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DRAFT

FOR DISCUSSION ONLY

UNIFORM CONSUMER LEASES ACT

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

OCTOBER 1998

UNIFORM CONSUMER LEASES ACT

With Comments

COPYRIGHT© 1998

BY

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

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

PAMELA G. CHIN, 35th Floor, 444 South Flower Street, Los Angeles, CA 90071

JACK DAVIES, Court of Appeals, Judicial Building, 25 Constitution Avenue, St. Paul, MN 55155

PATRICK C. GUILLOT, Suite 900, 8080 North Central Expressway, Dallas, TX 75206

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

RAYMOND P. PEPE, 13th Floor, 240 N. Third Street, Harrisburg, PA 17101-1507

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

CHARLES JORDAN 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

GENE N. LEBRUN, P.O. Box 8250, 9th Floor, 909 St. Joseph Street, Rapid City, SD 57709, President

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

AMERICAN BAR ASSOCIATION ADVISOR

KIMBERLY A. TAYLOR, 1200 Hillside Avenue, Chesapeake, VA 23322

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

Copies of this Act may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

211 E. Ontario Street, Suite 1300

Chicago, Illinois 60611

312/915-0195

Draft # 6 October 1998

Sec. # Caption Page #

101 Short Title; Scope 1

102 General Definitions 2

103 Exclusions; Sale Incident to Lease 11

104 Transaction Subject to Act by Agreement 14

105 Supplementary General Principles of Law Applicable 15

106 Waiver; Agreement to Forego Rights; Settlement of Claim 16

107 Territorial Application; Limitation on Applicable Law and Forum 17

108 Obligation of Good Faith 19

109 Unconscionability 19

201 Lease Advertising 21

202 Pre-Lease Availability of Sample Form 22

203 Rebate or Discount for Referrals 24

204 Payment or Trade-in Pending Execution of Lease; Refund or Return 25

205 Disclosure; Form of Lease Document 28

206 Cosigner Notice 29

207 Information During Lease Term 31

208 Renegotiation or Extension 32

209 Satisfaction of Lease 33

210 Prohibited Lease Terms 33

211 Security Interest Restricted; Security Deposit 34

212 Delinquency, Default and Collection Charges; Attorney's Fees 36

213 Assignment of Lease; Preservation of Lessee's Claims and Defenses 38

214 Sublease 40

215 Warranties of Quality and Title 41

301 Coverage of this Part 42

302 Definitions for Motor Vehicle Leases 42

303 Disclosure; Content and Form of Lease 46

304 Insurance 48

305 Liability for Gap Amount 53

306 Lessee's Default; Right to Cure 56

307 Repossession 58

308 Determining Realized Value 59

309 Manner of Disposition of Vehicle on Termination of Lease 60

310 Early Termination Liability 63

311 Excess Wear and Use; Excess Mileage 71

312 Open-End Lease 74

313 Calculation of Lease Rate 76

[Reserved]

501 Private Remedies 84

502 Effect of Violation on Rights of Parties 90

503 Administrative Enforcement 90

504 Administration of Act 91

601 Purposes; Rules of Construction 93

602 Construction Against Implicit Repeal 94

603 Severability 94

604 Effective Date; Transition 94

605 Specific Repealer and Amendments 95

Section 101. Short Title; Scope

(a) This Act shall be known and may be cited as the Uniform Consumer Leases Act.

(b) Subject to section 103, this Act applies to a transaction that is a consumer lease [as defined in section 102(a)(2)].

Reporter's Notes: 10/98 changes: Text: corrected cross reference in (b). Added Comment 1, below.

As a matter of Conference style, subsection (b) may be unnecessary. Comment 2 below assumes it remains.

Proposed Comments:

1. This Act is promulgated for uniform enactment by the states. This reflects the fact that the leasing of consumer goods has become a mainstream part of the processes for marketing and financing the use of such goods. The purpose of this Act, therefore, is to encourage the development and innovation of consumer lease products and practices, but subject to certain 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. Subsection (b) states the overall scope of this Act. It applies to consumer leases as defined in section 102(a)(2), subject to the exclusions in section 103. As the context of various provisions makes clear, this Act also applies to pre-transaction conduct such as advertising and other inducements. For the effectiveness of contractual choice-of-law clauses in consumer leases, see section 107.

3. 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), and to complement UCC Article 2A [Leases].

Section 102. General Definitions.

(a) As used in this Act:

(1) Option A "Conspicuous" means distinguished from other terms by type-size or in some other manner. A term in at least 10-point bold type is conspicuous.

Option B "Conspicuous" means so displayed or presented that a reasonable person against whom it is to operate would likely have noticed it, or, in the case of an electronic message intended to evoke a response without the need for review by an individual, in a form that would enable the recipient or the recipient's computer to take it into account or react to it without review of the message by an individual.

Reporter's Notes: 10/98 changes: Option B added.

Option A is the version that has appeared in prior drafts of this Act. It leaves several questions: (1) how would it relate to the present definition in UCC Article 1 (itself being reviewed for revision)? Is this adequate for electronic as well as written documents? Is the safe-harbor of 10-point bold type appropriate? That's only this big.

Option B is from the September '97 redraft of UCC Article 1. There are somewhat differing versions in the April '98 draft of Article 2B and the May 1998 draft of Article 2. This approach covers electronic messages, but does not contain any "safe harbor" as in Option A.

Per Auerbach memo of 7/21/98, there is an instruction from the Conference to the Art. 2, 2A and 2B Committees to harmonize a definition of conspicuous, to include a safe harbor and to leave conspicuousness a question of law. If an adequate definition is likely to emerge from the several UCC drafting exercises, perhaps we do not need a separate definition in this Act.

(2) "Consumer lease" means a contract for the transfer by a lessor of the right to possession and use of goods for a term in return for consideration, where -

(A) the lessee is obligated for a term exceeding four months and for a total contractual obligation not exceeding $150,000 (excluding the residual value, any payments for options to renew or purchase, and payments to third parties), 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

(B) at the time of consummation the leased goods are intended [by the lessee] primarily for personal, family, or household purposes.

Reporter's Notes: 10/98 changes: Put in alphabetical order & renumbered as 102(a)(2); some rephrasing for style & clarity: "by a lessor," "at the time of consummation" are new; "natural person who takes under the lease" deleted. Cf.: "Lessee."

Rewritten as of 6/97 and 10/98 to tighten language and reflect earlier Drafting Committee discussions. The earlier Options are collapsed together into a single version that combines the essential features of a consumer lease from UCC Art. 2A and from Reg. M. The preamble portion is verbatim from UCC Art. 2A.

Proposed Comments:

* * *

__. Under paragraph (a)(3) it is not a "consumer lease" if the term of the lease obligation is four months or less. This 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 obligated to renew beyond the initial weekly or monthly term.

__. A transaction is also not a "consumer lease if the "total contractual obligation" exceeds $150,000. The rationale is that leases above this magnitude are either 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 Reg. M). 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 a third party, such as taxes, licenses and registration fees.

___. The "consumer purposes" part of this definition, in conjunction with the definition of lessee as an "individual," excludes from this Act a lease to an organization, defined in UCC § 1-201(28) to include all forms of entities other than individuals, and any lease for a non-consumer purpose. 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 by a farmer is excluded on account of the agricultural purpose.

(3) "Consummation" means the time when a lessee [makes a non-refundable deposit or payment in a lease transaction, or] signs a record evidencing the lessee's contractual obligation on a lease [, whichever is earlier]. Consummation may occur even though the lease is subject to subsequent credit or other approval by the lessor or an assignee of the lessor.

Reporter's Notes: 10/98 changes: prior definition, from Reg. M Commentary, replaced by new language seeking bright-line test .

Reg. M uses the term "consummation," but defers to the state law of contract formation. Since this Act is state law, a less equivocal bright-line test seems desirable. This draft therefore focuses on when the lessee makes a contractual commitment to the transaction. As an option, the bracketed language would have consummation occur when the lessee made a non-returnable deposit or other payment toward the transaction if this was earlier than signing the lease. This notion used to be in Truth in Lending, but was dropped in favor of the test of contractual commitment.

The second clause is added to make clear that there has been "consummation" even if the deal is subject to later approvals by the lessor or financer. The question of how a "consummated" transaction is unwound if credit is declined is addressed in section 204.

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

Reporter's Notes: 10/98 changes: add "as amended," and "staff." Delete "from time to time."

Patterned on UCCC § 1.302, but citing specifically to the federal leasing statute and Reg. M. The bracketed language might be omitted for those states which have obstacles to delegation of legislative powers in this manner.

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

Reporter's Notes: 10/98 changes: delete "in the case of a merchant."

Rephrased 10/98 to track the draft revision of UCC Art. 1. The "fair dealing" criterion is made a part of the standard of good faith for all parties

(6) "Goods" means all things that are movable at the time of identification to the lease contract, or are fixtures, but the term does not include money, documents, instruments, accounts, chattel paper, general intangibles, or minerals or the like, including oil and gas, before extraction. [The term also includes the unborn young of animals.]

Reporter's Notes: 10/98 changes: delete 2A cross-reference.

Verbatim from UCC 2A-103(1)(h). Is it apt for this Act? This Act covers all "goods," not just vehicles. But it does not cover any other forms of "personal property," i.e., obligations, intellectual property, etc.

(7) "Holder" means the lessor and a subsequent assignee for the period of the assignee's interest. The term includes (A) a creditor with a security interest in a lease as chattel paper from the time the creditor is entitled to receive payments under the lease, and (B) the person that manages or administers a trust that owns leases. The term does not include the owner or beneficiary of an interest in a trust that owns leases.

Reporter's Notes: 10/98 changes: in first sentence, "if the lessor's interest is assigned" deleted as surplusage. Old second sentence replaced by two new sentences.

This definition was drawn originally from the Model act. Reference in earlier drafts to "leasehold interest" is dropped as that phrase (from UCC Art. 2A) can refer to lessor's or lessee's interest.

It seems useful to have a term to refer to whoever currently owns the lease; this may be the original lessor, but in many cases it will be a subsequent assignee. Both the lessor and assignee may have responsibilities and liabilities under this Act.

The second and third sentences are rewritten (10/98). A person with a security interest in leases as chattel paper becomes de facto the "assignee" of the paper when it undertakes collection, either by agreement or on default, so this language treats such financers as "holders" only when they are receiving the lessee's payments under the lease. Securitized pools of leases present unique problems, especially for motor vehicles where there must be a titled owner. This is usually the original lessor or a subsequent assignee which is packaging its lease portfolio for securitization. This language designates as the "holder" the entity which administers or services the securitized leases, and excludes the securities investors who have only diffused beneficiary interests.

(8) "Lease" means a consumer lease, unless the context indicates otherwise.

Reporter's Notes: 10/98 changes: None.

The purpose is to be able to refer to "lease" throughout this Act without having to use the full phrase "consumer lease" each time. Is this proper Conference style to accomplish that?

(9) "Lessee" means an individual who enters into, applies for, or is offered a lease. Where a trust established by an individual enters into, applies for, or is offered a lease for the use of an individual as beneficiary, [the trust] [that beneficiary] is a lessee. A cosigner or guarantor on a lease is not a lessee.

Reporter's Notes: 10/98 changes: "Individual" substituted for "natural person" (here and throughout). New second sentence added to address private trusts; bracketed phrases reflect Reporter's uncertainty as to who to treat as lessee. Former Option B deleted.

The first sentence is from Reg. M, with the addition of the phrase "applies for." "Lessee" (and "lessor," below) need to include prospective lessees and lessors in some provisions relating to pre-lease activity. Does adding "applies for" suffice in this regard?

The second sentence is new (10/98) to try to cover private trust arrangements, used for estate planning and other forms of financial management, where an individual's assets are held in trust for that individual's benefit. Under this language, the trust beneficiary would be a lessee, and the lease would be a consumer lease if the goods were intended for the personal, family, household purposes of the beneficiary.)

The last sentence excludes guarantors and co-signers.

(10) "Lessor" means a person who has leased [, or] offered to lease [, or arranged 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 is subject to this Act.

Reporter's Notes: 10/98 changes: Two sentences collapsed into one; "regularly" test deleted.

This is based on Reg. M, which uses the bright-line test of five transactions in a year for inclusion. This seems preferable to the test in UCC 2A-103(e): "regularly engaged in the business of leasing." Note that there is a difference between this definition (limited to persons who regularly lease) and the notion in UCC Art. 2A that a "consumer lease" includes one made by a lessor who regularly leases or sells goods of the kind .

The bracketed language refers to an "arranger" of leases -- a concept Congress put in the original federal CLA to parallel TILA, but which has since been dropped from the latter Act. It is a rather clumsy notion: even if a broker or other intermediary is involved, the real lessor will still have all the compliance responsibilities under this Act, so why also characterize the broker as a lessor? If the concept is retained, it may necessitate some sub-definition (maybe in Comments).

(11) "Record," when used as a noun, 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; when used as an adjective, "record" means that the designated information is contained in a record.

Reporter's Notes: 10/98 changes: Modified to differentiate use as noun and adjective.

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

Reporter's Notes: 10/98 changes: None.

These last two definitions come from the UCC revision process. They are meant to accommodate electronic messaging by accepting non-paper documentation with authentications by other than hand-written signature. We probably should use the same terms consistently throughout this Act, and coordinate with the Uniform Electronic Transactions Act project that is underway. The 7/98 draft of the UETA adds a definition of "signature" for electronic communication:

"Signature" means an identifying symbol, sound, process, or encryption of a record in whole or in part, executed or adopted by a person.

Note that recent drafts of Art. 2, 2B and 9 are using the term "authenticate" instead of "sign." The Art. 9 version [7/98] is as follows [9-102(a)(7)]:

"Authenticate" means to:

(A) sign; or

(B) execute or adopt a symbol, or encrypt a record in whole or in part, with present intent to:

(i) identify the authenticating party; and

(ii) adopt, accept or establish the authenticity of a record or term.

Assuming standardized terms are adopted in the UCC (including Art. 2A) and in the UETA, do we need separate definitions in this Act?

(b) A consumer lease under this Act may not be recharacterized as a credit sale, loan or security interest for purposes of coverage by other law of this State if -

(1) the lessor retains title to the goods;

(2) the lessor reasonably expects that the goods will have more than nominal [useful life] [residual value] at the end of the lease term; an expected residual value is deemed to be more than nominal if it is [10?] percent or more of the total of payments provided in the lease; and

(3) any purchase option price is substantially equivalent to the anticipated value of the goods at the time the option may be exercised; a purchase option price is deemed so equivalent if it is [10?] percent or more of the total of payments provided in the lease.

Reporter's Notes: 10/98 changes: Wording options suggested in (b)(1). "Safe harbor" language added to both (b)(1) and (2) .

This subsection (b) is an attempt to preclude arguments that a lease covered by this Act is really not a lease but a credit sale or other form of transaction subject to other laws and regulations. Such "re-characterizations" have been a significant problem in the non-vehicle leasing markets. See Letter from Christian Jones of Newcourt Financial, 5/15/97. The problem is particularly acute for products such as computers which can become obsolete fairly quickly; they may not in fact have much end-of-term value.

The proposed language seeks to establish criteria, including safe harbors, so that lessors can create lease products that are subject to this Act without fear that courts will later recharacterize the transaction and find it in violation of other state laws such as retail installment sales acts. Setting safe harbors in terms of a percentage of the total of payments seems preferable to using specific dollar figures.

(c) Other defined terms in this Act and the sections in which they appear are:

[List other defined terms with § references]

"Cosigner".....

"Gap amount"....

Etc.

[(d) Other terms used in this Act have the same meaning as in Uniform Commercial Code Article 2A - Leases.]

Reporter's Notes: 10/98 changes: None.

Patterned on UCCC § 1.303, this generally adopts UCC 2A definitions for terms used occasionally in this Act, e.g., "Sublease," "Supplier," etc. Did we decide to drop subsection (d)?

Section 103. Exclusions; Sale Incident to Lease.

(a) This Act does not apply to:

Reporter's Notes: 10/98 changes: Delete former subsections (1) and (2).

In 4/98 Committee voted to delete prior subsections (1) and (2). The first excluded leases to organizations or for agricultural or business purposes; unnecessary in light of "individual" and "consumer purposes" criteria in this Act. The second would have excluded leases of equipment by regulated public utilities; no demonstrated need for it, plus most such arrangements are month-to-month.

(1) a license or other agreement subject to UCC Article 2B;

Reporter's Notes: 10/98 changes: Rewritten to defer to 2B.

(2) A lease of goods which is incidental to a contract that is predominantly for the sale of goods or services [or is a license under UCC Article 2B];

Reporter's Notes: 10/98 changes: Bracketed language added.

(3) a lease of goods which is incidental to a lease of real property and which 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 leased goods;

(4) a safe deposit box; and

[(5) Other unique transactions?? Medical assistive devices? Livestock? Etc.]

Reporter's Notes: 10/98 changes: None in items (3) and (4).

Items (2), (3) and (4) are taken from the Reg. M Commentary.

(b) (1) A lease may include a purchase of goods, services or benefits, or a license, incidental to the lease, including but not limited to accessories, insurance, [, gap liability coverage (Section 312),] or service contracts. Option A: [end subsection here];

Option B: So long as the lease aspects of the transaction predominate, the incidental purchase is part of the lease, and the purchase is not subject to [insert citations to state credit sales laws].

(2) The inclusion in a lease of provisions for payment of governmental fees, license or registration fees, or taxes related to the lease, or any amount necessary to discharge a security interest in, a lien on, or a debt with respect to property traded in, or to satisfy a balance owed on a prior lease, does not make the lease subject to [laws of this state that govern small loans or other forms of financing.

Reporter's Notes: 10/98 changes: Subhead "(1)" added. Phrase "or license" added. In second sentence of (1), "and the purchase..." clause is new. All of (2) is new.

Original (b)(1) was Reporter's language, to sort out "mixed" transactions that are partly a lease and partly a sale or license. The concept is implicit in UCC Art. 2A, and is explicit in the federal CLA and some of the state leasing laws.

10/98: Option A is the cop-out option, i.e., leave the subsection as a general authorization to include incidental sales in the lease. Maybe better to drop second sentence and its vague "part of the lease" concept, and leave explanations to Comments.

Option B (second sentence in (1) and all of (2)) is from AIAM/AAMA. New language added to (1) and separate paragraph (2) to confirm that 'incidental' sales are subsumed in the lease and not covered by state credit sales or loan laws. Q. is language in (2) precise enough?

Proposed Comments:

1. This section is to clarify that certain transactions are outside the coverage of this Act, whether or not they meet the definition of "consumer lease" in the prior section.

2. Paragraph (a)(1) confirms that software licenses and other rights to use information are not covered by this Act, even if the licensing transaction is characterized in lease terms. UCC Article 2B is expected to deal adequately with this area of the marketplace.

3. Under subsection (a)(2), if a lease of goods is merely an "incidental" component to a transaction that is predominantly a sale of goods or services, it is excluded from this Act. Cf., Reg. 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.

4. Paragraph (a)(3), based on Reg. 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.

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

6. Paragraph (a)(5).......

7. Under subsection (b) purchases incidental to a lease -- accessories, 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, of course, does not affect the substantive regulation of the price, terms or quality of such incidental items under other law. Thus insurance remains fully subject to state insurance codes as to policy coverages, premium rates, agent licensing and the like.

8. "Predominance" is the test generally used by courts to determine whether hybrid transactions are sales of goods under UCC Art. 2. Presumably the same idea will be applied to leases under UCC Art. 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 servicing than for the use of the computer itself.

Section 104. Transactions Subject to Act by Agreement.

If the parties to a lease transaction that is not otherwise a consumer lease provide in the lease, [or in a contemporaneous record,] that the transaction is subject to this Act, the transaction is a consumer lease for the purposes of this Act.

Reporter's Notes: 10/98 changes: Slightly rewritten for clarity; "otherwise" added; "provide...record" substituted.

Based on UCCC § 1.109. This allows parties to manifest intent to be bound by this Act either in the lease or a separate record that is "contemporaneous." Could there be cases where the parties modify the lease, post-consummation, to bring it under this Act? Are such cases worth worrying about?

Proposed Comments:

1. The parties may choose 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 be part of the lease agreement at the time of consummation.

2. 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, a 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. Supplementary General Principles of Law Applicable.

The principles of law and equity, 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 supplement the provisions of this Act, except to the extent those principles are displaced by or inconsistent with the particular provisions of this Act.

Reporter's Notes: 10/98 changes: Reworked to combine "displaced" and "inconsistent" in first sentence.

Based on UCC § 1.103. Should be reviewed in light of likely revision of that section.

Proposed Comments:

1. Like UCC § 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. Other provisions of the UCC, such as the general obligation of good faith [UCC § 1-203] likewise continue to apply. So also do common law or statutory proscriptions concerning unfair or deceptive acts or practices relating to consumer transactions.

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 213(b) [Preservation of Lessee's Claims and Defenses] would displace any common law or statutory right to use a waiver of defense clause. By contrast, section 310 [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. Consumer leases covered by this Act are likely to be covered by the federal Consumer Leasing Act and Federal Reserve Board 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 [CLA § 186; Reg. 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 Forego Rights; Settlement of Claim

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

(b) A settlement in which a lessee waives or agrees to forego rights or benefits under this Act is invalid if the court finds the settlement to have been unconscionable when made. Matters relevant to unconscionability include the competence of the lessee, 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.

Reporter's Notes: 10/98 changes: None.

Based on UCCC § 1.107. 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. Q: do we need subsection (b) in light of general "unconscionability" provision in UCC Article 2A (or in § 109 of this Act)?

Section 107. Territorial Application; Limitation on Choice of Applicable Law and Forum

(a) Except as otherwise provided in this section, this Act applies to a lease that is consummated in this State.

(b) A provision in a lease providing that the lease is governed by the law of a particular jurisdiction is enforceable in this State [only] if the jurisdiction selected is the place where either:

(1) the lease is consummated,

(2) the goods are delivered to the lessee, or

(3) the lessee resides at the time the lease is consummated.

(c) If a lease [consummated outside this State] does not contain an enforceable provision on governing law, the lease is governed by the law of the jurisdiction where the lease is consummated.

(d) For purposes of this section, consummation occurs where the lessee signs a record constituting a contractual commitment to the lease.

(e) If a judicial forum provided in a lease for an action against the lessee is a forum that would not otherwise have jurisdiction over the lessee, the choice is not enforceable.

(f) An action by a lessee against a holder may be brought in any judicial forum which has jurisdiction over the holder, and a provision in a lease to the contrary is unenforceable.

Reporter's Notes: 10/98 changes: "for an action against the lessee" added to (e); (f) is new.

Rewritten 2/98 to reflect 10/97 directions from Committee. This is meant as a straightforward rule for (1) when a contractual choice of law clause will be enforced, (2) what law applies absent such an enforceable clause, and (3) when a choice of forum provision will be enforceable.

Subsection (e) is modified to apply only to forum selection for actions against the lessee. Subsection (f) is new, to address the Carnival Cruise issue. Actions against the holder can be brought in any court with jurisdiction over the holder, notwithstanding a forum clause that specifies a particular jurisdiction.

Proposed Comments:

1. As a general proposition, under subsection (a), this Act will apply whenever a lease is consummated in this state. As a matter of policy, however, the parties' choice of governing law should be given effect unless the law chosen to apply bears no relationship to the parties or the transaction, is unfair to the consumer lessee, or can be manipulated by the lessor to its advantage. Thus subsection (b) gives effect to a choice of law clause which invokes either the law of the place where the lessee commits to the deal, or where the goods are delivered, or where the lessee resides. In many consumer leases, all three indicators will point to the same jurisdiction: a vehicle lessee typically contracts with, and takes delivery from, a dealer close to the lessee's home. The law of that state obviously should apply, and under subsection (b) it would regardless of which of the three choice-of-law foci the lease contained. Even without a choice of law clause in the lease, subsection (c) would invoke the law of that same state, i.e., where the lease was consummated.

2. In some cases the lessor may be located in a different state from the lessee. This could easily be the case in an area close to state lines -- such as metropolitan Washington, D.C., or New York city -- where consumers regularly shop outside their home state. Assume a consumer living in Maryland leases a car from a dealer in northern Virginia, executing all paperwork and taking delivery at the dealer's Virginia premises. Under this section the lease could provide for either the law of the consumer's state of residence (Maryland), or the law of the lessor's premises (Virginia, where the consumer signed the lease and took delivery). If the vehicle were delivered at the lessee's employment site in Washington, D.C., the lease could also make D.C. law controlling. Any other choice of law would be unenforceable in any State adopting this Act. The default rule in subsection (c) would then come into play, and the lease would be construed under Virginia law, as the place where the lessee consummated the lease.

3. There is an instinctive attractiveness in having all consumer contracts governed by the law of the consumer's home state. As a matter of practicality, however, lessors conducting business face to face with customers on the lessor's premises would face very difficult compliance problems if their leases were required in all cases to be governed by the law of the consumer's residence. The examples above demonstrate the point. This section rejects such a "customer's state only" choice of law policy, and would allow such lessors always to contract in terms of the law of the place of business (normally where the lessee executes the lease, and where, in most cases, the goods are delivered). On the other hand, some lessors may operate from an out-of-state home office, perhaps in a distant state or even outside the United States, and market their goods through brokers or agents, or by mail or phone, or over the Internet. Here it is inappropriate to subject the consumer lessee to the laws of a distant jurisdiction which the consumer may never have visited and with which the consumer has no connection or familiarity. In this situation, under this section, the lessor could not "export" its home-state law, but would have to contract for choice of law in terms of where the lessee executes the lease commitment, takes delivery, or resides -- all pointing to the lessee's neighborhood.

[Section 108. Obligation of Good Faith.

Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.]

Reporter's Notes: 10/98 changes: None.

Same as UCC § 1-203. "Good faith" is defined in section 102(a)(5) of this Act the same as in the UCC. Query: do we need this at all, given general applicability of UCC?

[Section 109. Unconscionability.]

Reporter's Notes: 10/98 changes: None.

No specific text proposed. UCC § 2A-108 is a comprehensive statement on unconscionability, including particular applications in consumer leases, patterned on UCC § 2-302 [Sales of Goods] and UCCC § 5.108. There seems no need to reproduce that provision here unless we mean to change it.

Section 201. Lease Advertising.

(a) An advertisement for a lease must comply with the advertising requirements of the federal Consumer Leasing Act [whether or not the advertised lease is covered by that Act]. For purposes of this section, "advertisement" has the same meaning as in that Act.

(b) A person may not publish, broadcast or distribute, or cause to be published, broadcast or distributed, an advertisement for a lease that is false, deceptive, or misleading, or that misrepresents -

(1) the material terms or conditions of a lease;

(2) that the transaction is other than a lease; [or

(3) that a particular lease rate

(A) is generally available; or

(B) is directly comparable to an Annual Percentage Rate in a credit transaction.]

(c) This section does not apply to the owner or employees, as such, of any medium in which an advertisement appears or through which it is disseminated.

Reporter's Notes: 10/98 changes: None.

Basically unchanged from earlier drafts, although subsection (b)(3) was added in '97. It is particularly relevant if we proceed to require or authorize use of lease rates calculated similarly to those under TILA.

Proposed Comments:

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

2. Subsection (b) 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 state laws.

3. Subsection (b) also enumerates several aspects of a lease which if misrepresented in advertising, are per se violations without regard to the reasonableness of consumer understanding of the advertisement. "No money down" would be an example under paragraph (b)(1) if in fact a lessee must make a payment at consummation or otherwise before delivery. An advertisement claiming or intimating that a lease transaction is a credit sale, or that the lessee becomes the owner of the goods, would violate paragraph (b)(2).

4. Neither the federal CLA nor this Act require a lessor to disclose a lease rate calculated in a particular manner. But neither do the federal law or this Act prohibit lessors from disclosing or advertising a lease rate, and lessors are therefore free to compute rates in various ways (subject to Reg. M § 213.4(s) which requires a cautionary statement about any advertised or disclosed rate). Subsection (b)(3) prohibits advertising misrepresentation that a particular rate is generally available when it is not or when it is subject to such stringent conditions that few lessees will qualify. The subsection also prohibits falsely claiming or suggesting that a lease rate is comparable to an APR in a credit transaction. [Unless the advertiser uses a lease rate calculation formula demonstrably and virtually identical to that for credit transactions under the federal Truth in Lending Act (and Reg. Z),] an advertisement violates this subsection if it invites prospective lessees to compare the lease rate to credit rates or suggests that the lease rate is less costly than credit rates.

Section 202. Pre-Lease Availability of Sample Form.

(a) A lessor must make a copy [or sample? of a blank sample?] of its current lease form readily available at its place of business for examination at the request of a prospective lessee before the consummation of a lease, [and, if a lessor receives a prospective lessee's request [electronically] [by facsimile or computer], it must make the copy available in the same medium.] If a lessor uses more than one lease form, the lessor satisfies this requirement by making available either a commonly used form or the form pertinent to the type of lease about which the prospective lessee has inquired.

(b) Option A: A lessor need not furnish more than one copy of a current lease form to a prospective lessee.

Option B: A lessor may charge a fee not to exceed [$2.00] for a copy of a current lease form.

Option C: A lessor must furnish a prospective lessee one copy of a current lease form free of charge, but may charge a fee not to exceed [$2.00] each for additional copies..

Reporter's Notes: 10/98 changes: In first sentence of (a), "copy of" replaces "blank sample"; new bracketed language alternatives provided to deal with fax & e-mail. Options A-C added.

This reflects a common provision in recent state leasing legislation, and seems generally useful. Subsection (a) is changed (10/98) since the last draft: the bracketed part of the first sentence deals with electronic messaging. But query: if lessor must respond to fax or e-mail requests, why not written or telephone requests?

The optional versions of subsection (b) suggest several ways of allowing a lessor to control how many copies it must give to a single customer.

Proposed Comments:

1. A recurring concern is that lease documents are often lengthy and complex, and that their terminology and standard provisions are sometimes unfamiliar to consumers. Moreover, disclosures given only at consummation do 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 responds to those concerns by requiring lessors to make sample copies of lease forms available to prospective customers on request. This includes having such forms available at each of the lessor's business establishments where it consummates leases, [or furnishing a form by fax or Internet to prospective customers whose request it in that medium.] This section does not obligate the lessor to incur the expense of mailing sample forms in response to telephone or mail inquiries.

2. 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 a representative sample or one suited to the prospective customers interests if these are known.

Section 203. Rebate or Discount for Referrals.

A lessor [person ?] may not induce or attempt to induce any prospective lessee to consummate a 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 the lessor to lease or sell goods to another person.

Reporter's Notes: 10/98 changes: None.

Retained at Committee's instruction (10/97). Based on provisions in UCCC, and Model, CA, NH, NY acts, targeted on "referral sales" gimmicks that are inherently deceptive. I'm still uncertain of the need for it in a leasing law. The practice would probably violate a state UDAP Act in any event. Note that it applies only to pre-lease inducements where the customer is vulnerable to the promise of discounts.

The more elaborate version in UCCC § 3.309 provides a more severe sanction for violations, i.e., the consumer may retain the property without having to pay for it. Seems unnecessary or overkill here.

Proposed Comments:

1. In the past consumers have proved vulnerable to sales tactics which 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 are inducements offered prior to lease consummation which depend 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). But 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 204. Payment or Trade-in Pending Execution of Lease; Refund or Return.

(a) If a prospective lessee has made a payment [(other than an application fee)] to a lessor or has delivered possession of trade-in goods pending [the consummation of a lease] [approval of the lessee's application], and prior to consummation the lease application is withdrawn or not approved on the terms submitted, [unless the lessee submits a new application] the lessor must promptly, and in no event more than [5? 2 business?] days after the withdrawal or disapproval,

(1) refund the payment, and

(2) return the trade-in goods.

(b) (1) Option A: A lessor may not sell or otherwise dispose of trade-in goods until [both lessor and lessee are unconditionally contractually bound in the lease transaction] [the lessee's application is approved].

Option B: If after consummation of a lease the lessor exercises reserved authority to cancel or disapprove the lease, unless the lessee signs a new lease or fails to surrender the leased goods the lessor must promptly, and in no event more than [5? 2 business?] days after the cancellation or disapproval,

(A) refund any payment made by the lessee, and

(B) return any trade-in goods or, if the trade-in goods have been resold, pay the lessee the higher of the amount credited as a capitalized cost reduction for the trade-in or the price at which the trade-in was resold.

(2) The lessor may not impose on the lessee any charge for use of the leased goods in the interim between delivery to the lessee and cancellation.

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

Reporter's Notes: 10/98 changes: Subsection (a) modified to apply only to pre-consummation cases; bracketed phrases added for consideration in (a); wholly new Options A & B for (b) to deal with lessor cancellation post consummation.

The earlier draft was based on the Model, CA, NH, WI acts.. Subsection (a) requires the lessor to refund payments and return any trade-in if the transaction is never consummated.

Subsection (b) is new, pursuant to Committee instructions. Some lessors may have the lessee sign a lease and take delivery of the leased goods, but reserve or condition the lessor's own commitment until credit is approved or other conditions satisfied. Option A discourages this practice indirectly by requiring the lessor to hold onto the trade-in until the lessee's application is approved and/or the lessor is bound under the lease. Option B permits the practice but requires the lessor to refund any money the lessee paid and the (probably inflated) valuation of the trade-in. A theoretical Option C would outright forbid such after-the-fact cancellations, i.e., hold the lessor responsible for whatever deal the lessee commits to by signing the lease. (If the lessee doesn't have any cooling-off period, why should the lessor?)

The earlier version of subsection (c) would have permitted a lessor who "bought" the lessee's trade-in car outright to retain the agreed price for up to 30 days in anticipation of applying it to the eventual lease, or up to 75 days for a special-order vehicle. The Committee voted to delete this provision, finding no justification for a lessor to "buy" the consumer's trade-in car and retain the price for any extended period of time. Subsection (c) confirms this vote.

Proposed Comments:

1. When a consumer surrenders a trade-in or makes some other advance payment to the lessor in anticipation that they will soon consummate a lease, the consumer is left in a very vulnerable position if a lease is never concluded. 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. Where the consumer wants to withdraw the application, an uncooperative lessor has substantial leverage to compel the customer to conclude a lease. Recognizing that such retainages can be abused, subsection (a) requires the lessor in these circumstances to return "promptly" any trade-in and refund any advance payment if a lease deal is not closed. The five-day period runs from the time the customer's application is disapproved or withdrawn.

2. Some lessors will take 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 will typically have surrendered any trade-in, made front-end lease payments, and taken delivery of the leased goods; the trade-in may be resold within a short time. This practice enhances lease marketing, because the dealer in effect has a cooling-off period after the lessee executes the lease. Subsection (b) [Option B] does not prohibit this practice, but requires the lessor promptly to refund payments made and the higher of the credited or resale value of the trade-in goods.

3. 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. The consumer may want, for example, 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 (b) the prospective lessor cannot hold the purchase price hostage until the customer agrees to a lease from that dealer.

Section 205. Disclosure; Form of Lease Document; Copies to Lessee.

(a) Prior to the consummation of a lease the lessor must make the disclosures required by the federal Consumer Leasing Act [whether or not the lease is subject to that Act].

(b) A lease agreement must:

(1) be [a record, and if ]in writing, in at least ___ point type;

(2) clearly indicate that it is a lease agreement;

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

(4) be signed by the [lessor and ?] lessee.

(c) If casualty insurance on the leased goods is not included in the lease, the lease must contain or be accompanied by a record statement substantially as follows:

No insurance coverage for physical damage to, or loss of, the leased goods is provided under this lease. [Obtaining such insurance is the lessee's responsibility.]

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

(e) At the time a lessee signs a lease the lessor must deliver to the lessee a completed copy of the lease, and, if not previously delivered, a copy of any other record signed by the lessee in connection with the transaction, including but not limited to an application, purchase order, or worksheet.

Reporter's Notes: 10/98 changes: In (b)(3), identity of parties and goods deleted (covered by Reg. M); "goods" changed to "property." No changes in subsections (c), (d), and (e).

Subsection (a) adopts Reg. M disclosures as state law as well for all leases subject to this Act, i.e., up to $150,000. Is the parenthetical language needed to make this clear?

Subsection (b) states basic formalities for all leases: a written, signed lease document identified as such, with certain minimum contents. In paragraph (b)(3) I've deleted "identity of lessor and lessee, [&] the goods to be leased." These are required under Reg. M; no need to duplicate. Also, "property" seems a better word than "goods" -- a lessee might use securities or other non-goods assets as part of the down payment.

Subsection (c) requires a warning if casualty insurance is not included in the lease. Subsection (d) prohibits lessors from taking leases with blank spaces, except in special-order situations. Subsection (e) requires a copy of the lease be given the customer, and also that the lessor provide copies of other transaction documents.

Section 206. Cosigner Notice.

(a) For purposes of this section, "cosigner" means an individual other than a lessee who assumes liability for the obligation of a lessee without compensation. The term includes an individual whose signature is requested as a condition of making a lease to a lessee, or as a condition for forbearance on collection of a lessee's obligation that is in default. An individual who does not receive goods, services, or money in return for a lease obligation does not receive compensation within the meaning of this definition. A person is a cosigner within the meaning of this definition whether or not the person is designated as such on a lease.

(b) A lessor or holder may not accept a cosigner on a lease unless, prior to the cosigner becoming obligated, the lessor gives the prospective cosigner a separate [record] statement in substantially the following form:

You are being asked to guarantee this lease. Think carefully before you do. If the lessee doesn't pay, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the lease obligation if the lessee does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The holder of this lease can collect this obligation from you without first trying to collect from the lessee. The holder can use the same collection methods against you that can be used against the lessee, such as suing you, garnishing your wages, etc. If this lease is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for the lease obligation.

Reporter's Notes: 10/98 changes: In (a), deletes previously bracketed language re co-lessees; adds "other than a lessee"; drops "obligation" at end. No change in (b).

This is based on the FTC Credit Practices Rule, 16 CFR § 444.3, but substituting "lessor/lessee" for "creditor/borrower," and "obligation" for "debt." A similar provision is in UCCC § 3.208. The FTC Rule applies only to lenders and installment sellers, and a parallel co-signer disclosure for leases seems appropriate.

10/98: Bolded language in (a) replaces earlier potentially confusing language about who is a cosigner. Cf. AIAM/AAMA suggestion re deleting "condition of forbearance" clause.

Section 207. Information During Lease Term.

(a) During the term of a lease:

(1) The holder must provide the lessee a written receipt for any payment made in cash.

(2) Upon record request from a lessee the holder must promptly provide to the lessee a record statement of the dates and amounts of the periodic lease payments that have been received by the holder under the lease and the total amount of the remaining periodic lease payments. An amount in the statement that is estimated must be so identified.

(3) Upon record request from a lessee the holder must provide to the lessee a record statement or estimate of

(A) the lessee's current early termination obligation, and that the early termination obligation will be reduced by the realized value of the goods, if that is the case, and

(B) if applicable, the purchase option price at the time of early termination.

(b) A holder may not charge the lessee for providing one statement under subsection (a)(2) or (a)(3) of this section in a 12-month period. The holder may impose a reasonable fee for providing additional statements in a 12-month period if that fee is disclosed at the time of the lessee's inquiry.

Reporter's Notes: 10/98 changes: In (a)(3): former Option A deleted; old Option B blended into (a)(3)(A); new (a)(3)(B) added.

This subsection is based on provisions in the Model, MD, NY and WV acts, requiring certain follow-on information from the lessor/holder.

10/98: Subsection (a)(3)(B) now includes any applicable purchase option price.

Section 208. Renegotiation or Extension.

(a) The requirements of section 205 of this Act apply to a renegotiation of a lease, but not to an extension of a lease for a period of six months or less. A renegotiation occurs when a lease is satisfied and replaced by a new lease undertaken by the same lessee.

[(b) A renegotiation does not constitute a transaction subject to warranty or other provisions that apply to the sale of used goods under the laws of this State.]

Reporter's Notes: 10/98 changes: None.

Subsection (a) is drawn from the Model and various state acts. It also parallels Reg. M, including its definition of "renegotiation." A significant re-writing of the lease will require all new disclosures.

Bracketed subsection (b), from the Model act, is to avoid an implication that the renegotiated lease falls under "used car" sales laws. Q. Is it appropriate or necessary here?

Section 209. Satisfaction of Lease.

When a lessee has discharged all obligations under the lease, the holder must deliver or send to the lessee at the lessee's last known address a record indicating [payment in full] [satisfaction of the lease]. A copy of the lease marked "satisfied," "paid in full" or similar term fulfills this requirement. This record does not release the lessee from liability for events discovered by the holder after delivering or sending the record.

Reporter's Notes: 10/98 changes: Term "discharged" substituted for "satisfied [performed]"; in third sentence, "record" replaces "documentation."

Drawn from the Model and various state acts. A receipt or "paid in full" copy of the lease seems appropriate. The lessor's obligation is automatic and does not require a request from the consumer.

Section 210. Prohibited Lease Terms.

(a) A lease may not contain a provision by which:

(1) the holder may arbitrarily, without reasonable cause, or whenever the holder deems itself insecure, accelerate the maturity of all or part of the amount owing on the lease;

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

(3) the lessee gives the holder or another person authority to enter upon the lessee's premises, or to commit a breach of the peace in the repossession of the goods; or

(4) the lessee waives a right of action against the holder for an illegal act committed in the collection of payments under the lease or in the repossession of the goods.

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

Reporter's Notes: 10/98 changes: In (a)(1), phrase "or...insecure" added. In (a)(3), "unlawfully" deleted.

Based on provisions in UCCC, Model, NH, NY, MD acts. These are baseline restrictions in consumer credit transactions.

Section 211. Security Interest Restricted; Security Deposit.

(a) A lease or other record executed 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, other than the leased goods, to secure the payment of obligations arising from the lease. This prohibition does not apply to the taking of a security deposit, advance lease payment or other prepayment under subsection (c) of this section, or the taking of a security interest in unearned insurance premium or service contract fee rebates, or the proceeds or benefits of insurance or service contract on the leased goods. A security interest taken in violation of this section is void but does not otherwise affect the validity of the lease.

(b) Nothing in this section precludes a holder from making a permissive financing statement filing under Article 9 of the Uniform Commercial Code.

(c) A lease may provide for a security deposit, advance lease payment or other prepayment. A holder is not required to pay interest on such a security deposit, advance lease payment or other prepayment, but must promptly account to the lessee in a record on the application of those funds when they are applied.

Reporter's Notes: 10/98 changes: In (a), "record" replaces "document"; new language re unearned insurance premium or service contract rebates added; also in (a), "benefit of"added; in (c), earlier bracketed restrictions on amount of security deposit deleted.

Based on UCCC § 3.301, and Model, CA, NH, NY, MD, WI acts. The UCCC provision, and the analogous 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 rights in the leased goods from the nature of the lease arrangement, and should not need to encumber other property of the lessee. Still, some lessors prefer to claim a security interest in the leased goods as a hedge against possible recharacterization of the lease later on. Subsection (a) allows this, and also allows the lease to claim a security interest in funds which my be generated by cancellation of or collection on insurance or service contracts.

Subsection (b) allows the lessor/holder to file a UCC Art. 9 financing statement as a protective measure under (old) UCC § 9-408 (new § 9-505). This may be a prudent thing for the lessor to do in some cases, as a precaution lest a court later characterize the transaction as a credit sale. But such a permissive filing does not itself make the lease a security interest.

Subsection (c) deals with security deposits and other prepayments. 4/98: Committee voted 4-2 not to put any limits on the amount of such payments, on the view that they represent forms of prepayment or downpayment that consumers may select to reduce overall lease costs. The holder must, however, account for the application of those funds.

Section 212. Delinquency and Default Charges.

(a) [Except as otherwise provided in] [Subject to] section 310 for early termination charges in motor vehicle leases, a lease may specify penalties or other charges for a lessee's delinquency or default but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the delinquency or default, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

(b) A lease may provide for the holder's right to collect from the lessee a late charge on a lease payment that is delinquent for a period of 10 days or more in an amount provided in the lease but not to exceed the greater of $10.00 or 5 percent of the unpaid portion of the late payment. A holder may not assess or collect a late charge under this subsection when the only delinquency is late charge(s) assessed on an earlier lease payment or payments. A late charge permitted by this subsection is reasonable for purposes of subsection (a).

(c) A lease may provide that charges on default by the lessee may include the lessor's collection and court costs, but may include attorney's fees only on referral of the matter to an attorney not an [salaried] employee of the holder.

Reporter's Notes: 10/98 changes: Optional intro clauses ["Except..." "Subject..."] clauses added in (a); otherwise (a) - (c) unchanged.

For rationale, see Proposed Comments below.

(d) Where a lessee's default results in a renegotiation or extension of a lease, the holder may impose a reasonable charge for the renegotiation or extension.

Reporter's Notes: 10/98 changes: None.

Reporter's suggestion; maybe helpful, possibly unnecessary. A separate charge for writing a renegotiation or extension is not directly a "collection cost." But where the re-write is in fact a work-out arrangement, it seems logical to impose a comparable reasonableness test. Maybe put this in § 208?

Proposed Comments:

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. This "reasonableness" standard applies to any charge that may be imposed on the lessee for breach of terms of the lease, including late or default charges, collection costs, and charges for incidental breaches such as remitting payment by a check that bounces.

2. Late charges are conclusively deemed reasonable if they comply with this subsection. 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 15, a late charge of $10.00 could be imposed on April 26. If the missed April 15 payment were $400.00, a $20.00 late charge could be imposed on April 26. But if, when a $400.00 payment is due, the consumer remits only $200.00, the late charge is limited to $10.00 (5% of the unpaid portion).

The second sentence of subsection (b) 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. This 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.

3. Under subsection (c), 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 be unreasonable 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.

Section 213. Assignment of Lease; Preservation of Lessee's Claims and Defenses.

(a) Until [30] days after a lessee has [record?] notice that the 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.

Reporter's Notes: 10/98 changes: None.

Drawn from the Model and other state acts. Cf.. UCCC § 3.204. This protects the lessee who sends payments to a holder after the lease has been sold or transferred. Indirectly it requires any transferee who expects to receive payments to notify the lessee, but it does not specify the form or content of that notice. Should it?

(b)(1) Except as provided in section 501(k), and notwithstanding any provision in a lease, a holder is subject to all claims and defenses arising from the lease which the lessee could assert against the lessor 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 under the lease.

(2) A lessor or holder may not take or receive a lease which fails to contain the following provision in at least 10-point bold type:

[Option A]

ANY HOLDER OF THIS CONSUMER LEASE IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE LESSEE COULD ASSERT AGAINST THE LESSOR [OR SUPPLIER] OF THE LEASED GOODS. RECOVERY HEREUNDER BY THE LESSEE SHALL NOT EXCEED AMOUNTS PAID BY THE LESSEE HEREUNDER.

[Option B] NOTICE

This lease [will] [may] be transferred to a company other than the lessor, and you will make your lease payments to that company. You retain all the legal rights you have against the lessor [and supplier] and may assert them against the company that holds the lease, except that you cannot recover from that company more than you have paid under the lease.

Reporter's Notes: 10/98 changes: In (b)(1), "Except..." clause added; in second line, "or" changed to "and."

Redone at Committee's instruction, 2/97, to state a substantive rule, not just require a notice.

By FTC Rule, "holder in due course" protections for assignees of consumer credit contracts have effectively been abolished for more than 20 years. Subsection (b)(1) 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 or fraud. It also permits the lessee to assert claims, i.e., recover affirmatively from the holder up to the total of amounts paid under the lease. For example, assume after four months a leased vehicle proves to be a total lemon, and the lessee properly revokes acceptance under UCC 2A-517. Lessee has a claim to recover all monies paid on the lease to that point from the holder.

Query: To what extent should this Act preserve claims against a "supplier" as well as against the original lessor? In most leases, especially for vehicles, the operative warranty is the manufacturer's, not the lessor's. Also, if the lease is a "finance lease," the supplier will likely have made warranties to the lessee. Cf.. UCC 2A-209. If such a supplier warranty is breached, the finance lessee may assert that breach against the holder. A "hell or high water clause," or a statutory version of it, would not operate to cut off the lessee's rights. UCC 2A-407, Comment 2, recognizes that any other result "is not tenable" under long-standing case law and statutory precedents for consumer obligations. But what about lessee claims based on breach of manufacturer's warranty in non-finance leases? Should these be assertable against lease holder (who may or may not have an affiliation with the manufacturer)?

Subsection (b)(2) would require a parallel notice to that required by the FTC "Holder in Due Course" Rule, 16 CFR Part 433, which applies only to credit transactions. It preserves against an assignee the lessee's substantive contract and warranty rights against the lessor and any supplier of the vehicle. The FTC used this "notice" technique (destroying holder-in-due-course rights on the face of the contract) rather than attempt a direct substantive intrusion on state law.

It may be arguable that, with the substantive rule stated expressly in (b)(1), the Notice is not necessary at all. Does it serve an informational purpose for consumers (I have added an Option B notice that seems more intelligible than the FTC's). Or is it a disincentive for abuse by lessors? I am unaware of any reported case where a consumer lease assignee has claimed to be a HDC.

Even the Option B notice is a bit misleading. It suggests that any claim against a lessor is assertable against the holder, while in fact section 501(k) immunizes the holder from liability for non-apparent violations of this Act.

Section 214. Sublease.

(a) Unless the lease so [otherwise?] provides, a lessee under a lease with a term of one year or less may not sublease or assign the lessee's rights and interests.

(b) A lessee under a lease with a term of more than one year may sublease or assign the lessee's rights and interests with the record consent of the holder. A holder's withholding of consent is lawful unless the lessee demonstrates that the holder lacked a good faith belief that the sublease or assignment jeopardized its rights under the lease.

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

Reporter's Notes: 10/98 changes: In (a), "less than" deleted, "or less" added.

Based on a proposal in Connecticut. 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. It seems useful to reinforce that possibility by statute, applying a good faith test to the holder's conduct. This draft puts the burden of proof on the consumer to show the holder had no good grounds for refusing to consent to the sublease.

[Section 215. Warranties of Quality and Title.]

Reporter's Notes: 10/98 changes: None.

No text at this time. Correlate with UCC Art. 2, 2A, 2B developments. The question is whether lessee's warranty rights are adequately protected under UCC Art. 2A without repeating or elaborating here. The Committee's inclination, without a vote, seems to be to defer to Art. 2A.

Section 301. Coverage of This Part.

This Part (sections 301-313) applies only to a lease of a motor vehicle. Except as specifically noted, the provisions of this Part apply in addition to, and not in lieu of, the provisions of Parts 1, 2, 5 and 6 of this Act.

Reporter's Notes: 10/98 changes. None.

This "scope" provision confirms that this sub-set of rules applies only to vehicle leases, in addition to the general provisions earlier in this Act.

Section 302. Definitions for Motor Vehicle Leases.

[(a)] For purposes of this Part:

Reporter's Notes: 10/98 changes: Substantially reorganized: all definitions that are relevant only to the calculation of an Annual Lease Rate are moved to § 313 which sets out the computational rules for ALRs. Subsection caption "[(a)]" added here.

(1) "Constant yield method" means -

(A) in the case of a periodic payment lease, the method of determining the rent charge portion of each base periodic payment pursuant to which the rent charge for each computational period is earned in advance by multiplying the constant periodic rate implicit in the lease times the [balance subject to rent charge] [unpaid adjusted capitalized cost] 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 the adjusted capitalized cost and the sum of (i) all depreciation amounts accrued through the preceding computational periods and (ii) the first base periodic payment;

(B) in the case of a single payment lease, the method of determining the periodic earning of the rent charge portion of the single lease payment pursuant to which the rent charge for each computational period is earned in advance by 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 subtracting from the residual value the total rent charge scheduled to be earned over the lease term and adding to the difference all rent charges accrued through the preceding computational periods.

Reporter's Notes: 10/98 changes: In (A), suggested bracketed alternatives. Otherwise unchanged.

Basically a simple-interest formula for allocating periodic payment components to rent charge (interest) and capitalized cost (principal), but with periodic rent charges considered "earned" at the beginning of the period. It does not include the somewhat similar "Rule of 78s" method, nor the distinctive "straight-line" method.

Prior subsection (c) to be moved to Comment:

"(c) in the case of either a periodic payment lease or a single payment lease, the periodic rent charge calculation is based on the assumption that the holder receives the lease payment or payments on the exact due date or dates and that the lease goes to its full term."

Cf. NVLA critique [12/97].

(2) "Group credit insurance" means group credit life insurance, group credit accident insurance, group credit health insurance, group credit accident and health insurance, group disability insurance, or group credit unemployment insurance.

Reporter's Notes: 10/98 changes: None. But Q: Might this better be defined as simply "credit insurance" and make allowance for occasional individual (rather than "group") policies?

(3) Option A: "Motor Vehicle" means a device propelled [or drawn] by any power other than muscular power, upon or by which a person or property is or may be transported or drawn upon a public highway, road or street,[or waterway] and which is required by law to be registered for such use.

Option B: "Motor vehicle" means a device in, upon, or by which a person or property is or may be transported [or drawn] upon a highway [or waterway], except a device moved by human power or used exclusively upon stationary rails or tracks, and which is required by law to be registered for such use.]

Reporter's Notes: 10/98 changes: None.

Option A is from the Model act. Option B is from the Uniform Motor Vehicle Certificate of Title and Anti-Theft Act. Reg. M deals with "motor vehicle leases" but the Reg. M Commentary expressly leaves the definition to state law. Is there a better generic definition somewhere?

The bracketed phrase "or waterway" is to flag the question whether these motor-vehicle provisions should extend to boat leases. If we decide to cover them, we should review this definition.

(4) "Open-end lease" means a lease in which the lessee's liability at the end of the lease term is based on the difference between the estimated residual value of the leased property and its realized value.

Reporter's Notes: 10/98 changes: None.

Verbatim from Reg. M. Maybe belongs in section 102?

(5) "Periodic" means monthly, weekly, quarterly, or any other period as specified in the lease.

Reporter's Notes: 10/98 changes: None. Necessary?

(6) "Residual value" means the value of the leased vehicle at the end of the lease term, as estimated or assigned at consummation by the lessor, used in calculating the base periodic payment.

Reporter's Notes: 10/98 changes: Substituted "vehicle" for "property" and "goods."

This is from Reg. M. Since this term is used only for vehicle leases, I have substituted "vehicle" for "property" and "goods" where those terms had been used.

(8) "Single payment lease" means a lease for which a single payment is required at the beginning of the lease for the scheduled term of the lease.

[(b) The following terms have the meaning given them under the federal Consumer Leasing Act:

"Gross capitalized cost"

"Capitalized cost reduction"

"Adjusted capitalized cost"

etc.]

Reporter's Notes: 10/98 changes: None. But Q: does this apply to & belong in section 313 re lease rate?

Section 303. Disclosure; Content and Form of Lease.

(a) A lease must contain [or be accompanied by] the following information clearly and conspicuously, in a record:

(1) A designation of the lease as a "MOTOR VEHICLE LEASE," or words of similar specification, and a notice substantially as follows:

"NOTICE TO THE LESSEE: This is a lease. You have no ownership rights in the vehicle unless and until you exercise an [your] option to purchase the vehicle [, if this lease contains a purchase option.] Do not sign this lease before you read it. You are entitled to a completed copy of this lease when you sign it."

(2) The place of business of the lessor, and the residence of the lessee [??];

(3) The disclosures required by section 304 relating to insurance;

Reporter's Notes: 10/98 changes: In bolded Notice, brackets inserted to suggest alternate phrasing. No other changes in subsections (a)(1)-(a)(3).

This section was redone pursuant to drafting Committee instructions as of 2/97.

For vehicle leases this list adds to the disclosures required under section 205 (primarily the federal Reg. M disclosures which section 205 incorporates by reference). This section therefore need not repeat items required to be disclosed under section 205. The disclosures must be in a "record" which will include electronic communications.

10/98: Query: Must all this info go in the lease itself, or may it "accompany" the lease?

Subsection (a)(1) combines the "caption" and "health warning" items that previously were separate.

Subsection (a)(3) is a cross-reference to section 304 on insurance. The modifications to earlier subsections (a)(3) and (a)(4), directed by the Drafting Committee, are included in section 304.

(4) The "Annual Lease Rate," using that term, and a descriptive explanation such as "the cost of your lease as an annual rate";

Reporter's Notes: 10/98 changes: Explicit disclosure requirement stated.

This language would mandate disclosure of an ALR in all vehicle leases. The alternative -- permitting a rate disclosure and requiring that it be computed by a standardized formula -- is in subsection (b) of this section.

[(5) If the lease includes charges for goods or services provided by third parties, such as group credit insurance, service or maintenance contract or the like, a statement that the lessor may receive or retain a portion of those charges, if that is the case.]

Reporter's Notes: 10/98 changes: None.

Former paragraph (a)(5), dealing with disclosure of warranties from the supplier in a finance lease, is deleted as unnecessary. The definition of "finance lease" in UCC 2A-103(g) requires that the lessee be informed of supplier warranties.

Current paragraph (a)(5) [formerly (a)(6)] is the Reporter's notion, to address the somewhat contentious issue of upcharges. Does it help simply to tell the consumer that the lessor makes money on third-party charges? Cf.. Gibson v. Bob Watson Chevrolet Geo, Inc., 1997 WL 196704 (7th Cir. 1997)[distributed, 6'97]: held: under TILA, creditor misdisclosed extended warranty by showing whole amount paid to third-party when in fact creditor retained a portion.

(b) If a lease or a record which must be delivered to the lessee under section 205(e) identifies a percentage rate of charge applicable to the lease, that rate of charge must be:

(1) identified as the Annual Lease Rate, with a descriptive explanation such as "the cost of your lease as an annual rate", and

(2) calculated in accordance with section 313.

Reporter's Notes: 10/98 changes: This subsection (b) is brand new. It is an Option to (b)(4) above. This option would not require an ALR disclosure in every case, but if a rate is presented to the lessee it must be called an ALR and conform to § 313.

As written, this Option as well as (b)(4) above are preempted by Reg. M because the federal law forbids use of the term "annual lease rate and requires a different descriptive statement. Either of the Options presented here could be implemented only if the Federal Reserve Board changed its rules or made an exception for this Act.

(c) A lessee's signed acknowledgment of receipt of a copy of the lease is presumptive proof of delivery of the copy in an action or proceeding by or against a holder who took the lease without knowledge to the contrary.

Reporter's Notes: 10/98 changes: None.

Section 304. Insurance.

(a)(1) With respect to liability insurance against personal injury or property damage caused to others, the lessor must disclose -

(A) the amounts and types of coverage the lessee is required to maintain;

(B) that the lessee may purchase the required insurance from an agent or broker of the lessee's choice subject to the lessor's right to reject that insurer for reasonable cause; and

(C) the premium [for the initial coverage period] for [required or optional] liability insurance [that] [if it] is purchased from or through the lessor.

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

No liability insurance coverage for bodily injury or property damage caused to others is provided under this lease. [Obtaining such insurance is the lessee's responsibility.]

(b)(1) With respect to casualty [physical damage?] insurance on the leased vehicle, the lessor must disclose -

(A) the amounts and types of coverage required

[, including any maximum deductible amounts];

(B) that the lessee may purchase the required insurance from an agent or broker of the lessee's choice subject to the lessor's right to reject that insurer for reasonable cause; and

(C) the premium [for the initial coverage period] for [required or optional] casualty insurance that is purchased from or through the lessor.

(2) If casualty insurance on the leased vehicle is not included in the lease, the lease must contain or be accompanied by a record statement substantially as follows:

No insurance coverage for physical damage to, or loss of, the leased vehicle is provided under this lease. [Obtaining such insurance is the lessee's responsibility.]

(3) If subsections (a)(2) and (b)(2) of this section are both applicable in a particular lease, the lease may include a single combined notice.

Reporter's Notes: 10/98 changes: None.

Prior subsection (a), stating that insurance must be issued by an authorized company, is deleted per Committee instruction.

New subsections (a) and (b) respond to the Committee's suggestion [2/97] that disclosures about casualty and liability insurance be separated, and that we consider expanding the information given. As drafted here, the two subsections are almost verbatim the same. They call for information about the types of insurance the lessor may require, that the consumer may obtain the insurance on his own, and the cost of any insurance purchased from the lessor (including optional coverages included in the lease).

Vehicle leases almost always require the lessee to maintain casualty and liability insurance. Cf.., sample lease forms distributed earlier. Thus the "warning" notices in subsections (a)(2) and (b)(2) will usually apply in situations where the consumer elects to buy required insurance from another supplier, and the lessor or holder will usually demand evidence of such insurance. The warning, in this respect, reinforces the lessee's contract obligation to get the insurance. Q: is this an adequate justification for the warning? Note that the language (and intent) would require the warning even if the insurance were optional, i.e., not required.

(c)(1) If a lease includes group credit insurance the lessor must disclose -

(A) the term of insurance coverage and the premium for the initial period of coverage; and

(B) that the group credit insurance is not required.

(2) A lease may not be conditioned on the lessee's purchase of group credit insurance. A lessee's election to purchase group credit insurance is effective only if the lessee signs [or initials an affirmative written request for] [a record requesting] the insurance after receiving the disclosures specified in this subsection.

Reporter's Notes: 10/98 changes: None.

Subsections (1) and (2) are based on the disclosure rules for credit insurance in Reg. Z § 226.4(d)(1), to assure that the voluntary nature of the insurance is clear to the lessee.

(d)(1) If liability, casualty, or group credit insurance is canceled [or terminated], a refund of unearned insurance premiums received by the holder shall, at the holder's option, be:

(A) refunded to the lessee; or

(B) credited, together with the unearned portion of the rent charge applicable to the refunded premium, either to (i) the lessee's current obligation, (ii) the final maturing lease payments, or (iii) the lessee's obligation upon early or scheduled termination.

(2) No credit or refund need be made under this subsection if the amount would be less than one dollar.

Reporter's Notes: 10/98 changes: None.

As instructed by the Committee 2/97, this subsection (d) combines former subsections (b)(2) and (c)(3) to deal in one place with refunds of unearned premiums of any kind of insurance.

Cf. NVLA comments re (d)(1)(B).

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. This draft allows the holder to apply the refund in various ways (subject of course to the good faith standard). If it is held for future crediting, the holder must also credit the lessee with a rebate of unearned rent charges attributable to the refunded premium.

(e) If insurance in connection with a lease is provided by or through the lessor, the lessor must provide or arrange to have provided to the lessee a copy of the policy or certificate of insurance.

Reporter's Notes: 10/98 changes: None.

Drawn generally from the state acts. And see UCCC § 4.105. If the lessee is buying insurance through the lessor, the lessor should provide coverage information.

(f)(1) If a lessee fails to maintain insurance required under the lease, the holder may buy

[Option A: substitute insurance for substantially the same risks for either the interests of the lessee and the holder or the interest of either of them.]

[Option B: other insurance that satisfies the lease requirements.]

An amount paid by the holder for this insurance -

(A) is subject to a rent charge as though that amount was part of the adjusted capitalized cost, from the date the holder notifies the lessee of the purchase of substitute insurance, and

(B) is subject to the repayment and default provisions of the lease.

(2) Nothing in this subsection prevents the holder from pursuing any other remedy for default set forth in the lease or provided by law.

Reporter's Notes: 10/98 changes: None.

Modified to reflect drafting Committee instructions, 2/97.

Based on the Model and various state acts. This permits a holder to buy replacement coverage if the lessee lets insurance coverage lapse; it is an example of "advances to perform covenants" (cf. UCCC § 2.506). But force-placed insurance can be problematic: unduly narrow (or broad) coverages, high prices, lessor/seller upcharges, etc. Query: does this draft (either A or B) adequately deal with the overcharging problem?

Note that subsection (1)(A) imposes a de facto notice requirement: the holder cannot charge "interest" on the substitute insurance premium until the lessee is notified.

(g) A charge for insurance included in the lease or added under subsection (f) may not exceed the premium actually imposed by the insurer for such insurance.

Reporter's Notes: 10/98 changes: Delete "to the lease obligation." (Replacement insurance need not be financed within the lease.)

Modified per Committee direction, 2/97.This subsection puts an outside limit on the cost of insurance. The earlier, now-deleted "permitted by law" option would apparently have allowed a lessor to charge the legal ceiling rate even though the particular insurer's charges may be lower, i.e., an upcharge. The "actually imposed" option restricts premiums to the insurer's actual charge; even here the lessor will likely realize commission revenues.

Section 305. Liability for Gap Amount on Total Loss of Vehicle.

(a) (1) In this section "gap amount" means the difference between

(A) the amount that would be owed by the lessee if a total loss of the vehicle prior to the end of the lease term occasioned by its theft, physical damage or other occurrence, were considered an early termination of the lease, and

(B) the portion of the cash value of the vehicle actually received by the holder from the lessee's insurer or from any other person.

(2) The gap amount does not include the deductible amount applicable to an insurance policy maintained by the lessee, past due payments owed by the lessee at the time the holder receives the insurance proceeds, or any other amount due because of the lessee's delinquency or default [including excess mileage charges?].

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

(c) Nothing in this section precludes the holder from recovering the gap amount if [the holder establishes that] the total loss of the vehicle was occasioned by the lessee's fraud, intentional act, or [gross] negligence.

Reporter's Notes: 10/98 changes: Reformat (a) to have two subsections; delete "actual" in (a)(1)(B).

Modified to reflect 2/97 Committee vote (7-0) to bar gap liability.

Proposed Comments:

1. When a leased vehicle is destroyed, stolen, or otherwise becomes 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 vehicle, there is typically a "gap" between that sum and the amount due to terminate the lease at that point. The question is whether the lessee should be liable for that amount, and whether lessors should therefore be free to charge the lessee for contractual protection against that liability. Some vehicle leases 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" or "gap protection."

2. Subsection (b) mandates the former approach. This means that the risk of gap losses would be 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, and would likely reflect the increased risk in their lease pricing. In a sense all lessees would pay a bit more to cover the occasional losses borne by lessors when vehicles suffer casualty. On the other hand, casualty loss of the vehicle 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 vehicle, and does not (once the vehicle is lost) have the option to continue with the lease. Under this provision, the lessee's insurance will pay the policy limits toward the value of the vehicle; 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 after loss of the vehicle is consistent with the basic relationship between lessor and lessee. For leases generally (including both commercial and consumer leases) the lessor retains title to the goods, and bears the risk of loss. UCC § 2A-219(1). If the leased goods are destroyed without fault by the lessor or lessee, the lease contract is "avoided." UCC § 2A-221(a). Neither party has any further claim against the other; the holder cannot 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 an attempt at a contractual reallocation of the fundamental risk of loss in the lease. The judgement reflected in this section is that there is no justification for such a substantial reallocation in consumer leases.

4. Under subsection (a) the gap amount is measured 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 310(c). 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 vehicle. The gap amount is the difference, and it is this liability that the lease cannot shift to the lessee. The lessee remains responsible to pay the holder the deductible amount of its insurance coverage, and any other payments or charges due under the lease that are unrelated to the loss of the vehicle (such as late or default charges). But the lessee cannot be required to make periodic lease payments beyond the date of loss of the vehicle.

5. Subsection (c) is the moral-hazard qualification. The general principle is that, although the basic risk of loss is the lessor's or holder's, rather than the lessee's, the lessor or holder has a claim 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 vehicle, or intentionally or negligently allowing its 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 vehicle. The lessee's liability insurance coverage may protect the lessee if, for example, lessee's negligent driving caused an accident. [Is this right? ]

Section 306. Lessee's Default; Right to Cure

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

(1) the lessee fails to make a payment required by the lease; or

(2) the prospect of payment, performance, or realization of the holder's interest in the vehicle is significantly impaired; the burden of establishing the prospect of significant impairment is on the holder.

Reporter's Notes: 10/98 changes: Former Option A is dropped.

This is from UCCC § 5-109, using a prospect-of-impairment test.

(b)(1) After a lessee has been in default for 10 days solely by reason of failure to make a payment required by the lease, the holder may send the lessee a record notice of right to cure the default. The notice must contain a conspicuous statement that the lessee is entitled to cure the default, and set forth the dollar amount necessary to cure the default, the date by which the cure payment must be made and the name, address and telephone number of the holder from which information may be obtained regarding the cure. The date by which payment must be made may be no less than 20 days after the notice is sent. The holder may take no action to accelerate or collect the lessee's obligation or repossess the vehicle until expiration of the period for cure stated in the notice.

(2) Until expiration of the period for cure stated in the notice under subsection (b)(1), the lessee may cure the default by tendering the amount of all unpaid sums due at the time of the tender, plus any unpaid delinquency or default charges, but without additional security deposit or prepayment of periodic lease payments not yet due. Cure restores the rights of holder and lessee under the lease as though the default had not occurred.

(3) A lessee is entitled to the right to cure under this subsection only once [in any 12 month period] during the term of the lease.

Reporter's Notes: 10/98 changes: None.

Drawn from Model, NH, NJ, NY, MD acts. A more elaborate default/cure provision is in UCCC §§ 5.109, 5.110, 5.111. The right to cure is fairly standard fare where the consumer's default is a failure to pay; other defaults do not trigger cure rights.

The details and timing of the mechanism are important to understand. The holder can take no collection or foreclosure action until 10 days after a payment is delinquent; this means 10 days after the nominal due date plus any grace period. The holder may then send a cure notice whenever it wishes -- immediately or later (perhaps only after a second 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.

The UCCC limits the lessee to one cure over the term of the contract. Is there any reason in the lease setting to permit cure more often, such as once a year?

Section 307. Repossession

(a) [Except as provided in] [Subject to] section 306, if the lessee does not voluntarily surrender the leased vehicle to the holder, the holder may on default repossess the vehicle by judicial process or by self-help provided there is no breach of the peace.

Reporter's Notes: 10/98 changes: Bracketed intro phrases suggested. Substitute "if the lessee does not" for "and unless the lessee."

The earlier draft of this section was based on the MD and NY acts, and included two options for a subsection (b) creating a right to "reinstate" the lease even after repossession. By direction of the Committee (4/98) both versions of subsection (b) were dropped. The thought was that a statutory reinstatement right is unnecessary, cumbersome and prone to abuse, and that in the rare case where it makes sense to "undo" the repossession the parties can do this by agreement.

Subsection (a) now merely states the permissible methods of repossession: voluntary surrender, judicial process, or self-help.

(b) After repossession or voluntary surrender of the vehicle the holder must apply the realized value of the vehicle, determined under section 308, and any security deposit, in order, to --

(1) default charges and collection costs as provided for in the lease [section 212];

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

(3) the early termination liability of the lessee (section 310).

[Except as provided in section 310(f),] unless otherwise agreed the lessee is liable for any deficiency.

Reporter's Notes: 10/98 changes: None.

This tracks the state acts and UCC Article 9 on how sale proceeds are to be applied. It assumes the lessee will be liable for a deficiency, the amount of which will be controlled by the early termination rules in section 310.

The notion in an earlier draft that the lessee would be entitled to a "surplus" has been deleted.

Section 308. Determining Realized Value.

(a) Realized value is a valuation of the vehicle at early or scheduled termination of the lease where the lessee does not have or does not exercise a purchase option. Realized value is:

(1) the price received by the holder for the leased vehicle at disposition;

(2) the highest offer for disposition of the vehicle; or

(3) subject to subsection (b), the fair market value of the vehicle.

(b) A lessee and holder may, at the time of lease termination, agree on the fair market value of the vehicle and [unless unconscionable] [unreasonable?] the value so agreed upon is the realized value. [Such an agreed realized value is not unconscionable if the value is determined by an appraiser agreed to by the lessor and lessee, or by reference to a Blue Book or comparable reference source.]

Reporter's Notes: 10/98 changes: None.

Redone at Committee instruction, 10/97. Basically tracks Reg. M, but with some amplification. Subsection (b) tries to provide a safe harbor.

Proposed Comments:

1. When terminated early (voluntarily or upon default), most vehicle leases measure the lessee's termination liability by reference to the then-value of the vehicle. 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. Subsection (a) substantively replicates the definition of "realized value" in the federal Regulation M.

2. Subsections (a)(1) and (a)(2) apply when the holder offers the vehicle for sale or re-lease. If the vehicle is actually disposed of in this manner, the price received is the realized value. If the disposition is by re-lease, it is the present value of rents plus the estimated residual value under that lease. If the holder receives bona fide offers but does not complete a disposition, the realized value is the highest such offer. As an alternative, under subsection (a)(3), realized value may be measured by the fair market value of the vehicle, determined in any reasonable manner in the market in which the holder would otherwise dispose of the vehicle.

3. Subsection (b) relates to Subsection (a)(3), and permits "fair market value" to be set by agreement of the parties so long as the valuation is not unconscionable. This may be the preferable alternative for the parties where the holder either does not plan to, or cannot, dispose of the vehicle 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.

Section 309. Manner of Disposition of Vehicle on Termination of Lease

(a) When the realized value that determines lessee's liability on early or scheduled termination of the lease is determined under section 308(a)(1)[actual disposition] [or 308(a)(2)[best offer]], the disposition [or proposed disposition] may be by public or private sale or re-lease, at any time and place, and on any terms, but every aspect of the disposition including the method, manner, time, place, and other terms must be commercially reasonable. [The holder may purchase at a public sale.]

(b) If the purchaser is the holder, an affiliate of the holder, or a [secondary obligor] [person obligated to the holder under a recourse, warranty or similar agreement] the sale or disposition satisfies this section only if the amount of proceeds is commercially reasonable.

Reporter's Notes: 10/98 changes: Bolded language added. And see "N.B." below.

This section addresses the standards for a proper sale or other disposition of the vehicle by the holder. This would apply to dispositions after default and repossession, after voluntary early terminations, and also at the scheduled termination of an open-end lease.

In subsection (a), the basic standard is "commercial reasonableness," as under UCC Art. 9. The words "amount of proceeds" which was a criterion in earlier drafts based on then-drafts of UCC Art. 9 is dropped here because it was dropped in Art. 9.

10/98: The bolded language in (a) is meant to close a possible gap, where the holder uses "best offer" to determine realized value. The solicitation and evaluation of offers ought, it seems to me, to be subject to the same commercial reasonableness standard. Otherwise a holder might gin up a few offers, pick one to set a realized value, but then actually dispose of the vehicle at a better price.

The second sentence in (a) is revised to track revised UCC 9-610(c). This allows holder to buy at a public sale but not generally in a private sale. But if used cars wouldn't qualify under (A) or (B), there's no point keeping that language.

Subsection (b) address the issue of "insider" sales, often at reduced prices. One approach (in the earlier draft) is to say that a sale to the holder or a related or recourse party just doesn't count; it is the next sale that measures realized value. The approach in this Subsection (b) is drawn from an earlier UCC Art. 9 draft: an insider sale is OK if the proceeds are adequate. If this alternative is used, the second sentence in (a) should be deleted.

N.B. The final version of UCC 9-614 requires that a repossessing creditor send the consumer debtor a lengthy notice before disposition of the collateral. Query: whether any comparable notice is appropriate in this Act? Here is that UCC provision:

SECTION 9-614. CONTENTS AND FORM OF NOTIFICATION BEFORE DISPOSITION OF COLLATERAL: CONSUMER-GOODS TRANSACTION. In a consumer-goods transaction, the following rules apply:

(1) A notification of disposition must provide the following information:

(A) the information specified in section 9-613(a)(1);

(B) a description of any liability for a deficiency of the person to which the notification is sent;

(C) a telephone number from which the amount that must be paid to the secured party to redeem the collateral under section 9-623 is available; and

(D) a telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available.

(2) A particular phrasing of the notification is not required.

(3) The following form of notification, when completed, provides sufficient information:

     [Name and address of secured party]     

     [Date]   &nbs p;  

     [Name and address of any obligor who is also a debtor]     

Subject:       [Identification of Transaction]     

We have your       [describe collateral]     , because you broke promises in our agreement.

[For a public disposition:]

We will sell       [describe collateral]      at public sale. A sale could include a lease or license. The sale will be held as follows:

Date:               &nb sp;            &nbs p;    

Time:               &nb sp;            &nbs p;    

Place:               &nb sp;            &nbs p;    

You may attend the sale and bring bidders if you want.

[For a private disposition:]

We will sell       [describe collateral]      at private sale sometime after      [date]     . A sale could include a lease or license.

The money that we get from the sale (after paying our costs) will reduce the amount you owe. If we get less money than you owe, you      [will or will not, as applicable]      still owe us the difference. If we get more money than you owe, you will get the extra money, unless we must pay it to someone else.

You can get the property back at any time before we sell it by paying us the full amount you owe (not just the past due payments), including our expenses. To learn the exact amount you must pay, call us at      [telephone number]     .

If you want us to explain to you in writing how we have figured the amount that you owe us, you may call us at      [telephone number]      [or write us at      [secured party's address]     ] and request a written explanation. [We will charge you $            for the explanation if we sent you another written explanation of the amount you owe us within the last six months.]

If you need more information about the sale call us at      [telephone number]     ] [or write us at      [secured party's address]     ].

We are sending this notice to the following other people who have an interest in      [describe collateral]      or who owe money under your agreement:

     [Names of all other debtors and obligors, if any]     

(4) A notification in the form of paragraph (3) is sufficient, even if additional information appears at the end of the form.

(5) A notification in the form of paragraph (3) is sufficient, even if it includes errors in information not required by paragraph (1), unless the error is misleading with respect to rights arising under this article.

(6) If a notification under this section is not in the form of paragraph (3), law other than this article determines the effect of including information not required by paragraph (1).

Proposed Comments:

1. The standards applicable to the disposition of the vehicle on lease termination are comparable to those under UCC Articles 2A and 9. The holder has flexibility as to when and how the disposition will be conducted, but all aspects of it must be commercially reasonable. This standard applies when the holder actually liquidates the vehicle through resale or re-lease. It also applies when the holder chooses to base realized value on the "highest offer for disposition" under section 308(a)(2). The solicitation and consideration of offers must be genuine, and commercially reasonable in terms of being intended to generate offers in the range of market value.

2. If the realized value of the vehicle is determined under section 308(a)(2) [highest offer] or (3)[fair market value], the holder has no responsibility to the lessee under this section with respect to the ultimate disposition of the vehicle.

Section 310. Early Termination Liability.

(a) If a lease is terminated early by mutual agreement of the holder and lessee, and the lessee is not otherwise in default under the lease, the holder may not report the early termination to a consumer reporting agency as a default unless the lessee fails to satisfy the lessee's obligations under the lease within the time periods provided in the lease.

Reporter's Notes: 10/98 changes: None.

By Committee instruction [10/97] this section no longer attempts to specify when early termination is permissible. This is left to the lease agreement. Thus a lease might prohibit ET altogether, or permit ET only on specified circumstances, e.g., if lessee buys the car.

(b) [Subject to subsection (d),] a lease may provide a measure or formula for the lessee's liability on early termination, but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the early termination, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. An early termination charge does not include

(1) unpaid periodic lease payments through the date of early termination, (2) late, delinquency or default charges,

(3) charges for excess wear and use or excess mileage, and

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

Reporter's Notes: 10/98 changes: Bracketed intro phrase added; needed only if new subsection (d) stays in. Exclusions from ETC broken out into ¶¶s; (3) is new.

The structure of this subsection has been changed [10/97]. The new second sentence takes delinquent or already accrued payments out of the early termination charge, where they don't really belong. They are due and payable regardless of early termination. (Also, leaving them in complicates the use of the phrase "early termination charge" elsewhere in the Act, e.g., § 305 on gap liability, and subjects those accrued obligations to the "reasonableness" standard of this section.)

10/98: Item (3) is new. An ETC provision might be drawn to provide that excess wear and use, and excess mileage, charges are due even at early termination, perhaps as part of determining an "agreed" realized value. This seems legitimate; but does the language permit abuse?

(c) An early termination charge is [presumed to be] reasonable under subsection (b) if it [does not exceed the sum of] [contains these components]:

Reporter's Notes: 10/98 changes: In this intro, the second set of bracketed phrases are options to replace "does not exceed an amount equal to the sum of..."

Are we certain that this subsection is really needed, or is helpful? The basic test is reasonableness in light of the specified factors. This subsection identifies components of the ETC, but does not cap them in dollar terms, so lessors can charge whatever they want and defend it as reasonable. Is this really any kind of consumer protection or lessor safe harbor?

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

(2) the greater of

(A) a disposition fee in a fixed amount, or

(B) if the vehicle was repossessed or surrendered after default pursuant to section 307, the actual and reasonable costs of retaking, storing, preparing for sale and disposing of the goods;

Reporter's Notes: 10/98 changes: Restated in terms of "the greater of" the two figures, rather than one plus the excess; this doesn't change the result. Paragraph (2)(A) rephrased to eliminate redundant "set forth in the lease": under subsection (b), any ET charge has to be stated in the lease.

Query: should a disposition fee on early termination be permitted only if it is also charged at expiration of the lease? The holder's "disposition" burden is essentially the same in either case.

(3) the amount [, if any,] by which the [balance subject to rent charge] [unamortized adjusted capitalized cost], calculated in accordance with the constant yield method [or any other generally accepted actuarial method ??], plus the [pro rata] rent charge earned for the computational period in which the early termination occurs] [???]exceeds the realized value of the vehicle; and

Reporter's Notes: 10/98 changes: Bracketed options added; sentence reorganized; "[pro rata]" insertion suggested.

This is based on the Model and other state acts, and is the heart of early termination liability. It allows the holder to collect the unamortized adjusted capitalized cost (in credit terms, the unpaid principal balance). The "constant yield method" is essentially a simple interest calculation, except that rent payments are due at the beginning of the month rather than at the end.

Q: What is the rationale and basis for considering lease payments earned at beginning of month? Is it appropriate to "pro-rate" rent charges to the date of early termination?

The bracketed language would seem to approve only "actuarial" amortization methods, and not such methods as "Rule of 78s" and "straight line" formulas which are less generous in determining the payoff figure. Do we want to prohibit expressly use of these alternative methods? Or limit the circumstances in which they can be used. E.g., federal law (15 USC 1615) bars use of Rule of 78s in precomputed transactions longer than 61 months; UCCC § 2-510 similarly prohibits Rule of 78s in transactions longer than 48 months.

Keep in mind that the new Reg. M disclosure about early termination is a very summary one (a "description of the method," e.g., "constant yield method") plus a "health warning" about a possible "substantial charge if you end this lease early." Thus consumers are not likely to comprehend from the disclosures the dollar effects of different payoff formulas.

(4) an early termination charge [disclosed in the lease].

Reporter's Notes: 10/98 changes: Dropped "any other"; bracketed phrase probably redundant.

From the Model and other state acts. This would permit prepayment penalties as are sometimes imposed in credit transactions. The historical justification is that the creditor/lessor may have lost opportunity costs if the obligation is paid off early.

N.B. Former subsection (d) re permissibility of alternative computation methods is deleted as unnecessary.

[(d) Notwithstanding any early termination provision in the lease, the amount of early termination liability may not exceed the total of remaining periodic lease payments scheduled under the lease. ]

Reporter's Notes: 10/98 change: This subsection (d) is reinstated, tentatively, from a prior draft, pending report from industry on acceptability.

(e) If a lessee demonstrates that the holder has violated section 307 [Repossession; Reinstatement] or section 309 [Manner of Disposition of Vehicle on Termination of Lease], there is a rebuttable presumption that the realized value equals the amount authorized under subsection (c)(3). The holder may rebut this presumption by [clear and convincing] proof that notwithstanding the violation the reasonably determined value of the vehicle is less than the total of the amounts authorized under that subsection.

Reporter's Notes: 10/98 changes: None of substance. "Subsection" replaces "paragraph".

10/98: In light of how the final draft of UCC Art. 9 deals with this issue, the Committee may want to delete this subsection (d) and leave the issue to the courts. But, since that Art. 9 solution was in part a political compromise, we do not have to duck it.

This provision raises the question whether the holder loses its rights to any "deficiency" -- the rest of the lessee's early termination obligation -- if the holder mis-conducts the repossession or disposition of the vehicle. This has been a controversial topic during the UCC Article 9 revision process, with the final draft leaving the matter unresolved in the statute and thus up to the courts in each state (although the statutory penalty provision from old UCC 9-507 remains in new 9-624(c)(2)). UCCC § 5.103 bars a deficiency claim altogether unless the creditor acts in good faith and in a commercially reasonable manner.

In leases, disposition of the vehicle on early termination almost inevitably leaves a "deficiency" in the early termination liability. The ultimate question is whether a holder should forfeit this recovery on account of improper conduct of the repossession or disposition. Cf. NVLA comments [12/97].

Proposed Comments:

1. Vehicle leases are generally written to bind the lessee for the full term of the lease. Some leases 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, perhaps to facilitate the lessee's buying or leasing a new vehicle. In effect the holder waives the lessee's technical default. Subsection (a) 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.

2. Subsection (b) replicates § 183(b) of the federal Consumer Leasing Act which puts these substantive limits on early termination formulas, thus adopting the federal standard for all vehicle leases subject to this Act. The CLA in effect authorizes "liquidated damages" formulas in consumer leases, as does UCC § 2A-504(1). This is in lieu of requiring a complex calculation based on common law or UCC § 2A-528. That Art. 2A provision 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), out of deference to the possibly preemptive effect of that federal statute if it were interpreted differently from the UCC provision.

The second sentence of subsection (b) clarifies that overdue periodic lease payments, late charges or other charges accrued under the lease are not part of the early termination charge. Those charges are due and payable regardless of the early termination, and remain so.

3. The test is whether the aggregate early termination charge is reasonable in light of the stated factors. Leases may categorize early termination charge components in various ways. Thus individual elements of an early termination charge should not be assessed in isolation; rather it is the lessee's total obligation that must be reasonable. This test also 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 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. Paragraph (1) refers to specific charges related to terminating the lease and payable to third parties. Paragraph (2) allows recovery of either a fixed disposition fee (generally related to the expected expense of retaking, storing and disposing of the vehicle), 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 vehicle 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 rental payments is attributable to depreciation, i.e., reducing the "adjusted capitalized cost" [Reg. 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 vehicle. This latter component is the "rent charge" [Reg. 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, fixing the lessee's payoff obligation involves aggregating 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 vehicle [section 308]. 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. The calculation method is a "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 Reg. M § 213.4(g).

The balance owing under this subsection (c)(3) is sometimes referred to as the lessee's "gap liability." This is similar to, but separate from, the "Liability for Gap Amount" treated in section 305 of this Act.

6. Subsection (c)(4) acknowledges that an explicit early termination charge may be provided for in the lease. This permits a separate charge analogous to a "prepayment" charge 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 (e) provides an incentive for holders to conduct repossessions and foreclosures strictly in accordance with sections 307 and 309, by analogy to the limitations on deficiency judgments under UCC Article 9. If the holder is proved to have acted improperly, there is presumptively no "gap liability" for the lessee under subsection (c)(3). The holder may rebut this presumption only by establishing factually that the vehicle is worth less than the amount in subsection (c)(3).]

Section 311. Excess Wear and Use; Excess Mileage.

(a) (1) A lease may set standards and impose liability on the lessee for excess wear and use of the leased vehicle if the standards and amounts of liability are reasonable and reasonably applied to compensate the holder for actual unanticipated diminished value of the vehicle due to damage, [abuse?] overuse [?], or lack of maintenance, [including] [but not to exceed] the actual costs of repair and refurbishing.

(2) Standards for excess wear and use may not subject the lessee to liability for

(A) ordinary and expected wear, use and depreciation of the vehicle; or

(B) damage or repair to the extent they are covered by warranty, or by a repair or service contract.

Reporter's Notes: 10/98 changes: Rewritten. In (a)(1) two previous sentences collapsed into one; "reasonable & reasonably applied" replaces "reasonably designed and applied." Bracketed phrases raise question whether EWU charges should be limited to actual costs of repair. Subsection (2)(B) is new.

Subsection (a)(1) is rewritten to state the basic constraint on EWU charges in terms of a reasonableness standard related to the actual unexpected lost value of the vehicle. [Q: isn't "overuse" covered by excess mileage in subsection (c)?] Paragraph (a)(2)(A) excludes from EWU "ordinary and expected" use; this should reflect differing expectations for certain types of vehicles or certain regions of the country.

Paragraph (a)(2)(B) precludes charging the lessee for EWU items covered by warranty/service contract. The lessee has paid for that protection and ought to get the benefit of it. Do we need language re lessee assigning warranty/service contract rights to holder?

(b) (1) If on lease termination the holder assesses excess wear and use charges on the lessee, the holder must provide the lessee:

(A) record notice of the nature and amount of such charges within [ten? five?] business days after termination of the lease;

(B) reasonable time and opportunity for the lessee or another person designated by the lessee to examine the vehicle, and access to the vehicle for that purpose; the time is reasonable if it is no less than [_7?_] days after the holder sends the notice under subsection (b)(1)(A); and

(C) An opportunity for

[Option A: reinspection within ___ days after the holder sends the notice under subsection (b)(1)(A)

[Option B: prompt resolution of any dispute

by an independent inspector agreeable to the holder and lessee [, or through non-judicial dispute resolution procedures]. [The cost of the reinspection shall be shared equally by the holder and lessee.]

Reporter's Notes: 10/98 changes: None in subsection (b), except final bracketed sentence is new.

This version of an EWU rule is new [4/98], pursuant to Committee instructions, 10/97. It is a relatively"light" version of a limitation on EWU charges. It does not burden the parties with a very detailed choreography of who does what in what order. Rather, it concentrates on essential protections: notice, access & a chance for reinspection. As a practical matter, the holder will usually want to liquidate the vehicle promptly, and it seems unwise to build elaborate structures for sorting out EWU disputes that would involve inordinate delay. A critical question is how to deal with disputes about excess wear and use; this draft includes options that rely on reinspection by an independent inspector.

(2) If [within] [no more than] ___ days prior to termination of the lease the lessee has the vehicle inspected for excess wear and use by the holder or an inspector designated by the holder, the holder need not comply with subsection (b)(1) if, within (3 ?) days after the inspection, the holder advises [notifies] the lessee of the nature and amount of excess wear and use charges and that

(A) the lessee is entitled to a binding reinspection at the lessee's expense by an independent inspector agreed to by the lessee and holder;

(B) the lessee is entitled to have necessary repairs made at the lessee's own expense; and

(C) lessee remains liable for excess wear and use incurred after the inspection and before termination of the lease.

Reporter's Notes: 10/98 changes: None.

Subsection (b)(2) is in response to Committee instruction. It tries to give lessees and holders some incentive to inspect for excess wear and use before lease termination. I'm not sure how much real incentive there is or can be, though some -- maybe many -- holders do so.

(3) Notwithstanding subsections (b)(1) and (b)(2) of this section, a lessee remains liable for excess wear and use that was not reasonably detectable at the time of the holder's inspection or the independent reinspection under subsections (b)(1)(C) or (b)(2)(A).

Reporter's Notes: 10/98 changes: None.

(c) A lease may provide for the imposition of a charge for excess mileage. Such a charge must be reasonable in light of [reasonably related to] the expected diminution in value of the vehicle on account of the excess mileage.

Reporter's Notes: 10/98 changes: Bracketed phrase suggested as alternative language.

Subsection (c) puts a "reasonableness" restraint on excess mileage charges.

Section 312. [Open-End Lease]

Option A:

A lessor may not offer or consummate an open-end lease.

Option B:

(a) The obligation of a lessee upon expiration of an open-end lease may not exceed twice the average payment allocable to a monthly period under the lease. This limitation does not apply to charges for excess wear and use or excess mileage, or for other default.

(b) If the realized value of the vehicle at the expiration of an open-end lease exceeds the estimated residual value, the lessee is entitled to the surplus.

Option C:

(a) In an open-end lease [where the lessee's total obligation (excluding residual value) is $25,000 or less], there is a rebuttable presumption that, at the end of the lease term, the disclosed residual value of the vehicle is unreasonable and not in good faith to the extent that the residual value exceeds the realized value by more than three times the base monthly payment (or more than three times the average payment allocable to a monthly period, if the lease calls for periodic payments other than monthly); the holder cannot collect the excess amount unless the holder brings a successful court action and pays the lessee's reasonable attorney's fees, or unless the excess is due to unreasonable or excessive wear or use of the leased property (in which case the rebuttable presumption does not apply).

(c) Notwithstanding subsections (a) and (b), a lessee and holder are permitted, after termination of the lease, to make any mutually agreeable final adjustment regarding excess liability.

Reporter's Notes: 10/98 changes: None.

"Open-end lease" refers to one where the lessee's obligation at expiration depends on the realized value of the vehicle at that time. The lessee cannot simply return the car and walk away, but rather must bear some or all of the depreciation risk.

Option A would flat-out prohibit open-end leases, arguably justified on the ground that there is too much risk that the consumer will be stuck with a large balloon obligation.

Option B is almost verbatim from UCCC § 3.401. It restricts the consumer's liability to two monthly payments. Lessors may argue this unduly increases their residual risk in open-end leases.

Option C is almost verbatim from Reg. M § 213.4(m)(2) and (3), which are in turn drawn from CLA § 183(a). 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 complicated "presumption" mechanism. Several states (CA, NH) restate this substantive limitation in their leasing acts. The bracketed language would limit this restrictive provision to leases up to $25,000, the same as the federal Act.

There is a wrinkle here. Section 205 of this Act requires that all leases, up to $150,000, make the disclosures required by Reg. M. That regulation handles these special open-end rules with a disclosed presumption limiting liability to three monthly payments. Thus this Act would require any open-end lessor to make Reg. M disclosures with its "presumptive" restrictions. It would seem incongruous to put in this Act Option B [flat limitation], or Option C [limited to smaller leases]; the lessor would be disclosing one thing to satisfy section 205 but this section would be imposing a different limitation. We would need to adjust the disclosure rules accordingly in section 205, or put an override rule in here.

Unless we wish to outlaw open-end leases (Option A), I suggest we delete this section in its entirety as unnecessary. Let Reg. M take care of it for all sizes of open-end leases.

Section 313. Calculation of Annual Lease Rate.

(a) For purposes of this section:

Reporter's Notes: 10/98: This is all new.

To set up the mathematical formula for a lease rate calculation it is necessary to define a number of terms. It seems useful to use terms from Reg. M to the extent they suffice.

Might it be possible to adopt en masse all the relevant definitions from Reg. M, without restating them here? E.g., "The following terms have the same meaning as in the federal Consumer Leasing Act: (list terms)."

(1) "Adjusted capitalized cost" means the gross capitalized cost less the capitalized cost reduction, and is [the] [an] amount used by the lessor in calculating the base periodic payment.

Reporter's Notes: 10/98 changes: "[an]" suggested in Option A.

This is similar to the "amount financed" in a credit transaction. This is the Reg. M definition.

(2) "Base periodic payment" means that portion of the periodic lease payment which is the sum of the rent charge, depreciation and other amortized amounts attributable to that payment period.

Reporter's Notes: 10/98 changes: None.

This is the "principal and interest" portion of the monthly payment, without adding taxes or other incidentals. The term is used, but not specifically defined, in Reg. M. I think this definition is consistent with Reg. M usage.

(3) "Capitalized cost reduction" means the total amount of any rebate, cash payment, net trade-in allowance, and noncash credit that reduces the gross capitalized cost.

Reporter's Notes: 10/98 changes: None.

This is essentially the down payment including any trade-in, verbatim from Reg. M.

(4) "Ending balance" means

(A) Option A: the purchase option price at the end of the lease term if the lease states that price;

Option B: the average of the residual value and the purchase option price at the end of the lease term if the lease states a purchase option price; or

(B) the residual value if the lease does not state a purchase option price.

Reporter's Notes: 10/98: Brand new. This is the most important mathematical component -- the ending balance which drives the rate computation. To have a lease rate at all comparable to a credit APR, we will have to bite the bullet and decide what this ending balance figure will be. For leases with a stated purchase option price, that may be the best number to use, as in (a)(4)(A)[Option A]. Option B splits the different between POP and RV.

Absent a POP, the only available number in the lease is the RV, which, as the Fed and others have noted, is subject to wide fluctuations and perhaps to manipulation. Alternatively, you could create an artificial number based on the RV, e.g., 110% of RV to use as ending balance, but that's pretty arbitrary. Or a reference to industry price guides (Blue Books, etc.) might be used, but that is no more solid than other guesstimates of future value.

(5) "Gross capitalized cost" means the amount agreed upon by the lessor and the lessee as the value of the leased vehicle and any items that are capitalized or amortized during the lease term, including but not limited to taxes, insurance, service agreements, and any outstanding balance from a prior loan or lease.

Reporter's Notes: 10/98 changes: "property" changed to "vehicle." Otherwise, this is verbatim from Reg. M.

(6) "Lease amount financed" means the adjusted capitalized cost minus: (A) any lease finance charge included in it, and

(B) an advance lease payment or non-refundable security deposit due on or before delivery of the vehicle.

Reporter's Notes: 10/98: Brand new. Reporter's language to capture a "pure" baseline number directly comparable to the "amount financed" in credit transactions. The Reg. M definition of "adjusted capitalized cost" gets close, but it is necessary to exclude any components that are part of the "lease finance charge." Under paragraph (A) an origination fee, e.g., would be subtracted. Under paragraph (B), typically the first month's payment would also be subtracted, as well as a non-refundable security deposit which is essentially a prepayment.

(6) (A) "Lease finance charge" means the rent charge plus any other charge payable directly or indirectly by the lessee, and imposed directly or indirectly by the lessor as an incident to [or condition of] the lease.

(B) Examples of lease finance charge include:

(i) an origination [or acquisition?] charge;

(ii) a charge for assigning, servicing or carrying the lease;

(iii) broker fees;

(iv) a disposition or pick-up charge due on lease termination;

(v) [taxes unique to leases?]

(C) Lease finance charge does not include:

(i) charges of a type payable in a cash purchase, such as official fees for [sales or use?] taxes, registration or title, or for an extended warranty or service contract;

(ii) charges for late payment or other delinquency or default;

(iii) a refundable security deposit;

(iv) premiums for insurance disclosed pursuant to section 304;

(v) charges for additional authorized mileage;

(vi) an application fee charged to all applicants whether or not a lease is consummated;

(vii) fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest.

Reporter's Notes: 10/98: Brand new. This is an effort to capture a comprehensive "finance charge" concept for leases. It builds on the "rent charge" currently defined in and disclosed under Reg. M, but it is broader to pick up various front- or back-end charges that are unique to the lease. The exclusions in paragraph (C) resemble those in TILA, but (iii) and (v) are unique. [Refundable security deposits are excluded by analogy to "required deposits" under TILA, Reg. Z § 226.18(r).]

This almost certainly needs refinement.

(7) "Rent charge" means the difference between the total of base periodic payments over the lease term minus the depreciation and any amortized amounts. [The term does not include

(A) any amount included in the {gross/adjusted} capitalized cost;

(B) any delinquency, default, disposition, early termination, collection, or reinstatement charge;

(C) any amount for taxes, registration, license, acquisition, administration, assignment and other fees;

(D) charges for insurance, for accessories or their installation, for delivering, servicing, repairing or improving the vehicle and for other goods, benefits or services incidental to the lease, whether such amount is included in the capitalized cost, paid separately at lease inception by cash, check, credit card or similar means, or paid on a periodic basis in addition to the base lease payment.]

Reporter's Notes: 10/98 changes: Partially reformatted This resembles (but is not identical to) the "finance charge" in credit transactions. The first sentence is verbatim the same as in Reg. M.

The bracketed remainder is taken from the Model and several state laws, intended to be a helpful amplification that is not inconsistent with (or preempted by) the federal definition. I have reformatted to list the exclusions in subparagraphs (A)-(D). This bracketed add-on may be unnecessary, since "rent charge" is used only as a component of the "lease finance charge," and that is defined to exclude basically these same items.

(8) "Residual value" means the value of the leased vehicle at the end of the lease term, as estimated or assigned at consummation by the lessor, used in calculating the base periodic payment.

Reporter's Notes: 10/98: New; verbatim from Reg. M.

(b) "Annual lease rate" ("ALR") is the nominal annual percentage rate that reflects the amortization of the lease amount financed to the ending balance over the term of the lease, calculated according to the actuarial method of allocating payments made on an obligation between the lease amount financed and the amount of the lease finance charge, pursuant to which a payment is applied first to the accumulated lease finance charge and the balance is applied to the unpaid lease amount financed.

(c) An annual lease rate conforms to subsection (b) if it is calculated in accordance with the following instructions and equations:

Reporter's Notes: 10/98: Subsections (b) and (c) are brand new. Subsection (b) is based on TILA § 107(a), requiring an actuarial computation. Subsection (c) will draw on the definitions earlier in this section to spell out instructions and the appropriate algorithms. Hopefully this can be packaged tightly enough that we won't need lots of variations for irregular transactions and the like, as in TILA Reg. Z Appendix J.

(d) An annual lease rate is accurate for purposes of this Act if the rate disclosed is within a tolerance of not greater than one-eighth of 1 per centum more or less than the actual rate calculated in accordance with subsection (c).

Reporter's Notes: 10/98: New, to permit an accuracy tolerance, as in TILA § 107(c).

N.B. The approach presented here defines certain terms to create numbers that can then be used to compute a "rate" fairly comparable to the APR under TILA. There is an important but subtle difference however. In the TILA disclosures, all the critical computational numbers are disclosed, and a consumer (with a calculator) can verify that the APR is correct. The rate produced under this section, by contrast, could not easily be verified from the up-front disclosures; the consumer would need to know the specially defined terms applicable only within this provision.

Part 4. SPECIAL PROVISIONS (OTHER THAN MOTOR VEHICLES)

[With experience and the passage of time it may become appropriate to add provisions dealing with discrete forms of consumer leases other than those involving motor vehicles. The Conference does not recommend such provisions at this time.]

Reporter's Notes: 10/98 changes: None.

This merely leaves a logical place in the Act to expand its coverage to other kinds of consumer leases at some future time.

Section 501. Private Remedies

Reporter's Notes: This section generally resembles the civil liability section of the Truth in Lending Act [§ 130] (which applies to violations of the federal CLA), and UCCC §§ 5.201 and 5.203. The focus is on liability for violating this Act; remedies for contractual breaches of the lease are covered in UCC Article 2A.

The objective is to give lessees incentives to police lessor/holder misconduct, primarily through recovery of actual and statutory damages and court costs and attorney's fees. It is not intended to create a minefield of potential liability for the leasing industry. Thus the effectiveness, and fairness, of these civil liability rules depends on the clarity and precision of compliance responsibilities stated throughout this Act.

(a) (1) A holder who violates this Act is liable to the lessee for actual [direct and consequential] damages suffered as a consequence of the violation.

Reporter's Notes: 10/98 changes: Rephrased for clarity and style.

This allows recovery for provable actual damages.

(2) Whether or not a lessee seeks or is entitled to damages [or has an adequate remedy at law, the lessee may bring an action to]:

(A) obtain a declaratory judgment that an act or practice violates this Act; or

(B) enjoin, in accordance with principles of equity, a lessor or holder who has violated, is violating, or is otherwise likely to violate this Act.

Reporter's Notes: 10/98 changes: None, but brackets added to question need for that language.

This subsection (2) is new, in response to Committee instruction [10/97]. It allows declaratory and injunctive relief, as well as money damages.

(b) Except as otherwise provided in this section, and in addition to recovery of actual damages under subsection (a)(1), in an action in which it is determined that a holder has violated any of the following provisions of this Act,

Sec. 203 [Rebate or Discount for Referrals]

Sec. 205 [Disclosure; Form of Lease Document]

Sec. 206 [Co-Signer Notice]

Sec.207 [Information During Lease Term]

Sec.208 [Renegotiations and Extensions]

Sec. 210 [Prohibited Lease Terms]

Sec. 212 [Delinquency and Default Charges]

Sec. 303 [Disclosure; Content and Form of Lease Document]

Sec. 306 [Lessee's Default; Right to Cure]

Sec. 307 [Repossession; Reinstatement]

(1) in an individual action the lessee is entitled to an award of statutory damages of [Option A] $_____ [Option B] the greater of $____ or the amount of [#] periodic payments provided for in the lease; and

Reporter's Notes: Options A and B are different ways of setting statutory damages: either a flat dollar amount, or some proportion of the lease obligation.

The sections listed are those that involve more serious misconduct that ought to be discouraged even though it may not produce measurable "actual damages" for the lessee. For violations of other sections, the lessee would be limited to actual damages.

(2) (A) in a class action, the lessees are entitled to an award of statutory damages in such amount as the court may allow, except that as to each member of the class no minimum recovery is applicable, and the total recovery under this subsection in any class action or series of class actions arising out of the same failure to comply by the same holder may not be more than the lesser of $500,000 or 1 per centum of the net worth [??] of the holder that committed the violation.

(B) In determining the amount of award in any 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.

(c) In a successful action under subsections (a) or (b), 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.

(d) A holder has no liability under this section if, within [60 ?] days after discovering [learning of (?)] a violation of this Act, [and prior to the institution of an action under this section or the receipt of written notice of the violation from the lessee], the holder notifies the lessee concerned and corrects the violation(s) [including refund, restitution or crediting of any charges improperly disclosed or imposed].

(e) A holder is not liable for a violation of this Act if the holder shows 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 any such error. Examples of bona fide errors include, but are not limited to, clerical errors, calculation errors, computer malfunctions and programming errors, except that an error of legal judgment with respect to a holder's obligations under this Act is not a bona fide error.

(f) When there are multiple lessees in a lease, there shall be no more than one recovery of statutory damages under subsection (b)(2).

(g)(1) An action under this section may [must] be brought within [one/two]? years from the date of the occurrence of the violation which is the subject of the action. For this purpose an action is "brought"--

(A) when a lessee initiates an action against a holder; or

(B) when a lessee raises a violation of this Act as a defense or counterclaim in an action initiated against the lessee (including proceedings in insolvency).

(2) Option A: This subsection does not bar a lessee from asserting a violation of this Act in an action by a holder to collect obligations under the lease which is brought more than ___ years from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action.

Option B: A claim for damages to which a lessee is entitled under this section may be raised as a defense [or counterclaim] to an action on the lease without regard to the time limitations prescribed by subsection (g)(1) of this section.

Reporter's Notes: 10/98 changes: None in subsections (b)(2) through (g).

Modified pursuant to Committee instruction [10/97]. Option A is from federal Truth in Lending law (applicable to Consumer Leasing Act chapter). Option B is from UCCC § 5.202. Core question is how long and how tight should the statute of limitations be? Both the federal CLA and the UCCC have basically a 1-year SOL, but permit "recoupment" counterclaims beyond that point.

(h) No liability arises under this section with respect to an act done or omitted in good faith in conformity with any rule, regulation or interpretation of this Act, or in conformity with any approval, by [Attorney General or other enforcement authority under § 505] notwithstanding that after such act or omission has occurred, such rule, regulation, interpretation or approval is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.

(i) The multiple failure to disclose to a lessee any information required to be disclosed under this Act entitles the lessee to a single recovery under this section but continued failure to disclose after a recovery has been granted gives rise to rights to additional recoveries.

(j) A lessee may not take any action to offset any amount for which a holder is potentially liable to the lessee under subsection (b) against any amount owed by the lessee, unless the amount of the holder's liability under subsection (b) 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 bar a lessee then in default under the lease from asserting a violation of this Act as an original action, or as a defense or counterclaim to an action brought by a holder to collect amounts owed by the lessee.

(k) Notwithstanding section 213(b), and 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 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 prohibited provision or does not contain the notices, legend or items required by this Act.

Reporter's Notes: 10/98 changes: Minor stylistic adjustments only in subsections (h) through (k).

Subsections (h), (i), and (j) are from TILA.

Subsection (k) insulates a subsequent assignee from liability under this section for any violation committed by a prior holder which the current holder could not identify from the lease documentation.

(l) For purposes of this section, "lessee" includes a cosigner or trustee in bankruptcy to the extent the cosigner or trustee is a successor in interest of a lessee.

Reporter's Notes: 10/98: New. The phraseology of this section 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 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. This "mini-definition" is meant to assure that the claim for violation of this Act is still actionable by the successor in interest. (Is the phraseology accurate?)

Section 502. Effect of Violation on Rights of Parties; Election of Remedies.

(a) [(1)] Except as otherwise specifically provided in this Act, a violation of this Act by a holder does not impair the holder's rights on the lease.

[ (2) If it is determined that a holder has violated sections ___, ___, ___ , the lessee may rescind the lease and recover all payments made by surrendering the leased goods and paying the fair market value for any use the lessee has made of the goods.]

(b) If an action or omission that violates this Act also violates other law, the lessee is entitled to [but a single monetary remedy] [the larger of the monetary remedies authorized by this Act or the other law].

Reporter's Notes: 10/98 changes: Minor stylistic adjustments.

This is the Reporter's proposal. Subsection (a)(1) is to make clear that a violation of this Act does not nullify or undercut the lessee's obligation on the lease, i.e., the violation does not void the lease contract. Cf. UCCC § 5.201(4).

Subsection (a)(2) is new [10/97]. Might certain violations be so serious as to justify canceling the lease. (Which violations?) If so, the lessee ought to be expected to surrender the goods and pay for whatever use of them he/she has gotten. This is roughly analogous to rescission rights under TILA. [I have a recollection, but no notes, that the Committee was inclined to delete subsection (a)(2).]

Subsection (b) is to prevent multiple recoveries for the same violation. Cf. UCCC § 5.203(8).

Section 503. Administrative Enforcement.

This Act shall be enforced by the [Attorney General, Credit Code Administrator, or similar public agency]. For this purpose the [Attorney General, Credit Code Administrator, or similar public agency] shall have the powers and remedies provided in the [state UDAP act].

Reporter's Notes: 10/98 changes: None.

This section would assign enforcement authority to a public agency, presumably one that has investigative, cease-and-desist, and similar powers. That agency would have the same enforcement powers as under the state UDAP Act or similar consumer fraud act.

Shouldn't this section logically be combined with section 504, just below?

Section 504. Administration of Act.

(a) The [designate public official or office] shall administer this Act, and shall have the authority to issue rules, regulations, interpretations or approvals designed to effectuate the consumer protection purposes of this Act, prevent circumvention or evasion thereof, facilitate compliance therewith, [avoid preemption by the federal Consumer Leasing Act,] and assure consistent interpretations with those of other states enacting substantially this Uniform Consumer Leases Act.

Reporter's Notes: 10/98 changes: Bracketed phrase added, to encourage conformity to federal CLA.

(b) Rules, regulations, interpretations or approvals pursuant to this section shall be promulgated in accordance with [appropriate state administrative procedure act].

(c) To keep the [Administrator's] rules, regulations, interpretations or approvals in harmony with the rules of administrators in other jurisdictions that enact substantially the Uniform Consumer Leases Act, the [Administrator], so far as is consistent with the purposes, policies, and provisions of this Act, shall:

(1) before adopting, amending, and repealing rules, regulations, interpretations or approvals, advise and consult with administrators in other jurisdictions that enact substantially the Uniform Consumer Leases Act; and

(2) in adopting, amending, and repealing rules, regulations, interpretations or approvals, take into consideration the rules, regulations, interpretations or approvals of administrators in other jurisdictions that enact substantially the Uniform Consumer Leases Act.

Reporter's Notes. 10/98 changes: None in (b). Subsection (c) is new.

There was a suggestion [10/97] to bracket this whole section to indicate it is an option for the states to enact. But my notes say this was withdrawn.

Is there need for an Administrator for this Act? Is it wise to permit regulations and interpretations beyond the text of the statute, when this might lead to non-uniform interpretations of the Act? On the other hand, if exhorted to maintain uniform interpretations, the Administrator may provide useful guidance to lessors. Note that section 501(h) would protect lessors from liability if they follow such administrative guidance.

Subsection (c) is new as of 10/98, based on UCCC § 6.104(3), to promote harmonious interpretations.

Reporter's Notes: 10/98: There are no changes in this Part 6, which the Drafting Committee has not yet reviewed in any detail.

Section 601. Purposes; Rules of Construction.

(a) This Act shall be liberally construed and applied to promote its underlying purposes and policies.

(b) The underlying purposes and policies of this Act are:

(1) to simplify, clarify, and modernize the law governing the leasing of consumer goods;

(2) to recognize the unique characteristics and legitimate role of leasing in the marketing of consumer goods;

(3) to further consumer understanding of the terms of lease transactions and to foster competition among suppliers of leases so that consumers may lease goods at reasonable cost;

(4) to protect consumers against unfair practices by some suppliers of leases, having due regard for the interests of legitimate and scrupulous lessors;

(5) to permit and encourage the development of fair and economically sound consumer leasing practices;

(6) to conform the regulation of disclosure in lease transactions to the federal Consumer Leasing Act; and

(7) to make uniform the law, including administrative rules, among the various jurisdictions.

Reporter's Notes: Based on UCCC § 1.102. Paragraph (2)(b) is proposed new language, to replace a UCCC reference to setting rate ceilings.

This whole section may be outside current Conference style guidelines.

Section 602. Construction Against Implicit Repeal.

This Act being a general act intended as a unified coverage of its subject matter, no part of it shall be construed to be impliedly repealed by subsequent legislation if that construction can reasonably be avoided.

Reporter's Notes: Boilerplate. Same as UCCC § 1.104.

Section 603. Severability.

If any provision of this Act or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this Act which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

Reporter's Notes: Boilerplate. Same as UCCC § 1.105.

Section 604. Effective Date; Transition.

(a) This Act takes effect at 12:01 a.m. on [ ] [and applies to a lease consummated thereafter].

(b) A 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

(1) a renegotiation made after this Act takes effect as to a lease whenever entered into;

(b) a lease entered into before this Act takes effect insofar as the remedies of holders are limited by sections 210 [Prohibited Lease Terms], 306 [Lessee's Default; Right to Cure], 307 [Repossession; Reinstatement], and 309 [Manner of Disposition of Vehicle on Termination of Lease].]

Reporter's Notes: Based on UCCC § 9.101. Subsection (b) would change certain terms and ground rules for enforcement of existing leases. Q: Is this constitutional? Is it fair? Maybe better to use the parenthetical in (a) as a bright-line divider.

Section 605. Specific Repealer and Amendments.

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

(a)

(b)

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

(a)

(b)

Reporter's Notes: Based on UCCC § 9.103. As this Act is meant as fairly comprehensive coverage of consumer leases, it would be necessary to identify existing state statutes that deal with consumer leases and repeal or amend them as appropriate.