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3/8/00

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

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

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

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

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

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

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

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

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

CHARLES J. TABB, University of Illinois College of Law, 504 E. Pennsylvania Avenue, Champaign, IL 61820

RALPH J. ROHNER, Columbus School of Law, The Catholic University of America, Cardinal Station, Washington, DC 20064, Reporter

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

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

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

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

OK 73019, Executive Director

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

ARTICLE 1
SHORT TITLE; DEFINITIONS; GENERAL PROVISIONS

SECTION 101. SHORT TITLE. 1

SECTION 102. DEFINITIONS. 1

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

SECTION 104. CHARACTERIZATION OF LEASE; TRANSACTION SUBJECT TO ACT BY AGREEMENT. 13

SECTION 105. SUPPLEMENTAL PRINCIPLES OF LAW APPLICABLE. 15

SECTION 106. WAIVER; AGREEMENT TO FORGO RIGHTS IN SETTLEMENT OF CLAIM.
16

SECTION 107. LIMITATION ON CHOICE OF APPLICABLE LAW AND FORUM. 17

SECTION 108. OBLIGATION OF GOOD FAITH. 20

SECTION 109. UNCONSCIONABILITY. 20

ARTICLE 2
ADVERTISING; DISCLOSURE OF INFORMATION

SECTION 201. ADVERTISING. 25

SECTION 202. PRE-LEASE AVAILABILITY OF SAMPLE FORM. 26

SECTION 203. DISCLOSURE; FORM OF CONSUMER LEASE; COPY TO LESSEE. 27

SECTION 204. INSURANCE DISCLOSURES. 30

SECTION 205. NOTICE TO GUARANTOR. 33

SECTION 206. INFORMATION DURING TERM OF LEASE; SATISFACTION OF LEASE. 36

SECTION 207. CALCULATION OF ANNUAL LEASE RATE. 38

ARTICLE 3
LIMITATIONS ON TERMS AND PRACTICES

SECTION 301. PAYMENT OR TRADE-IN PENDING APPROVAL OF LEASE; REFUND OR RETURN. 43

SECTION 302. PROHIBITED LEASE TERMS. 45

SECTION 303. SECURITY INTEREST RESTRICTED; SECURITY DEPOSIT. 46

SECTION 304. DELINQUENCY AND DEFAULT CHARGES. 48

SECTION 305. ASSIGNMENT OF LEASE; PRESERVATION OF LESSEE'S CLAIMS AND DEFENSES. 50

SECTION 306. SUBLEASE. 52

SECTION 307. OPEN-END LEASE. 53

SECTION 308. WARRANTIES OF QUALITY AND TITLE. 55

SECTION 309. REBATE OR DISCOUNT FOR REFERRALS. 55

SECTION 310. LIMIT ON INSURANCE CHARGES; TERMINATION OR REPLACEMENT OF INSURANCE. 56

ARTICLE 4
LEASE TERMINATION

SECTION 401. LIABILITY FOR GAP AMOUNT ON TOTAL LOSS OF GOODS. 59

SECTION 402. LESSEE'S DEFAULT; RIGHT TO CURE. 62

SECTION 403. REPOSSESSION; APPLICATION OF REALIZED VALUE. 64

SECTION 404. DETERMINING REALIZED VALUE. 66

SECTION 405. EARLY TERMINATION LIABILITY. 69

SECTION 406. EXCESS WEAR AND TEAR; EXCESS MILEAGE. 76

ARTICLE 5
PENALTIES; ENFORCEMENT; ADMINISTRATION

SECTION 501. PRIVATE REMEDIES. 81

SECTION 502. CLASS ACTIONS. 83

SECTION 503. LIMITATIONS ON PRIVATE REMEDIES. 84

SECTION 504. ASSIGNEE LIABILITY. 87

SECTION 505. EFFECT OF VIOLATION ON RIGHTS OF PARTIES; ELECTION OF REMEDIES. 88

SECTION 506. ADMINISTRATIVE ENFORCEMENT. 89

SECTION 507. ADMINISTRATION OF [ACT]. 89

ARTICLE 6
MISCELLANEOUS PROVISIONS

SECTION 601. SEVERABILITY. 91

SECTION 602. EFFECTIVE DATE. 91

SECTION 603. TRANSITION. 91

SECTION 604. REPEALS AND AMENDMENTS. 91

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 102. DEFINITIONS.

(a) In this [Act]:

(1) "Authenticate" means to execute or adopt a symbol, or encrypt a record in whole or in part, with present intent:

(A) to identify the authenticating party, and adopt, accept, or establish the authenticity of a record or term; or

(B) to sign.

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

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

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

4/00 Update: StyleCom suggests using "consumer lease" as the basic term throughout. So "lease" is now defined as in UCC 2A [see 102(a)(9)], below, and that definition need not be repeated here. This definition therefore shrinks by dropping some of the former first two lines. 9/99: Phrase "persons other than the holder" substituted for "third parties."

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

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

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

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

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

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

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

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

4/00 Update: Per 7/99 suggestion: "investment property" added to exclusions.

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

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

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

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

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

(11) "Lessor" means a person who has leased, 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.

4/00 Update: Changes in definition of "consumer lease" and "lease" eliminate circularity problem here. 7/99: a commissioner suggested clarifying this "five times" rule. How? StyleCom alsosuggested possibly putting this five-times rule in the next section (103) on "Exclusions."

Q.: Do we want to eliminate the potentially mischievous "arranger" notion?.

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

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

(14) "Record," 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.

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

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

(16) "Single payment lease" means a consumer lease for which a single payment is required for the scheduled term of the lease.

(17) "State" means a state, territory or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico.

4/00 Update: New. StyleCom says we need it.

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

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

Note: Former subsection (b), on "other definitions in this Act,", deleted per StyleCom.

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

"Conspicuous" [UCC] § 1-201(10)

"Contract" [UCC] § 1-201(11)

"Finance lease" [UCC] § 2A-103(1)(g)

["Lease" [UCC] § 2A-103(1)(j)]

"Lien" [UCC] § 2A-103(1)(r)

"Person" [UCC] § 1-201(30)

"Security interest" [UCC] § 1-201(37)

"Send" [UCC] § 1-201(38)

"Supplier" [UCC] § 2A-103(1)(x)

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

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

"Adjusted capitalized cost"

"Base periodic payment"

"Capitalized cost reduction"

"Depreciation and any amortized amounts"

"Gross capitalized cost"

"Periodic payment"

"Rent charge"

"Residual value".

4/00 Update: Most of these terms are used only in § 207 on computation of lease rate, and perhaps should be relocated there (if that section stays in the Act)..

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

2. "Consumer lease."

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

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

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

i. Residual value amounts or purchase option prices;

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

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

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

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

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

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

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

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

8. "Holder."

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

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

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

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

10. "Lessee."

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

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

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

11. "Lessor."

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

b. The person who enters into the contractual lease arrangement with a consumer is the "lessor" even though it may be understood, or pre-arranged, that the lease will promptly be assigned to a financing institution. That person -- typically a retail dealer -- should not be considered an "arranger" of the lease on behalf of the assignee as "true" lessor. Such a division of roles complicates compliance and litigation exposure, for no particular gain since the retailer (as lessor) must satisfy all the duties of a lessor under this Act. On the other hand, retail dealers or others may act merely as brokers or similar intermediaries on behalf of entities that close leases in their own names. In this context "arranged to lease goods" should be construed consistently with the phrase "arrange for lease of personal property" in Regulation M.

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

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

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

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

15. "Sign." . . .

16. "Single payment lease." A lease may call for a single payment to cover its full term. It is a "single payment lease" whether that payment is required at consummation or at some later time.

17. "State"...

18. "Termination"....

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

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

4/00 Update: Phraseology changed, per StyleCom.

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

(1) a transaction that is [an information license];

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

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

(B) [an information license];

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

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

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

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

(c) If a consumer lease includes an incidental sale of goods, services or benefits, including accessories, insurance, extended warranty, or service contract, or

an incidental information license, and the lease aspects of the transaction predominate, the sale or license is not subject to [insert citations to state credit sales laws].

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

4/00 Update: Stylistic changes only in (c) and (d).

1. Certain transactions are outside the coverage of this Act, whether or not they meet the definition of "consumer lease" in the prior section. Thus software licenses and other forms of transfers of intellectual property or rights to use information are not covered by this Act, even if the licensing transaction is characterized in lease terms.

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

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

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

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

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

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

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

4/00 Update: Q: Do we need to include "license" to accommodate UCITA?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4/00 Update: I thought I heard assent to substituting "sophistication" for "competence" Also, see Reporter's Note 2, below, re arbitration; Is that our sentiment?

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

2. This Act takes no position on the validity of a provision in a consumer leases that some or all claims be resolved through arbitration or other alternative dispute mechanism. Such a provision does not per se constitute a waiver of rights under this Act.

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

(a) The parties to a consumer lease may not choose [contract?] to apply the law of a particular state or other jurisdiction unless:

(1) the lessee resides in the state or other jurisdiction when the lease agreement becomes enforceable or within 30 days thereafter; or

(2) the goods are to be used in that state or other jurisdiction.

(b) The parties to a consumer lease may not choose [contract for?] a judicial forum for an action against the lessee that would not otherwise have personal jurisdiction over the lessee.

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

1. Absent a choice of law clause in the lease and as a matter of territorial application this Act is controlling for leases made and performed in this State. Thus if a consumer resident in this State leases goods from a merchant in another State the lease must satisfy this Act. [Q.: is this necessarily true, if general conflicts rules would allow law of place of contracting?]

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

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

4/00 Update: A commissioner questioned § 107(a) as too limited. I.e., it restricts choice-of-law clauses to the lessee's residence. (This language is taken verbatim from UCC Art. 2A.). FYI: our earlier version was broader. That language (and relevant comments) follows:

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 consumer lease that is consummated in this State.

(b) A provision in a consumer 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 consumer 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.

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 subject to this [Act] imposes an obligation of good faith in its performance or enforcement.

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

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

SECTION 109. UNCONSCIONABILITY.

OPTION A (from 9/99 draft)

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

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

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

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

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

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

OPTION B (from 12/99 draft of UCC 2A-108):

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

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

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

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

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

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

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

OPTION C (via Neal Ossen, based on 7/99 version of UCC 2-108)

4/00 Update: Commissioner Ossen suggests that the following three subsections (b), (c), and (d), be substituted for current subsections (b) and (c). The new language is taken from the proposed revision of UCC Art. 2:

(b) In a lease a non-negotiated term in a standard form record is unconscionable and not enforceable if it:

(1) eliminates the essential purpose of the lease;

(2) conflicts with other material terms to which the parties have expressly agreed; or

(3) imposes manifestly unreasonable risk or cost on the lessee in the circumstances.

(c) If the court as a matter of law finds that a lease or any clause of a lease has been induced by unconscionable conduct or that unconscionable conduct has occurred in the collection of a claim arising from a lease, the court may grant appropriate relief.

(d) If it is claimed or appears to the court that a lease or any term thereof may be unconscionable, the parties must be afforded a reasonable opportunity to present evidence as to its setting, purpose, and effect to aid the court in making the determination.

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

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

SECTION 201. ADVERTISING.

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

4/00 Update: This definition, taken verbatim from Reg. M, seems necessary so that the term means the same thing for leases over $25,000 as for leases in lesser amounts. I.e., Reg. M only applies up to $25,000, while this section applies to ads for leases up to $150,000.

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

4/00 Update: StyleCom's suggested rewording.

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

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

4/00 Update: StyleCom's suggested rewording.

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

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

3. Section 203(g) limits disclosure of a "lease rate" to specified circumstances and only if the rate is calculated in accordance with Section 207. An advertisement for a lease rate other than as permitted by those provisions would violate this subsection (c).

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

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

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

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

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

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

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

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

(c) A lessor must furnish a consumer lease that is a record authenticated by the lessor and lessee. The lease must:

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

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

(A) if the lease contains a purchase option:

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

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

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

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

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

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

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

4/00 Update: For expedience, former (d) re lease rate disclosure moved to end of this section, as (f), below. Former (e) becomes (d), and former (f) and (g) are combined in new (e).

[(f) A consumer lease or other record that is delivered to the lessee under subsection (e) may state a percentage rate of charge applicable to the lease only if:

(1) the rate is identified as the "annual lease rate," with a descriptive explanation such as "the cost of your lease as an annual rate";

(2) the lease states a specific purchase option price; and

(3) the rate is calculated in accordance with Section 207.]

4/00 Update: Former (d), relating to lease rate disclosure, becomes (f).

In Denver (7/99) the Conference voted (39-32) its "sense of the house" that we should abandon a lease rate disclosure. That would mean deleting this subsection (f).

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

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

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

[4. Subsection (f) permits disclosure of an "Annual Lease Rate," called by that name and calculated under Section 207, but only if the lease states a lease-end purchase option price as a specific dollar figure. This authorization to state an Annual Lease Rate therefore does not apply if the lease contains no purchase option price, or if that price is contingent on circumstances at lease end, such as the then-market value of the goods.

In its present form, this permissive disclosure appears inconsistent with the requirements of the federal Regulation M, and to that extent it is probably preempted. Lessors should not rely on this Act's authorization to disclose an Annual Lease Rate until the Federal Reserve Board has indicated it is permissible.]

SECTION 204. INSURANCE DISCLOSURES.

(a) Except in a consumer lease to which subsection (b) applies, if casualty insurance on the leased goods is not included in the lease, the lease must contain or be accompanied by a statement in a record substantially as follows:

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

(b) In the case of a consumer lease of a motor vehicle:

(1) if the lease requires liability insurance against personal injury or property damage caused to others [, and such insurance is not included in the lease for no additional charge ??]:

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

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

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

No liability insurance coverage for bodily injury or property damage caused to others is provided under this lease. You must obtain that insurance yourself.

(2) If the lease requires casualty insurance against property damage to the leased motor vehicle:

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

4/00 Update: Clarify that lessee has choice of "insurer," not just agent or broker.

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

No casualty insurance coverage for property damage to the leased motor vehicle is provided under this lease. You must obtain that insurance yourself.

(3) If paragraphs (1)(B) and (2)(B) both apply in a particular consumer lease, a single combined notice may be given.

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

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

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

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

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

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

2. For leases generally, unless casualty insurance is included in the lease, the lessor must give the lessee a brief reminder of that fact. Thus a consumer who leases a home computer is alerted to seek coverage under a homeowner's or similar casualty policy.

3. Subsection (b) is limited to motor vehicle leases where the lessor requires the lessee to maintain casualty or liability insurance, or both. For either type of required insurance, the lessor must give the lessee the option to obtain the coverage from an insurer of the lessee's choosing. If the lessee elects to buy the insurance outside the lease, the lessor must give the lessee an explicit reminder of lessee's responsibility to obtain the specified insurance coverages.

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

SECTION 205. NOTICE TO GUARANTOR.

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

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

The term does not include:

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

(2) an assignor of a consumer lease.

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

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

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

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

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

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

IDENTIFICATION OF OBLIGATION YOU MAY HAVE TO PAY:

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

1. An individual may undertake to guarantee the obligation of a lessee in order to help the lessee qualify for the lease, or to forestall collection on a lease in default. This provision therefore provides for a summary notice to the guarantor, in simple English, describing the nature of the obligation and risk they are assuming. The timely giving of this notice is a condition to the enforceability of the guaranty.

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

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

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

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

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

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

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

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

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

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

4/00 Update: Bracketed phrase suggested to clarify that a current payoff figure is called for.

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

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

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

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

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

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

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

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

[SECTION 207. CALCULATION OF ANNUAL LEASE RATE.

4/00 Update: In light of ongoing efforts to refine a lease rate formula to satisfy the Connecticut law, I've made no changes in this section. I expect to bring to the April meeting in Boston the best possible effort at a workable formula and definitions.

Although there is a "sense of the Conference" vote that we abandon lease rate, my understanding is that the Drafting Committee has not yet committed either to drop or retain it..

(a) In this section:

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

(2) "Ending balance" means the purchase option price at the end of the lease term.

(3) "Lease amount financed" means the adjusted capitalized cost minus:

(A) any lease finance charge included in the adjusted capitalized cost; and

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

(4) "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. The term includes an origination or acquisition charge; a charge for assigning, servicing, or carrying the lease; broker fees; and a disposition or pick-up charge due on lease termination. The term does not include:

(A) charges of a type payable in a cash purchase, such as official fees for taxes, registration, or title, or the charge for an extended warranty or service contract;

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

(C) a refundable security deposit;

(D) premiums for insurance disclosed pursuant to Section 204;

(E) charges for additional authorized mileage;

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

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

(b) An annual lease rate disclosed under Section 203(d) must be calculated as follows:

(1) The annual lease rate for a consumer lease with equal base periodic payments and equal periodic intervals is where m is the number of payment periods in a year, and the value of i is such that

where "C" is the lease amount financed; "P" is the amount of each base periodic payment; "R" is the ending balance; "n" is the number of payment periods in the lease; and "x" is the number of base periodic payments that are paid at or before the beginning of the lease term.

(2) If there is an irregularity in the amount or timing of base periodic payments required during the lease term, the equation must be modified as necessary to calculate the value of "i" in accordance with actuarial principles. An "irregularity" means that the amount or timing interval varies by more than _[25?]_ percent from the amount or timing interval most commonly specified under the lease.

(c) If a consumer lease calls for payments to be made at intervals measured by reference to weeks or months, the annual lease rate may be calculated on the assumption that each week is 1/52 of a year and that each month is 1/12 of a year.

(d) In a consumer lease with no irregularity in the amount or timing of base periodic payments, a disclosed annual lease rate is accurate if it is within one eighth of one percent of the annual lease rate calculated in accordance with subsection (c).

(e) In a consumer lease with an irregularity in the amount or timing of base periodic payments, a disclosed annual lease rate is accurate if it is within one fourth of one percent of the annual lease rate calculated pursuant to this section.

[(f) The [Administrator] may by rule prescribe additional assumptions for calculating the annual lease rate or its component values.]

1. A lessor may disclose an annualized rate of charge for a consumer lease only if that rate is calculated in accordance with this section. The objective of the computational rules in this section is to produce an Annual Lease Rate methodology that is precise and that produces an "ALR" fairly comparable to an "annual percentage rate" for credit transactions under the Truth in Lending Act (TILA). At the time this is drafted, the Federal Reserve Board has declined to require an ALR disclosure, citing a number of grounds for concluding that any such rate would be inherently unreliable. In addition, the Board's Regulation M currently prohibits disclosure of an ALR under that name, and requires a cautionary warning about the imprecision of any disclosed annualized rate.

2. 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.

3. Note to Conference: The mathematical algorithm set out in subsection (c) above is imprecise, and would need to be adjusted to produce, via an iteration process, an ALR with actuarial integrity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 302. PROHIBITED LEASE TERMS.

(a) A consumer lease may not:

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

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

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

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

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

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

SECTION 303. SECURITY INTEREST RESTRICTED; SECURITY DEPOSIT.

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

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

(b) A consumer lease may provide for:

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

(2) a security interest in unearned insurance premiums or service contract fee rebates; and

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

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

9/99: Old paragraph (2) deleted as inconsistent with UCC (lease and security interest are mutually exclusive). .

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

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

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

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

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

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

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

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

SECTION 304. DELINQUENCY AND DEFAULT CHARGES.

(a) Except as otherwise provided in this Section, a consumer lease may impose upon the lessee penalties or other charges for the lessee's delinquency or default but only at an amount that is reasonable in light of the anticipated or actual harm caused by the delinquency or default, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. This section does not apply to charges for early termination (section 405) or for excess wear and tear (section 406).

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

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

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

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

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

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

1. Subsection (a) replicates the rule stated in Section 183(b) of the federal Consumer Leasing Act, recognizing that specified charges imposed by the lessor or holder for the lessee's default and delinquency are in the nature of liquidated damages and so must be reasonable in light of the stated factors. This means that while an appropriate charge is related to actual damages, it is not confined to that sum and may reflect other ingredients or purposes, such as permitting ease of calculation and discouraging breach. 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. Charges for early termination are dealt with separately in Section 405.

2. Late charges specified in the lease are conclusively deemed reasonable if they comply with subsection (b). This requires a ten day grace period, and the amount of the late charge cannot exceed the larger of $10.00 or 5.0% of the late payment. Thus if a $150.00 payment is due on April 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 $200.00, the late charge is limited to $10.00 (5% of the unpaid $200.00 portion).

3. Subsection (c) prohibits the pyramiding of late charges, i.e., imposing a new late charge merely because the consumer has not paid a previously imposed late charge. This subsection does not prohibit the imposition of successive late charges if a scheduled payment (e.g., a periodic lease payment of $400.00) itself remains unpaid in subsequent payment periods.

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

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

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

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

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

2. By state law (e.g., UCCC §§ 3.307, 3.404, 3.405) and by FTC Rule (Preservation of Consumers' Claims and Defenses, 16 C.F.R. Part 433), "holder in due course" protections for assignees of consumer credit contracts have effectively been abolished for more than 20 years. Subsection (b) states the parallel proposition that there can be no "holder in due course" of a consumer lease. This rule permits a lessee to defeat a holder's collection efforts by proving defenses such as breach of warranty, failure of consideration, or fraud that could have been asserted against the original lessor. It also permits the lessee to assert against the assignee claims against the lessor, i.e., the lessee may recover affirmatively from the holder up to the total of amounts paid under the lease (whether paid to the original lessor or to a subsequent holder). For example, after several months a leased vehicle proves to be a total lemon, and the lessee properly revokes acceptance under UCC Section 2A-517. Lessee has a claim to recover all monies paid on the lease to that point from the holder, including capitalized cost reductions paid in the first instance to the original lessor.

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

4. In many leases, as in sales of goods, the operative warranty to the consumer comes not from the seller or lessor (or supplier, in a finance lease), but from the manufacturer. This warranty obligation of the manufacturer exists independently of the contractual relationship between lessor and lessee. In Mercedes-Benz Credit Corp. v. Lotito, 306 N.J.Super. 25, 703 A.2d 288 (1997), an automobile was leased by a dealer and the lease was assigned to the "captive" finance company. The court held that because of the "close-connectedness" of dealer, financer and manufacturer, the financer was subject to the lessee's claims or defenses arising from breach of the manufacturer's warranty. This is a novel extension of assignee liability, which this Act does not adopt.

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

SECTION 306. SUBLEASE.

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

(b) A lessee under a consumer lease with a term of more than one year may sublease or assign the lessee's rights and interests with the consent of the holder. A holder may withhold consent if the holder has a good faith belief that the sublease or assignment will jeopardize its rights under the lease.

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

4/00 Update: Subsection (c) is new, responding to suggestion to parallel UCC 2A-303(8). Q: is this necessary, or appropriate given our treatment of subleases?

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

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

SECTION 307. OPEN-END LEASE.

4/00 Update: 9/99: This draft [§ 102(c)] incorporates by reference the Reg. M definition of open-end lease. A commissioner suggested setting it out here (and redesignate following subsections). Should we?

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

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

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

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

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

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

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

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

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

4/00 Update: My understanding of the current posture of the UCC 2A Committee [Dec. '99 draft] is to leave the substantive warranty provisions unchanged from what they are in current 2A (which basically tracks "old" Art. 2). I.e., Art. 2A does not include the expanded rules on direct warranties to remote purchasers that are included in the Art. 2 rewrite [Dec.'99 draft, §§ 2-313A, 2-313B].

The pending revisions to both Art 2A [§ 2A-214] and Art. 2 [§ 2-316] contain more specific rules on disclaiming implied warranties than in current law.

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

1. In the past consumers have proved vulnerable to sales tactics 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 is an inducement offered prior to lease consummation which depends on events occurring after lease consummation. If before lease consummation, a lessor solicits and pays or credits a customer for referrals, the practice is not unlawful. Similarly, if after lease consummation a lessor agrees to pay or credit the lessee for referrals, that too is not an unlawful practice.

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

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

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

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

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

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

(1) be refunded to the lessee; or

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(2) the lessee's intentional wrongful act or gross negligence.

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

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

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

3. A prohibition on gap liability after loss of the goods 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 during the lease term. UCC Section 2A-219(1). If the leased goods are destroyed without fault by the lessor or lessee, the lease contract is "avoided." UCC Section 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 a contractual reallocation of the fundamental risk of loss in the lease. The judgement reflected in this section is that the profit opportunity created by selling gap coverage is an insufficient business justification for such a substantial risk reallocation in consumer leases.

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

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

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

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

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

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

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

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

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

4/00 Update: Some StyleCom changes. Also I've tried to make (b) and (c) "flow" better as a description of a process. Does it work? Can we drop the bracketed phrase in (c), as being an implicit carry-over from (b)?

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

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

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

1. Default clauses in consumer leases may include a number of "events of default" in addition to failing to make payments due under the lease. Subsection (a)(2) restrains the holder from acting on such a default (i.e., other than failure to pay) unless the holder can establish that the breach is a serious one. To be an actionable default, the lessee's conduct must threaten the holder's expectation of "payment, performance, or realization of the holder's interest in the goods." An example of the first would be the lessee's arrest and imprisonment. "Performance" might be impaired if the lessee moved the leased goods out of State. The holder's "realization" interest would be impaired if the lessee failed to maintain required casualty insurance. The "significant impairment" standard is to be judged from the perspective of a reasonable holder at the time of the default. A holder may act on a "significant impairment" breach immediately, as by repossession or judicial action.

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

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

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

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

SECTION 403. REPOSSESSION; APPLICATION OF REALIZED VALUE.

(a) Subject to Section 402, on a lessee's default the holder may repossess the goods by judicial process or by self-help without a breach of the peace. [The Committee reserves judgment whether electronic disabling of computer systems should be prohibited.]

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

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

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

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

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

(3) the early termination liability of the lessee.

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

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

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

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

SECTION 404. DETERMINING REALIZED VALUE.

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

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

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

4/00 Update: Should parenthetical be included?

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

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

(B) the fair market value of the goods.

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

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

(c) If the realized value is determined under subsection (a)(1), the disposition may be by public or private sale or re-lease, at any time and place, and on any terms. Every aspect of the disposition, including the method, manner, time, place, and terms must be commercially reasonable. Disposition in a wholesale market is not unreasonable.

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

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

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

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

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

1. When terminated early (voluntarily or upon default), most leases measure the lessee's termination liability by reference to the then-value of the goods. The same is generally true at the scheduled expiration of an "open-end lease." This section permits "realized value" to be measured in alternative ways.

2. Under subsection (a)(1), when the holder disposes of the goods by sale or re-lease, the price received is the realized value. If the disposition is by re-lease, it is the present value of rent payments plus the estimated residual value under the new lease. If the holder retains the goods, the realized value is the highest actual offer received or (if higher) the market value of the goods. In this context "fair market value" may be determined in any reasonable manner in the market in which the holder would otherwise dispose of the goods.

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

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

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

6. Subsection (e) imposes a sanction on a holder whose disposition is not commercially reasonable. It directs a court to set realized value at retail market value if the holder has acted improperly. This reduces the holder's recovery somewhat, and may be seen as an alternative to requiring the holder to "forfeit" the deficiency if an "absolute bar" rule is applied. Cf., Section 405(f).

SECTION 405. EARLY TERMINATION LIABILITY.

(a) In connection with a consumer lease:

(1) "Constant yield method" means

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

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

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

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

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

(i) the adjusted capitalized cost; and

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

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

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

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

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

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

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

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

Conference Note: The following subsections (c) and (d) are bracketed to call attention to an issue not yet resolved by the Committee. The federal Consumer Leasing Act establishes a "reasonableness" standard for early termination and default charge provisions. This draft Act restates that standard at several points [as in Section 405(b) just below; and see also Sections 304, 406]. But this draft goes on to develop refinements on that standard, including "safe harbor" provisions that this Act would deem reasonable. The issue is whether this is a worthwhile effort, or is it better to leave the "reasonableness" of various termination and default charges to be determined exclusively under the federal standard.

4/00 Update: Q.: Is this issue still open? Hasn't the Committee agreed to retain this section? If so, "Conference Note" should be deleted.

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

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

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

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

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

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

4/00 Update: Per Committee 7-0 decision [9/99], this subsection now states a cap on early termination liability. Q.: The critical mass of this cap is the assessment of unrecovered depreciation in paragraph (3); so how will this cap work for holders who don't use that formula or use other ETC components?

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

(2) the greater of:

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

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

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

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

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

9/99: Terminology change: the overall "early termination charge" is the sum of items (1) thru (4).

(d) An early termination charge is reasonable if:

(1) it comprises the items listed in paragraphs (c)(1) through (c)(3); and

(2) the amount determined under paragraph (c)(3) does not exceed the total of the remaining periodic payments scheduled under the lease.

4/00 Update: By 7-0 vote in 9/99, Committee decided to make (c) a cap, and then recast (d) as a safe harbor for ETCs that only include three components, plus the limitation not to exceed remaining payments.

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

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

1. Leases of goods are generally written to bind the lessee for the full term of the lease. Some leases may end in default and repossession, and are terminated early for that reason. In addition, holders will often agree to an early termination of the lease, perhaps to facilitate the lessee's buying or leasing of new goods. In effect the holder waives the lessee's technical default. Subsection (b) 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 (c) replicates Section 183(b) of the federal Consumer Leasing Act which puts these substantive limits on early termination formulas, thus adopting the federal standard for all leases subject to this Act. The CLA in effect authorizes "liquidated damages" formulas in consumer leases, as does UCC Section 2A-504(1). This is in lieu of requiring a complex calculation of damages based on common law or UCC Section 2A-528. UCC Section 2A-528(1) states a lessor's basic measure of damages for lessee default as the current value of the lessor's expectancy under the lease. The "reasonableness" of an early termination formula, therefore, is ultimately measured by reference to that underlying measure of damages. This Act uses the liquidated damages language of the federal act, rather than UCC Section 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 (c) 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.

4/00 Update: These Reporter's Notes 2 through 8 need to be redone to reflect change in approach in subsections (c) and (d).

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 dollar limits or formulas for calculating a maximum permissible "payoff" figure when a lease is terminated early. The test remains whether the early termination charge provided in the lease is reasonable as a form of liquidated damages. Subsection (d) enumerates the most likely categories of "payoff" components, and provides a limited safe harbor for a lessor who computes the early termination charge in terms of those categories. Subsection (d)(1) refers to specific charges related to terminating the lease and payable to third parties. Subsection (d)(2) allows recovery of either a fixed disposition fee (generally related to the expected expense of retaking, storing and disposing of the goods), or the actual costs expended in repossessing and foreclosing after default. Thus, a lease might provide a uniform "disposition" fee in a sum certain, regardless how or when the goods is returned to the holder. Or the lease might provide, alternatively, that the holder may recover a sum equal to actual out-of-pocket expenses where repossession is necessary.

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

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

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

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

Arguably a lessor bears the depreciation risk only at the scheduled termination of the lease, when the lessee can simply surrender the goods and walk away. By this view, at all intermediate points the lessee bears the depreciation risk, and the lessee's early termination liability should reflect that allocation of risk. Subsection (e) rejects this view. A holder may altogether refuse to agree to an early termination, forcing the lessee to hold the goods through the full term of the lease. But the holder may not use the occasion of an otherwise mutually agreeable early termination to shift dramatic depreciation risks to a lessee who may not appreciate how or why the payoff figure is so high.

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

SECTION 406. EXCESS WEAR AND TEAR; EXCESS MILEAGE.

Conference Note: The text of this section is bracketed to raise the same issue as discussed in the Conference Note to Section 405. I.e., should this Act prescribe specific criteria for excess wear and tear charges, or defer to the "reasonableness" standard in the federal Consumer Leasing Act?

4/00 Update: Same Q as to 405: Hasn't Committee resolved to go forward with this section? If so, delete "Conference Note."

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

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

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

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

(2) damage or repair to the extent they are covered by warranty, or by a repair, service or maintenance agreement written in connection with the lease.

4/00 Update: 7/99: A commissioner suggested clarifying what is meant by a "repair or service contract." Does the phrase "written in connection with the lease" help?

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

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

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

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

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

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

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

(1) Not more than [90] nor less than [30] days before the expiration of the lease, the holder shall provide the lessee notice in a record of the lessee's rights under paragraphs (2) through (5).

(2) The lessee may have the vehicle inspected for excess wear and tear by the holder or holder's designated inspector, or by an independent inspector agreeable to the holder, at a reasonably accessible site within [20] days before scheduled expiration of the lease.

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

(3) Except as otherwise provided in paragraph (5), a report in a record of an inspection under paragraph (2) is binding on the holder if the lessee either pays the excess wear and tear charges indicated, or has necessary repairs made at lessee's expense, by the time the vehicle is returned at the expiration of the lease;

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

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

(5) The lessee remains responsible for excess wear and tear that was not reasonably detectable by an inspection under paragraph (1), was incurred after the inspection and before return of the vehicle, or was the result of incomplete or improper repairs.

(f) A consumer lease of a motor vehicle may provide for the imposition of a [reasonable?] charge for excess mileage. [Such a charge must be reasonable in light of the expected diminution in value of the vehicle because of the excess mileage.]

4/00 Update: Keep or discard bracketed word/sentence?

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

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

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

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

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

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

SECTION 501. PRIVATE REMEDIES.

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

(b) A holder who violates this [Act] is liable to the lessee for actual [compensatory?] damages suffered as a consequence of the violation.

4/00 Update: Style Com. asks whether "compensatory" is better word.

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

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

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

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

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

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

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

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

4/00 Update: These and subsequent Reporter's Notes need to be reorganized a bit to correspond to the new sectioning in this Article.

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

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

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

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

SECTION 502. CLASS ACTIONS.

4/00 Update: Per StyleCom, class actions split off as a separate section. (a) Within [thirty] days after commencing a class action for a violation of this [Act], the plaintiff shall serve a copy of the complaint on the [Enforcing Authority] who, within an additional [sixty, ninety] days, may intervene in the action to seek injunctive or declaratory relief [or statutory damages?].

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

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

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

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

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

1. (Re AG intervention....)

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

SECTION 503. LIMITATIONS ON PRIVATE REMEDIES.

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

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

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

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

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

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

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

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

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

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

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

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

4/00 Update: First sentence reference changed to § 501.

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

UCLA TILA

502 130(a)(2)(B)

501(f) 130(a)(3)

503(a) 130(b)

503(b) 130(c)

503(c) 130(d)

503(f) 130(f)

503(g) 130(g)

503(h) 130(h)

504 131(a)

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

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

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

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

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

4/00 Update: Formerly 501(q), now a separate section.

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

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

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

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

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

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

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

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

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

[SECTION 507. ADMINISTRATION OF [ACT].

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

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

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

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

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

4/00 Update: Style Com. suggested some reorganizing of these sections. Former 601 (Implicit Repeal) deleted; former 603(b) [Transition] made a separate section 604.

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

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

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

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

SECTION 604. REPEALS AND AMENDMENTS.

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

(1)

(2)

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

(1)

(2)