely fashion

SECTION 406. EXCESS WEAR AND TEAR; EXCESS MILEAGE.

10/00 Update: "Conference Note" re policy issue deleted.

(a) A consumer lease may prescribe standards and impose liability on the lessee for excess wear and tear of the leased goods if the standards and amounts of liability are reasonable and reasonably applied to compensate the holder for diminished value of the goods due to damage, abuse, or lack of maintenance, but not exceeding the estimated or actual cost of repair and refurbishing.

4/00 Update: "estimated or actual" used, at Committee instruction.

(b) Standards for excess wear and tear may not subject the lessee to liability for:

(1) ordinary and expected wear, use, and depreciation of the goods; or

(2) damage or repair to the extent the leased goods are covered by warranty, or by a repair, service or maintenance agreement issued in connection with the lease and [Option A: the holder may avail itself of the benefits of the warranty or agreement.] [Option B: recovery or repair under the warranty or agreement is available to the holder.]

10/00 Update: At 4/00 meeting, Committee voted 5-1 to clarify that this limitation operates only if the holder can collect under the warranty/agreement. Optional language proposed. Also, "issued" replaces "written" in second line.

(c) In connection with the expiration of a consumer lease of goods other than a motor vehicle, if the holder charges the lessee for excess wear and tear, the holder shall:

10/00 Update: "expiration' replaces "termination.'

(1) send to the lessee notice in a record of the nature and amount of the charges within five business days after the goods are returned to the holder; and

(2) provide reasonable time and opportunity for the lessee or another person designated by the lessee to examine the goods, and access to the goods for that purpose.

4/00 Update: Former paragraph (3), dealing with opportunity for dispute resolution, deleted by Committee vote 4-3 in 9/99.

(d) The time is reasonable under subsection (c)(2) if it is no less than [10] business days after the holder sends the notice under subsection (c)(1).

(e) In connection with the expiration of a consumer lease of a motor vehicle, the following rules apply:

10/00 Update: "expiration" replaces "termination."

4/00 Update: Per StyleCom, considerable reorganizing of what was former (c), including splitting out new (d). Former (d) and (e) [vehicle leases] combined into new (e). Old (d) is now para. (e)(1).

(1) Not more than [90] nor less than [30] days before the expiration of the lease, the holder shall provide the lessee notice in a record of

(A) the lessee's rights under paragraphs (2) through (5); and

(B) the identity and location of one or more persons authorized to inspect the vehicle for excess wear and tear.

10/00 Update: Paragraph (B) is new, per Committee suggestion. The pre-expiration notice must tell the lessee where he can get the vehicle inspected.

(2) The lessee may have the vehicle inspected for excess wear and tear by the holder or holder's designated inspector, or by an independent inspector agreeable to the holder, at a reasonably accessible site within [20] days before scheduled expiration of the lease. An inspection report prepared by the originating dealer is deemed to be by a designated inspector for purposes of this subsection.

10/00 Update. New sentence added at suggestion of observers, to deal with case where lessee allows original dealer to inspect for W&T (perhaps in the course of trying to get the lessee to buy or lease a new car) and the dealer gives a low-ball estimate of W&T charges.

4/00 Update: "at a reasonably accessible site" added.

(3) Except as otherwise provided in paragraph (4), a report in a record of an inspection under paragraph (2) is binding on the holder if the lessee either pays the excess wear and tear charges indicated, or has necessary repairs made at lessee's expense, by the time the vehicle is returned at the expiration of the lease;

(4) If no inspection under paragraph (2) occurs before expiration of the lease, the holder may not impose excess wear and tear charges unless the holder furnishes to the lessee notice in a record of the nature and amount of the charges within [ 60? ] days after return of the vehicle to the holder.

4/00 Update: Is some more protection for lessees who doesn't use early inspection needed? Maybe a reminder/disclosure at the time the car is turned in that it is subject to EWT inspection and possible additional charges?

(5) The lessee remains responsible for excess wear and tear that was not reasonably detectable by an inspection under paragraph (2), was incurred after the inspection and before return of the vehicle, or was the result of incomplete or improper repairs.

(f) A consumer lease of a motor vehicle may provide for the imposition of a reasonable charge for excess mileage.

10/00 Update: "reasonable" retained; former second sentence deleted.

1. The linchpin in pricing a consumer lease is estimating the value the goods will have at the end of the lease when the lessee may surrender the goods without further obligation. In a sense the lessor is estimating the depreciation that will occur over the lease term, expecting that the lessee's payments will generally keep pace, and projecting that the combination of those payments plus the "residual value" of the goods will cover the lessor's overall investment and expected earnings on that transaction. The lessor necessarily projects depreciation on the basis of average or typical use patterns over the lease term. Sometimes the goods may be surrendered in damaged condition or showing signs of unusually heavy use or lack of maintenance. Subsection (a) therefore recognizes the justification for contractual imposition on a lessee of responsibility for "excess wear and tear" (EWT). The standards themselves must be reasonable, and they must be applied in a reasonable - i.e., consistent, non-arbitrary - manner. Since the objective is to compensate the lessor for avoidable lost value, the EWT charges may not exceed the estimated or actual costs of returning the goods to their expected condition.

2. Subsection (b) limits EWT standards in two ways. Some degree of wear and depreciation is inherent in a lease; the goods will normally be used and will age, and these expected patterns may differ by type of goods and location. An off-road vehicle in Montana will likely have "ordinary" wear and tear different from a sedan in Florida. These normal patterns of depreciation cannot be treated as "excess" wear and tear subject to a special charge. Likewise, a lessee cannot be required to pay as EWT charges amounts covered by a warranty or service contract under which the holder may claim.

3. If EWT charges are to be imposed on a lessee at lease termination, fundamental fairness requires that the lessee have a realistic opportunity to verify or contest that those charges are appropriate. At the same time, it creates economic waste to require the holder to retain or store the leased goods until all possible EWT issues are resolved. Subsections (c)-(e) seek to balance these interests.

4. For leases of goods other than motor vehicles, subsection (c) prescribes a minimum level of due process. Within a reasonably brief time after lease termination, the holder must notify the lessee of EWT charges and permit the lessee (or lessee's representative) access to the goods for inspection. If the EWT charges are contested, the lessee has an additional period to arrange a reinspection by a mutually agreeable inspector whose conclusions are binding. The holder may not dispose of goods while this process is ongoing. Nothing in this subsection precludes the parties from agreeing, in the lease or otherwise, to a more expeditious method of identifying and resolving EWT claims, such as by pre-termination inspection, as long as the lessee has an opportunity to inspect, contest the EWT charge, and obtain a binding reinspection.

5. Motor vehicle leases call for a somewhat different pattern to expedite resolution of EWT claims. This is partly because the vehicles themselves are more prone to damage or wear than "indoor" goods, and also because there is more justification for the holder to dispose of the vehicle quickly. Within a window of 30 to 90 days before the lease will end, the holder must notify the lessee of the EWT ground rules spelled out in subsection (e). If the lessee brings the vehicle in for pre-termination inspection within 20 days before lease end, and either pays the EWT charge or has the vehicle repaired to cure the excess wear and tear, that satisfies the lessee's responsibility. As a qualification, under subsection (e)(3), the lessee remains responsible for latent damage, post-inspection damage, or inadequately repaired damage. If the vehicle lessee fails to use the pre-termination inspection process, under subsection (e)(4) the holder must in any case notify the lessee of any EWT claim within a specified period. The holder need not retain the vehicle, allow the lessee access to it, or agree to a binding reinspection, but its assessment of EWT charges remains subject to dispute by the lessee.

6. Vehicle leases typically include provisions stating maximum authorized mileage during the lease, and imposing a per-mile charge for any excess miles. Subsection (f) authorizes such clauses, separate and apart from EWT charges. The inclusion of this explicit authorization for excess-mileage charges in vehicle leases does not prohibit comparable provisions for non-vehicle leases. For example, a lease of an aircraft might include a charge for excess flying hours.

SECTION 501. PRIVATE REMEDIES.

(a) In this Article, "lessee" includes a trustee or receiver in insolvency proceedings, a guardian, a personal representative of a deceased lessee, or other successor in interest of a lessee.

(b) A holder who violates this [Act] is liable to the lessee for actual damages..

10/00 Update: By vote of 4-2, "actual" retained instead of "compensatory," and "suffered as a consequence of the violation" deleted.

(c) Whether or not a lessee seeks or is entitled to damages, the lessee may maintain an action for declaratory or injunctive relief.

(d) Except as otherwise provided in this [Article], in addition to actual damages under subsection (b):

(1) a holder is liable for statutory damages of [$1,000? $2,000] for a violation of any of the following provisions: Sections 202, 203, 204, 206, 301, 303(d), 304(b)-(c), 309, 310(a)-(b), 402(b), 403(a) & (c), 404(c), 405(e), and 406(b)-(c) & (e)-(f).

10/00 Update: "405(b) and (d)" and "406(a)" deleted. "405(e)" added. "406(f) - (g)" changed to "406 (e) - (f)."

4/00 Update: Are the 405 and 406 entries correct? What is to be the amount of statutory damages? 7/99: Unanimous "sense of the house" to retain statutory damages.

[(2) a holder is liable for statutory damages of not less than [$50?] or more than [$2,000? $5,000?], as determined by the court] for a violation of any of the following provisions:..........

4/00 Update: Subsections (d)(2) and (e) are bracketed to ask: Is there any interest in this alternate approach -- variable statutory damages. Keep or discard? If keep, to what violations does it apply. If discard, subsection (e), below, goes too.

(e) In determining the amount of statutory damages under paragraph (d)(2), the court shall consider, among other relevant factors, the seriousness of the violation, the amount of actual damages caused, the extent to which the violation is isolated or repetitive and intentional or inadvertent, and lessor's efforts at pre-violation compliance and post-violation cure.]

(f) In a successful action under this section, a lessee is also entitled to the costs of the action and reasonable attorney's fees as determined by the court. In determining the award of attorney's fees, the amount of the lessee's recovery is not controlling.

1. This section sets out the bases for private remedies by lessees against lessors or holders who violate this Act. Actual damages are recoverable in all cases; this includes both direct and consequential damages proved. Lessees may also bring declaratory judgment or injunction actions where appropriate under the normal criteria for such actions.

2. This Act adopts, in part, a "private attorney general" policy toward its enforcement. As an incentive to lessees to police the conduct of lessors and holders, subsection (f) directs courts to award attorney's fees and court costs to a successful lessee litigant for any violation of this Act. In addition, subsection (d) permits recovery of statutory damages for violations of certain provisions of this Act, even where no actual damages are proved.

3. For a violation of enumerated disclosure rules, subsection (d)(1) directs an award of [statutory damages of $1,000]. Under subsection (d)(2), for violations of other listed sections of this Act, statutory damages are set as a range ($50 to $5,000), to be fixed by the court in light of the factors specified in (e). In essence, the more serious and intentional the violation, the larger the statutory damages.

4. This Article refers constantly to a "lessee" as the claimant. In some circumstances private actions under this section might be brought by others who have succeeded to a lessee's rights. A cosigner or guarantor who has paid a lessee's lease obligation (or is being sued for it) is one example, as a subrogee. A lessee's trustee in bankruptcy, or the personal representative of a deceased person, are others. The "mini-definition" in subsection (a) is meant to ensure that the claim for violation of this Act is still actionable by the successor in interest

SECTION 502. CLASS ACTIONS.

(a) Within [thirty] days after commencing a class action for a violation of this [Act], the plaintiff shall serve a copy of the complaint on the [Enforcing Authority] who, within an additional [sixty, ninety] days, may intervene in the action to seek injunctive or declaratory relief [or statutory damages?].

4/00 Update: New, at suggestion of Committee, 9/99. Does this simple version work? What remedy can AG pursue alongside class action damages claims?

(b) In a class action for statutory damages under Section 501(d):

(1) the lessee class, if successful, is entitled to an award of statutory damages in such amount as the court may allow, but as to each member of the class no minimum recovery applies, and the total recovery of statutory damages in a class action or series of class actions arising from the same failure to comply by the same holder may not exceed the lesser of [$500,000, $1 million] or one percent of the net worth of the holder that committed the violation; and

4/00 Update: The $500,000 cap on class action recoveries is borrowed from the federal law, where it has been unchanged since 1976. Query: should we raise the number? The "1% of net worth" is also from the federal law; do we want to change or elaborate on it?

(2) In determining the amount of award of statutory damages in a class action, the court shall consider, among other relevant factors, the amount of any actual damages awarded, the frequency and persistence of failures of compliance by the holder, the resources of the holder, the number of lessees adversely affected, and the extent to which the holder's failure of compliance was intentional.

1. (Re AG intervention....)

2. Class actions for statutory damages are allowed under this Article, but subject to a cap applicable to any class action or series of class actions spawned by the same violation by the same holder. The "1 per centum of net worth" limitation is measured by reference to the violator and not as the net worth of a subsequent assignee.

SECTION 503. LIMITATIONS ON PRIVATE REMEDIES.

4/00 Update: Formerly part of § 501; now separate section.

(a) A holder has no liability under this [Article] if, within [60 ?] days after discovering a violation of this [Act], and before commencement of an action under Section 501 or the receipt of written notice of the violation from the lessee, the holder notifies the lessee concerned and corrects the violation, including refund, restitution, or crediting of any charges improperly disclosed or imposed.

(b) A holder is not liable for a violation of this [Act] if the holder proves by a preponderance of evidence that the violation was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid the error. Examples of bona fide errors include clerical errors, calculation errors, computer malfunctions and programming errors, but an error of legal judgment with respect to a holder's obligations under this [Act] is not a bona fide error.

(c) If there are multiple lessees in a consumer lease, there may be no more than one recovery of statutory damages under Section 501(d).

(d) Except as otherwise provided in subsection (e), an action under this Article may be commenced within [one/two?] years after the occurrence of the violation that is the subject of the action. For this purpose, an action is commenced:

(1) when a lessee commences an action against a holder; or

(2) when a lessee raises a violation of this [Act] as a defense or counterclaim in an action commenced against the lessee, including proceedings in insolvency.

(e) A lessee's claim for actual or statutory damages under this Article may be raised by way of recoupment in an action on the lease without regard to the period of limitations under subsection (d).

(f) Liability does not arise under this Article with respect to an act or omission in good faith conforming to a rule or interpretation of this [Act], or to an approval by [the Attorney General or other enforcement authority under Section 507], even if after the act or omission occurred, the rule, interpretation, or approval is amended, rescinded, or determined by judicial or other authority to be invalid.

(g) Multiple violations resulting from failure to comply with the requirements of this [Act] entitle the lessee to a single recovery under this Article, but continued failure to comply after a recovery has been granted gives rise to rights to additional recoveries.

4/00 Update: Per Committee instruction (9/99), this now covers all failures to comply, not just non-disclosure.

(h) A lessee may not take any action to offset an amount for which a holder is potentially liable to the lessee under Section 501 against an amount owed by the lessee, unless the amount of the holder's liability has been determined by judgment of a court of competent jurisdiction in an action to which the lessee was a party. This subsection does not preclude a lessee then in default under the lease from asserting a violation of this [Act] as an original claim, or as a defense or counterclaim to an action brought by a holder to collect amounts owed by the lessee.

1. Section 503 tracks provisions in Sections 130 and 131 of the federal Truth in Lending Act, which, by incorporation (CLA § 185), are the source of private remedies for violations of the federal Consumer Leasing Act. These subsections are basically protective ones for lessors and holders; they narrow the range of potential liability. Although the dollar amounts of statutory damages in the federal act differ somewhat from this Act, it seems appropriate to have consistent rules otherwise. These subsections are intended to be interpreted consistently with their counterparts in TILA Sections 130 and 131. The parallel provisions in TILA are as follows:

UCLA TILA

502 130(a)(2)(B)

501(f) 130(a)(3)

503(a) 130(b) [double check these]

503(b) 130(c)

503(c) 130(d)

503(f) 130(f)

503(g) 130(g)

503(h) 130(h)

504 131(a)

2. Subsections (d) and (e) diverge somewhat from the statute-of-limitation provision applicable to violations of the federal Consumer Leasing Act [TILA § 130(e)]. The basic limitations period is ___ year(s). Generally actions under this Act are deemed "brought" either when the lessee commences an action or when the lessee raises the violation defensively in an action by the holder (including bankruptcy). But under subsection (e) a lessee may always raise a violation of this Act as a matter of recoupment.

Some courts have held that the running of the statute of limitations may be suspended where the lessor's conduct effectively masks the violation so that the lessee could not readily discover it. This Act takes no position on when or whether such "equitable tolling" may be appropriate.

SECTION 504. ASSIGNEE LIABILITY. Except where the assignment is involuntary, an action for a violation of this [Act] which may be brought against a holder may be maintained against a subsequent holder only if the violation is apparent on the face of the consumer lease. [???] For purposes of this subsection, a violation is apparent on the face of the lease if:

(1) a required disclosure is omitted or can be determined to be incomplete or inaccurate from the face of the lease or other documents assigned; or

(2) the lease contains a provision prohibited by this [Act], or does not contain a notice, legend, or other item required by this [Act].

1. This section is patterned on TILA Section 131(a). Under Section 305(b) of this Act, an assignee of a holder is generally subject to claims and defenses which the lessee could assert against the assignor. Where the lessee's claim or defense is based on a violation of this Act, however, the assignee's exposure is limited to violations "apparent on the face of the lease." The practical effect is to make assignees liable only for obvious errors in documentation, and not for violations based on conduct, practices or oral representations which could not be discerned from the lease itself. The lessee's recourse in these cases is to pursue the lessor or other holder that committed the violation.

This Act takes no position on the question whether, in appropriate circumstances, a nominal assignee might be accountable for violations by the assignor on theories of ratification, agency, conspiracy, negligence, or the like.

SECTION 505. EFFECT OF VIOLATION ON RIGHTS OF PARTIES; ELECTION OF REMEDIES.

(a) Except as otherwise provided in this [Act], a violation of this [Act] by a holder does not impair the holder's rights on the lease.

(b) If the same act or omission that violates this [Act] also violates other law, the lessee is entitled to the larger of the monetary remedies authorized by this [Act] or the other law.

1. A violation of this Act gives rise to a claim by the lessee for damages, but does not nullify or void the underlying contractual agreement, nor give grounds for rescission. Where this Act declares certain terms or provisions to be unenforceable, the lessor may still enforce the rest of the lease.

2. Subsection (b) precludes multiple recoveries where the same conduct violates this Act and other law. This may occur, for example, with respect to improper disclosures which may violate both this Act and the federal Regulation M. Where a violation of this Act merely accompanies other separately unlawful conduct (such as fraud), recoveries for both may be appropriate.

SECTION 506. ADMINISTRATIVE ENFORCEMENT. The [Attorney General, Credit Code Administrator, or similar public agency] shall enforce this [Act]. For this purpose, the [Attorney General, Credit Code Administrator, or similar public agency] shall have the powers and remedies provided in the [state Unfair or Deceptive Acts or Practices Act, or comparable consumer fraud law].

1. Vigorous administrative enforcement is critical to the successful implementation of this Act. The designated officer or agency should have an array of investigative, injunctive, restitution and similar powers. Typically these powers are accorded under a generic UDAP or consumer fraud statute.

[SECTION 507. ADMINISTRATION OF [ACT].

Conference Note: This section is bracketed as an option for state enactment. Many of the requirements of this Act are complex, and their application to various lease patterns in the future may be uncertain. An administrative officer for this Act with appropriate authority to issue rules and interpretations could be useful in easing compliance burdens, maintaining uniformity with other States, and avoiding frictions with the federal Consumer Leasing Act. On the other hand, for States that do not already have such an administrative office for consumer matters, the creation and staffing of such an office may have significant fiscal implications.

(a) The [designate public official or office] shall administer this [Act], and may adopt rules, issue interpretations, or give approvals designed to effectuate the consumer protection purposes of, prevent circumvention or evasion of, and facilitate compliance with, this [Act], avoid preemption by the federal Consumer Leasing Act, and assure consistent interpretations with those of other States enacting legislation substantially the same as this [Act].

(b) To keep the [Administrator's] rules, interpretations, or approvals in harmony with those of administrators in other states that enact legislation substantially the same as this [Act], the [Administrator], to the extent consistent with the purposes, policies, and provisions of this [Act], in adopting, amending, and repealing rules, interpretations, or approvals, shall take into consideration the rules, interpretations, or approvals of administrators in other states that enact legislation substantially the same as this [Act].]

4/00 Update: 7/99: A commissioner suggested deleting former paragraph (1), requiring consultation with other state administrators as offensive to public officials, and adequately dealt with in former (2), now subsection (b)..

1. This provision establishes an administrative "traffic cop" to deal with the myriad issues of interpretation of this Act, coordination with other States adopting this Act, and avoidance of inconsistencies with the federal Consumer Leasing Act.

4/00 Update: Style Com. suggested some reorganizing of these sections. Former 601 (Implicit Repeal) deleted.

SECTION 601. SEVERABILITY. If any provision of this [Act] or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this [Act] that can be given effect without the invalid provision or application, and to this end the provisions of this [Act] are severable.

SECTION 602. EFFECTIVE DATE. This [Act] takes effect at 12:01 a.m. on [                ].

SECTION 603. TRANSITION. A consumer lease entered into before this [Act] takes effect and the rights, duties, and interests flowing from it thereafter may be terminated, completed, or enforced as required or permitted by any statute, rule of law, or other law amended, repealed, or modified by this [Act] as though the repeal, amendment, or modification had not occurred; but this [Act] applies to a renegotiation made after this [Act] takes effect as to a consumer lease whenever previously entered into.

Legislative Note: This Act will require significant changes in the documentation and practices used in consumer leases. To permit adequate lead time for reprinting of forms, redesign of computer systems, and retraining of personnel, an effective date of no less than eighteen months after enactment is recommended.

SECTION 604. REPEALS AND AMENDMENTS.

(a) The following acts and parts of acts are repealed:

(1)

(2)

(b) The following acts and parts of acts are amended:

(1)

(2)