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Draft #1 August 13, 1996

Section 1.101 Short Title; Scope of Coverage

Section 1.102 Purposes; Rules of Construction

Section 1.103 Supplementary General Principles of Law

Applicable

Section 1.104 Construction Against Implicit Repeal

Section 1.105 Severability

Section 1.106 Waiver; Agreement to Forego Rights;

Settlement of Claims

Section 1.107 Transactions Subject to Act by Agreement

Section 1.108 Obligation of Good Faith

Section 1.109 Unconscionability

Section 1.110 Non-Discrimination

Section 1.201 Territorial Application

Section 1.202 Exclusions

Section 1.301 General Definitions

Section 1.302 Definition: "Federal Consumer Leasing Act"

Section 1.303 Other Defined Terms

Section 2.101 Short Title

Section 2.102 Scope

Section 2.201 Lease Advertising and Solicitation

Section 2.202 Pre-Lease Availability of Sample Form

Section 2.203 Disclosure; Lease Document

Section 2.204 Co-Signer Notice

Section 2.301 Rebate or Discount for Referrals

Section 2.302 Prohibited Lease Terms

Section 2.303 Security Interest Prohibited

Section 2.304 Warranties of Quality and Title

Section 3.101 Short Title; Scope

Section 3.102 Definitions

Section 3.201 Payment or Trade-in Pending Execution

of Lease; Refund or Return

Section 3.202 Refund of Excess Fees

Section 3.301 Content and Form of Lease Agreement

Section 3.302 Other Disclosures

Section 3.303 Renegotiations and Extensions

Section 3.304 Satisfaction of Lease

Section 3.401 Inoperable Vehicle; "Lemon Laws"

Section 3.402 Insurance

Section 3.403 Delinquency and Default Charges

Section 3.404 Gap Liability

Section 3.405 Assignment of Lease by Lessor or Lessee

Section 3.501 Lessee's Default; Right to Cure

Section 3.502 Repossession; Reinstatement

Section 3.503 Disposition of Vehicle at Lease

Termination; Realized Value

Section 3.504 Early Termination Liability

Section 3.505 Assessment of Excess Wear and Use

Section 3.506 Open-End Lease

[Reserved for Future Use]

Section 5.101 Short Title; Scope

Section 5.102 Civil Liability

Section 5.103 Criminal Liability

Section 5.104 Effect of Violation on Rights of Parties;

Election of Remedies

Section 5.105 Administrative Enforcement

Section 5.106 Administration of Act

Section 6.101 Time of Taking Effect; Transition

Section 6.102 Specific Repealer and Amendments

Section 1.101 [Short Title; Scope of Coverage]

(1) This Act shall be known and may be cited as Uniform Consumer Leasing Act.

[Possible alternatives:

Uniform Consumer Leasing Code?

Uniform Consumer Goods Leasing Act?]

(2) Except as otherwise provided by particular provisions of this Act, this Act applies to any transaction that is a consumer lease as defined in Section 1.301.

Section 1.102 [Purposes; Rules of Construction]

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

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

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

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

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

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

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

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

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

(3) [A reference to a requirement imposed by this Act includes reference to a related rule of the Administrator adopted pursuant to this Act.]

Reporter's Notes: Based on U3C 1.102. Paragraph (2)(b) is proposed new language, to replace a U3C reference to setting rate ceilings. Paragraph (3) is needed only if an Administrator has rulemaking authority. See 5.106, infra.

Section 1.103 [Supplementary General Principles of Law Applicable]

Unless displaced by the particular provisions of this Act, the Uniform Commercial Code and the principles of law and equity, including the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause supplement its provisions. In the event of inconsistency between the Uniform Commercial Code and this Act the provisions of this Act control.

Reporter's Notes: Same as U3C 1.103. This specifically references the UCC; thus Article 2A (Leases) provides a broad foundation for this Act: Article 2A provisions apply unless "displaced by" or "inconsistent" with this Act.

Section 1.104 [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 U3C 1.104.

Section 1.105 [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 U3C 1.105.

Section 1.106 [Waiver; Agreement to Forego Rights; Settlement of Claims]

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

(2) A claim by a consumer against a lessor or holder for an excess charge, any other violation of this Act, a civil penalty [statutory damages ?], or a claim against a consumer for a default or breach of a duty imposed by this Act, if disputed in good faith, may be settled by agreement.

(3) A claim against a consumer, whether or not disputed, may be settled for less value than the amount claimed.

(4) A settlement in which the consumer waives or agrees to forego rights or benefits under this Act is invalid if the court finds the settlement to have been unconscionable at the time it was made. The competence of the consumer, any deception or coercion practiced upon the consumer, the nature and extent of the legal advice received by the consumer, and the value of the consideration are relevant to the issue of unconscionability.

Reporter's Notes: Based on U3C 1.107. Subsection (1) generally invalidates any contractual waiver by a consumer 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 1.107 [Transactions Subject to Act by Agreement]

Parties to a lease transaction or modification thereof that is not a consumer lease (subsection (1) of Section 1.301) may agree in a writing signed by them that the transaction is subject to the provisions of this Act. If the parties so agree the transaction is a consumer lease transaction for the purposes of this Act.

Reporter's Notes: Based on U3C 1.109. This allows a lessor 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. This seems a useful way for lessors to establish a safe-harbor legal framework for leases at the margins of coverage.

Section 1.108 [Obligation of Good Faith]

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

(2) "Good faith" means honesty in fact in the conduct or transaction concerned and in the case of a merchant includes observance of reasonable commercial standards of fair dealing in the trade.

Reporter's Notes: Based on U3C 1.110. The "fair dealing" criterion for merchants is taken from UCC 2-103(1)(b) which is incorporated in Art. 2A [Leases] in 2A-103(3). Query: do we need a separate definition of "merchant," or is that fairly incorporated via UCC 2A-103(2) and 2-104(1)?

Section 1.109 [Unconscionability]

Reporter's Notes: No specific text proposed. UCC 2A-108 is a comprehensive statement on unconscionability, including particular applications in consumer leases, patterned on UCC 2-302 [Sales of Goods] and U3C 5.108. [Text and Comment of UCC 2A-108 are attached to this draft.] There seems no need to reproduce that provision here unless we mean to change it.

Section 1.110 [Non-Discrimination]

Reporter's Notes: No text proposed at this time. The issue is whether this Act should seek to assure non-discrimination against lessees based on race, color, age, gender, marital status, etc., or whether this should be left to other federal or state law.

Courts have held that leases subject to the federal Consumer Leasing Act [i.e., more than 4 months & less than $25,000] are also subject to the federal Equal Credit Opportunity Act. Brothers v. First Leasing, 724 F2d 789 (9th Cir. 1984), cert. denied, 105 S.Ct. 121 (1984). That leaves open questions about coverage of other leases by ECOA, and coverage of all leases by state "little-ECOA" laws or broader civil rights laws.

Section 1.201 [Territorial Application]

(1) Except as otherwise provided in this section, this Act applies to a consumer lease transaction entered into in this State. For the purposes of this Act, a consumer lease transaction is entered into in this State if either a signed writing evidencing the lease obligation or offer of a lessee [consumer] is received by the lessor in this state, or the lessor induces a lessee [consumer] who is a resident of this State to enter into the transaction by face-to-face solicitation in this State.

(2) With respect to a consumer lease to which this Act does not otherwise apply, if a consumer who is a resident of this State, pursuant to solicitation in this State, sends a signed writing evidencing the lease obligation or offer of the consumer to a lessor in another state [and keeps or maintains the leased goods in this State ??];

(a) the lessor may not contract for or receive charges exceeding those permitted by this Act; and

(b) [Section 5.106 on Administration of this Act applies as though the lease were entered into in this State. ?]

(3) The limitations on creditors' remedies in Sections 2.302, 3.501, and 3.502 apply to actions or other proceedings brought in this State to enforce rights arising from consumer lease transactions wherever entered into.

(4) Except as provided in subsection (2), a consumer lease transaction to which this Act does not apply entered into with a person who is a resident of this State at the time of the transaction is valid and enforceable in this State to the extent that it is valid and enforceable under the laws of another jurisdiction, but:

(a) a holder may not collect through actions or other proceedings in this State an amount exceeding the amount permitted if this Act were applicable; and

(b) a holder may not enforce rights against the consumer in this State with respect to the provisions of agreements that violate the provisions of Sections 2.302, 3.501, and 3.502.

(5) Except as provided in subsections (2), (3), and (4), a consumer lease transaction entered into in another jurisdiction is valid and enforceable in this State according to its terms to the extent it is valid and enforceable under the laws of the other jurisdiction.

(6) For the purposes of this Act, the residence of a consumer is the address given by the consumer as a residence in a writing the consumer signs in connection with a consumer lease transaction until the consumer notifies the holder of a different address as the residence, and is then the different address.

(7) Notwithstanding other provisions of this section:

(a) except as provided in subsection (3), this Act does not apply if the consumer is not a resident of this State at the time of a consumer lease transaction and the parties have agreed that the law of the consumer's residence applies; and

(b) this Act applies if the consumer is a resident of this State at the time of a consumer lease transaction and the parties have agreed that the law of the consumer's residence applies.

(8) Each of the following agreements or provisions of an agreement by a consumer who is a resident of this State at the time of a consumer lease transaction is invalid with respect to the transaction:

(a) that the law of another jurisdiction apply;

(b) that the consumer consents to be subject to the process of another jurisdiction;

(c) that the consumer appoints an agent to receive service of process;

(d) that fixes venue; and

(e) that the consumer consents to the jurisdiction of a court that does not otherwise have jurisdiction.

(9) [The following provisions of this Act specify the applicable law governing certain cases:

(Sections dealing with powers of Administrator)].

Reporter's Notes: Based on U3C 1.201. Subsection 1 omits a U3C paragraph dealing with mail applications for open-end credit which seems inapplicable here. Subsection (2) references where the leased goods are kept, rather than the U3C reference to where loan proceeds are received. Otherwise essentially verbatim.

The thrust of the section is to cover any lease "entered into" in this state [subsection (1)], but also to give this Act some extra-territorial reach to protect local residents. Thus it covers the price terms of a lease 'solicited' in this state [subsection (2)], and it limits an out-of-state lessor's enforcement rights in this state [subsections (3) and (4)]. Otherwise out-of-state leases are respected [subsections (5) and (7)]. Subsection (8) bars a resident consumer's waiver of the coverage of this Act and of the jurisdiction, venue and process rules of local courts.

Query whether this lengthy choice-of-law recitation, vintage 1974, is still necessary and appropriate? Might it be possible to focus on leases entered into in this state, or where parties understood goods would be kept in this state? If this Act is uniformly adopted, there seems to be less need for a far-reaching choice-of-law rule.

Section 1.202 [Exclusions]

This Act does not apply to:

(1) a lease to an organization;

(2) transactions under public utility or common carrier tariffs if a subdivision or agency of this State or of the United States regulates the charges for the lease services involved.

[(3) pawnbrokers ??].

Reporter's Notes: Based generally on U3C 1.202, but several of its subsections omitted (re sales of insurance, securities transactions, etc.) as irrelevant. Subsection 2 would exclude, e.g., phone equipment leased through phone company.

Query whether this material deserves a separate section? Definition of "consumer lease" (Section 1.301, below) could deal adequately with limitations on coverage.

Section 1.301 [General Definitions]

(1) "Consumer lease" means a lease that a lessor regularly engaged in the business of leasing or selling makes to a lessee who is an individual and who takes under the lease primarily for a personal, family, or household purpose [, if the total payments to be made under then lease contract, excluding payments for options to renew or buy, do not exceed $_______].

Options: Add:

* A consumer lease may include the purchase of goods, services or benefits incidental to the lease.

* A consumer lease does not include a lease -

(A) primarily for agricultural, business or commercial purposes;

(B) in which the leased goods are [livestock, snowmobiles, whatever];

(C) [other limitations: RTOs?]

Reporter's Notes: The main paragraph is verbatim from UCC 2A-103(1)(e). Note that the lessor must regularly lease or sell consumer goods; thus a car dealer is covered when he makes his first lease transaction.

The possible add-ons are drawn generally from other leasing laws, and can be used to define or narrow the scope of coverage.

(2) "Goods" means all things that are movable at the time of identification to the lease contract, or are fixtures (UCC 2A-309), but the term does not include money, documents, instruments, accounts, chattel paper, general intangibles, or minerals or the like, including oil and gas, before extraction. The term also includes the unborn young of animals.

Reporter's Notes: Verbatim from UCC 2A-103(1)(h). Is it apt for this Act? Are we agreed that this Act covers all "goods," and not just vehicles? And that this Act does not cover any other forms of "personal property"?

(3) "Holder" means the person with the leasehold interest with respect to a consumer lease. The term includes the lessor for the period of the lessor's leasehold interest and, if the leasehold interest is acquired by an assignee, the assignee for the period of the assignee's interest. The term does not include a pledgee [?] of a consumer lease to secure a bona fide obligation of the pledgor [creditor holding a security interest in the lease as chattel paper] or the owner or beneficiary of an interest in a trust that owns consumer leases.

Reporter's Notes: This is drawn from Model act, except that it uses the term "leasehold interest" from UCC 2A-103(1)(m) instead of the term "ownership of the lease."

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

The last sentence is meant, I believe, to insulate indirect financers from vicarious liability. Query: even if such secondary parties are not "holders" within this definition, are they not likely to be treated as assignees or transferees of the lessor, and so subject to exposure on that basis?

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

Reporter's Notes: Verbatim from UCC 2A-103(1)(j). Query: Do we also need to replicate Art. 2A definition of "Finance lease" and "supplier" to deal with the pattern where the formal lessor is a financing entity, such as a bank?

(5) "Lessee" means a person who acquires the right to possession and use of goods under a lease. [Where the context so indicates, the term includes a sublessee, and a prospective lessee or applicant for a lease. ?]

(6) "Lessor" means a person who transfers the right to possession and use of goods under a lease. [Unless the context clearly indicates otherwise, the term includes a sublessor.?]

Reporter's Notes: These latter two definitions are drawn from UCC 2A-103(1)(n) and (p). "Lessee" needs to include prospective lessees in some provisions relating to pre-lease activity.

General definitions are kept to a minimum, on the assumption UCC 2A definitions are applicable. Other specific definitions for this Act appear later on, especially in Article 3 on vehicle leases.

Section 1.302 [Definition: "Federal Consumer Leasing Act"]

In this Act, "federal Consumer Leasing Act" means Chapter 5 of Title I of the Consumer Credit Protection Act, 15 U.S.C.A. 1667, and includes regulations and interpretations issued from time to time by the Board of Governors of the Federal Reserve System pursuant to that Act (Regulation M, 12 C.F.R. Part 213).

Reporter's Notes: Patterned on U3C 1.302, but citing specifically to the federal leasing statute and Reg. M.

Section 1.303 [Other Defined Terms]

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

[List other defined terms with references]

(2) Unless the context clearly indicates otherwise, other terms used in this Act have the same meaning as in Uniform Commercial Code Article 2A - Leases.

Reporter's Notes: Patterned on U3C 1.303; subsection (2) generally adopts UCC 2A definitions for terms used occasionally in this Act, e.g., "Leasehold interest," "Sublease," "Supplier," etc.

Section 2.101 [Short Title]

This Article shall be known and may be cited as Uniform Consumer Leasing Act -- Regulation of Agreements and Practices.

Section 2.102 [Scope]

Except for a lease excluded from this Act by Section 1.202, this article applies to any consumer lease regardless of duration, dollar amount or kind of goods leased. Part 2 deals with advertising and solicitation of the lease, basic disclosure of lease terms, and co-signer notices. Part 3 states a number of limitations or restrictions on lease terms or practices.

Reporter's Notes: Via this scope provision, the Act covers every form of consumer lease, from multi-year vehicle leases to daily rental cars, from furniture and appliances to garden tools and medical assistive devices. As will emerge, the Act provides some basic general rules for all leases, then deals separately and more extensively with motor vehicle leases, and reserves space for special treatment of other forms of leases.

Section 2.201 [Lease Advertising and Solicitation]

(1) An advertisement for a consumer lease that is subject to the federal Consumer Leasing Act must comply with the advertising requirements of that Act. For purposes of this Section, "advertisement" has the same meaning as in that Act.

(2) No person shall publish, broadcast or distribute a lease advertisement that is false, deceptive, or misleading, or that misrepresents -

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

(b) that the transaction is other than a lease.

This subsection does not apply to the owner or personnel, as such, of any medium in which an advertisement appears or through which it is disseminated.

(3) The practices of a lessor or holder with respect to advertisements, solicitations, and negotiations concerning a consumer lease transaction are subject to the [state "unfair and deceptive acts or practices" act, or similar state statute] as well as to this Act.

Reporter's Notes: For lease advertisements subject to the federal Reg. M, subsection (1) makes compliance with Reg. M a state law rule as well.

Subsection (2) is a general "false advertising" proscription in the leasing context. It applies to any "person" who advertises, not just lessors. Thus a vehicle manufacturer advertising lease arrangements through its franchised dealers would be covered.

Subsection (3) confirms that lessor/holder conduct remains subject to general consumer fraud laws.

Section 2.202 [Pre-Lease Availability of Sample Form]

The lessor must make a blank sample of [each version of] its current consumer lease form readily available for examination by a prospective lessee by furnishing it upon request before the consummation of a consumer lease.

Reporter's Notes: This is a common provision in recent state leasing legislation, and seems generally useful. But is it workable outside the context of big-ticket vehicle leases?

Section 2.203 [Disclosure; Lease Document]

(1) For any consumer lease subject to the federal Consumer Leasing Act, the lessor must make the disclosures required by that Act.

(2) A consumer lease agreement shall:

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

[FYI only:]

(b) clearly indicate that it is a lease [or rental] agreement;

(c) identify the lessor and lessee and the goods to be leased; and

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

(3) Promptly on execution of the consumer lease the lessor must deliver to the lessee a completed copy of the lease as signed by the lessee. The lease may provide space for the lessee's separate signed acknowledgement of receipt of the copy.

Reporter's Notes: Subsection (1) adopts Reg. M disclosures as state law as well, for leases subject to the federal law, i.e., more than four months & less than $25,000. This provision does not impose Reg. M disclosure requirements on short term or large-dollar leases.

Subsections (2) and (3) are rudimentary formalities for all leases: a written, signed lease document identified as such, with a copy to the consumer. More elaborate disclosures will apply for vehicle leases under Article 3 of this Act.

Section 2.204 [Co-Signer Notice]

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

(2) A lessor or holder may not request [or require ?] a co- signer on a consumer lease unless, prior to the cosigner becoming obligated, the lessor gives the prospective cosigner a separate document in substantially the following form:

Reporter's Notes: This is almost verbatim from the FTC Credit Practices Rule, 16 CFR 444.3, but substituting "lessor/lessee" for "creditor/borrower." A similar provision is in U3C 3.208. The FTC Rule applies only to lenders and installment sellers, and a parallel co-signer disclosure for leases seems appropriate. But query: can the phraseology of the notice be improved? E.g., is "debt" the right term?

Section 2.301 [Rebate or Discount for Referrals]

No lessor [person ?] shall induce or attempt to induce any person to enter into a consumer lease by offering a subsequent 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: Based on provisions in U3C, and Model, CA, NH, NY acts. I'm still uncertain of need for it, and 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 U3C 3.309 provides a more severe sanction for violations, i.e., the consumer may retain the property without having to pay for it.

Section 2.302 [Prohibited lease terms]

(1) No consumer lease shall contain a provision by which:

(a) in the absence of the lessee's default, the holder may arbitrarily and without reasonable cause accelerate the maturity of any part or all of the amount owing on the lease;

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

(c) the lessee gives the holder or any other person authority to enter upon the lessee's premises unlawfully, or to commit any breach of the peace in the repossession of the goods;

(d) the lessee waives any right of action against the holder for any illegal act committed in the collection of payments under the consumer lease or in the repossession of the goods; or

(e) the lessee agrees not to assert claims or defenses arising from the consumer lease against a subsequent holder of the consumer lease.

(2) Any agreement, waiver or provision prohibited by this Act shall be unenforceable but shall not otherwise affect the validity of a consumer lease.

Reporter's Notes: Based on provisions in U3C, Model, NH, NY, MD acts. These are baseline restrictions in consumer credit transactions. Other restrictions centered on vehicle leases are left to Article 3.

Section 2.303 [Security Interest Prohibited]

(1) No consumer lease or other document executed by the lessee in connection with the lease may provide for the creation of a security interest in personal or real property of the lessee [other than the leased goods] to secure the payment of the obligations arising from the consumer lease. This prohibition does not apply to the taking of a security deposit, advance lease payment, or other prepayment by cash, credit card, check, or similar means.

(2) A security interest taken in violation of this section is void but does not otherwise affect the validity of a consumer lease.

Reporter's Notes: Based on U3C 3.301, and Model, CA, NH, NY, MD, WI acts. The U3C provision, and the analogous FTC Credit Practices Rule, 16 CFR 444.2, essentially limit 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. If the lease is truly a lease, the lessor's interest should be safe from third-party claimants including the lessee's trustee in bankruptcy.

The parenthetical language, if included, would allow a lessor to take a formal security interest in the leased goods themselves. From a business perspective this may be a prudent thing for the lessor to do, at least as a precaution in case a court might later characterize the transaction as a credit sale. But allowing the lessor to take a UCC Article 9 security interest may complicate the transaction, especially on repossession and foreclosure. Which rules control, this Act, UCC Article 9, or the U3C?

Section 2.304 [Warranties of Quality and Title]

A consumer lease under this Act is subject to the provisions of sections 2A-209 through 2A-216 of the Uniform Commercial Code - Leases [, except that, notwithstanding subsections (1), (2), and (3) of section 2A-214 of that code, no words or conduct are effective to negate an express warranty, or to exclude or modify an implied warranty.]

Reporter's Notes: This is essentially an incorporation-by-reference of the warranty rules in UCC Article 2A. [A copy of these UCC 2A provisions is attached to this draft.] There seems no particular value in copying them fully into this Act unless we expect to make significant changes.

One possible change is the parenthetical language above, which would bar warranty disclaimers. I.e., the lessor or supplier of the leased goods cannot disclaim express or implied warranties otherwise made. This would track non-uniform amendments to UCC 2-316 [disclaimers in sale contracts] adopted in about a half-dozen states.

Some revision of the basic warranty rules in UCC Article 2 may emerge from the current Article 2 project. Presumably these would be carried into Article 2A as well, and so would become applicable to consumer leases through this Act. Is there any need to try to anticipate those changes here?

I will double-check, but I think the federal Magnuson-Moss Warranty Act would still apply in the lease context to any written warranty by a manufacturer or supplier (including a lessor). So those additional protections are retained here without needing to say so expressly.

Article 3, infra, will deal with disclosure of warranty terms in motor vehicle leases.

Section 3.101 [Short Title; Scope]

(1) This Article shall be known and may be cited as Uniform Consumer Leasing Act -- Motor Vehicles.

(2) This Article applies to a consumer lease of a motor vehicle in which the lessee is obligated for a period of time exceeding four months [and for a total contractual obligation not exceeding $______. "Total contractual obligation" means all sums the lessee would pay under the lease if it runs full term without default, including any capitalized cost reduction but not including the residual value or charges for excess wear and use or excess mileage.]

(3) As used hereafter in this Article the term "consumer lease" means a lease to which this Article applies.

(4) Except as may be specifically noted, the provisions of this Article apply in addition to, and not in lieu of, the provisions of Articles 1 and 2 of this Act.

Reporter's Notes: Subsection 2 establishes that this Article deals exclusively with longer-term motor vehicle leases. I.e., Article 3 covers a "consumer lease" of a "motor vehicle" [defined below] for a period of more than four months. A dollar ceiling may be inserted if desired. The Model and WI acts retain the $25,000 ceiling from Reg. M, while the CA, IN, NH, NY, and MD acts have no ceiling. WV's ceiling is $45,000 for vehicle leases. If a dollar cap is included, criteria for measuring "total contractual obligation" should be included, as suggested.

Subsection (4) reminds that vehicle leases are still covered by the general provisions in Articles 1 and 2.

Section 3.102 [Definitions]

For purposes of this Article:

Reporter's Notes: Most of the definitions that follow are drawn from the Model act, and versions of them appear in the CA, FL, IN, NH, NY and WI acts. These fairly intricate definitions are necessary to parse out the lease cost structure, to support disclosure of Capitalized Cost figures, and to permit calculation and possibly disclosure of the Lease Charge and Lease Rate.

Definitions in this Act relating to disclosures and calculations should be consistent with those in the federal Consumer Leasing Act; otherwise they may be preempted by Reg. M. Thus if the Federal Reserve Board amends Reg. M to expand disclosures, it may create definitions for some of these terms that could be replicated or incorporated by reference here.

(1) "Adjusted capitalized cost" means the amount which serves as the basis for determining the base lease payment, computed by subtracting from the capitalized cost any capitalized cost reduction.

Reporter's Notes: This is the functional equivalent of the "amount financed" in a credit transaction.

(2) "Base lease payment" means that portion of the periodic lease payment which is the sum of the amortizing depreciation and the lease charge attributable to that payment period.

Reporter's Notes: This is the "principal and interest" portion of the monthly payment, without adding taxes or other incidentals.

(5) "Capitalized cost" means the amount which, when reduced by the amount of the capitalized cost reduction, equals the adjusted capitalized cost. The capitalized cost includes all items that are capitalized in the lease and, after the application of the capitalized cost reduction, amortizes to the residual value by the depreciation portions of the periodic lease payments over the term of the lease. For a single payment lease, the capitalized cost amortizes to the residual value by the depreciation portion of the single lease payment. The capitalized cost may include, without limitation, taxes, registration, license, acquisition, administration, assignment and other fees, and charges for insurance, for a waiver of the contractual obligation to pay the gap amount, for accessories and their installation, for delivering, servicing, repairing or improving the goods and for other services and benefits incidental to the consumer lease. The term also may include, with respect to any property traded in connection with a lease, the unpaid balance of any amount financed under an outstanding credit agreement or the unpaid portion of the early termination obligation under any lease or other obligation of the lessee. The term capitalized cost does not include any lease charge.

(6) "Capitalized cost reduction" means any payment made by cash, check, rebate or similar means that is in the nature of a down payment by the lessee and any net trade-in allowance granted by the lessor at the inception of the consumer lease for the purpose of reducing the capitalized cost. The term does not include any base lease payments due at the inception of the lease.

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

(8) "Constant Yield Method" means -

(a) in the case of a periodic payment lease, the method of determining the lease charge portion of each base lease payment pursuant to which the lease charge for each computational period is earned in advance by multiplying the constant rate implicit in the lease times the balance subject to lease charge as it declines during the lease term. At any given time during the scheduled term of a periodic payment lease, the balance subject to lease charge is the difference between the adjusted capitalized cost and the sum of (i) all depreciation amounts accrued during the preceding computational periods and (ii) the first base lease payment;

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

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

(9) "Gap amount" means the difference between the amount owed (or which would be owed in the absence of gap protection) by the lessee under the consumer lease in the event of a total loss of the vehicle prior to the end of the lease term occasioned by its theft, physical damage, or other occurrence as specified in the consumer lease, and the actual cash value or portion of the actual cash value of the vehicle actually received by the holder from the insurance company or from any other person. The gap amount does not include any deductible amount applicable to any insurance policy maintained by the lessee or any past due payments owed by the lessee at the time the lessor receives the insurance proceeds, or any other amount due because of the lessee's default.

(10) "Gap protection" means a contractual undertaking by the lessor to waive, or by a third person to pay, the gap amount. For purposes of Section 3.402 [Insurance] gap protection is not "liability insurance or other insurance on the goods."

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

(12) "Lease charge" means the charge determined by the lessor to be payable by the lessee for the privilege of making the lease payments as scheduled in a consumer lease. The term does not include any amount included in the capitalized cost, or any delinquency, default, disposition, early termination, collection, or reinstatement charge. The term does not include any amount for taxes, registration, license, acquisition, administration, assignment and other fees, or charges for insurance, for accessories or their installation, for delivering, servicing, repairing or improving the vehicle and for other goods, benefits or services incidental to the consumer lease, whether such amount is included in the capitalized cost, paid separately at lease inception by cash, check, credit card or similar means, or paid on a periodic basis in addition to the base lease payment. [The lessor may calculate the lease charge on any basis. ?]

Reporter's Notes: This is the functional equivalent of the "finance charge" in credit transactions. The last sentence, bracketed, means the lessor can use any computational formula it wishes; it does not authorize lease charges in any amount (although this Act does not cap lease charges as the U3C caps finance charges).

(13) "Lease rate" means that nominal annual percentage rate which will yield a sum equal to the amount of the lease charge when it is applied to the unpaid balances of the adjusted capitalized cost, calculated according to the actuarial method of allocating payments made on a debt between the adjusted capitalized cost and the amount of the lease charge, pursuant to which a payment is applied first to the accumulated [accrued?] lease charge and the balance is applied to the unpaid adjusted capitalized cost.

[or?]... the annualized actuarial rate by which the total of base lease payments amortizes the adjusted capitalized cost and the total lease charge to the residual value over the term of the lease, as prescribed by regulations of the Administrator.

Reporter's Notes: This is the functional equivalent of the "annual percentage rate" in credit transactions. This term is not currently used in Reg. M or in any state leasing law; thus these alternative statements are the Reporter's attempt at a definition.

Actuarial APR calculations for credit transactions require very complex mathematical formulae. See Appendix J of Regulation Z [Truth in Lending]. Thus if a comparable "lease rate" calculation is specified in this Act, we may need more extensive statutory directions on how to compute it. If, however, the Federal Reserve Board amends Reg. M to require or permit a rate disclosure, this Act can incorporate the federal computation formula by reference.

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

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

(16) "Person" means an individual, partnership, corporation, association or other group, however organized.

(17) "Precomputed lease transaction" means a consumer lease transaction in which the total of the base lease payments for the term of the lease is established at the inception of the lease, whether or not it is paid at that time, as a sum comprising the total depreciation estimated for the scheduled lease term and the amount of the lease charge computed in advance for the scheduled term of the lease. A disclosure required by the Consumer Leasing Act does not in itself make a lease charge or transaction precomputed.

(18) "Realized value" ["Disposition value" ??] means, according to the context in which the term is used: (a) the price received by the lessor on disposition of the goods [, after subtracting all actual and reasonable expenses of sale ?]; (b) insurance proceeds in the event of the total loss or destruction of the goods; (c) the highest bona fide offer received by the holder for disposition of the goods; (d) the value of the goods determined by a lessee appraisal under Section 3.503(c) or Section 3.506 [lessee's appraisal rights]; or (e) if the lessor and the lessee agree upon the realized value, such agreed-upon amount.

Reporter's Notes: The concept here is to identify the liquidation or disposition value of the vehicle which is then credited toward the lessee's liability on default or early termination (and in open-end leases, at scheduled termination). The definition identifies 5 ways of valuing the vehicle; the applicable sub-definition should be apparent from context.

"Realized value" may not be the best term if the figure sometimes derives from offers or appraisals.

This definition also introduces the broader issue of what is the appropriate benchmark "market" for valuing the vehicle at lease termination: wholesale, retail, blue-book, etc.

(19) "Renegotiation" means the satisfaction and replacement of an existing consumer lease by a new consumer lease undertaken by the same lessee. The term does not include: (a) a deferral or extension of one or more periodic lease payments, or portions of one or more periodic payments; (b) a consumer lease involving [??] a court proceeding or the settlement of a dispute; or (c) any other agreement or event which does not constitute a "renegotiation" under the federal Consumer Leasing Act. An extension of periodic payments aggregating more than six months is a renegotiation.

Reporter's Notes: This is from the Model act. I assume part (b) is referring to a judicial reformation of the lease (as in bankruptcy), or a novation resulting from a dispute, but the language seems a bit unclear.

(20) "Residual value" means the estimated value of the goods at the end of the scheduled lease term, used by the lessor in determining the base lease payment, as established by the lessor at the time the lessor and lessee enter into a consumer lease.

(21) "Single Payment Lease" means a consumer lease for which a single payment is required to be paid at the beginning of the lease for the scheduled term of the lease.

Section 3.201 [Payment or Trade-in Pending Execution of Consumer Lease; Refund or Return]

(1) If a prospective lessee has made a payment to a lessor or has surrendered possession of trade-in goods pending the execution of a consumer lease, and the consumer lease application is not approved, the lessor must promptly return the trade-in goods and refund any payment made. If a lessee leaves trade-in goods with the lessor and the lessor and lessee agree that the parties will enter into a consumer lease, the lessor may not sell or transfer the trade-in goods until the lessee and the lessor execute a consumer lease.

(2)(a) Notwithstanding subsection (1) of this Section, a prospective lessee may sell a vehicle to a prospective lessor under a separate contract of sale if the contract of sale -

(i) is executed before the parties have consummated a consumer lease, is dated as of the sale date, and is signed by the parties;

(ii) provides that the contract price establishes the value of the goods for purposes of determining the amount the lessor will credit as a capitalized cost reduction under any consumer lease subsequently consummated by the parties or as the amount payable promptly to the lessee in the event the parties fail to consummate a consumer lease within [30] days.

(b) The contract of sale may also provide that if the parties agree to consummate a lease for a motor vehicle to be [specially] ordered from a manufacturer [or supplier ?] or not yet in production as of the date of the contract, the prospective lessee agrees to leave the contract price on deposit with the prospective lessor pending delivery of that vehicle but not beyond [an additional 30 days] [a total of 75 days].

Reporter's Notes: Based on Model, CA, NH, WI acts, with some re-write. Subsection (1) requires the lessor to return "promptly" any trade-in and refund any advance payment if a lease deal is not closed. Subsection (2) carves out an exception, permitting the lessee to sell the trade-in car outright to the prospective lessor: presumably the consumer definitely wants to dump the old car but is still considering lease/purchase alternatives; a prompt sale avoids further depreciation. In this case the lessor can retain the agreed price for up to 30 days in anticipation of applying it to the eventual lease, or up to 60 [or 75] days for a special-order vehicle.

Subsection (2) is problematic. It is unclear why the lessor should be able to "buy" the consumer's trade-in car and retain the price for any extended period of time. It is a revenue source for the lessor and the industry says such retainages (security deposit is another) help keep overall costs down for the lessor. No doubt it provides leverage to keep the customer on the hook, and so may be prone to abuse. Maybe shorten the periods? Or require the lessor to credit interest on the retained funds?

Section 3.202 [Refund of Excess Fees]

If a lessee pays to the lessor an amount for fees owed to the state for the licensing or transfer of title of the motor vehicle, and the amount paid exceeds the actual fees due for such licensing or transfer (including any excess of the amount the lessor paid to the state prior to execution of the lease in order to avoid penalties that would have accrued because of late payment of such fees), the lessor shall promptly return such excess amount to the lessee.

Reporter's Notes: Based on NH act. Apparently some lessors (or sellers) charge a lump-sum figure for official fees, which may be more than the actual official fees incurred. I.e., there is a dealer mark-up ("upcharge") on these fees. Query: should this Act restrict that practice, and if so how? An alternative might be to deal with this in a separate section on permissible charges.

Section 3.301 [Content and Form of Lease Agreement]

(1) The consumer lease shall contain the following items printed or written in a conspicuous manner:

(a) At the top of the consumer lease, in at least ten-point [?], bold capitalized type, the words "MOTOR VEHICLE LEASE";

(b) Identification of the lessor and lessee, the place of business of the lessor, the residence or place of business of the lessee [as specified by the lessee], and a description of the leased motor vehicle.

(c) If physical damage or liability insurance coverage for bodily injury and property damage caused to others is not included in the consumer lease, a notice in at least 10-point, bold capitalized type, substantially similar to the following:

"NO PHYSICAL DAMAGE OR LIABILITY INSURANCE COVERAGE FOR BODILY INJURY OR PROPERTY DAMAGE CAUSED TO OTHERS IS INCLUDED IN THIS LEASE"

and;

(d) Directly above the acknowledgment required by subsection (e) of this section, a written notice substantially similar to the following:

"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, if this lease contains a purchase option. Do not sign this lease before you read it. Early termination may require you to pay a substantial amount. You are entitled to a completed copy of this lease when you sign it."

(e) An acknowledgment by the lessee of delivery of a copy of the consumer lease, appearing conspicuously directly above the space reserved for the lessee's signature. [Should it be separately signed/initialed? Or on a separate acknowledgement document?]

(2) The lessor may not present for the lessee's signature a consumer lease that contains blank spaces to be filled in after it has been signed except that, if the vehicle is to be specially ordered for future delivery to the lessee, specific identifying numbers or marks or similar information concerning the vehicle, and the due date of the first payment, may be inserted in the consumer lease after its execution.

(3) The lessee's written acknowledgment of delivery of a copy of the consumer lease (subsection (1)(e) of this section) shall be [conclusive] [presumptive] proof of delivery of a copy of the consumer lease in any action or proceeding by or against an assignee of the consumer lease without knowledge to the contrary at the time of the assignment.

Reporter's Notes: The Model act, and every state law, have a set of elementary warnings and disclosures like these. It may be arguable that some additional information should be required, but probably not less.

There is room to debate the form of the consumer's acknowledgement of receipt of a copy of the lease [subsection (1)(e)], and how conclusive that acknowledgement will be against assignees [subsection (3)].

Section 3.302 [Other Disclosures]

(1) The consumer lease shall contain, as applicable, all items required to be disclosed by the federal Consumer Leasing Act without regard to that Act's dollar limitation on transactions covered.

Reporter's Notes: This subsection requires, as a matter of state law, that vehicle lessors disclose all information required by Reg. M without regard to the $25,000 cap in the federal law. This assumes this Act has no dollar cap or one higher than $25,000.

(2) In addition to the disclosures required under subsection (1), the lease shall contain the following items if they, or substantially similar items, are not required to be disclosed by the federal Consumer Leasing Act;

(a) The capitalized cost, identified as "capitalized cost", and a descriptive explanation such as "the agreed upon amount determined at lease inception for all items and services included in the lease":

(b) Any capitalized cost reduction, using the term "capitalized cost reduction", and itemizing and identifying each amount comprising it, [including identification of any trade-in vehicle by make, model year and vehicle identification number];

(c) The adjusted capitalized cost, using the term "adjusted capitalized cost" and a descriptive explanation such as "the agreed upon amount which serves as the basis for determining the base lease payment. [If you are not then in default, this amount plus any applicable early termination charges determines your maximum early termination obligation"];

(d) The estimated residual value of the vehicle at the expiration of the lease, using the term "residual value";

(e) The total amount of the "Lease Charge," using that term, and a descriptive explanation such as "the amount you will pay for financing this vehicle over the term of the lease";

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

(g) In the case of a finance lease [defined?], a statement identifying any express warranties or guarantees available to the lessee made by the supplier of the leased vehicle.

(h) The disclosures required by Section 3.402 relating to insurance, and by Section 3.404 relating to gap protection.

[(i) If the lease includes charges payable to third parties, such as group credit insurance, gap protection, service contract or the like, a statement that the lessor may receive or retain a portion of those charges.]

Reporter's Notes: This subsection requires additional disclosures beyond Reg. M, most notably the Lease Charge and Lease Rate which are the leasing analogues to the Finance Charge and Annual Percentage Rate in credit transactions. The computational steps for these are contained in the definitions, supra, but may need elaboration and refinement in separate sections of this Act or by regulatory interpretation. These two items are not currently required disclosures under the federal act or any state law.

Reg. M requires disclosure of warranties made by the lessor or manufacturer, but not by the supplier of the vehicle in a finance lease. Supplier warranties in fact flow to the lessee under UCC 2A-209, but that UCC section requires no particular disclosure of them. Item (g) is meant to fill that gap.

Item (i) is the Reporter's notion, to pick up on the somewhat contentious issue of upcharges. Does it help simply to tell the consumer that the lessor makes money on third-party charges?

(3) The disclosures required by subsection (2) of this section shall be made at the same time as the disclosures required by subsection (1) of this section and to the extent permitted by the federal Consumer Leasing Act in the same location and format. [If the disclosures required under subsection (1) may be made in a document separate from the lease, the disclosure items required under subsection (2) may be included in that separate document, unless the federal Consumer Leasing Act prohibits such inclusion.]

Reporter's Notes: This subsection tries to harmonize the federal and additional state disclosures in terms of timing, location, and format. If Reg. M goes to a "federal box" format, hopefully these state items would be permissible additional information in that box, or on a separate disclosure document.

(4) During the course of the consumer lease:

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

(b) Upon written request from a lessee the holder must promptly provide to the lessee a written statement of the dates and amounts of the periodic lease payments that have been received by the holder under the consumer lease and the total amount of the remaining periodic lease payments. Any amounts in the statement that are estimated shall be so identified.

(c) Upon written request from a lessee the holder must provide to the lessee a written statement [estimate?] of the lessee's projected early termination obligation under the consumer lease without consideration of the value of the vehicle.

(d) The holder may not impose a charge on the lessee for providing a statement under paragraph (b) or (c) of this subsection once in any 12-month period. The holder may impose a reasonable fee, not to exceed $20 [?] per statement, for providing additional statements in a 12-month period, provided that such charge has been disclosed in the lease.

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.

Section 3.303 [Renegotiations and Extensions]

The disclosure requirements of subsections 3.302(1) and (2) of this Act apply to the renegotiation of a consumer lease, but do not apply to any extension of a consumer lease for a period of six months or less. [A renegotiation does not constitute a transaction subject to warranty or other provisions that apply to the sale of used vehicles under the laws of this state [?]].

Reporter's Notes: Drawn from the Model and various state acts, and paralleling Reg. M. A significant re-writing of the lease will require all new disclosures.

The bracketed language, from the Model act, is to avoid any assertion that the renegotiated lease falls under "used car" laws.

Section 3.304 [Satisfaction of Lease]

After the payment of all sums for which the lessee is obligated under a consumer lease [, and upon the lessee's written request,] the holder shall send to the lessee at the lessee's last known address documentation to indicate payment in full. This documentation shall not operate to release the lessee from liability for events discovered by the holder after the sending of such documentation.

Reporter's Notes: Drawn from the Model and various state acts. A receipt or "paid in full" copy of the lease seems appropriate. Should the consumer have to request it in writing? If so, the lease probably ought to disclose that fact.

Section 3.401 [Inoperable Vehicle; "Lemon Law"]

(1) The lessee is entitled to a pro rata adjustment in the amount of base lease payments for any period in excess of ___[10?] consecutive days in which the leased vehicle is inoperable or otherwise unavailable to the lessee on account of warranty defects for which the holder is responsible. This paragraph does not limit a lessee's other remedies for breach of warranty.

(2) Leases subject to this Article [may also be] [are also] subject to [cite to state "lemon law"].

Reporter's Notes: Subsection (1) is the Reporter's creation. Unlike a credit purchase where the consumer is buying outright ownership of a car, a lessee is buying its use for a finite period of time; if warranted defects deprive the lessee of some significant part of that use, some adjustment seems appropriate.

Subsection (2) states the obvious: leased vehicles may be covered by the state lemon law, allowing cancellation of the lease if the vehicle is seriously defective.

Section 3.402 [Insurance]

(1) Any insurance for which a charge is included in the consumer lease must be issued by an insurance company authorized to do that kind of insurance business in this state.

Reporter's Notes: This is from the Model, and several state acts, to assure that insurance products are authorized in the state.

(2)(a) If the lease requires the lessee to maintain liability insurance or casualty insurance on the vehicle, the lease must disclose -

(i) the premium for the insurance if purchased from or through the lessor; and

(ii) that the lessee may purchase the required insurance coverage from an agent or broker of the lessee's choice subject to the lessor's right to refuse to accept that insurer for reasonable cause.

(b) If any required policy of liability insurance or casualty insurance on the goods is canceled, any unearned insurance premium refund received by the holder may be:

(i) refunded to the lessee;

(ii) credited, together with the unearned portion of the lease charge applicable thereto, to the lessee's obligations, including, without limitation, to the final maturing lease payments; or

(iii) credited to the obligations of the lessee upon early or scheduled termination or toward payment for similar insurance under subsection (4) of this Section.

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

Reporter's Notes: This subsection (2) is based partly on the Model and several of the state acts, with the disclosure aspects drawn from Truth in Lending, Reg. Z 226.4(d).

Paragraph (a) allows a lessor to require property or liability insurance on the leased vehicle, but lets the lessee obtain the insurance on his own.

Paragraphs (b) and (c) give the lessor options for applying rebated premiums. Should the holder be able just to bank a refund against "final maturing payments" that may be months or years away?

(3)(a) If the consumer lease includes group credit insurance the lease must disclose -

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

(ii) the fact that the group credit insurance is not required.

(b) No consumer lease may be conditioned on the lessee's purchase of group credit insurance. The lessee's election to purchase group credit insurance is effective only if the lessee signs or initials an affirmative written request for the insurance after receiving the disclosures specified in this subsection.

(c) If group credit insurance is canceled the refund of unearned insurance premiums received by the holder shall be

[Option A]: either: (i) refunded to the lessee; or (ii) credited, together with the unearned portion of the lease charge applicable thereto, either to the lessee's obligations, including, without limitation, to the final maturing lease payments or, at the holder's option, to the obligations of the lessee upon early or scheduled termination, provided that no such credit or refund need be made if the amount thereof would be less than one dollar.

[Option B]: promptly refunded to the lessee.

Reporter's Notes: Subsections (a) and (b) are based on the disclosure rules for credit insurance in Reg. Z 226.4(d)(1), to assure that the voluntary nature of the insurance is clear to the lessee.

Subsection (c) deals with refunds of group insurance premiums; the question is who controls the refund? Option A lets the holder apply the refund on the lease obligation; Option B requires a refund to the lessee. Since this insurance is voluntary [unlike casualty coverage], and can be cancelled at any time, arguably the lessee should get the cash refund.

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

Reporter's Notes: Drawn generally from the state acts. And see U3C 4.105. If the lessee is buying insurance through the lessor, the lessor should provide coverage information.

(5)(a) If the lessee fails to maintain insurance required under the lease, the holder may buy [reasonably equivalent ?] insurance insuring substantially the same risks for either the interests of the lessee and the holder or the interest of either of them. Any amount paid by the holder for this insurance -

(i) may be the subject of a lease charge from the date the amount was paid by the holder, as though such amount was part of the capitalized cost; and

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

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

Reporter's Notes: From the Model and various state acts. This permits a holder to buy replacement coverage if the lessee lets coverage lapse; it is an example of "advances to perform covenants" (cf. U3C 2.506). But force-placed insurance can be problematic: unduly narrow (or broad) coverages, high prices, lessor/seller upcharges, etc. The "reasonably equivalent" parenthetical might be one way to constrain these problems. Are there other ways?

(6) No charge for insurance included in the lease or added to the lease obligation under subsection (4) may exceed the premium [permitted by law] [actually imposed by the insurer] for such insurance.

Reporter's Notes: This subsection puts outside limits on the cost of insurance. The "permitted by law" option allows 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 3.403 [Limitations on Charges to Lessee]

(1) Late charge:

(a) The consumer lease may provide for the holder to collect a late charge on a lease payment that is delinquent for a period of 10 days in an amount provided in the consumer lease [but not to exceed the [greater] [lesser] of $___ or 5 percent of the late payment].

(b) The holder may not assess or collect a late charge under paragraph (a) of this subsection when the only delinquency is late charge(s) assessed on an earlier lease payment or payments.

Reporter's Notes: This allows a late charge, but bars the pyramiding of those charges.

(2) Attorney fees; collection costs:

[Option A] The consumer lease may not provide for payment by the lessee of attorney's fees. A provision in violation of this section is unenforceable.

[Option B] The consumer lease may provide for payment by the lessee of reasonable attorney's fees not in excess of 15 percent of the lease obligation [remaining at] after default and referral to an attorney not a salaried employee of the holder. A provision in violation of this section is unenforceable.

[Option C] The consumer lease may provide that in the event of default the lessee will pay collection costs, court costs, and where the consumer lease is referred to an attorney not a salaried employee of the holder for collection, reasonable attorney's fees.

Reporter's Notes: To what extent should a lessee be liable on default for the lessor's attorney's fees (or other collection costs)?

Option A forbids attorney's fees provisions. Option B generally allows them. A and B are alternatives offered in U3C 2.507. Option C, from the Model act, allows not just attorney fees but "collection costs" and "court costs" as well.

(3) Charges for renegotiations:

Reporter's Notes: No text proposed. The U3C 2.503 and 2.504 set precise limits on charges that may be imposed for deferral, extension, consolidation, or other refinancing [renegotiation] arrangements, often triggered by the consumer's actual or imminent default. These fit in the U3C pattern of regulating credit rates and charges, but seem unnecessary in the leasing context. Maybe a brief "reasonableness" rule for any such charges?

(4) Other charges:

Reporter's Notes: Open question: should this Act limit, or otherwise address, any other typical fees or charges?

Section 3.404 [Gap Liability]

Reporter's Notes: Maybe move relevant "gap" definitions into this section?

(1) The consumer lease must contain a notice indicating -

(a) Whether the lessee is responsible, or would be responsible in the absence of gap protection, for the gap amount and the obligations comprising the gap amount;

(b) If the lessee is or would be responsible for the gap amount, whether the lessor offers gap protection that the lessee may obtain from the lessor or a third party; and

(c) The amount of the charge for the gap protection if offered.

(2) No consumer lease shall be conditioned upon the lessee's purchasing gap protection. The lessee's obligation to purchase gap protection is unenforceable unless the lessee signs or initials an affirmative written request for gap protection after receiving the notice specified in subsection (1).

(3) Failure to provide the notice specified in subsection (1) invalidates any lease provision which otherwise would obligate a lessee to pay the gap amount.

(4) The lessor's waiver of its contractual right to hold the lessee liable for the gap amount may be conditioned upon receipt by the lessor of:

(i) all amounts due under the consumer lease as of the date of receipt by the lessor of the insurance proceeds or equivalent amount as specified in the lease, or if no such date is specified, as of the date of total loss of the vehicle;

(ii) an amount from the lessee equal to the amount of the lessee's deductible and any other subtractions from the actual cash value under the lessee's insurance policy; and

(iii) insurance proceeds from the insurance policy required under the lease, or the equivalent amount of the value of the vehicle.

(5) The lessor's waiver of its contractual right to hold the lessee liable for the gap amount shall not be considered insurance under the laws of this state and no license shall be required of lessors who waive or offer to waive such right. A third party that supplies gap protection must be an entity authorized to do business in this state.

Reporter's Notes: This is based on the Model, and NH, NJ, NY, and WI acts. It deals with the lessee's potential liability when the vehicle is destroyed, stolen, confiscated, etc. Insurance proceeds usually cover only the actual cash value of the car, while the lessee's amortizing obligation under the lease typically exceeds that amount. Thus the "gap." This provision assumes generally that the lessee can be held liable for the gap amount.

Subsection (1) requires, in all cases, disclosure of gap liability and any voluntary options for the lessee to cover it with "gap protection" -- a quasi-insurance agreement.

Subsections (2) and (3) require lessee's explicit assent to purchase gap coverage, and penalize the lessor who doesn't disclose properly.

Subsection (4) sets conditions on effective gap protection.

Subsection (5) allows lessors and third-parties to offer gap protection without regard to insurance laws.

Section 3.405 [Assignment of Lease by Lessor or Lessee]

(1) Notwithstanding any contrary provision of this Act or other laws of this state [?]:

(a) a holder may purchase, sell, or otherwise acquire or transfer an interest in a consumer lease or a vehicle subject to a consumer lease, on such terms and conditions and for such price as may be mutually agreed upon; and

(b) no filing of the sale or transfer, no notice to the lessee of the sale or transfer, and no requirement that the holder be deprived of dominion over payments due under the consumer lease or over the vehicle if repossessed by or returned to the holder, shall be necessary to the validity of a written sale or transfer of a consumer lease as against creditors, subsequent purchasers, pledgees, mortgagees, or encumbrancers of the holder.

Reporter's Notes: This is from the Model, MD, NY, and WI acts. Subsection (1) generally authorizes any transfer of leasehold interests.

Subsection (2) appears to allow leases, or portfolios

of them, to be validly transferred without formalities and without regard for third-party claims. This seems to displace the UCC Article 9 rules on perfecting transfers of, or security interests in, consumer leases as chattel paper. Is that the intent? Why?

(2) Unless the lessee has notice of actual or intended sale or transfer of a consumer lease, a payment made by the lessee to the last known holder of such consumer lease shall be binding upon all subsequent holders or assignees. Any holder who sells or transfers a lease and thereafter receives payment from the lessee shall forward such payment in the form in which it was received, to the person to whom it sold or transferred the lease, unless that purchaser or transferee agrees in writing that the person who sells or transfers the lease may retain such payment.

Reporter's Notes: Drawn from the Model and other state acts. Cf. U3C 3.204. Indirectly it requires any transferee who expects to receive payments to notify the lessee, but it does not specify the form or content of that notice. Should it?

(3) No lessor shall take or receive a consumer lease which fails to contain the following provision in at least 10-point bold type:

Reporter's Notes: This is a parallel notice to that required by the FTC "Holder in Due Course" Rule, 16 CFR Part 433, which applies only to credit transactions. It prevents any transferee of the lease from claiming the protections of holder-in-due-course status. It preserves against an assignee the lessee's substantive contract and warranty rights against the lessor and any supplier of the vehicle. [Assignees get some insulation from vicarious liability for violations of this Act under Section 5.102, infra.]

Is the phraseology adequate? Is further elaboration needed on how this notice operates to preserve claims and defenses?

(4)(a) A lessee under a consumer lease with a term of one year or more may sublease or assign the lessee's rights and interests with the written consent of the holder. The holder may not delay or withhold consent without reasonable cause to believe the sublease or assignment jeopardizes its right to payment under the lease. The holder may require that the sublessee or assignee meet the lessor's or holder's underwriting criteria for the lease.

(b) Unless otherwise agreed by the holder, the obligations of the 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: Based on a proposed provision 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. Does it help measurably to reinforce that possibility by statute? Is the universal good-faith/fair-dealing standard a sufficient incentive for lessors to consider subleases? Will it unduly burden second or third level holders to have to assess "reasonable cause" and whether a sublessee meets "underwriting criteria"?

Section 3.501 [Lessee's Default; Right to Cure]

(a) A consumer lease may provide for events constituting default by the lessee, except that a default based on relocation of the lessee or the vehicle, or because the holder otherwise deems itself insecure, may be acted upon only if the holder has a good faith belief that such relocation or insecurity [jeopardizes] [significantly impairs] its rights under the lease.

Reporter's Notes: "Jeopardizes" is from Model act; "significantly impairs" is from U3C 5.109.

(b) After a lessee has been in default for 10 days solely by reason of the lessee's failure to make a timely lease payment and any applicable late charges, the holder may declare the lessee to be in default and may send the lessee a notice of default. A lessee who receives a notice of default and who has not previously been afforded the right to cure a default is entitled to cure the default. The notice of default must contain a conspicuous statement that the lessee is entitled to cure the default, setting forth the dollar amount necessary to cure the default, the date by which payment must be made and the name, address and telephone number of the holder from which information may be obtained regarding the cure. The date by which payment must be made may be no less than 20 days after the notice is sent. The holder may take no action to accelerate the lessee's obligation or foreclose on the vehicle until expiration of the period for cure stated in the notice.

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

Reporter's Notes: Drawn from Model, NH, NJ, NY, MD acts. A more elaborate default/cure provision is in U3C 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.

Section 3.502 [Repossession; Reinstatement]

(a) Except as provided in Section 3.501, and unless the lessee voluntarily surrenders the leased vehicle to the holder, the holder may on default repossess the vehicle by judicial process or by self-help provided there is no breach of the peace or trespass on private premises.

(b) If on default the lessee surrenders the vehicle or the vehicle is repossessed [(and has not previously been repossessed under the same consumer lease) ?], the holder shall within ___ days after surrender or repossession give the lessee written notice of the amount due in order to reinstate the consumer lease, and the time, place and manner at or after which the holder proposes to dispose of the vehicle. For this purpose the 'amount due in order to reinstate' is all amounts currently owed or in default under the consumer lease (without acceleration) and the costs of repossession and storage, and may include a reasonable additional security deposit for the reinstated lease. The notice must also state that on disposition of the vehicle the lessee will remain liable for any unpaid portion of its early termination liability. [The notice may also state an amount and payment terms for which the holder is willing to sell the vehicle in full satisfaction of the lessee's obligations under the consumer lease.]

Reporter's Notes: Drawn from the MD and NY acts. It speaks to a post-repossession right to "reinstate" the lease, rather than "redemption" which does not quite fit where the lessee has no equity interest.

The Reporter suggests the parenthetical sentence as a way for the holder to broach a full-payoff figure. Might this be made mandatory?

(c) If the lessee does not reinstate the lease by the date stated in the notice, the lessee may dispose of the goods and apply the [realized value] [disposition value] and any security deposit, in order, to -

(1) the expenses of repossession and sale (including preparation of the goods for sale);

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

(3) the early termination liability of the lessee.

Any surplus shall be returned to the lessee, and [, except as provided in Section 3.504(e)(3),] unless otherwise agreed the lessee is liable for any 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 3.504.

(c) The manner of disposition of the repossessed vehicle and the calculation of its [realized value][disposition value] are governed by Section 3.503.

Section 3.503 [Disposition of Vehicle at Lease Termination; Realized Value]

(a) This section applies when the lessee's liability on early termination of the lease (including repossession on default), or on expiration of the lease term, is determined by reference to the value of the leased vehicle realized on disposition by sale [or re-lease?], and the lessee does not exercise any purchase option.

(b)(1) The holder must use reasonable care in the custody and preservation of a vehicle in the holder's possession following surrender or repossession.

(2) Unless otherwise agreed, when the leased vehicle is in the holder's possession or custody -

(i) reasonable expenses (including the cost of any insurance and payment of taxes) incurred in the custody or preservation of the vehicle are chargeable to the lessee;

(ii) the risk of accidental loss or damage is on the [holder?] [lessee ?] to the extent of any deficiency in effective insurance coverage; and

(iii) the holder must keep the leased vehicle identifiable, and may not sell, re-lease or otherwise encumber it except as permitted in this Section.

(3) The holder is liable for any loss caused by failure to meet any obligation imposed by the preceding subsections but does not lose its leasehold interest.

Reporter's Notes: Based on UCC 9-207, to place a "reasonable care" responsibility on the holder while the car is in its possession.

(c) Where a consumer lease is terminated

(1) early by a lessee who does not exercise a purchase option, or

(2) at scheduled expiration by a lessee who does not exercise a purchase option and whose liability at the scheduled expiration of the lease term is based on the realized value of the vehicle,

the lessee may obtain, at the lessee's expense and within __ days after the termination, a professional appraisal of the [wholesale] [retail] value which could be realized at sale of the vehicle, by an appraiser mutually acceptable to the lessee and the holder. The appraisal shall be final and binding upon the parties and shall be the realized value used in determining the lessee's liability at early termination or at the scheduled end of the lease term.

Reporter's Notes: Based on the Model and several state acts. This confirms that an appraisal valuation obtained by a lessee establishes "realized value" for measuring the lessee's termination liability. Does this need some mandatory disclosure?

As written, this would apply in a repossession setting as well as voluntary termination. Does that make sense?

(d) If the consumer lease so provides, the realized value on lease termination may be determined by reference to a Blue Book or comparable reference source, with or without adjustments for excess wear and use. If excess wear and use are considered, the requirements of Section 3.505(d) apply.

Reporter's Notes: Reporter's imagination: might a lease use a Blue Book benchmark (adjusted by wear and use) instead of accounting for specific proceeds of sale, one car at a time?

(e) Nothing in this section prohibits the lessee and lessor from agreeing upon the realized value of the goods, and the value so agreed upon is final and binding upon the parties and is used as the realized value in determining the lessee's liability at early termination or at the scheduled end of the lease term.

(f) In the event of a total loss of the vehicle prior to the end of the lease term occasioned by theft, physical damage, or other occurrence as specified in the consumer lease, the realized value is the sum of: the amount received by the holder from the lessee's insurance company or from any other party in payment of the loss; and the amount of the lessee's deductible under the lessee's insurance policy.

(g) In any case not otherwise provided for in this Section, the realized value is the amount received on sale or other disposition of the vehicle after due allowance for the reasonable expenses of the sale or other disposition including the expenses of repossession, storage and preparation of the vehicle for sale. Disposition of the vehicle may be by public or private sale, at any time and place, and on any terms, but every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable. The holder may buy at any public sale. A transfer of the vehicle to the holder [or to a recourse party or a related party] is not a sale or disposition under this Section.

Section 3.504 [Early Termination Liability]

(a)(1) Option A: A lessee may terminate the consumer lease voluntarily at any time after the lessee has made 12 full periodic lease payments for which lease charges have been accrued by the holder, or, in the case of a single payment lease, at the expiration of 12 months from the consummation of the lease. Nothing in this section prohibits the holder from permitting the lessee to terminate the consumer lease before the expiration of 12 months.

Option B: A consumer lease may provide a period of time not to exceed one year during which termination of the lease by the lessee constitutes an event of default. A voluntary termination by the lessee outside that period, or at any time

with the holder's agreement, is not a default under the consumer lease.

Reporter's Notes: Option A is from the Model, NH and NY acts. Option B is the Reporter's version. Both have the same objective: to allow a minimum period for the lessor/holder to recoup depreciation and lease charges before the lessee is "entitled" to terminate. The sanction for a lessee who terminates within the proscribed period is exposure to default charges and adverse credit reports, as well as possibly very large early termination liability.

(2) The holder may not report the voluntary early termination of a consumer lease to a consumer reporting agency as a default unless the lessee fails to satisfy the lessee's early termination obligations within the time periods set forth in the consumer lease.

Reporter's Notes: From the Model, NH and NY acts.

(b) If the consumer lease does not provide a measure or formula for the lessee's liability on early termination, the holder may recover, in addition to any obligations of the lessee already accrued or in default under the lease, the amount of remaining base periodic payments scheduled under the lease plus the residual value of the vehicle, each component reduced to present value at the lease rate disclosed under Section 3.302 and the resulting amount reduced further by the realized value of the vehicle [and expenses saved in consequence of the termination]. In the case of a single payment lease the "amount of remaining base periodic payments" is deemed to be the pro rata portion of the single payment allocable to the remaining term of the lease.

Reporter's Notes: This is based on UCC 2A-528, which states the lessor's basic measure of damages for lessee default. In reality this rule would rarely if ever be invoked because leases always contain early-termination formulas in the nature of liquidated damages (dealt with below). But this subsection is meant to set a philosophical floor for assessing the reasonableness of those early termination formulas.

The policy premise is that the lessor is entitled to the current value of its expectancy under the lease over its full term. That deferred expectancy consists of the remaining base lease payments and the residual value. To discount that sum to present value, the disclosed lease rate is logically applied, and the resulting figure is further reduced by the actual realized value (and perhaps the lessor's "expenses saved" if there are any). Are there miscellaneous lessor costs (lost tax benefits, e.g.) that should also be accounted for on early termination?

(c) A consumer lease may provide a formula or measure for the lessee's obligation [liability ?] on early termination where the lease does not contain or the lessee does not exercise a purchase option. The formula or measure must be reasonable in light of the then anticipated [or actual] harm or loss caused by the early termination [, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy]. Except as further limited in subsection (e) of this Section, the lessee's early termination obligation may not exceed an amount equal to the sum of:

Reporter's Notes: The second sentence repeats the baseline test for a "formula" [liquidated damages] measure of liability from UCC 2A-504 and (in brackets) from 183(b) of the federal Consumer Leasing Act. It seems useful, even essential, to have that reasonableness standard stated explicitly in this Act. What follow are the permissible components of that formula, based on the Model, NH, NY and WI acts.

(1) any unpaid lease payments that accrued through the date of early termination;

(2) any other unpaid amounts, other than excess mileage charges, arising under the terms of the lease;

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

(4) either (i) a disposition fee in an amount set forth in the consumer lease, or (ii) the actual and reasonable costs of retaking, storing, preparing for sale and selling the goods, including reasonable attorneys' fees [and collection and court costs ?] incurred by the lessor in recovering or securinq possession of the vehicle;

Reporter's Notes: The Model act states (4)(i) and (4)(ii) as two separate components, although it seems they cover the same costs. Also the expenses in (ii) may already be accounted for in the 3.503 rules on calculating realized value.

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 the same in either case.

(5) the amount, if any, by which (i) the balance subject to lease charge plus the lease charge earned in advance for the computational period in which the early termination occurs, calculated in accordance with the constant yield method or any other generally accepted lease accounting method exceeds (ii) the realized value of the goods; and

Reporter's Notes: This is from 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 (I think) essentially a simple interest calculation. Do we want to prohibit expressly use of the "sum of the digits" or "Rule of 78s" method?

(6) any other early termination charge expressly disclosed in the consumer lease.

Reporter's Notes: From the Model and other state acts. This would appear to permit unlimited prepayment penalties. But the whole formula remains subject to the "reasonableness" standard. Is that enough constraint? (See (e)(2), below).

(d) As an alternative to the constant yield and other generally accepted lease accounting methods of determining the depreciation amounts accrued through the date of early termination of a precomputed lease transaction, those amounts may be determined under paragraph (5) of subsection (c) of this section by using a lease provision under which the lease charge is calculated on the adjusted capitalized cost for the time outstanding according to a generally accepted actuarial method.

This section does not [otherwise] limit or restrict the manner of calculating the lessee's early termination obligation, whether by way of unamortized capitalized cost, discounted present value of remaining lease payments, multiples of monthly payments or otherwise.

Reporter's Notes: Combines provisions from the Model, NH, NY, and WI acts. This gives the lessor flexibility as to computational technique, but still within "reasonableness" bounds.

Same question as above re "Rule of 78s": allowed or disallowed?

(e) In connection with the early termination liability authorized under subsection (c) of this Section:

(1) The sum of the amounts recoverable under paragraphs (5) and (6) of that subsection may not exceed the total of periodic lease payments remaining under the lease at the time of early termination except to the extent the excess amount is due to excess wear and use or excess mileage;

Reporter's Notes: This is the Reporter's suggestion. The lessee should not be held to an artificial early termination formula that requires him/her to pay more than the rest of the lease would cost, unless the vehicle is returned in really bad condition.

(2) There is a rebuttable presumption that the early termination obligation provided for by the consumer lease is unreasonable if the total early termination obligation is more than ___% [125 ??] of the amount for which the lessee would be liable in the absence of an early termination obligation provision in the lease (subsection (b) of this Section).

Reporter's Notes: Again, this is the Reporter's suggestion. Other than "reasonableness," there is no cap on the amount of early termination charges a lease may impose. This paragraph would set a kind of outside boundary, by saying that the charge is presumptively unreasonable if it exceeds the current value of the lessor's contract expectancy by more than some stated percent.

There is direct precedent for this approach in 183(a) of the federal Consumer Leasing Act, which creates a rebuttable presumption concerning the reasonableness of residual value estimates in open-end leases.

One way a holder could rebut the presumption would be to show a very low realized value resulting from excessive wear and use.

(3) If it is determined that the holder has violated Section 3.502 [Repossession; Reinstatement] or subsection (g) of Section 3.503 on disposition of the leased vehicle, there is a rebuttable presumption that the realized value equals the total of the amounts authorized under paragraphs (4), (5), and (6) of subsection (c) of this Section. The presumption may be rebutted by [clear and convincing] proof that notwithstanding the violation the reasonably determined value of the vehicle is less than the total of the amounts authorized under those paragraphs.

Reporter's Notes: This is perhaps clumsy language to raise the question whether the holder loses its rights to any "deficiency" -- the rest of the lessee's early termination obligation -- if the holder mis-conducts the repossession or disposition of the vehicle. This has been a controversial topic under UCC Article 9: the current revision draft of Article 9 [ 9-507(c)(2)(i)] proposes a version of this "presumption" approach. But U3C 5.103 bars a deficiency claim altogether unless the creditor acts in good faith and in a commercially reasonable manner.

In leases, disposition of the vehicle on early termination almost inevitably leaves a "deficiency" in the early termination liability. The question is whether a holder should forfeit this recovery on account of improper conduct of the repossession or disposition.

(f) Any refundable security deposit or advance lease payment held by the holder may be retained by the holder and credited against the lessee's early termination obligation. The amount of such security deposit or advance lease payment in excess of the amount of the lessee's early termination obligation shall be returned to the lessee. The holder is not obligated to pay interest to the lessee on the security deposit.

Reporter's Notes: From the Model and various state acts. Maybe better handled in a separate section on security deposits and advanced lease payments?

Section 3.505 [Assessment of excess wear and use]

Reporter's Notes: This section is a composite of Model and various state acts, but substantially re-written. The capture of excess wear and use charges is an important device for lessors to avoid being stuck with beat-up vehicles at lease end. This can also be a source of abuse if those charges are not subject to scrutiny.

The primary objective here is to provide a mechanism to assure that consumers have a fair chance to question or challenge excess wear and use charges without ham-stringing the holder's efforts to evaluate and dispose of the returned vehicle without delay.

(a)(1) A consumer lease may provide that the lessee is responsible at the termination [expiration ?] of the lease for excess wear and use of the vehicle, and for excess mileage, according to standards stated in the lease [or accompanying documents ?].

Reporter's Notes: I am assuming that "excess wear and use" [EWU] is only relevant when the lease expires on schedule. For any earlier termination, diminished value of the vehicle is reflected in the realized value.

(2) No charge for excess wear and use, or excess mileage, may be assessed if the lessee exercises a purchase option provided in the consumer lease.

Reporter's Notes: If the lessee buys the car at the option price in the lease, the lessor/holder gets its full bargain in that price, and can't tack on charges for EWU.

(3) The holder may not prohibit the lessee from being present at any inspection for excess wear and use, and must permit the lessee reasonable access to the vehicle for purposes of an appraisal on the lessee's behalf.

(b) If the lease requires the lessee, or gives the lessee the option, to have the vehicle inspected by the holder prior to scheduled termination, the holder must so notify the lessee at least ___ days prior to the last date available for the inspection (which shall not be earlier than 15 days prior to scheduled termination). If the holder inspects the vehicle pursuant to this subsection, the holder must proceed as required by subsection (d) of this Section.

Reporter's Notes: The Model, NH, NY and WI acts require some notice to the lessee where the lease anticipates pre-termination inspection by the holder.

(c) If the lease does not require, or give the lessee the option to have, an inspection of the vehicle by the holder prior to scheduled termination, not more than [40 ?] days nor less than [20 ?] days before the scheduled expiration of the lease, the holder shall mail or deliver to the lessee a notice advising the lessee that:

(1) the lessee may return the vehicle at the scheduled termination date with an itemized appraisal of excess wear and use under the standards for excess wear and use stated in the lease;

(2) the lessee may obtain the appraisal from or through the holder if that is the case; and

(3) the appraisal will be conclusive on the condition of the vehicle, but not on whether the condition is covered as excess wear and use under the lease.

Reporter's Notes: Drawn from the Model and various state acts. This gives the lessee a chance to preempt disputes over EWU by getting an appraisal of his own.

(d) In order to hold the lessee responsible for excess wear and use the holder must provide the lessee the notices and counter-inspection rights provided in this subsection:

(1) If the holder has inspected the vehicle prior to expiration of the lease or the lessee returns the vehicle at the expiration of the lease without an appraisal authorized by subsection (c), the holder must within ___ business days after the [earlier of the] inspection or return provide to the lessee an itemized bill identifying the items of excess wear and use and the amounts to be paid by the lessee on account of the excess wear and use. The itemized bill must include or be accompanied by a notice to the lessee that, if the lessee disputes the itemized bill and charges for excess wear and use, the lessee may within ___ business days after receiving the itemized bill obtain an appraisal on the lessee's own behalf, and that appraisal will be conclusive on the condition of the goods but not on whether such condition is covered as excess wear and use under the lease. If the lessee does not obtain such an appraisal, the holder's appraisal is conclusive. A notice in substantially the following form satisfies the notice requirement of this subsection:

"You are being asked to pay this amount for excess wear and damage. If you do not agree with this amount and to preserve valuable rights, you must obtain and deliver to us, within ___ days after hand delivery or ___ days after mailing of this bill, an itemized appraisal and estimate of the cost of repairing such excess wear and damage from a licensed appraiser or one agreed to by us and, if your lease has ended, payment of any charges due under the appraisal you obtained. If you properly obtain and deliver such an appraisal and tender any amounts due, that appraisal is binding on the holder. If you fail to do so, the holder's inspection and appraisal is conclusive."

(e) If the holder inspects the vehicle pursuant to subsection (b), the itemized bill must also contain a statement substantially as follows:

"This inspection report was prepared by the holder prior to the scheduled termination of your lease. You may avoid excess wear and damage charges by having those items satisfactorily repaired prior to the return of the vehicle. The holder may inspect the vehicle on return and may seek additional charges only by written notice and only for wear and damage incurred after the date of the holder's vehicle inspection. In addition, any charges for wear and damage under this inspection or your own inspection are due when your lease terminates."

Reporter's Notes: Subsections (d) and (e) resemble the Model and several state acts. Lessor/holder wants to close on EWU issues quickly and dispose of the vehicle; lessee wants to avoid gouging on EWU charges. Does this draft retain the holder's flexibility while also giving lessee a realistic counter-inpection opportunity? Should this Act try to anticipate every possible dispute wrinkle? Should it include more elaborate ADR mechanisms, as in NY?

(f) As used in this section:

(1) An "itemized bill" is a listing of the items of excess wear and damage and the amounts to be paid by the lessee. An itemized bill may be comprised of separate documents delivered or mailed separately. [??] An itemized bill may also include identified charges for excess mileage and other amounts due under the lease. Mere acknowledgment by the lessee of receipt of an itemized bill is not an admission of the existence, nature, obligation to pay, or amount of any of the items therein.

(2) An "appraisal" must (i) be conducted by a person licensed for such purpose under the _____ Law of this state or by an independent third party agreed to by holder and lessee, (ii) describe conditions of excess wear and use, and (iii) estimate the cost of repair.

(3) An appraisal or itemized bill is "conclusive" on the information contained in it, except to the extent that such wear and damage was obscured or concealed or is reasonably believed by the holder to have occurred after a pre-termination inspection.

(g) Notwithstanding any other provision of this section or any provision of the lease, if the itemized bill is not based on an appraisal, the holder may not collect for excess wear and use any amount beyond the actual costs of repair.

Reporter's Notes: From the NY act. If the holder's bill for EWU is not prepared by an authorized appraiser (whose estimates are presumably reliable), the holder can't collect more than actual repair costs.

(h) Nothing in this Section -

(1) requires the holder to send any itemized bill or notice if the holder does not claim an excess wear and use charge;

(2) limits the lessee's obligation for any charge for excess mileage stated in the lease;

(3) prohibits any agreement between the lessee and the holder relating to wear and damage if such agreement is consistent with the rights given to the lessee in this Section; or

(4) limits the lessee's liability to the holder for odometer rollbacks or obscured or concealed structural or safety related damage discovered by the holder after the return of the goods or after the lessee receives an itemized bill.

Section 3.506 [Open-end lease]

Reporter's Notes: No text proposed at this time. "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, but rather must bear some or all of the depreciation risk.

The federal Consumer Leasing Act 183 effectively restricts the lessee's liability under an open-end lease to an amount no greater than three monthly payments. There is a comparable limitation in U3C 3.401. Several states (CA, NH) restate this substantive limitation in their leasing acts.

Query: (1) do we want to adopt this federal limitation into state law?; (2) is any other special treatment appropriate for open-end leases?

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

Reporter's Notes: There are other consumer leasing patterns in the marketplace, including rent-to-own appliance transactions, furniture and musical instrument leasing, and short-term rentals for cars, tools, party equipment, and the like.

RTOs are currently regulated to some degree in virtually every state. Query: does the drafting committee desire to include RTO provisions in this uniform act? And does the committee see evidence of a need to deal separately with any other leasing pattern at this time?

Reporter's Notes: This section parallels the civil liability section of the Truth in Lending Act, and is similar to U3C 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 here is give lessees incentives to police lessor misconduct, primarily through recovery of statutory damages and court costs and attorney's fees. It is not intended to create a minefield of potential liability for the leasing industry. Thus the effectiveness, and fairness, of these civil liability depends on the clarity and precision of compliance responsibilities stated throughout this Act.

(a) A lessee who has suffered a loss due to a violation of any provision of this Act by a holder is entitled to recover the lessee's actual damages from the holder who has violated this Act.

(b) Any lessor who fails to return goods which the lessee left with the lessor pending the execution of a consumer lease which is not executed, or who sells or transfers such goods contrary to the provisions of subsection (1) of Section 3.201 of this Act, shall be liable to the lessee for the value of the goods traded-in and [consequential and incidental damages ?] [all costs and expenses ?] incurred by the lessee because of the failure to return the goods.

(c) In an action [other than a class action] in which it is determined that a holder has violated any of the following provisions of this Act, the lessee is entitled to an award of statutory damages of [Option A] $_____ [Option B] the greater of $100 or the amount of [#] periodic payments provided for in the consumer lease:

Reporter's Notes: The parenthetical poses the question whether class actions should be allowed for statutory damages. The sections listed below are those that include explicit and fairly precise requirements for lessors and holders; most apply only to vehicle leases.

Sec. 2.204 [Co-Signer Notice]

Sec. 2.301 [Rebate or Discount for Referrals]

Sec. 2.302 [Prohibited Lease Terms]

Sec. 2.303 [Security Interest Prohibited]

Sec. 3.201 [Payment or Trade-in Pending Execution

Lease; Refund or Return]

Sec. 3.301 [Content and Form of Lease Agreement]

Sec. 3.302 [Other Disclosures]

Sec. 3.303 [Renegotiations and Extensions]

Sec. 3.402 [Insurance]

Sec. 3.403 [Delinquency and Default Charges]

Sec. 3.404 [Gap Liability]

Sec. 3.501 [Lessee's Default; Right to Cure]

Sec. 3.502 [Repossession; Reinstatement]

Sec. 3.503 [Disposition of Vehicle at Lease

Termination; Realized Value]

Sec. 3.504 [Early Termination Liability]

Sec. 3.505 [Assessment of Excess Wear and Use]

Sec. 3.506 [Open-end Leases]

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

(e) Notwithstanding the provisions of subsections (b), and (c) of this section, if within [60 ?] days after discovering a violation of the provisions 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 corrects the violation(s) [including refund or restitution of charges improperly disclosed], neither the lessor nor the holder has liability under subsection (c) of this Section.

(f) A holder may not be held liable for a violation of this Act that 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 person's obligations under this Act is not a bona fide error.

(g) No action shall be brought under this Act more than two years after the occurrence of the act, method or practice which is the subject of the action. An action is "brought" for purposes of this subsection -

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

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

Reporter's Notes: How tight should the statute of limitations be? Both the federal CLA and the U3C have basically a 1-year SOL, but permit "recoupment" counterclaims beyond that point.

(i) No recovery under this Section may exceed the total amount to be paid by the lessee under the terms of the consumer lease, exclusive of the purchase option price, if any.[?]

(j) Notwithstanding the provisions of Sections 2.302(1)(__) and 3.405(3) of this Act, and except where the assignment is involuntary, a civil 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 for which the action or proceeding is brought is apparent on the face of the consumer lease. For purposes of this section, a violation is apparent on the face of the consumer lease if:

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

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

Reporter's Notes: This 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.

(k) [Other possible refinements: class action caps; multiple lessees; multiple violations; lessee offsets, etc.]

Section 5.103 [Criminal Liability]

Reporter's Notes: No text proposed at this time. Do any provisions of this Act deserve crimnal sanctions?

Note that under U3C 5.301 criminal sanctions attach only to "willfully and knowingly" (1) making excess charges in 'supervised' loans, (2) lending without a license, and (3) not making reports or paying license fees. Section 112 of the Truth in Lending Act, applicable to consumer leases, provides criminal sanctions for certain non-disclosures.

Section 5.104 [Effect of Violation on Rights of Parties;

Election of Remedies]

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

(2) Where an action or omission that violates this Act also violates other law, the lessee is entitled to but a single remedy.

Reporter's Notes: This is the Reporter's proposal. Subsection (1) is to make clear that a violation of this Act does not nullify or undercut the lessee's obligation on the lease. Cf. U3C 5.201(4). Subsection (2) is to prevent multiple recoveries for the same violation. Cf. U3C 5.203(8).

Section 5.105 [Administrative enforcement]

(1) The provisions of this Act shall be enforced by the [Attorney General, Credit Code Administrator, or similar public agency]. [and, or]

(2) For purposes of enforcement by [agency named in subsection (1)], a violation of this Act shall constitute an unfair or deceptive act or practice within the meaning of 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. As an additional power, or as an alternative enforcement mechanism, Subsection (2) would treat violations of this Act as violations of a broader consumer fraud act.

Section 5.106 [Administration of Act]

The [designate public official or office] shall administer the provisions of this Act, and shall have the authority to issue regulations and interpretations designed to effectuate the purposes of this Act, to prevent circumvention or evasion thereof, to facilitate compliance therewith, and to assure consistent interpretations with those of other states enacting this uniform Act.

Section 6.101 [Time of Taking Effect; Transition]

(1) This Act takes effect at 12:01 a.m. on [ ].

(2) Transactions entered into before this Act takes effect and the rights, duties and interests flowing from them thereafter my be terminated, completed, consummated 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) a renegotiation made after this Act takes effect as to a consumer lease whenever entered into;

(b) all consumer leases entered into before this Act takes effect insofar as the remedies of holders are limited by Sections 2.302 [Prohibited lease terms], 3.501 [Lessee's default; right to cure], and 3.502 [Repossession; reinstatement], and 3.503 [Disposition of vehicle at lease termination].

Reporter's Notes: Based on U3C 9.101.

Section 6.102 [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 U3C 9.103. As this Act is meant as 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.

Some particular state laws, e.g., on RTOs, or short-term car rental contracts, might be left in place until thought deserving of uniform treatment under Article 4 of this Act.