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DRAFT

FOR DISCUSSION ONLY

UNIFORM CONSUMER LEASES ACT

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

DRAFT # 7

MARCH, 1999

UNIFORM CONSUMER LEASES ACT

With Reporter's Notes

COPYRIGHT© 1999

BY

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

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

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

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

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

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

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

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

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

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

CHARLES 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

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

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

AMERICAN BAR ASSOCIATION ADVISOR

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

312/915-0195

DRAFT # 7 March 1999

Draft 7 [Draft 6 Draft 7

Sec. # Sec. #] Caption Page #

101 [101] Short Title 1

102 [102] Definitions 1

103 [103] Exclusions; Sale Incident to Lease 11

104 [102(b), 104] Recharacterization; Transaction Subject to Act by Agreement 14

105 [105] Supplementary General Principlesof Law Applicable 15

106 [106] Waiver; Agreement to Forego Rights; Settlement of Claim 17

107 [107] Limitation on Choice of Applicable Law and Forum 17

108 [108] Obligation of Good Faith 18

109 [109] Unconscionability 19

201 [201] Lease Advertising 21

202 [202] Pre-Lease Availability of Sample Form 23

203 [205, 303] Disclosure; Form of Lease Record; Copy to Lessee 24

204 [304(a)-(c), Insurance Disclosures; Limitation on Premiums 27

(g)]

205 [206] Notice to Guarantor 30

206 [207] Information During Lease Term; Satisfaction of Lease 32

207 [313] Calculation of Annual Lease Rate 34

301 [204] Payment or Trade-in Pending Approval of Lease; Refund or

Return 40

302 [210] Prohibited Lease Terms 42

303 [211] Security Interest Restricted; Security Deposit 42

304 [212] Delinquency and Default Charges; Attorney's Fees 44

305 [213] Assignment of Lease; Preservation of Lessee's Claims and Defenses 47

306 [214] Sublease 48

307 [312] Open-End Lease 49

[308] [215] [Warranties of Quality and Title] 50

309 [203] Rebate or Discount for Referrals 51

401 [ 304(d)-(f)] Termination and Replacement of Insurance 53

402 [305] Liability for Gap Amount on Total Loss of Goods 54

403 [306] Lessee's Default; Right to Cure 57

404 [307] Repossession; Application of Realized Value 59

405 [308, 309] Manner of Determining Realized Value 60

406 [310] Early Termination Liability 65

407 [311] Excess Wear and Tear; Excess Mileage 73

501 [same] [Violation as Unfair or Deceptive Act or Practice] [Private Remedies] 77

502 " Effect of Violation on Rights of Parties; Election of Remedies 84

503 " Administrative Enforcement 85

[504 " Administration of Act] 85

601 [same] Construction Against Implicit Repeal 87

602 " Severability 87

603 " Effective Date; Transition 87

604 " Specific Repealer and Amendments 88

Section 101. SHORT TITLE

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

Reporter's Notes: 12/98 changes: Deleted "Scope" from caption. Also deleted subsection (b) which said Act applies to "consumer leases"; unnecessary and against Conference style.

Proposed Comments:

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) As used in this Act:

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

(A) identify the authenticating party; and

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

Reporter's Notes: This is apparently the term being settled on in the UCC revisions to cover both written and electronic authorizations.

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

Reporter's Notes: 12/98 changes: Former Option A deleted. Retained text is from pending redraft of UCC Article 1. There are somewhat differing versions in drafts of Article 2B and Article 2. This approach covers electronic messages, but does not contain any "safe harbor" (such as 10-point type).

Per Auerbach memo of 7/21/98, there is an instruction from the Conference to the Art. 2, 2A and 2B Committees to harmonize a definition of conspicuous, to include a safe harbor and to leave conspicuousness a question of law. The sense of the UCLA Drafting Committee is to await UCC resolution on this definition.

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

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

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

Reporter's Notes: 12/98 changes: Style changes per J. Bassett letter. Rewritten as of 6/97 and 10/98 to tighten language and reflect earlier Drafting Committee discussions. The earlier Options are collapsed together into a single version that combines the essential features of a consumer lease from UCC Art. 2A and from Reg. M. The preamble portion is verbatim from UCC Art. 2A.

Proposed Comments:

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

2. 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.

3. 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 Reg. M). It includes non-refundable amounts a lessee is contractually obligated to pay to the lessor, but excludes items such as:

i. Residual value amounts or purchase option prices;

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

4. 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, via the definition in UCC § 1-201(28), 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.

5. 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.

(4) "Consummation" means the time when a lessee authenticates a record evidencing the lessee's contractual obligation on a lease. Consummation may occur even though the lease is subject to subsequent credit or other approval by the lessor or an assignee of the lessor.

Reporter's Notes: Language about "non-refundable deposits" deleted.

Reg. M uses the term "consummation," but defers to the state law of contract formation. Since this Act is state law, a less equivocal, bright-line test seems desirable. This draft therefore focuses on when the lessee makes a contractual commitment to the transaction. The second sentence is added to make clear that there has been "consummation" even if the deal is subject to later approvals by the lessor or financer.

(5) "Federal Consumer Leasing Act" means Chapter 5 of Title I of the Consumer Credit Protection Act, 15 U.S.C.A. § 1667 [, as amended,] and includes Regulations and Official Staff 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 where incorporation of future provisions of federal law is constitutionally impermissible, the phrase "as amended" should be omitted; it will then be necessary for these states to re-enact this definition periodically, i.e., when changes occur in the federal law.]

Reporter's Notes: 12/98 changes: Bracket "as amended," for those states that have delegation problem. "Legislative Note" added.

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

Reporter's Notes: 12/98 changes: Delete "in the trade" at the end. The "fair dealing" criterion is made a part of the standard of good faith for all parties

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

Reporter's Notes: 12/98 changes: Delete sentence re "unborn young of animals" as unnecessary.

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

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

Reporter's Notes: 12/98 changes: Phrase "if the lease is assigned" reinserted for clarity. Prior [10/98] second and third sentences moved to Comments.

This definition was drawn originally from the Model act. It is useful to have a term to refer to whoever currently owns the lease; this may be the original lessor, but in many cases it will be a subsequent assignee. Both the lessor and assignee may have responsibilities and liabilities under this Act.

Proposed Comments:

1. 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.

2. 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 the lease has been delivered to that person. But that person becomes de facto the assignee, and "holder," of the lease when it undertakes collection, either by agreement or on default by the grantor of the security interest.

3. Securitized pools of leases present unique issues, especially for motor vehicles where there must be a titled and registered owner of the vehicle under the motor vehicle laws. This is usually the original lessor or an initial assignee, either of which may wish to 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" means a consumer lease, unless the context indicates otherwise.

Reporter's Notes: The purpose is to be able to refer to "lease" throughout this Act without having to use the full phrase "consumer lease" each time.

(10) "Lessee" means an individual who enters into, applies for, or is offered a lease. A guarantor on a lease is not a lessee.

Reporter's Notes: The first sentence is from Reg. M, with the addition of the phrase "applies for." "Lessee" (and "lessor," below) need to include prospective lessees and lessors in some provisions relating to pre-lease activity. 12/98 changes: Second sentence re trusts moved to Comments. In last sentence, "cosigner or" is deleted.

Proposed Comments:

1. 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 -- may be a lessee under this definition.

2. 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.

3. 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 or in a comparable suretyship capacity, that individual is not a lessee. Cf. section 205, requiring special disclosure to guarantors.

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

Reporter's Notes: This is based on Reg. M, which uses the bright-line test of five transactions in a year for inclusion. This seems preferable to the somewhat indefinite test in UCC 2A-103(e): "regularly engaged in the business of leasing." Note that there is a difference between this definition (limited to persons who regularly lease) and the notion in UCC Art. 2A that a "consumer lease" includes one made by a lessor who regularly leases or sells goods of the kind . E.g., under the UCC a dealer who has regularly been selling cars would be a "lessor" with its first lease.

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

(12) "Motor vehicle" means

Option A: a device propelled [or drawn] by any power other than muscular power, upon or by which an individual or property is or may be transported or drawn upon a public highway, road or street, and which is required to be registered for such use under [insert citations to vehicle registration laws of the state].

Option B: a device required by law to be registered under [insert citations to vehicle registration laws of the state].

Reporter's Notes: Option A is what my notes show the Committee agreed on. But if we're simply going to defer to state vehicle registration laws, why not get right to that point and eliminate all the descriptive language? This is what Option B does.

(13) "Record," when used as a noun, means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. When used as an adjective, "record" means that the designated information is contained in a record.

Reporter's Notes: Modified to differentiate use as noun and adjective.

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

Reporter's Notes: These last two definitions come from the UCC revision process. They are meant to accommodate electronic messaging by accepting non-paper documentation with authentications by other than hand-written signature. We probably should use the same terms consistently throughout this Act, and coordinate with the Uniform Electronic Transactions Act project that is underway. Note that recent drafts of UCC Art. 2, 2B and 9 are using the term "authenticate" instead of "sign."

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

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

Reporter's Note: 12/98: Moved from old sec. 302.

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

"Annual lease rate" [Section 207(b)]

"Constant yield method" [Section 406(c)]

"Ending balance" [Section 207(a)(1)]

"Gap amount" [Section 402(a)]

"Guarantor" [Section 205(a)]

"Lease amount financed" [Section 207(a)(2)]

"Lease finance charge" [Section 207(a)(3)]

(c) The following terms used in this Act have the same meaning as in the Uniform Commercial Code:

"Conspicuous" [?] [UCC § 1-201(10)]

"Contract" [UCC § 1-201(11)]

"Finance lease" [UCC § 2A-103(1)(g)]

"Lien" [UCC § 2A-103(1)(r)]

"Organization" [UCC § 1-201(28)]

"Person" [UCC § 1-201(30)]

"Security interest" [UCC § 1-201(37)]

"Send" [UCC § 1-201(38)]

"Supplier" [UCC § 2A-103(1)(x)]

"Termination" [UCC § 2A-103(1)(z)]

Reporter's Notes: Patterned on UCCC § 1.303, this generally adopts UCC Art. 1 and Art. 2A definitions for terms used occasionally in this Act, e.g., "Person," "Supplier," etc. Maybe add to this list: "conspicuous," "good faith."

(d) The following terms have the same meaning as in the federal Consumer Leasing Act:

"Adjusted capitalized cost"

"Advertisement"

"Base periodic payment"

"Capitalized cost reduction"

"Depreciation and any amortized amounts"

"Gross capitalized cost"

"Open-end lease"

"Periodic payment"

"Rent charge"

"Residual value"

Reporter's Notes: 12/98 changes: New. This incorporates by reference the key terms from Reg. M.

Section 103. EXCLUSIONS; SALE INCIDENT TO LEASE.

(a) This Act does not apply to:

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

(1) a license or other agreement [concerning intellectual property] [subject to UCC Article 2B];

Reporter's Notes: 12/98 changes: Optional language; check against 2B and its exclusions.

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

Reporter's Notes: 12/98 changes: Adjusted per Committee suggestions. Substitute "purchase" for "sale." Reference to "license" added.

(3) a lease of goods which 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 leased goods;

and

(4) a safe deposit box.

Reporter's Notes: Items (2), (3) and (4) are taken from the Reg. M Commentary.

(b) (1) If a lease includes an incidental purchase of goods, services or benefits, or a license, including but not limited to accessories, insurance, or a service contract, so long as the lease aspects of the transaction predominate, the incidental purchase is not subject to [insert citations to state credit sales laws].

(2) A provision in a lease for payment of governmental fees, 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 prior lease, does not subject that payment to [insert citations to laws of this state governing small loans or other forms of consumer financing].

Reporter's Notes: 12/98 changes: Subsection (b)(1) is redrafted for style, to confirm that 'incidental' sales are subsumed in the lease and not covered by state credit sales laws. This concept is implicit in UCC Art. 2A, and is explicit in the federal CLA and some of the state leasing laws. Subsection (b)(2) deals with situations where the lease includes advances to cover obligations owing to third parties, including payoffs on trade-ins that have negative equity; the purpose is to permit these obligations to be financed as part of the lease without being subject to separate loan laws.

Proposed Comments:

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 intellectual property or rights to use information are not covered by this Act, even if the licensing transaction is characterized in lease terms. UCC Article 2B deals adequately with this area of the marketplace.

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

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

4. Paragraph (a)(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 (b) 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. 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 Art. 2 or leases under UCC Art. 2A. Predominance relates to the core purpose of the transaction and is not necessarily always measured by the relative cost of the "lease" and "sale" components. For example, a lease of a home computer remains a lease even though, over time, the lessee may pay more for delivery, installation, software, and servicing than for the use of the computer itself.

Section 104. RECHARACTERIZATION; TRANSACTION SUBJECT TO ACT BY AGREEMENT.

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

Reporter's Notes: Formerly § 102(b). Per 10/98 Committee vote (6-2) this subsection is reduced to a single sentence, without specific safe harbor delineations. Committee suggested a separate section, but it seems the flip side of issue in subsection (b), and so I include it here.

Proposed Comments:

1. 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 CLA). 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 recharacterization. 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.

2. 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 recharacterizing 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 mischaracterizing as leases transactions what are not leases, can be adequately policed under state fraud or deceptive practices laws outside of this Act, or under the advertising provisions of this Act.

(b) If the parties to a lease that is not otherwise a consumer lease agree in the lease, or in a contemporaneous record, that the transaction is subject to this Act, the transaction is a consumer lease for the purposes of this Act.

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

Proposed Comments:

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

2. Merely because a lease is documented in apparent or attempted conformity with this Act does not, in and of itself, make the lease a consumer lease. For example, 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. SUPPLEMENTARY GENERAL PRINCIPLES OF LAW APPLICABLE.

The principles of law and equity, including the Uniform Commercial Code, the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, unfair or deceptive acts or practices, or other validating or invalidating cause supplement the provisions of this Act, except to the extent those principles are displaced by or inconsistent with the particular provisions of this Act.

Reporter's Notes: Based on UCC § 1.103. Should be reviewed in light of likely revision of that section.

Proposed Comments:

1. Like UCC § 1-103, this section confirms that this Act does not completely occupy the field for the transactions it covers. In particular, consumer leases remain subject to UCC Article 2A (Leases) for such matters as contract formation, performance responsibilities, priority as to third parties, and basic remedies for breach. Common law or statutory proscriptions concerning unfair or deceptive acts or practices relating to consumer transactions also continue to apply.

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 [CLA § 186; Reg. M § 213.7], it preempts any state law (including this Act) to the extent the state law is inconsistent with it. No such inconsistencies are intended in this Act.

Section 106. WAIVER; AGREEMENT TO FOREGO RIGHTS; SETTLEMENT OF CLAIM

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

(b) A settlement in which a lessee waives or agrees to forego rights or benefits under this Act is invalid if the court finds the settlement to have been unconscionable when made. Matters relevant to unconscionability include the competence of the lessee, any deception or coercion practiced upon the lessee, the nature and extent of legal advice received by the lessee, and the value of the consideration.

Reporter's Notes: Based on UCCC § 1.107. Subsection (a) generally invalidates a consumer's contractual waiver of rights under this Act, either in the lease agreement or otherwise. But disputed claims by or against a consumer, or collection claims, may be settled unless unconscionable.

Section 107. LIMITATION ON CHOICE OF APPLICABLE LAW AND FORUM

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

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

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

Reporter's Notes: By 10/98 Committee vote (9-0) prior subsections (a) through (d) discarded in favor of new (a) which is identical to UCC 2A-106(1).

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

Proposed Comments:

1. 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. 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 is 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.

2. Consumer lessees sometimes shop across state lines, especially in multi-state metropolitan areas. If a consumer resident in this state leases goods from a merchant in another state the lease is enforceable in this state only in accordance with this Act.

3. Subsection (b) is patterned on UCC 2A-106(2). For actions against the consumer lessee, it nullifies a choice of forum clause unless the consumer is otherwise subject to the jurisdiction of that forum. 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.

Section 108. OBLIGATION OF GOOD FAITH.

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

Reporter's Notes: Same as UCC § 1-203. "Good faith" is defined in section 102(a)(5) of this Act the same as in the UCC.

Section 109. UNCONSCIONABILITY.

(a) If the court as a matter of law finds a lease contract or any clause 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 clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(b) If the court as a matter of law finds that a lease contract or any clause 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 [including statutory damages under section 501(b)].

(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 clause thereof, or of the conduct.

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

Reporter's Notes: 12/98 changes: New text, taken verbatim from UCC § 2A-108. Added by Committee instruction. This is a comprehensive statement on unconscionability, including recovery of attorney's fees, patterned on UCC § 2-302 [Sales of Goods] and UCCC § 5.108. Arguably unnecessary, as UCC § 2A-108 already applies.

In (b), language suggested to connect to civil liability provisions in section 501.

Section 201. LEASE ADVERTISING.

(a) As used in this section, "advertisement" [Option A: has the same meaning as in the federal Consumer Leasing Act.]

[Option B: means a commercial message in any medium that directly or indirectly promotes a lease transaction.]

Reporter's Notes: 3/99: Option A is the old version, but it may create a glitch because under the federal CLA it only applies to leases covered by that Act, i.e., up to $25,000. Option B uses the Reg. M language but applies it to any lease covered by this Act.

(b) An advertisement for a lease must comply with the advertising requirements of the federal Consumer Leasing Act whether or not the advertised lease is covered by that Act.

(c) A person may not cause to be published, broadcast or distributed a false, deceptive, or misleading advertisement for a lease, or an advertisement that misrepresents:

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

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

(3) that a particular annual lease rate

[(A)] is generally available; [or

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

[(d) An advertisement may state a percentage rate of charge applicable to a lease only if the rate of charge is identified as the Annual Lease Rate and calculated in accordance with section 207.]

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

Reporter's Notes: 3/99 change: Since this Act permits disclosure of an Annual Lease Rate [§§ 203, 207], it should permit ALRs to be included in advertisements as well. The bolded language shows how this might be done: i.e., delete existing (c)(3) and add new (d).

12/98 changes: Definition of "advertisement" put in separate subsection (a), per J. Bassett. Other subsections re-lettered. Redundant words removed from first line of (c).

Proposed Comments:

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

2. Subsection (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 state laws.

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

Section 202. PRE-LEASE AVAILABILITY OF SAMPLE FORM.

On request a lessor must give a copy or reproduction of its current lease form to a prospective lessee at its place of business before the consummation of a lease. If a lessor contracts with lessees by mail or electronically, the lessor must make the copy available on request in the same medium. If a lessor uses more than one lease form, the lessor satisfies this requirement by providing either a commonly used form or the form pertinent to the type of lease about which the prospective lessee has inquired.

Reporter's Notes: This reflects a common provision in recent state leasing legislation, and seems generally useful. 12/98 changes: Separate subsection (b) deleted (see Comments). Remaining text rewritten per Committee instruction. Lessor must "give" copy, not merely "make available." "Copy or reproduction" suggested to permit use of pad forms. Second sentence requires copies be given via mail, or by Internet or fax, if lessor contracts through those systems.

Proposed Comments:

1. Lease documents are often 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 in the medium the prospective customer uses to inquire. This section does not otherwise obligate the lessor to mail sample forms in response to telephone or mail 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, a representative sample or one suited to the prospective customers interests if these are known.

Section 203. DISCLOSURE; FORM OF LEASE RECORD; COPY TO LESSEE.

(a) (1) Prior to the consummation of a lease, the lessor shall make the disclosures required by the federal Consumer Leasing Act whether or not the lease is subject to that Act.

(2) The requirements of subsection (a)(1) apply to a renegotiation of a lease, but not to an extension of a lease for a period of six months or less or to an extension of a lease for a period of more than six months if the amount of the base periodic payment is reduced. A renegotiation occurs when a lease is satisfied and replaced by a new lease undertaken by the same lessee.

(b) A lease agreement shall:

(1) be a record;

(2) clearly indicate at the top or beginning of the record that it is a lease; (3) in the case of a motor vehicle lease, contain in a location proximate to the lessee's signature a notice substantially as follows:

(A) if the lease contains a purchase option:

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

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

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

(6) be authenticated by the lessor and lessee.

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

(1) that rate of charge 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.

Reporter's Notes: 12/98 changes: This subsection (d) reflects the Committee's vote (9-0) to permit a rate disclosure only if there is a purchase option price stated in the lease (to provide an end-of-lease computational anchor).

N.B. As written, this provision is preempted by Reg. M because the federal law forbids use of the term "annual lease rate" and requires a different descriptive statement. This provision could be implemented only if the Federal Reserve Board changed its rules or made an exception for this Act.

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

(e) Promptly after a lease is consummated the lessor shall provide to the lessee a completed copy of the lease, and, if not previously provided, a copy of any other record authenticated by the lessee in connection with the transaction, including but not limited to an application, purchase order, or worksheet.

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

Reporter's Notes: Substantially reorganized to incorporate all of what was in prior § 302 (vehicle lease disclosures). Subsection (a) adopts Reg. M disclosures as state law as well for all leases subject to this Act, i.e., up to $150,000. New (a)(2) added concerning renegotiations and extensions, picking up language in prior § 208, which is now deleted.

Subsection (b) states basic formalities for all leases: a written, signed lease document identified as such, with certain minimum contents. In (b)(1), type-size requirement deleted. In (b)(3), two notices required, one for leases with purchase option price, one for leases without. In (b)(4), brackets around "lessor and" deleted. Subsection (c) is moved from § 302; it is the authorization for an "ALR" disclosure.

Subsection (d) prohibits lessors from taking leases with blank spaces, except in special-order situations. Subsection (e) requires a copy of the lease be given the customer, and also that the lessor provide copies of other transaction documents. "Promptly" addressed in Comment.

Proposed Comments:

1. Basic disclosures for consumer leases are provided under the federal CLA, which is here adopted as state law as well, for all leases subject to this Act. In addition, subsection (b) requires certain formalities: a record clearly indicating the transaction is a lease, a description of any trade-in, and signatures by both parties. 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 Part 5 of this Act but does not nullify or invalidate the lease contract.

2. .....

3. Under subsection (e) a lessee is entitled to copies of the lease and any other records the lessee has signed 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 ordinarily be provided at that point, other transaction documents may need to be retrieved, copied and mailed. In any case the time should not exceed several days.

Section 204. INSURANCE DISCLOSURES; LIMITATIONS ON PREMIUMS.

(a) Except in the case of a lease of a motor vehicle, if casualty insurance on the leased goods is not included in the lease, the lease shall contain or be accompanied by a record statement substantially as follows:

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

Reporter's Notes: Former 205(c). This requires a warning if casualty insurance is not included in the lease.

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

(1) If liability insurance against personal injury or property damage caused to others is required by the lease,

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

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

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

(2) If casualty insurance against property damage to the leased motor vehicle is required by the lease,

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

(B) If the insurance is not included in the lease, the lease shall 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 subsections (b)(1)(B) and (b)(2)(B) are both applicable in a particular lease, a single combined notice may be given.

Reporter's Notes: Former 304(a) and (b). Disclosures duplicative of those required by Reg. M deleted. Second sentence of notice rewritten.

This subsection (b) responds to the Committee's suggestion [2/97] that disclosures about casualty and liability insurance be separated. As drafted here, the two subsections are almost verbatim the same. They call for disclosure that the consumer may obtain the insurance on his own, and a warning if insurance is not included in the lease.

Vehicle leases almost always require the lessee to maintain casualty and liability insurance. Cf., sample lease forms distributed earlier. Thus the "warning" notices in subsections (b)(1)(B) and (b)(2)(B) will usually apply in situations where the consumer elects to buy required insurance from another supplier, and the lessor or holder will usually demand evidence of such insurance. The warning, in this respect, reinforces the lessee's contract obligation to get the insurance. Note that the language (and intent) would require the warning even if the insurance were optional, i.e., not required.

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

(1) the lessor must 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 specified in subsection (1).

Reporter's Notes: Former 304(c), rewritten to delete redundancy with Reg. M. This is based on the disclosure rules for credit insurance in Reg. Z § 226.4(d)(1), to assure that the voluntary nature of the insurance is clear to the lessee.

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

Reporter's Notes: Former 304(e). Drawn generally from the state acts. And see UCCC § 4.105. If the lessee is buying insurance through the lessor, the lessor should provide coverage information.

(e) A charge for insurance included in the lease or added under section 401(b) may not exceed the premium actually imposed by the insurer for such insurance.

Reporter's Notes: Former 304(g). This subsection puts an outside limit on the cost of insurance. The earlier, now-deleted "permitted by law" option would apparently have allowed a lessor to charge the legal ceiling rate even though the particular insurer's charges may be lower, i.e., an upcharge. The "actually imposed" option restricts premiums to the insurer's actual charge; even here the lessor will likely realize commission revenues.

Section 205. NOTICE TO GUARANTORS.

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

Reporter's Notes: This last sentence may confuse the matter if our intent is not to require the notice to a person who merely signs as a co-lessee. Cf., Proposed Comment 3 to § 102(a)(10).

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

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

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

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

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

Reporter's Notes: 12/98 changes: Limited to "guarantors."

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

Cf. suggestion re changing "condition of forbearance" phrase to "in exchange for forbearance".

Proposed Comments:

1. An individual who undertakes, at the lessor's request, to guarantee the obligation of a lessee need not receive all the documentation and disclosures required to be given to the lessee. This provision therefore provides for a summary notice to the guarantor, in blunt English, describing the nature of the obligation and risk they are assuming.

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 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 for those goods. But where for purposes of credit approval or collection forbearance the lessor explicitly requests an additional signatory, or the lessee offers to furnish one, and that individual will be an uncompensated surety for the lease obligation, the Notice required by this section must be given.

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

(a) During the term of a lease:

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

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

(3) Upon record request from a lessee, the holder shall promptly provide to the lessee a record statement or estimate of:

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

(B) if the lease provides a purchase option price at the time of early termination, that price.

(4) A holder may not charge the lessee for providing one statement each under subsection (a)(2) or (a)(3) in a 12-month period. The holder may impose a reasonable fee for providing additional statements in a 12-month period.

Reporter's Notes: This subsection is based on provisions in the Model, MD, NY and WV acts, requiring certain follow-on information from the lessor/holder. 12/98 changes: In (a)(3)(B), rephrased for clarity. In (b), "each" inserted, and disclosure requirement dropped from second sentence. Subsection (a)(3)(B) now includes any applicable purchase option price.

(b) When it appears from a holder's records that a lessee has discharged all of the lessee's obligations under the 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 fulfills this requirement. This record of satisfaction does not release the lessee from liability for acts or events discovered by the holder after sending the record.

Reporter's Notes: Drawn from the Model and various state acts. A receipt or "paid in full" copy of the lease seems appropriate. The lessor's obligation is automatic and does not require a request from the consumer. 12/98 changes: In first sentence, "it appears from holder's records" added.

Section 207. CALCULATION OF ANNUAL LEASE RATE

(a) For purposes of this section:

Reporter's Notes: 12/98: Definitions of terms defined in Reg M are deleted; they are incorporated by reference in § 102(d).

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

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

Reporter's Notes: 12/98: Options deleted, since ALR now requires that there be a specific POP.

This is a critical mathematical component -- the ending balance that drives the rate computation. The judgment reflected here is that the only reliable end-of-term valuation is the price for which the lessee can buy the goods at that time.

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

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

Reporter's Notes: 10/98: Reporter's language to capture a "pure" baseline number directly comparable to the "amount financed" in credit transactions. The Reg. M definition of "adjusted capitalized cost" gets close, but it is necessary to exclude any components that are part of the "lease finance charge." Under paragraph (A) an origination fee, e.g., would be subtracted.

Under paragraph (B), typically the first month's payment would also be subtracted, as well as a non-refundable security deposit which is essentially a prepayment. This treats such advance payments essentially as down payments, reducing the amount of "principal" being financed. But: is this consistent with the convention that lease charges are earned at the beginning of the period?

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

(B) Examples of lease finance charge include:

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

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

(iii) broker fees;

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

(v) [taxes unique to leases?]

(C) Lease finance charge does not include:

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

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

(iii) a refundable security deposit;

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

(v) charges for additional authorized mileage;

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

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

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

(b) "Annual lease rate" ("ALR") is the nominal annual percentage rate that reflects the amortization of the lease amount financed to the ending balance over the 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.

Reporter's Notes: 10/98 changes: This states in narrative form the principal of an actuarial rate computation.

(c) An annual lease rate conforms to subsection (b) if it is calculated as follows:

(1) The annual lease rate for a 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.

Reporter's Notes: Maybe put this formula in a Comment instead of statutory text?

(2) If there is an irregularity in the amount or timing of base periodic payments required during the lease term, the equation in subsection (2) 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.

(d) For purposes of this section:

(1) Where a 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 long or that each month is 1/12 of a year long.

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

(3) In a lease with an irregularity in the amount or timing of base periodic payments, a disclosed annual lease rate is considered to be accurate if it is within one fourth of one percent of the actual annual lease rate, as calculated in accordance with this section

[(4) Regulations of the [Administrator (section 504)] may prescribe additional assumptions for calculating the annual lease rate or its component values.]

Reporter's Notes: 10/98: Subsections (c) and (d) draw substantially on work being done by the Uniform Law Conference of Canada.

Subsection (c) draws on the definitions earlier in this section to spell out instructions, assumptions, and the basic algorithm. This needs to be checked and verified for mathematical accuracy; for example, in the large brackets of the formula the entry"+ x" may be inconsistent with the way we define "lease amount financed" to exclude advance payments. Also the formula could be reformatted so that it solves for "i" directly (rather than apparently solving for "C").

Since most lease products are "regular" in the sense of equal payment amounts and intervals, hopefully we won't need lots of variations for irregular transactions and the like, as in TILA Reg. Z Appendix J.

Subsection (d) permits accuracy tolerances, comparable to TILA § 107(c).

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

(a) (1) If a prospective lessee's application is not approved on the terms submitted, the lessor shall

(A) within one business day return any trade-in goods, and

(B) promptly but in no event more than 5 business days after disapproval of the application refund any payment other than an application fee.

(2) If the lessee has taken delivery of the leased goods prior to the disapproval of the lessee's application, the lessor may withhold the refund or return under subsection (a)(1) until the lessee returns the leased goods, and the lessee may retain the leased goods until the trade-in is redelivered.

(3) In the case of a motor vehicle lease where 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 to exceed 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 this charge against any refund due the lessee.]

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

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

Reporter's Notes: 12/98 changes: Redone. Subsection (a)(1) requires prompt return of any trade-in or fee if customer's application is not approved. ["Approved" substituted for "executed" in caption and text, so that lessor's obligations don't hinge on whether or not a formal lease was signed. Subsections (a)(2) and (3) deal with the "spot delivery" pattern where goods are delivered to the lessee pending credit approval. Committee voted (10-0) for this overall approach, and voted (7-2) to limit (a)(3) to motor vehicles.

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

Proposed Comments:

1. 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 will typically have surrendered any 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) requires the lessor in these circumstances to return any trade-in within one business day and refund any advance payment within 5 days.

2. Not only must the lessor be prepared promptly to return the trade-in and refund payments made, but under subsection (b) the lessor may not dispose of the trade-in until approval of the customer's application is assured. For motor vehicle leases only, the lessor may impose a mileage charge for the interim period if it is disclosed and separately agreed to by the customer. Other than offsetting this charge, the lessor may not withhold return of the trade-in or refund of payments.

3. Occasionally a customer will agree, in advance of any lease agreement, to sell existing goods to a leasing dealer. This separate sale, from customer to dealer, may occur for a number of reasons. 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 lease may not contain a provision by which:

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

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

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

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

Reporter's Notes: Based on provisions in UCCC, Model, NH, NY, MD acts. These are baseline restrictions in consumer credit transactions. 12/98 changes: In (a)(1), rewritten for clarity. Former (a)(4) [waiver of rights] deleted as unnecessary in light of § 106(a). In (b), "waiver" deleted for same reason.

Section 303. SECURITY INTEREST RESTRICTED; SECURITY DEPOSIT.

(a) A lease may provide for

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

(2) a security interest in the leased goods;

(3) a security interest in unearned insurance premium or service contract fee rebates;

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

(b) Except as provided in subsection (a), a 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 taken in violation of this section is void but does not otherwise affect the validity of the lease.

(c) Nothing in this section precludes 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 those funds.

Reporter's Notes: 12/98 changes: Reorganized and clarified per Committee instructions. New (a) lists all forms of permitted security interests, including the qualification added ("except" clause) in (a)(4). Subsection (b) now states a flat prohibition on other security interests. In (c), "on leased goods" added. In (d), former first sentence deleted. Likewise former last phrase "when they are applied."

Based on UCCC § 3.301, and Model, CA, NH, NY, MD, WI acts. The UCCC provision, and the analogous FTC Credit Practices Rule, 16 CFR § 444.2, essentially limit sale creditors to purchase-money security interests. In the lease context, the lessor retains comparable rights in the leased goods from the nature of the lease arrangement, and should not need to encumber other property of the lessee. Still, some lessors prefer to claim a security interest in the leased goods as a hedge against possible recharacterization of the lease later on. Subsection (a) allows this, and also allows the lease to claim a security interest in funds which my be generated by cancellation of or collection on insurance or service contracts. Subsection (b) then bars other security interests.

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

Subsection (a)(1) and (d) deal with security deposits and other prepayments, reflecting Committee judgments that they represent forms of prepayment or down payment that consumers may select to reduce overall lease costs. The holder must, however, account for the application of those funds.

Section 304. DELINQUENCY AND DEFAULT CHARGES.

(a) Subject to section 406 for early termination charges, a lease may specify penalties or other charges for a lessee's delinquency or default but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the delinquency or default, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

(b) (1) A lease may provide for the holder's right to collect from the lessee a late charge on a periodic payment that is delinquent for 10 days or more in an amount provided in the lease but not to exceed the greater of $10.00 or 5 percent of the unpaid portion of the late periodic payment. A late charge permitted by this subsection is reasonable for purposes of subsection (a).

(2) A holder

(A) may not assess or collect a late charge on a current periodic payment when the only delinquency in the current payment is an amount equal to or less than unpaid late charges assessed on earlier periodic payments; [and] [but]

(B) Option A [may]; Option B [may not] assess an additional late charge if all or part of a periodic payment remains delinquent through an additional payment period.

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

Reporter's Notes: 12/98 changes: Subsection (b) rewritten to incorporate Committee suggestions. (b)(1) keeps the general authorization and safe-harbor for specified late charges. (b)(2)(A) is modified for clarity, but retains the prohibition on classic "pyramiding" of late charges. E.g., consumer makes a payment 15 days late and so is assessed a late charge. The next payment is made in full and on time but doesn't include the late fee from the prior month, so holder tacks a new late charge onto the current payment. This is prohibited.

Subsection (b)(2)(B) then addresses the related issue: Can holder add additional late charges if consumer skips a payment, makes subsequent payments on time, but never makes up the missed one? Or is holder limited to one late charge per scheduled payment no matter how long the missed payment remains outstanding? Options are given for either a yes or no answer. A "yes" answer permits multiple late charges, e.g., one for each month the payment remains delinquent. A "no" answer means a lessee can postpone any monthly payment indefinitely for the cost of a single late charge.

Proposed Comments:

1. Subsection (a) replicates the rule stated in section 183(b) of the federal Consumer Leasing Act, recognizing that specified charges imposed by the lessor or holder for the lessee's default and delinquency are in the nature of liquidated damages and so must be reasonable in light of the stated factors. This means that while an appropriate charge is related to actual damages, it is not confined to that sum and may reflect other ingredients or purposes, such as permitting ease of calculation and discouraging breach. This "reasonableness" standard applies to any charge that may be imposed on the lessee for breach of terms of the lease, including late or default charges, collection costs, and charges for incidental breaches such as remitting payment by a check that bounces.

2. Late charges are conclusively deemed reasonable if they comply with subsection (b)(1). This requires a ten day grace period, and the amount of the late charge cannot exceed the larger of $10.00 or 5.0% of the late payment. Thus if a $150.00 payment is due on April 15, a late charge of $10.00 could be imposed on April 26. If the missed April 15 payment were $400.00, a $20.00 late charge could be imposed on April 26. But if, when a $400.00 payment is due, the consumer remits only $200.00, the late charge is limited to $10.00 (5% of the unpaid portion).

Subsection (b)(2) 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] [also bars] the imposition of successive late charges if a scheduled payment (e.g., a periodic lease payment of $400.00) itself remains unpaid in subsequent payment periods.

3. Under subsection (c), a lease may impose on the lessee the costs of collection after default, either as actual costs incurred, a fixed dollar figure, or as a percentage of the unpaid obligation. This of course is subject to the "reasonableness" standard in subsection (a); for example, a default charge of 15% of the unpaid balance may be unreasonable if default occurs early in the lease and the charge would far exceed the actual costs of collection. Collection costs may include court costs, and attorney's fees where the matter is referred to a non-employee attorney.

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

(a) Until 30 days after a lessee has [received] [been sent] record notice that the lease has been assigned or transferred, the lessee may make payments to the last known holder of the lease. If otherwise timely, such a payment to the last known holder is not subject to a late charge.

Reporter's Notes: 12/98 changes: Optional phrases suggested in first line. Otherwise, none.

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

(b) Except as provided in section 501(k), and notwithstanding any provision in a lease, a holder is subject to all claims and defenses arising from the lease which the lessee could assert against the lessor and, in the case of a finance lease, the supplier. A lessee's recovery from a holder under this subsection may not exceed amounts paid by the lessee under the lease.

Reporter's Notes: 12/98: Former sub. (b)(2) -- "holder notice" -- is deleted per Committee decision.

By FTC Rule, "holder in due course" protections for assignees of consumer credit contracts have effectively been abolished for more than 20 years. Subsection (b)(1) states the parallel proposition that there can be no "holder in due course" of a consumer lease. This rule permits a lessee to defeat a holder's collection efforts by proving defenses such as breach of warranty or fraud. It also permits the lessee to assert claims, i.e., recover affirmatively from the holder up to the total of amounts paid under the lease. For example, assume after four months a leased vehicle proves to be a total lemon, and the lessee properly revokes acceptance under UCC 2A-517. Lessee has a claim to recover all monies paid on the lease to that point from the holder.

Cf., Mercedes-Benz Credit Corp. v. Lotito, 306 N.J.Super. 25, 703 A.2d 288 (1997): financer claimed "holder in due course" immunity from lessee's warranty claims against manufacturer; held, on common law authority of Unico v. Owen, "close-connectedness" of dealer, financer and manufacturer leaves financer subject to warranty claims. Query: To what extent should this Act preserve claims against a "supplier" as well as against the original lessor? In most leases, especially for vehicles, the operative warranty is the manufacturer's, not the lessor's. Also, if the lease is a "finance lease," the supplier will likely have made warranties to the lessee. Cf. UCC 2A-209. If such a supplier warranty is breached, the finance lessee may assert that breach against the lessor, and presumably against a subsequent holder. A "hell or high water clause," or a statutory version of it, would not operate to cut off the lessee's rights in a finance lease. UCC 2A-407, Comment 2, recognizes that any other result "is not tenable" under long-standing case law and statutory precedents for consumer obligations. But what about lessee claims based on breach of manufacturer's warranty in non-finance leases? Should these be assertable against lease holder (who may or may not have an affiliation with the manufacturer)?

Section 306. SUBLEASE.

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

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

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

Reporter's Notes: 12/98 changes: deleted language re burden of proof. .

Based on a proposal in Connecticut. A lessor and lessee are always free to negotiate and agree on a modification of the lease, including a "sublease" or "assignment" by the lessee -- like an "assumption" of a mortgage. It seems useful to reinforce that possibility by statute, applying a good faith test to the holder's conduct. This draft puts the burden of proof on the consumer to show the holder had no good grounds for refusing to consent to the sublease.

Section 307. OPEN-END LEASE

Option A:

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

Option B:

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

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

Option C: [Delete entire section]

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

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

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

Option C would, by silence, permit open-end leases, subject only to the limitations in Reg. M § 213.4(m)(2) and (3), which are in turn drawn from CLA § 183(a). The federal Act effectively restricts the lessee's liability under an open-end lease to an amount no greater than three monthly payments, but does it through a complicated "presumption" mechanism. Several states (CA, NH) restate this substantive limitation in their leasing acts.

There is a wrinkle here. Reg. M applies only to leases up to $25,000, while this Act goes up to $150,000, and requires all lessors to make the disclosures required by Reg. M. Thus this Act would require any open-end lessor to make Reg. M disclosures with its "presumptive" 3-payment restrictions.

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

[Section 308. WARRANTIES OF QUALITY AND TITLE.]

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

Section 309. REBATE OR DISCOUNT FOR REFERRALS.

A lessor [person ?] may not induce or attempt to induce any prospective lessee to consummate a lease by offering a post-consummation rebate, discount, commission or other consideration on the condition that the lessee provide information or assistance for the purpose of enabling the lessor to lease or sell goods to another person.

Reporter's Notes: 12/98 changes: Moved to end of Part 3, until we decide whether to keep or discard it.

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

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

Proposed Comments:

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

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

3. The sanction for a lessor who violates this section includes statutory damages under section 501(b). 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 401. TERMINATION OR REPLACEMENT OF INSURANCE.

(a)(1) Subject to the holder's security interest rights under section 303, if liability, casualty, or credit insurance is canceled or terminated, a refund of unearned insurance premiums received by the holder shall, at the holder's option, be:

(A) refunded to the lessee; or

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

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

Reporter's Notes: Former 304(d). 12/98 changes: New intro phrase, to acknowledge that holder may have a security interest in the unearned insurance premiums.

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

The question is who controls or is entitled to the refund? Since insurance included in the lease is often financed as part of the capitalized cost, a cash refund to the lessee is arguably a windfall. On the other hand, to the extent the lessor has agreed to finance that premium, it may be viewed as part of the credit to which the lessee is entitled and which the lessee remains obliged to repay. This draft allows the holder to apply the refund in various ways (subject of course to the good faith standard). If it is held for future crediting, the holder must also credit the lessee with a rebate of unearned rent charges attributable to the refunded premium.

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

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

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

(2) An amount paid by the holder for substitute insurance -

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

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

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

Reporter's Notes: Former 304(f).

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

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

Section 402. LIABILITY FOR GAP AMOUNT ON TOTAL LOSS OF GOODS.

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

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

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

(2) The gap amount does not include the deductible amount applicable to a casualty insurance policy on the goods, past due lease payments owed by the lessee at the time of the total loss of the goods, or any other unpaid amount due to the lessee's delinquency or default.

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

(c) Nothing in this section precludes the holder from recovering the gap amount from the lessee if :

(1) at the time of the total loss of the goods the lessee has failed to maintain in effect casualty insurance required under the lease and the holder has not obtained substitute insurance under section 401(b); or

(2) the total loss of the goods was occasioned by the lessee's fraud, intentional act, or gross negligence.

Reporter's Notes: Reflects 2/97 Committee vote (7-0) to bar gap liability. Subsection (c)(1) is new, at suggestion of NVLA: Lessee should not escape GAP liability if he/she has allowed casualty coverage to lapse.

Proposed Comments:

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 typically a "gap" between that sum and the amount due to terminate the lease at that point. The question is whether the lessee should be liable for that amount, and whether lessors should therefore be free to charge the lessee for contractual protection against that liability. Some leases have not imposed this gap liability on the consumer; instead the lessor protects itself through insurance or by absorbing these occasional losses internally. On the other hand, other lessors have contractually imposed this "gap liability" on the lessee, and used that as an opportunity to sell the consumer "gap liability waivers" or "gap protection."

2. Subsection (b) mandates the former approach. This means that the risk of gap losses would be absorbed and distributed through the holder's overall pricing structure, perhaps self-insured or covered by private insurance. With this restriction on gap liability, lessors lose the profit opportunity represented by sales of gap waivers, and would likely reflect the increased risk in their lease pricing. In a sense all lessees would pay a bit more to cover the occasional losses borne by lessors when 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, and does not (once the goods is lost) have the option to continue with the lease. Under this provision, the lessee's insurance will pay the policy limits toward the value of the 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 § 2A-219(1). If the leased goods are destroyed without fault by the lessor or lessee, the lease contract is "avoided." UCC § 2A-221(a). Neither party has any further claim against the other; the holder cannot seek further rent payments or other compensation from the lessee, nor does the lessee have a claim against the holder for nonperformance of the lease. Thus a lease provision that would impose gap liability on the lessee is an attempt at a contractual reallocation of the fundamental risk of loss in the lease. The judgement reflected in this section is that there is no justification for such a substantial reallocation in consumer leases. ...why?

4. Under subsection (a) the gap amount is measured by comparing two figures. One is the amount that the lessee would owe if the lease were considered to be terminated early, i.e., on the date of the loss. Cf. section 310(c). The other figure is the amount the lessor or holder actually receives from the lessee's casualty insurer (or from a third party, such as a tortfeasor's liability insurer) as representing the cash value of the goods. The gap amount is the difference, and it is this liability that the lease cannot shift to the lessee. The lessee remains responsible to pay the holder the deductible amount of its insurance coverage, and any other payments or charges due under the lease that are unrelated to the loss of the goods (such as late or default charges). But 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 403. LESSEE'S DEFAULT; RIGHT TO CURE.

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

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

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

Reporter's Notes: This is from UCCC § 5-109, using a prospect-of-impairment test.

(b)(1) A lessee who is in default solely by reason of failure to make a payment required under the lease has a right to cure that default in accordance with this subsection. The holder may not accelerate, take judicial action to collect, or repossess the goods until the lessee has failed timely to cure the default.

(2) After a lessee has been in default for 10 days solely by reason of failure to make a payment required under the lease, the holder may send the lessee a record notice of right to cure the default. The notice shall contain a conspicuous statement that the lessee is entitled to cure the default, and set forth the dollar amount necessary to cure the default, the date by which the cure payment shall be made and the name, address and telephone number of the holder from which information may be obtained regarding the cure. The date by which payment shall be made may be no less than 20 days after the notice is sent.

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

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

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

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

Section 404. REPOSSESSION; APPLICATION OF REALIZED VALUE. (a) Subject to section 403, if on default the lessee does not voluntarily surrender the leased goods to the holder, the holder may repossess the goods by judicial process or by self-help provided there is no breach of the peace.

Reporter's Notes: The earlier draft of this section was based on the MD and NY acts, and included two options for a subsection (b) creating a right to "reinstate" the lease even after repossession. By direction of the Committee (4/98) both versions of subsection (b) were dropped. The thought was that a statutory reinstatement right is unnecessary, cumbersome and prone to abuse, and that in the rare case where it makes sense to "undo" the repossession the parties can do this by agreement. Subsection (a) now merely states the permissible methods of repossession: voluntary surrender, judicial process, or self-help.

(b) After repossession or voluntary surrender of the goods the holder shall apply the realized value of the goods, determined under section 405, in the following order --

(1) default charges and collection costs as provided for in the lease [section 304];

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

(3) the early termination liability of the lessee (section 407).

(c) [Except as provided in section 407(f),] unless otherwise agreed the lessee is liable for any deficiency. The holder may apply to the deficiency a security deposit taken under section 303(a)(1), but must refund to the lessee any surplus amount of the security deposit after satisfaction of the deficiency.

Reporter's Notes: This tracks the state acts and UCC Article 9 on how sale proceeds are to be applied. It assumes the lessee will be liable for a deficiency, the amount of which will be controlled by the early termination rules in section 406.

Section 405. DETERMINING REALIZED VALUE.

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

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

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

(3) the fair market value of the goods.

(b) A lessee and holder may, at the time of lease termination, agree on the fair market value of the goods and unless unreasonable the value so agreed upon is the realized value. Such 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.

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

Proposed Comments:

1. When terminated early (voluntarily or upon default), most 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. Subsection (a) substantively replicates the definition of "realized value" in the federal Regulation M.

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

3. Subsection (b) relates to subsection (a)(3), and permits "fair market value" to be set by agreement of the parties so long as the valuation is not 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.

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

(d) If in a disposition under subsection (a)(1) the purchaser is the holder, an affiliate of the holder, or a person obligated to the holder under a recourse, repurchase or similar agreement, the sale or disposition satisfies subsection (c) only if the amount of proceeds is commercially reasonable.

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

Reporter's Notes: Subsections (c)-(e) addresse 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 terminations, and also at the scheduled termination of an open-end lease.

In subsection (c), the basic standard is "commercial reasonableness," as under UCC Art. 9. The words "amount of proceeds" which was a criterion in earlier drafts based on then-drafts of UCC Art. 9 is dropped here because it was dropped in Art. 9. Where the holder uses "best offer" to determine realized value, the solicitation and evaluation of offers ought, it seems to me, to be subject to the same commercial reasonableness standard. Otherwise a holder might gin up a few offers, pick one to set a realized value, but then actually dispose of the goods at a better price. The second sentence in (c) tracks revised UCC 9-610(c). This allows a holder to buy at a public sale but not generally in a private sale.

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

Subsection (e) is new. 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 deficient as suggested in § 406(e).

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

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

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

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

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

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

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

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

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

     [Name and address of secured party]     

     [Date]   &nbs p; 

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

Subject:       [Identification of Transaction]     

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

[For a public disposition:]

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

Date:                                 

Time:                                 

Place:                                 

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

[For a private disposition:]

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

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

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

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

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

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

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

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

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

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

Reporter's Notes: In one sense there is no need in leases for such elaborate notification because the lessee has no equity interest in the goods to redeem or protect. On the other hand, both debtors under Art. 9 and lessees under Art 2A and this Act can monitor the disposition process to assure that it is commercially reasonable. There is no post-repossession notice requirement under Art. 2A.

Proposed Comments:

1. The standards applicable to the disposition of the goods on lease termination are comparable to those under UCC Article 9. The holder has flexibility as to when and how the disposition will be conducted, but all aspects of it must be commercially reasonable. This standard applies when the holder actually liquidates the goods through resale or re-lease. It also applies when the holder chooses to base realized value on the "highest offer for disposition" under section 405(a)(2). The solicitation and consideration of offers must be genuine, and commercially reasonable in terms of being intended to generate offers in the range of market value.

2. If the realized value of the goods is determined under section 405(a)(2) [highest offer] or (3)[fair market value], the holder has no responsibility to the lessee under this section with respect to the ultimate disposition of the goods.

Section 406. EARLY TERMINATION LIABILITY.

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

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

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

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

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

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

Reporter's Notes: The structure of this subsection has been changed [10/97]. The new second sentence takes delinquent or already accrued payments out of the early termination charge, where they don't really belong. They are due and payable regardless of early termination. (Also, leaving them in complicates the use of the phrase "early termination charge" elsewhere in the Act, e.g., § 402 on gap liability, and subjects those accrued obligations to the "reasonableness" standard of this section.)

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

(c) (1) For purposes of this subsection "constant yield method" means:

(A) in the case of a periodic payment lease, the method of determining the rent charge portion of each base periodic payment pursuant to which the rent charge for each computational period is considered earned in advance and is calculated by multiplying the constant periodic rate implicit in the lease times the unpaid adjusted capitalized cost at the beginning of the period. At any point during the scheduled term of a periodic payment lease, the unpaid adjusted capitalized cost is the difference between the adjusted capitalized cost and the sum of all depreciation amounts accrued through the preceding computational periods and the first base periodic payment; or

(B) in the case of a single payment lease, the method of determining the periodic earning of the rent charge portion of the single lease payment pursuant to which the rent charge for each computational period is considered earned in advance and is calculated by multiplying the constant rate implicit in the lease times the unpaid adjusted capitalized cost as it increases during the lease term. At any point during the term of a single payment lease, the unpaid adjusted capitalized cost is determined by subtracting from the residual value the total rent charge scheduled to be earned over the lease term and adding to the difference all rent charges accrued through the preceding computational periods.

Reporter's Notes: Query: Could we not eliminate this somewhat clumsy and lengthy definition, and in sub. (2) just below refer to "any generally accepted actuarial method." The Comments could then elaborate on which calculation methods are permissible and which are not.

12/98 changes: Substitute "unpaid adjusted capitalized cost" for "balance subject to rent charge." This is basically a simple-interest formula for allocating periodic payment components to rent charge (interest) and capitalized cost (principal), but with periodic rent charges considered "earned" at the beginning of the period. It does not include the somewhat similar "Rule of 78s" method, nor the distinctive "straight-line" method.

Prior subsection (c) to be moved to Comment:

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

Cf. NVLA critique [12/97].

(2) A provision for an early termination charge is reasonable under subsection (b) if the charge [does not exceed the sum of] [contains these components]:

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

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

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

(B) the greater of

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

(ii) the actual and reasonable costs of retaking, storing, preparing for sale and disposing of the goods;

Reporter's Notes: 10/98 changes: Restated in terms of "the greater of" the two figures, rather than one plus the excess; this doesn't change the result. Query: should a disposition fee on early termination be permitted only if it is also charged at expiration of the lease? The holder's "disposition" burden is essentially the same in either case.

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

Reporter's Notes: See "Query" after definition of "constant yield method," above.

10/98 changes: Bracketed options added; sentence reorganized; "[pro rata]" insertion suggested. This is based on the Model and other state acts, and is the heart of early termination liability. It allows the holder to collect the unamortized adjusted capitalized cost (in credit terms, the unpaid principal balance). The "constant yield method" is essentially a simple interest calculation, except that rent payments are due at the beginning of the month rather than at the end.

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

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

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

(iv) an early termination charge disclosed in the lease.

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

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

Reporter's Notes: 10/98 change: This subsection (d) is reinstated, tentatively, from a prior draft, pending report from industry on acceptability. Note that it restricts only the "early termination charge," and does not affect obligations in default, excess wear and tear, or excess mileage charges.

(e) If a lessee demonstrates that the holder has violated section 404(a) [Repossession] or section 405(c) [Manner of Determining Realized Value], there is a rebuttable presumption that the realized value equals the total amount authorized under subsection (c)(2)(iii). The holder may rebut this presumption by clear and convincing proof that notwithstanding the violation the reasonably determined value of the goods is less than the total of the amounts authorized under that subsection.

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

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

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

Proposed Comments:

1. Goods leases are generally written to bind the lessee for the full term of the lease. Some leases end in default and repossession, and are terminated early for that reason. In addition, holders will often agree to an early termination of the lease, perhaps to facilitate the lessee's buying or leasing a new goods. In effect the holder waives the lessee's technical default. Subsection (a) recognizes this reality. In such a case of agreed-to early termination, and assuming the lessee is not otherwise in default, the holder may not report the early lease termination as a default or equivalent "derogatory" to a credit reporting agency if the lessee settles all obligations under the lease in a timely fashion.

2. Subsection (b) replicates § 183(b) of the federal Consumer Leasing Act which puts these substantive limits on early termination formulas, thus adopting the federal standard for all goods leases subject to this Act. The CLA in effect authorizes "liquidated damages" formulas in consumer leases, as does UCC § 2A-504(1). This is in lieu of requiring a complex calculation based on common law or UCC § 2A-528. That Art. 2A provision states a lessor's basic measure of damages for lessee default as the current value of the lessor's expectancy under the lease. The "reasonableness" of an early termination formula, therefore, is ultimately measured by reference to that underlying measure of damages. This Act uses the liquidated damages language of the federal act, rather than UCC § 2A-504(1), out of deference to the possibly preemptive effect of that federal statute if it were interpreted differently from the UCC provision.

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

3. The test is whether the aggregate early termination charge is reasonable in light of the stated factors. Leases may categorize early termination charge components in various ways. Thus individual elements of an early termination charge should not be assessed in isolation; rather it is the lessee's total obligation that must be reasonable. This test also recognizes that in the often fast-paced and high volume consumer leasing markets (including securitizations) it is important for holders to be able to clear their books of terminated leases without undue complexity or delay, and that an early termination formula may properly reflect this objective.

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

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

The balance owing under this subsection (c)(3) is sometimes referred to as the lessee's "gap liability." This is similar to, but separate from, the "Liability for Gap Amount" treated in section 402 of this Act.

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

[7. Subsection (e) provides an incentive for holders to conduct repossessions and foreclosures strictly in accordance with sections 404 and 405, by analogy to the limitations on deficiency judgments under UCC Article 9. If the holder is proved to have acted improperly, there is presumptively no "gap liability" for the lessee under subsection (c)(3). The holder may rebut this presumption only by establishing factually that the goods are worth less than the amount in subsection (c)(3).]

Section 407. EXCESS WEAR AND TEAR; EXCESS MILEAGE.

(a) (1) A lease may set 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 actual unanticipated diminished value of the goods due to damage, abuse, or lack of maintenance, but not to exceed the actual costs of repair and refurbishing.

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

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

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

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

Subsection (a)(1) is rewritten to state the basic constraint on EWT charges in terms of a reasonableness standard related to the actual unexpected lost value of the goods. Paragraph (a)(2)(A) excludes from EWT "ordinary and expected" use; this could reflect differing expectations for certain types of goods or certain regions of the country.

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

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

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

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

(C) An opportunity for prompt resolution of any dispute by reinspection by an independent inspector agreeable to the holder and lessee. The cost of the reinspection shall be [borne by the lessee] [shared equally by the holder and lessee.]

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

(2) The holder need not comply with subsection (b)(1) if

(A) within [90? 60? 30?] but no less than [20?] days prior to termination of the lease the lessee has the goods inspected for excess wear and tear by the holder or an inspector designated by the holder;

(B) the holder at the time of the inspection or within [3 business?] days thereafter delivers to the lessee a record stating:

(i) the nature and amount of excess wear and tear charges;

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

(iii) that the lessee remains liable for excess wear and tear incurred after the inspection and before termination of the lease; and

(C) the lessee does not, within [5?] days after delivery of the record specified in subsection (B), dispute the excess wear and tear charges by record notice to the holder or the holder's designated inspector.

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

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

(c) A motor vehicle lease may provide for the imposition of a charge for excess mileage. Such a charge shall be reasonable in light of the expected diminution in value of the vehicle on account of the excess mileage.

Reporter's Notes: Subsection (c) puts a "reasonableness" restraint on excess mileage charges.

Section 501. [VIOLATION AS UNFAIR OR DECEPTIVE ACT OR PRACTICE] [PRIVATE REMEDIES]

Option A: For the purpose of providing a civil remedy to lessees for violations of this Act, a violation of this Act is an unfair or deceptive act or practice under [insert citation to state UDAP Act or comparable consumer fraud act].

Reporter's Notes: This option would simply borrow the remedial provisions of the state UDAP statute. The value of this approach is that it piggybacks on existing state law and so avoids the need to develop a whole separate civil remedies structure, as in Option B. On the other hand, state UDAP statutes are not all the same in terms of civil remedies. They may differ, for example, as to when and whether statutory damages are permissible, whether the consumer's attorney's fees and court costs are recoverable, whether class actions are permitted, what exculpatory defenses are available to lessors and holders, and on procedural matters such as statutes of limitation. Thus this approach would mean a degree of non-uniformity among the states.

Option B:

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

The objective is to give lessees incentives to police lessor/holder misconduct, primarily through recovery of actual and statutory damages and court costs and attorney's fees, but without creating a minefield of potential liability for the leasing industry. Thus the effectiveness, and fairness, of these civil liability rules depends on the clarity and precision of compliance responsibilities stated throughout this Act.

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

Reporter's Notes: 10/98 changes: Rephrased for clarity and style. This allows recovery for provable actual damages.

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

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

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

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

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

Sec. 203 a)-(e) [Disclosure; Form of Lease Record; Copy to Lessee]

Sec. 204 [Insurance Disclosures; Limitation on Premiums]

Sec. 205(b) [Notice to Guarantor]

Sec. 206 [Information During Lease Term; Satisfaction of Lease]

Sec. 301 [Payment or Trade-in Pending Approval of Lease; Refund or Return]

Sec. 302(a) [Prohibited Lease Terms]

Sec. 303(b) [Security Interest Restricted]

Sec. 304 [Delinquency and Default Charges; Attorney's Fees]

Sec. 305(a) [Assignment of Lease]

Sec. 306(b) [Sublease]

[Option A: Sec. 07] [Option B: Sec. 307(a)] [Open-End Lease]

Sec. 309 [Rebate or Discount for Referrals]

Sec. 402 [Liability for Gap Amount on Total Loss of Goods]

Sec. 403(b) [Lessee's Default; Right to Cure]

Sec. 404 [Repossession; Application of Realized Value]

Sec. 405(c) [Manner of Determining Realized Value]

Sec. 406(a), (b), (d) [Early Termination Liability]

Sec. 407 [Excess Wear and Tear; Excess Mileage]

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

Reporter's Notes: Options A and B are different ways of setting statutory damages: either a flat dollar amount, or some proportion of the lease obligation. The sections listed are those that involve more serious misconduct that ought to be discouraged even though it may not produce measurable "actual damages" for the lessee. For violations of other sections, the lessee would be limited to actual damages.

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

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

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

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

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

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

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

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

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

Reporter's Notes: 3/99: A number of courts have held that the TILA statute of limitations is "equitably tolled" when the lessor withheld information or the lessee could not otherwise have discovered the violation. Should we address "equitable tolling" here, and if so, how?

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

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

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

(h) No liability arises under this section with respect to an act done or omitted in good faith in conformity with any rule, regulation or interpretation of this Act, or in conformity with any approval, by [Attorney General or other enforcement authority under section 503] notwithstanding that after such act or omission has occurred, such rule, regulation, interpretation or approval is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.

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

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

(k) Notwithstanding section305(b), and except where the assignment is involuntary, an action for a violation of this Act which may be brought against a holder may be maintained against a subsequent holder only if the violation is apparent on the face of the lease. For purposes of this subsection, a violation is apparent on the face of the lease if:

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

(2) the lease contains a prohibited provision or does not contain the notices, legend or items required by this Act.

Reporter's Notes: Subsections (h), (i), and (j) are from TILA.

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

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

Reporter's Notes: 10/98: New. The phraseology of this section refers constantly to a "lessee" as the claimant. In some circumstances private actions under this section might be brought by others who have succeeded to a lessee's rights. A cosigner 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. This "mini-definition" is meant to assure that the claim for violation of this Act is still actionable by the successor in interest. (Is the phraseology accurate?)

Section 502. EFFECT OF VIOLATION ON RIGHTS OF PARTIES; ELECTION OF REMEDIES.

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

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

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

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

Subsection (a)(2) is merely to raise a question. Might certain violations be so serious as to justify canceling the lease. (Which violations?) If so, the lessee ought to be expected to surrender the goods and pay for whatever use of them he/she has gotten. This is roughly analogous to rescission rights under TILA or "revocation of acceptance" under UCC Art. 2A-517 . [I have a recollection, but no notes, that the Committee was inclined to delete subsection (a)(2).]

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

Section 503. ADMINISTRATIVE ENFORCEMENT.

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

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

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

[Section 504. ADMINISTRATION OF ACT.

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

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

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

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

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

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

Reporter's Notes. This entire section is bracketed to indicate it is an option for states to consider. 10/98: Subsection (c) is new.

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

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

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

Section 601. CONSTRUCTION AGAINST IMPLICIT REPEAL

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

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

Section 602. SEVERABILITY.

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

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

Section 603. EFFECTIVE DATE; TRANSITION.

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

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

Reporter's Notes: Based on UCCC § 9.101.

Section 604. SPECIFIC REPEALER AND AMENDMENTS.

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

(a)

(b)

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

(a)

(b)

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