(Working Draft 1/12/01)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OK 73019, Executive Director

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

SECTION 101. SHORT TITLE 7

SECTION 102. DEFINITIONS 7

SECTION 103. SCOPE; EXCLUSIONS; SALE INCIDENT TO LEASE 22

SECTION 104. CHARACTERIZATION OF LEASE; TRANSACTION SUBJECT TO ACT

BY AGREEMENT 25

SECTION 105. SUPPLEMENTAL PROVISIONS AND PRINCIPLES OF LAW APPLICABLE 26

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

CLAIM 29

SECTION 107. LIMITATION ON CHOICE OF APPLICABLE LAW AND FORUM 30

SECTION 108. OBLIGATION OF GOOD FAITH 31

SECTION 109. UNCONSCIONABILITY 32

SECTION 201. ADVERTISING 35

SECTION 202. PRE-LEASE AVAILABILITY OF SAMPLE FORM 36

SECTION 203. DISCLOSURE; FORM OF CONSUMER LEASE; COPY TO LESSEE 37

SECTION 204. INSURANCE; INSURANCE DISCLOSURES 44

SECTION 205. NOTICE TO GUARANTOR 47

SECTION 206. INFORMATION DURING TERM OF LEASE; SATISFACTION OF LEASE 49

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

OR RETURN 53

SECTION 302. PROHIBITED LEASE TERMS 55

SECTION 303. SECURITY INTEREST RESTRICTED; SECURITY DEPOSIT 56

SECTION 304. LATE FEES; DELINQUENCY AND DEFAULT CHARGES 59

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

DEFENSES 62

SECTION 306. SUBLEASE 65

SECTION 307. OPEN-END LEASE 66

SECTION 308. WARRANTIES OF QUALITY AND TITLE WARRANTY DISCLAIMERS

AND REMEDY LIMITATIONS UNENFORCEABLE 68

SECTION 309. REBATE OR DISCOUNT FOR REFERRALS 70

SECTION 310. LIMIT ON INSURANCE CHARGES; TERMINATION OR REPLACEMENT

OF INSURANCE 71

SECTION 401. LIABILITY FOR GAP AMOUNT ON TOTAL LOSS OF GOODS 74

SECTION 402. LESSEE'S DEFAULT; RIGHT TO CURE 77

SECTION 403. REPOSSESSION; APPLICATION OF REALIZED VALUE 80

SECTION 404. DETERMINING REALIZED VALUE 82

SECTION 405. EARLY TERMINATION LIABILITY 85

SECTION 406. REPORTING EARLY TERMINATION TO CONSUMER

REPORTING AGENCY 94

SECTION 407. EXCESS WEAR AND USE; EXCESS MILEAGE 95

SECTION 501. PRIVATE REMEDIES 101

SECTION 502. CLASS ACTIONS. 104

SECTION 503. LIMITATIONS ON PRIVATE REMEDIES. 105

SECTION 504. EFFECT OF VIOLATION ON RIGHTS OF PARTIES; ELECTION OF

REMEDIES 109

SECTION 505. ADMINISTRATIVE ENFORCEMENT 110

SECTION 506. ADMINISTRATION OF [ACT] 110

SECTION 601. SEVERABILITY 113

SECTION 602. EFFECTIVE DATE 113

SECTION 603. TRANSITION 113

SECTION 604. REPEALS AND AMENDMENTS 113

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

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

The Drafting Committee members and Reporter were appointed in late 1995, and the Committee had its first meeting in March 1996. The Drafting Committee has met semi-annually since then, at each meeting considering a wholly revised draft. The Drafting Committee has had regular advice and input from a group of Observers that includes consumer and industry representatives, government officials, and academics. The Committee has also received numerous and extensive comments on its drafts from consumer organizations, trade associations, and interested individuals.

Members of the Committee on Style offered informal critiques on earlier versions, and thorough editings in April 1999, February 2000, and January 2001. Virtually all of those emendations are incorporated in the current draft. Where a suggested style change appeared to modify the substance of the draft, the Drafting Committee's language is retained.

The draft Uniform Consumer Leases Act had its first reading before the Conference in July 1999 in Denver. In part to allow coordination with the final revisions of UCC Articles 2 and 2A, the second reading of the Uniform Consumer Leases Act was deferred until the summer Conference meeting in 2001.

1. State of the law. UCC Article 2A is a baseline legal structure for leases of goods, but its principal emphasis is on commercial rather than consumer leases. Its provisions addressing consumer leases do not purport to be comprehensive consumer protection. At the same time, the federal Consumer Leasing Act, 15 U.S.C.A. §§ 1667-1667f, has since 1976 specified disclosure requirements for consumer leases. The federal act also establishes a general "reasonableness" standard for charges in connection with default or termination, but does not regulate other aspects of the lease relationship. In the past decade a small number of states have enacted laws dealing with consumer leases of motor vehicles. These laws vary from state to state, tend to be fairly bare-bones in their coverage, and do not deal with leases of goods other than motor vehicles. There has been virtually no state legislative activity on this topic in the past three or four years.

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

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

3. Coverage of the draft Act. The Act would apply to leases of consumer goods, but not other forms of personal or real property. A covered lease must be for a term longer than four months, for a total obligation not exceeding $150,000, and the leased goods must be intended for the personal, family or household purposes of the lessee. Thus the draft Act does not deal with short-term rentals, such as weekend car or tool rentals. Nor does the draft Act deal with rent-to-own contracts, i.e., rental arrangements, typically of furniture or appliances, that are terminable at the end of any weekly or monthly payment period but in which the consumer lessee becomes the owner of the goods on completion of a specified number of payments. Virtually every state has enacted some form of consumer protection law for rent-to-own transactions.

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

Article 2 addresses informational responsibilities of lessors. It prohibits deceptive advertising about leases. It adopts the federal Consumer Leasing Act disclosure rules for all leases covered by the draft Act. It entitles lease customers to a copy of the lease form beforehand, specifies certain informational content for the lease itself, and requires lessors to furnish statements of account and payoff information on request. A special disclosure to "guarantors" (co-signers) is also provided. It is notable that the draft Act does not require disclosure of a "lease rate" comparable to the Annual Percentage Rate in credit transactions. See the "Issues" discussion, infra.

Article 3 imposes restraints on certain terms and practices, to prevent over-reaching and to assure that consumers are not unwittingly subjected to unfairness. Many of these have analogues in the law applicable to credit sales. For example, under Section 301, a lessor must promptly return a trade-in and refund payments received if the lessee's application is disapproved; absent such a rule, consumers are vulnerable to manipulation, especially in "spot delivery" situations. Certain heavy-handed types of lease terms, such as confessions of judgment and wage assignments, are prohibited in Section 302. Section 303 bars a lessor from taking a broad security interest in the lessee's property in addition to its residual interest in the leased goods themselves. Late, delinquency, and default charges are restricted in Section 304, and consumers are afforded a reciprocal right to attorney's fees if the lease provides them for the lessor. Section 305(b) is the "anti-holder in due course" provision; it preserves a lessee's claims and defenses against an assignee of the lease; this is standard protection for consumer buyers on credit. Section 308 takes the strong position of altogether barring warranty disclaimers and remedy limitations by lessors, to assure that lessees are not deprived of their expectations about the quality of the leased goods. Section 310 constrains the lessor's ability to overcharge in connection with force-placed insurance coverages.

Article 4 deals with issues at the termination stage. It prohibits the imposition of so-called "gap liability" on consumer lessees when the leased goods are lost or destroyed. It establishes a right of the lessee to "cure" delinquent payments before repossession. Controls are placed on the manner of establishing the realized value of leased goods as a premise for fixing the lessee's termination liability. Sections 405 and 407 establish standards for assessing early termination charges and excess wear-and-tear charges on lessees.

Article 5 creates an enforcement structure. This includes enforcement by designated public officials, and also private enforcement by lessees. As incentives for private enforcement, lessees may recover statutory damages for certain violations, and court costs and attorneys fees for all violations. Class actions are authorized, subject to a recovery cap.

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

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

A number of issues were controversial in the drafting process. The draft Act resolves most, but not all, of them.

1. Coverage of the Act. [Sections 102(a)(3), 103]. As noted, the Drafting Committee agreed with the Study Committee that the Act should not cover short term leases, including rent-to-own transactions. The dollar cut-off for covered transactions was set at $150,000; this compares to the $25,000 coverage limit under the federal CLA, set 25 years ago. The $150,000 is not a scientifically derived number, but the Committee wants to assure coverage of leases of big-ticket vehicles and other consumer goods . Some commenters believe the number is too high, and that the Act will affect transactions that are not truly "consumer" leases. The draft also addresses "mixed" or "hybrid" transactions in Section 103.

2. Choice of law and forum. [Section 107]. The Committee determined generally to follow UCC Article 2A with respect to permissible choice of law and forum clauses, even though some industry commenters argued for authorization to choose the law of the lessor's jurisdiction even if the consumer resided elsewhere. The draft Act also adds a limitation on choice of forum clauses with respect to actions by a lessee against a lessor or holder.

3. Disclosure of an "annual lease rate." This was the most difficult issue for the Committee to resolve, and it occupied more of the Committee's time than any other matter. Consumers support this disclosure; industry strongly opposes it. In 1996 the Federal Reserve Board declined to require such a disclosure, on grounds that the number of variables in lease pricing made a consistent, comparable lease rate disclosure impossible or subject to manipulation. After extended discussion and consideration of draft language, the Committee ultimately decided, by a close vote in April 2000, not to require or authorize a lease rate disclosure.

4. Warranty disclaimers and remedy limitations. [Section 308]. The Committee generally hoped that matters of warranties, warranty disclaimers, and limitations on remedies for breach of warranty, could be handled under UCC Article 2A, without separate treatment in this Act. Late in the drafting process, however, the Committee determined that -- notwithstanding the UCC Article 2A revisions in process -- this Act should retain for consumer lessees the full range of warranty protections and remedies provided under UCC Article 2A, and that disclaimers and remedy limitations should be prohibited for all consumer leases.

5. Bar on "gap liability" [Section 401]. Some leases contractually allocate the risk of casualty loss of the leased goods to the lessee, enabling the lessor to sell to lessees "gap" insurance or waivers to protect against that risk. Early in the drafting process the Committee determined that this was an inappropriate risk allocation, and that the Act should prohibit it, and Section 401 so provides. Some segments of the industry therefore oppose that provision.

6. Cure of default [Section 402]. The draft Act replicates a procedure from the Uniform Consumer Credit Code and other state laws which bars a lessor or holder from collection efforts until the lessee has a chance to cure the default by bringing the account current. In a lease context where the lessor or holder retains title to the goods, this "cure procedure" is roughly comparable to a debtor's right to redeem collateral in a defaulted credit sale.

7. Early termination liability [Section 405]. Federal law permits lease provisions, in the nature of liquidated damages, that impose liability on a lessee who terminates early, so long as the early termination charge is "reasonable." The draft Act incorporates that standard, but imposes a formula cap on early termination charges in motor vehicle leases. The charge may not exceed the total of listed components (which reflect standard lease accounting principles), and may not in any case exceed the total of remaining scheduled payments. At least some industry observers would prefer to have the unadorned federal standard with no state law elaboration. Consumer representatives and commenters assert that the draft Act formula is too generous to lessors.

8. Excess wear and use [Section 407]. Charges for excess wear and use are also subject to the federal CLA standard of reasonableness. The draft Act provides some due-process ground rules for the imposition of such charges. For motor vehicle leases in particular, there must be an opportunity for inspection of the vehicle before the lease expires. The industry-consumer tension centers on the timing of these procedures: the dealers want to dispose of the vehicle quickly, while consumers want protection against trumped-up EWU charges.

9. Private remedies [Section 501]. Industry observers oppose exposure to statutory damages (including class actions) for what may be harmless or technical violations. Consumer spokesperson want strong private enforcement, including class actions. The draft Act provides statutory damages for specified violations,

permits class actions, but provides protective rules for lessors and holders that parallel those under the federal CLA.

10. Administration of the Act [Section 506]. The issue for the Drafting Committee was balancing the value of administrative guidance against the expense of maintaining the necessary administrative entity. Some administrative monitoring and interpretation of the Act can facilitate compliance; but that function entails possibly significant operating costs.

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

1. This Act is promulgated for uniform enactment by the States. Leasing has become a mainstream part of the process for marketing and financing the use of consumer goods. The Act encourages the nationwide development and innovation of consumer lease products and practices, subject to baseline protections for consumers in those transactions. The framework of permissible or proscribed lease terms and practices in this Act provides greater certainty for both lessees and lessors as to their rights and responsibilities in lease transactions. Unlike usury laws (for loans) or retail installment sales acts (for credit sales), however, this Act does not directly regulate the pricing of consumer leases.

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

SECTION 102. DEFINITIONS.

(a) In this [Act]:

(1) "Authenticate" means to:

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

(B) sign.

(A) to sign, or

(B) to execute or adopt a record with the intent to sign, and to attach to or logically associate with the record an electronic sound, symbol, or process.

02/01 Update: Tracks latest draft of UCC 2A; subject to further conformance to that act.

(2) "Conspicuous," with reference to a term, means so written, displayed or presented that a reasonable person individual against which whom it is to operate ought to have noticed it. A term in an electronic record intended to evoke a response by an electronic agent is conspicuous if it is presented in a form that would enable a reasonably configured electronic agent to take it into account or react to it without review of a record by an individual. Whether a term is "conspicuous" or not is a decision for the court. Conspicuous terms include the following:

(A) with respect to a person:

(i) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font or color to the surrounding text of the same or lesser size;

(B) (ii) language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language; and

(B) with respect to a person or an electronic agent,

(C) a term that is so placed in a an electronic record or display that the person or electronic agent an individual can not proceed without taking action with respect to the particular item.

02/01 Update: Definition of "conspicuous" reinstated, based on most recent draft of UCC 2A, but edited to exclude references to "electronic agents."

Subsequent definitions renumbered.

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

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

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

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

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

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

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

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

(8) "Goods" means all things that are movable at the time of identification to a lease, or are fixtures. The term does not include money in which the rent is to be paid, the subject matter of foreign exchange transactions, documents, letters of credit, letter-of-credit rights, instruments, investment property, accounts, chattel paper, deposit accounts, or general intangibles , or minerals or the like, including oil and gas, before extraction.

02/01 Update: Modified to track revised UCC Art. 2A. Query: Why do we need a separate definition that parrots UCC 2A? Why not just incorporate by reference via subsection (b), below?

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

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

02/01 Update: Drafted to track UCC 2A definition. Query: Why parrot a definition from UCC 2A? Why don't we simply incorporate the UCC 2A definition by reference in subsection (b) of this section? Suggest doing so (and renumbering definitions below).

(11) "Lessee" means an individual who enters into acquires, applies for, or is offered the right to possession and use of goods under a consumer lease. The term does not include a guarantor on a consumer lease.

02/01 Update: Re-phrased for clarity.

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

02/01 Update: Delete "offers to lease" in counting transactions necessary to fit definition.

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

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

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

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

02/01 Update: "Sign" is used only within definition of authenticate; thus separate definition seems unnecessary.

(16) "Single payment lease" means a consumer lease for which the lessee makes a single payment to the lessor for depreciation and rent charge for the scheduled term of the lease.

02/01 Update: Earlier "Option B" adopted to clarify that "single payment" refers only to basic rent and not to incidental periodic fees.

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

(18) "Termination" of a consumer lease occurs when the lessee's right to continued possession and use of the goods ends, either:

(A) by expiration of the lease, or

(B) by earlier election of one of the parties as provided in the lease.

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

"Computer"

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

"Computer information transaction"

"Contract" [UCC] § 1-201(11) 1-201(b)(12)

"Finance lease" [UCC] § 2A-103(1)(g) 2A-102(a)(16)

["Goods" [UCC] § 2A-102 (a)(18)]

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

["Lease" [UCC] § 2A-102(a)(24)]

"Lien" [UCC] § 2A-103(1)(r) 2A-102(a)(32)

"Person" [UCC] § 1-201(30) 1-201(b)(29)

"Security interest" [UCC] § 1-201(37) 1-201(b)(38)

"Send" [UCC] § 1-201(38) 1-201(b)(39)

"Sign" ??

"Supplier" [UCC] § 2A-102(a)(40)

Legislative Note: Some of these cross-referenced definitions are from Revised UCC Article 1, Article 2A, and Article 9: i.e., "finance lease," "lien," and "supplier." If a State has not adopted those UCC Revisions, it should add comparable definitions in this Act.

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

"Adjusted capitalized cost"

"Capitalized cost reduction"

"Gross capitalized cost"

"Periodic payment"

02/01 Update: Not a defined term in Reg. M.

"Rent charge"

"Residual value".

Comparable Uniform Statutory Provisions:

Since this Act complements Uniform Commercial Code Article 2A [Leases], certain definitions in this Act are based on those in UCC Article 2A, but sometimes with variations necessary for purposes of this Act. See: "authenticate," "consumer lease," "good faith," "goods," "lease," "lessee," "lessor," "record," and "termination." Other defined terms are incorporated by reference from the UCC; these are listed in Section 102(b) of this Act.

This Act also overlaps coverage with the federal Consumer Leasing Act, primarily with respect to disclosure. Certain definitions in this Act are therefore drafted to harmonize with the federal statute; See: "consumer lease," "consummation," "lessor," and "realized value." Other defined terms from the federal act are incorporated by reference; See Section 102(c) of this Act.

Purpose: To define key terms in the Act.

1. "Authenticate." Increasingly, consumer and business transactions are being marketed, negotiated and consummated by electronic communications, without use of paper documentation or written signatures on paper. The term "authenticate" refers to the act by which a party identifies itself and expresses assent to or acceptance of the "record" being authenticated. (See definition of "record," supra.) This may be by electronic signature: an encrypted symbol or code, a PIN, or equivalent action. The term should be construed consistently with the same term in the Uniform Commercial Code [§ 2A-102(a)(1)]. Paragraph (B) includes an "electronic signature" as defined in the Uniform Electronic Transactions Act [§ 2(8)] and in the Electronic Signatures in Global and National Commerce Act, Pub. L. No. 106-229, 15 U.S.C.A.§ 7001 (2000).

2. "Conspicuous." This is based on the definition of the same term in UCC Article 2A, but without reference to "electronic agents." Conspicuousness under this Act is to be determined always by reference to human comprehension.

3. "Consumer lease."

a. A transaction covered by this Act must in fact be a lease. See the definition of "lease," supra. A "consumer lease" therefore incorporates the baseline definition of lease from UCC Article 2A [Section 2A-102(a)(24)], which excludes a transaction that is in reality a sale or security interest [cf. UCC § 1-201(37)]. See also Section 104(a) of this Act which bars re-characterization of a consumer lease in order to take it outside the coverage of this Act.

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

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

i. Residual value amounts or purchase option prices;

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

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

e. The determination of consumer purpose is made at the time the lease is consummated, and by reference to the lessee's intentions. Subsequent changes in the purpose for which the goods are used do not affect coverage by this Act.

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

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

6. "Federal Consumer Leasing Act." References to this Act include the relevant Federal Reserve Board regulations (Regulation M, 12 C.F.R. Part 213) and the Official Staff Commentary [Supplement 1] to that regulation.

7. "Good faith." The standard includes both subjective honesty and more objectively measured standards of fair dealing. Section 108 applies this standard to all parties to consumer leases. It should be interpreted consistently with the same term in the Uniform Commercial Code.

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

9. "Holder."

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

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

c. Securitized pools of leases present "ownership" issues, especially for leases of motor vehicles where there must be a titled and registered owner of the vehicle under the motor vehicle laws. This owner is usually the original lessor or an initial assignee, either of which may then securitize its lease portfolio for sale into the securities markets. For purposes of this definition the "holder" is the special purpose entity, trustee, or other entity that holds title to the leased goods. Thus the term would not include a mere servicing agent, nor the securities investors who have only beneficial or nominal ownership interests.

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

11. "Lessee."

a. This Act protects lease customers at various stages of the lease transaction, including advertising, solicitation and application processes as well as under the resulting lease contract. The term "lessee" is used to identify that customer or prospective customer in those various settings.

b. In general, only an "individual" - i.e., a natural person rather than an organization - is a lessee under this definition. A person or entity acting as legal representative of, or fiduciary for, an individual may be a lessee under this Act. For example, private trust arrangements are sometimes used for estate planning and other forms of financial management, and may include assets held in trust for the benefit or use of an individual. If such a trust is a party to a lease of goods intended for the personal, family, or household purposes of the individual beneficiary, the lease is a consumer lease under this Act, and the trust is the lessee. Similarly, a legal guardian would be a lessee if the guardian entered into a consumer lease on behalf of the represented individual.

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

12. "Lessor."

a. Both the federal Consumer Leasing Act and the UCC Article 2A definitions of "consumer lease" base coverage on whether the lessor "regularly" engages in consumer leasing. Regulation M refines the federal rule by adopting a bright-line test which counts the number of specific lease transactions the leasing entity has made in the prior or current year. Reg. M § 213.2(h). This Act follows Regulation M by adopting a bright-line test of five leases in the prior or current calendar year. This excludes truly casual or isolated lease transactions, even if made by a commercial entity otherwise engaged in distributing goods. But this definition differs from the Reg. M definition in two respects: it does not count instances where a merchant "offers" or "arranges" a consumer lease. Pinpointing when an offer occurs is inherently ambiguous. The "arranger" concept is eliminated to avoid compliance uncertainties where there are multiple lessors in the same transaction. Thus there may be some instances where a person who "offers" or "arranges" leases is a lessor under the federal CLA but not under this Act.

b. The person who enters into the contractual lease arrangement with a consumer is the "lessor" even though it may be understood, or pre-arranged, that the lease will promptly be assigned to a financing institution. This Act does not include as a lessor a person who merely "arranges" leases, such as a broker or other intermediary. In this respect this Act differs from the federal CLA which retains the "arranger" subdefinition. Since the compliance duties under this Act always rest with the contractual lessor or subsequent holder, there is no consumer protection advantage in also treating "arrangers" as lessors. An intermediary who engages in unfair or deceptive acts or practices not addressed by this Act may be liable under other consumer fraud laws of this State. A person who is an "arranger" under the federal Consumer Leasing Act continues to be covered by that federal law.

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

14. "Realized value." This is based on the Regulation M definition. Reg. M § 213.2(m). See Section 404 for its computation under this Act.

15. "Record." This is a generic term to describe the recordation of information in paper or electronic form. It includes a writing, and any form of electronic communication which is retained and can be read. The term is to be construed consistently with the same term in the UCC, in the Uniform Electronic Transactions Act, and in the federal Electronic Signatures in Global and National Commerce ("E-SIGN") Act, Pub. L. No. 106-229, 15 U.S.C.A. § 7001 (2000).

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

17. "State." As in all uniform Acts, the reference to a "state" includes the District of Columbia and U.S. territories and possessions.

18. "Termination." A lease may terminate on its scheduled expiration date [see definition of "Expiration," supra], or at some earlier time, by agreement of the parties, by default and foreclosure, or by other acts provided in the lease.

19. Subsections (b) and (c) incorporate by reference other definitions from the Uniform Commercial Code and the federal Consumer Leasing Act.

Conference Note: These borrowed definitions, and where each is used in this Act, are as follows:

Draft UCC § 1-201(b)(3):

"Agreement" means the bargain of the parties in fact, as found in their language or inferred from other circumstances including course of performance, course of dealing, or usage of trade as provided in [UCC Section 1-303].

UCLA: 103(c); 107(c); 302(c); 303(b); 404(d); 406; 407(b) & (c).

UCITA § 102(a) (9), (10) and (11):

"Computer" means an electronic device that accepts information in digital or similar form and manipulates it for a result based on a sequence of instructions.

"Computer information" means information in electronic form which is obtained from or through then use of a computer or which is in a form capable of being processed by a computer. The term includes a copy of the information and any documentation or packaging associated with the copy.

UCLA: 103(b); 104(a).

"Computer information transaction" means an agreement or the performance of it to create, modify, transfer, or license computer information or informational rights in computer information. The term includes a support contract under Section 612. The term does not include a transaction merely because the parties' agreement provides that their communications about the transaction will be in the form of computer information.

Draft UCC § 1-201(b)(12):

"Contract" means the total legal obligation that results from the parties' agreement as determined by [the Uniform Commercial Code] as supplemented by any other applicable laws.

UCLA: 103(b); 105, 108, 205(c); 303(b); 308(b); 404(a).

Draft UCC § 2A-102(a)(16):

"Finance lease" means a lease with respect to which:

(A) the lessor does not select, manufacture, or supply the goods;

(B) the lessor acquires the goods or the right to possession and use of the goods in connection with the lease or, in the case of goods that have been leased previously by the lessor and are not being leased to a consumer, in connection with another lease; and

(C) one of the following occurs:

(i) the lessee receives a copy of the agreement by which the lessor acquired, or proposes to acquire, the goods or the right to possession and use of the goods before authenticating the lease agreement;

(ii) the lessee's approval of the agreement or of the general contractual terms under which the lessor acquired or proposes tom acquire the goods or the right to possession and use of the goods is a condition to the effectiveness of the lease contract;

(iii) the lessee, before authenticating the lease agreement, receives an accurate and complete statement designating the promises and warranties, and any disclaimers of warranties, limitations or modifications of remedies, or liquidated damages, including those of a third party, such as the manufacturer of the goods, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods; or

(iv) if the lease is not a consumer lease, before the lessee authenticates the lease agreement, the lessor informs the lessee in writing:

(I) of the identity of the person supplying the goods to the lessor, unless the lessee has selected that person and directed the lessor to acquire the goods or the right to possession and use of the goods from that person;

(II) that the lessee is entitled under this article to the promises and warranties, including those of any third party, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods; and

(III) that the lessee may communicate with the person supplying the goods to the lessor and receive an accurate and complete statement of those promises and warranties, including any disclaimers and limitations of them, or a statement of remedies.

UCLA: 305(b); 308(a) & (b).

Draft UCC § 1-201(b)(29):

"Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, government subdivision or agency or instrumentality, or any other legal or commercial entity.

UCLA: 102(a)(3) & (12); 201(c) & (d), 205(c); 302(a); 309; 404(d); 407(c), 601.

Draft UCC § 1-201(b)(38):

"Security interest" means an interest in personal property or fixtures which secures payment or performance of an obligation. The term also includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9. The special property interest of a buyer of goods on identification of those goods to a contract for sale under Section 2- 401 is not a "security interest", but a buyer may also acquire a "security interest" by complying with Article 9. Except as otherwise provided in Section 2-505, the right of a seller or lessor of goods under Article 2 or 2A to retain or acquire possession of the goods is not a "security interest", but a seller or lessor may also acquire a "security interest" by complying with Article 9. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer (Section 2-401) is limited in effect to a reservation of a "security interest ". Whether a transaction in the form of a lease is a "security interest" is determined pursuant to Section 1-203.

UCLA: 102(a)(10); 103(d); 104(a); 303(a) & (b).

Draft UCC § 1-201(b)(39):

"Send" in connection with a writing, record or notice means to:

(A) deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and, in the case of an instrument, to an address specified thereon or otherwise agreed, or if there be none to any address reasonable under the circumstances; or

(B) in any other way cause to be received any record or notice within the time it would have arrived if properly sent.

UCLA: 206(b); 305(a); 402(c); 407(c), (d) & (e).

Reg. M § 213.2(f):

"Adjusted capitalized cost" equals the gross capitalized cost less the capitalized cost reduction, and is the amount used by the lessor in calculating the base periodic payment.

UCLA: 310(d); 405(b).

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

UCLA: 203(c).

"Gross capitalized cost" means the amount agreed upon by the lessor and the lessee as the value of the leased property and any items that are capitalized or amortized during the lease term, including but not limited to taxers, insurance, service agreements, and any outstanding prior credit or lease balance.

UCLA: 203(c).

Reg. M § 213.4(f)(6):

"Rent charge" is means the difference between the total of the base periodic payments over the lease term minus the depreciation and any amortized amounts.

UCLA: 102(a)(16); 310(a), (b), (d); 405(b).

Reg. M § 213.2(m):

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

UCLA: 102(a)(3); 307(a)-(d); 404(a); 405(b).

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

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

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

(1) a computer information transaction;

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

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

(B) a computer information transaction;

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

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

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

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

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

02/01 Update: Rephrased for style.

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

Comparable Uniform Statutory Provisions: None

Purpose: To set clearly the bounds of coverage of this Act, especially with respect to mixed or "hybrid" transactions.

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

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

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

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

5. Under subsection (c) purchases incidental to a lease - accessories or service contracts, for example - are subsumed in the lease obligation, and are therefore not subject to piecemeal coverage by laws applicable to "credit sales" of those products. Thus where a lessee buys and "capitalizes" a service contract on leased goods, the lessor may treat the price of the service contract as part of the capitalized cost in the lease, and need not provide separate disclosures for it as a credit sale. Similarly if the lessee buys a vehicle accessory, e.g., a trailer hitch, as part of the lease transaction, that price may be capitalized in the lease and incorporated in lease payment calculations and disclosures. This "incidental sale" rule does not affect the substantive regulation of the price, terms or quality of such incidental items under other law which is not expressly excluded under subsection (b) or (c). Thus insurance remains fully subject to state insurance codes as to policy coverages, premium rates, agent licensing and the like. And the purchase of the trailer hitch would still be subject to sales taxes, and to the warranty rules of UCC Article 2 [Sales of Goods].

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

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

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

02/01 Update: Underlined phrase borrowed from UCITA for the time being, until new UCC 2A settles on its definition for the same concept.

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

Comparable Uniform Statutory Provisions: None

Purpose: To prevent re-characterization of a transaction to take it outside the coverage of this Act, while permitting parties to a lease to opt in to coverage by this Act if they wish.

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

2. The parties to consumer lease transactions should expect that courts will respect the integrity of those transactions, and the adequacy of consumer protections accorded under this Act (and the federal Consumer Leasing Act). Thus the characterization of a transaction as a lease is to be controlled by its contractual terms and the circumstances at the time the lease is executed, and should not be subject to judicial or administrative re-characterization after the fact. The definitions in this Act, and the related definitions of "lease" and "security interest" in the UCC, provide sufficient guidance for identifying lease transactions as of the time they are entered into.

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

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

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

SECTION 105. SUPPLEMENTAL PROVISIONS AND PRINCIPLES OF LAW APPLICABLE. Unless displaced by the particular The provisions of this [Act] are supplemented first by the provisions of [UCC Article 2A] and then by , the general principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions. , unless those provisions or principles are displaced by or inconsistent with the provisions of this Act.

02/01 Update: Recast to give primacy to UCC 2A as supplementary law, then "general principles," and to retain both "displacement" and "inconsistency" standards.

Legislative Notes:

(1)This Act does not contain a general proscription of unfair or deceptive acts or practices in connection with consumer leases, as this is often covered by a more general consumer fraud act. See, e.g., Uniform Consumer Sales Practices Act § 2(1) ["lease" included in definition of "consumer transaction"]. An enacting State should therefore ensure that its statutory treatment of unfair and deceptive acts and practices includes consumer lease transactions.

(2) Similarly, this Act does not provide a cooling-off period for leases solicited door-to-door or otherwise consummated off the dealer's premises. Cf., Uniform Consumer Credit Code §§ 3.501-3.505. An enacting State should therefore consider amending its existing door-to-door (or off-premises) sales law to cover consumer leases.

(3) Nor does this Act contain or replicate "Lemon Law" provisions that entitle a consumer to a price refund or replacement of seriously defective goods. An enacting State should consider amending its Lemon Laws to afford protection to consumer lessees as well as buyers.

Comparable Uniform Statutory Provisions: Uniform Commercial Code § 1-103; Uniform Consumer Credit Code § 1.103.

Purpose: To confirm that this Act is not exclusive coverage of consumer leases, and may be supplemented by the UCC and general legal and equitable principles.

1. As is the case with the Uniform Commercial Code (UCC § 1-103), this Act does not completely occupy the field for the transactions it covers. In particular, consumer leases remain subject to UCC Article 2A (Leases) for such matters as contract formation, performance responsibilities, priority as to third parties, and basic remedies for breach. Thus, as a general proposition UCC Article 2A supplements this Act and is the primary source of such supplementation. For example, if by operation of UCC § 1-103 UCC Article 2A displaces a particular common law rule, the Article 2A rule supplements this Act -- unless the Article 2A rule is itself displaced by or inconsistent with this Act.

Other common law or statutory proscriptions that may continue to apply to consumer leases include the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, unfair or deceptive acts or practices, or other validating or invalidating cause.

2. UCC Article 2A and other principles of law and equity apply unless "displaced by" or "inconsistent" with this Act. These can be two different forms of nullification. For example, Section 305(b) of this Act [Preservation of Lessee's Claims and Defenses] would displace any common law or statutory right of a holder to invoke a waiver of defense clause. By contrast, the statutory standard of "unconscionability" in this Act [Section 109] may impose a more rigorous standard than common law rules. In a given case this may lead to inconsistent answers on permissible lease terms. The answer dictated by this Act controls.

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

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

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

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

Comparable Uniform Statutory Provisions: Uniform Consumer Credit Code § 1.107.

Purpose: To prevent consumers from losing rights under this Act by contractual waiver.

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

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

3. This Act takes no position on the validity of a provision in a consumer lease that some or all claims must be resolved through arbitration or other alternative dispute mechanism. Such a provision does not per se constitute a waiver of rights or remedies under this Act. Cf., Green Tree Financial Corp. V. Randolph, No. 99-1235, ___ U.S. ___ (2000) [consumer's agreement to arbitrate TILA claims not rendered unenforceable because it fails to state arbitration costs].

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

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

In connection with a consumer lease:

(1) The parties may choose the applicable law if it is that of a jurisdiction in which:

(A) the lessee resides at the time the lease is consummated;

(B) the lessee will reside within 30 days after the lease is consummated; or

(C) the leased goods are to be used.

(2) Any other choice of law is not enforceable.

02/01 Update: Recast to permit choice of law clauses so long as they meet one of three criteria. No change of substance. Note: Current drafts of UCC Art. 1 and 2A would allow a choice of law clause based on the state where the goods are received (as well as consumer's residence). Cf., 11/00 draft of UCC § 1-301(b)(2) and 11/00 proposed amendment to § 2A-106(a).

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

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

Comparable Uniform Statutory Provision: Uniform Commercial Code § 2A-106; Uniform Consumer Credit Code § 1.201.

Purpose: To limit lessors' ability to control choice of law and forum by contractual provision.

1. Absent a choice of law clause in the lease, the normal choice-of-law rules of a judicial forum will determine whether the law of this or another state applies in a particular case. The parties may contract for coverage by the law of a particular jurisdiction, and that choice will be respected if the law chosen satisfies subsection (a). There are three options for a permissible choice of law clause: The jurisdiction selected may be that of the consumer's residence when the lease is executed, or the consumer's expected residence within 30 days thereafter. Or the choice-of-law clause may refer to the law of the place where the goods are to be used, for example, the lease of furnishings for a summer vacation home. Any other choice of law clause or purported agreement is unenforceable. Absent these choice-of-law limitations, there is a danger that a lessor may induce a consumer lessee to agree that the applicable law will be a jurisdiction with which the consumer has no contact or relationship or a jurisdiction that has little effective consumer protection.

2. For actions against the consumer lessee, subsection (b) nullifies a choice of forum clause unless the consumer is otherwise subject to the jurisdiction of that forum. That is, the choice of forum clause does not establish jurisdiction over the lessee by consent. Conversely, subsection (c) preserves the lessee's right to sue in any forum having jurisdiction over the holder notwithstanding a protective choice of forum clause for such actions. While the U.S. Supreme Court has generally validated contractual choice of forum clauses in Carnival Cruise Lines, Inc. v Shute, 499 U.S. 585 (1991, that holding rests on freedom of contract grounds which this section does not adopt as appropriate in a consumer context.

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

Comparable Uniform Statutory Provision: Uniform Commercial Code § 1-203; Uniform Consumer Credit Code § 1.110.

Purpose: To put a general boundary of good faith around all consumer lease relationships.

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

2. Upon a finding of lack of good faith by a party to a lease, the court may fashion any appropriate remedy, which may include precluding or estopping the party from enforcing rights under the lease.

SECTION 109. UNCONSCIONABILITY.

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

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

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

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

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

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

02/01 Update: Recast for clarity, to confirm that it is a groundless assertion of unconscionability that triggers attorney's fees liability.

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

Comparable Uniform Statutory Provision: UCC § 2A-108. Cf., UCCC § 1.110.

Purpose: To recognize authority in the courts to refuse enforcement of, and to impose sanctions on, unconscionable lease terms or practices.

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

2. Subsection (d)(2) permits an award of attorney's fees to a lessor or holder if the lessee has made a groundless assertion of unconscionability, either offensively as part of a claim for relief or defensively in opposition to an action for breach. The test is whether the lessee (or lessee's counsel) "knew" that the assertion of unconscionability was frivolous; "knowledge" requires actual awareness, not just reason to know.

SECTION 201. ADVERTISING.

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

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

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

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

02/01 Update: Clarifying language suggested, to deal with, e.g., TV station owner who also is a lessor.

Comparable Uniform Statutory Provisions: UCCC § 2.209.

Purpose: To require truthfulness in advertising about lease products and terms.

1. The advertising of the terms of consumer leases is regulated by the federal Consumer Leasing Act and its implementing regulation, Regulation M, 12 C.F.R. § 213.7. For any consumer lease advertisement, subsection (b) makes compliance with the federal Regulation M a state law rule as well. This extends the substance of the Regulation M advertising rules to transactions outside Regulation M's scope (i.e., over $25,000) but within the scope of this Act (up to $150,000). The term "advertisement" is defined in subsection (a) consistently with the definition in Regulation M § 213.2(b).

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

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

SECTION 202. PRE-LEASE AVAILABILITY OF SAMPLE FORM. (a) Before consummation of a consumer lease, a lessor shall, on request of a prospective lessee, give a copy or reproduction of its current consumer lease form to the prospective lessee at the lessor's place of business. If a lessor contracts with lessees by mail, the lessor shall make available on mail request a copy or reproduction by mail. If a lessor contracts with lessees electronically, the lessor shall make available on electronic request a copy or reproduction by mail or electronically.

(b) A lessor shall provide the first copy or reproduction to a lessee without charge, and may impose a reasonable charge for additional copies or reproductions provided to the same lessee.

(c) If a lessor uses more than one consumer lease form, the lessor satisfies this section by providing a form the lessor has reason to believe is pertinent to the type of lease about which the prospective lessee has inquired.

02/01 Update: Re-organized into three separate subsections. New (b) confirms that the first copy is free, but the lessor may charge for additional copies.

Comparable Uniform Statutory Provisions: None

Purpose: To allow consumers to consider and compare lease contract forms before committing to a lease.

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

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

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

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

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

Conference Note: The federal Act specifies that the disclosures are to be made "clearly and conspicuously in writing," "segregated from other information" in or relating to the lease, and in "a dated statement that identifies the lessor and lessee." The items to be disclosed are:

a. A description of the leased property;

b. Amount due at lease signing, itemized by type and amount;

c. Payment schedule and total amount of periodic payments;

d. Other charges, itemized by type and amount;

e. Total of payments;

f. In a vehicle lease, the payment calculation, including:

-- Gross capitalized cost;

-- Capitalized cost reduction;

-- Adjusted capitalized cost;

-- Residual value;

-- Depreciation and any amortized amounts;

-- Rent charge;

-- Total of base periodic payments;

-- The lease term;

-- Amount of each base periodic payment;

-- Itemization of other charges;

-- Total periodic payment.

g. Early termination: conditions, charges, & notice;

h. Maintenance responsibilities;

i. Purchase option and price;

j. Statement referencing other information in the lease;

k. Liability between residual and realized value;

l. Right of appraisal;

m. End-of-term liability (open-end leases);

n. Fees and taxes;

o. Insurance: coverages and cost;

p. Warranties or guarantees;

q. Penalties and delinquency charges;

r. Security interest;

s. Limitations on rate information.

The "model" form on the following two pages is that approved by the Federal Reserve Board for a closed-end vehicle lease:

(b) Subsection (a) applies to a renegotiation of a consumer lease, but not to an extension of a consumer lease for a period of six months or less, or an extension of a consumer lease for a period of more than six months if the amount of the base periodic payment is reduced. Before renegotiation or extension of a consumer lease, the holder shall make such new disclosures as are required by the federal Consumer Leasing Act even if the lease is not subject to that Act. A renegotiation occurs when a consumer lease is satisfied and replaced by a new consumer lease undertaken by the same lessee for the same goods. An extension is a continuation, agreed to by the holder and the lessee of an existing consumer lease beyond its originally scheduled expiration, except when the continuation is the result of a renegotiation.

02/01 Update: Redone to track Reg. M more precisely. Mini-definitions of "renegotiation" and "extension" also taken from Reg. M.

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

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

(A) if the lease contains a purchase option:

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

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

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

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

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

(5) in a lease of a motor vehicle, itemizes the disclosed gross capitalized cost by type and amount.

02/01 Update: "Itemization" requirement limited to vehicle leases, as in Reg. M.

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

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

Comparable Uniform Statutory Provisions: Cf., UCCC § 3.201.

Purpose: To provide lessees clear, adequate, and timely disclosure of lease terms and cost components, and copies of relevant records, and to prevent undue surprise about the implications of the lease transaction.

1. An array of basic disclosures for consumer leases is provided under the federal Consumer Leasing Act and Regulation M, which in subsection (a) is adopted as state law as well, for all leases subject to this Act (i.e., up to $150,000). Thus for all leases covered by this Act, the lessee will receive the full set of disclosures specified in the federal law. Where the federal law requires certain additional disclosures for motor vehicle leases [Regulation M § 213.4(f)], the same disclosures must be made under this Act for motor vehicle leases. All of these disclosures must be made prior to "consummation" of the lease, as defined in Section 102(a)(3), and must be made in the format specified for the federal disclosures in Regulation M § 213.3.

Subsection (b) tracks the federal law as to when new disclosures are required for renegotiations or extensions.

2. Beyond the disclosures made in accordance with federal law, subsection (c) requires certain formalities for a consumer lease: a record authenticated by both parties, clearly indicating the transaction is a lease, cautionary notices about the lessee's ownership of the goods, the parties' locations, a description of any trade-in, and -- for motor vehicle leases -- an itemization of the gross capitalized cost. These requirements assume the parties have otherwise concluded an enforceable contract. Thus failure of a lessor to comply with these disclosure and formality rules subjects the lessor to the sanctions provided in Article 5 of this Act but does not in and of itself nullify or invalidate the consumer lease. For example, omission of the identification of the lessee's trade-in would be a violation of this Act but would not affect the parties' contract. On the other hand, omission of the lessee's signature or other authentication could create a Statute of Frauds enforcability issue under UCC § 2A-201.

3. The federal Consumer Leasing Act, through its Regulation M, addresses itemization of the gross capitalized cost only in conjunction with motor vehicle leases. Under that regulation [Regulation M § 213.4(f)(1)], vehicle lessors have an option to provide the itemization as a matter of course in all transactions, or to disclose to the customer that the itemization is available on request. See Reg. M Commentary ¶ 4(f)(1)-2. Most lessors find it expedient to furnish the itemization routinely (rather than disclose the option and then furnish the itemization separately). Subsection (c)(5) makes that approach mandatory for motor vehicle leases under this Act. The gross capitalized cost must be itemized by type and amount, in the level of detail required under Regulation M. This includes the agreed-upon value of the goods (which may include accessories and options, taxes, and title, and license or registration fees), and other charges and fees that are capitalized, such as insurance, a service or maintenance contract, or an outstanding balance on a prior lease or credit transaction. No precise format is required so long as the itemization presents the components of the gross capitalized cost individually or in reasonable categories.

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

SECTION 204. INSURANCE; INSURANCE DISCLOSURES.

(a) A consumer lease may require that the lessee maintain casualty insurance on the leased goods, or liability insurance against personal injury or property damage caused to others, or both, be maintained in effect during the term of the lease. If a consumer lease requires that the lessee maintain either casualty or liability insurance, or both, and unless such insurance is not included in the lease for no additional charge: , (1) the lessor shall disclose in a record that the lessee may purchase the required insurance from an insurer of the lessee's choice, subject to the lessor's right to reject that insurer for reasonable cause. ; and

02/01 Update: Style; put in active voice.

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

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

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

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

02/01 Update: Committee member suggests repeating "the leased goods" phrase.

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

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

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

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

Comparable Uniform Statutory Provisions: None.

Purpose: To assure adequate disclosure of insurance coverages relating to the leased goods.

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

2. Subsection (a) authorizes lessors to require lessees to maintain casualty or liability insurance, or both. For either type of required insurance, and with respect to any kind of leased goods (not just motor vehicles) the lessor must give the lessee the option to obtain the coverage from an insurer of the lessee's choosing.

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

Under subsection (b), if the lessee elects to buy the insurance outside the lease, the lessor must give the lessee an explicit reminder of the lessee's responsibility to obtain the specified insurance coverages.

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

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

SECTION 205. NOTICE TO GUARANTOR.

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

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

(2) an assignor of a consumer lease.

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

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

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

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

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

IDENTIFICATION OF OBLIGATION YOU MAY HAVE TO PAY:

02/01 Update: "Name of Guarantor" added.

(d) As against a holder who took the consumer lease without knowledge to the contrary, a guarantor's authenticated acknowledgment of receipt of the records specified in subsection (b) creates a presumption of delivery of those records to the guarantor.

Comparable Uniform Statutory Provisions: UCCC § 3.208.

Purpose: To condition the liability of third-party guarantors on adequate, timely disclosure of the credit risk they are undertaking.

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

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

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

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

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

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

(2) If a lessee so requests in a record, the holder shall promptly, within two weeks after receiving the request, furnish the lessee in a record:

02/01 Update: Two week time frame added, per 10/00 Committee instruction.

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

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

02/01 Update: To clarify the "as of" date for payoff quote.

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

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

(4) A holder may not charge the lessee for furnishing one statement under each paragraph of subsection (2) in each 12-month period. The holder may charge a fee not to exceed $5.00 each for providing additional statements during the same period.

02/01 Update: To clarify that lessee may get one free quote under each paragraph.

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

02/01 Update: Modified to add time frame and eliminate "appears from holder's records" trigger.

Comparable Uniform Statutory Provisions. None

Purpose: To assure that lessees get adequate information concerning the status of their accounts during the lease term.

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

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

3. Under subsection (a)(2)(C) the lessee may inquire about a purchase option price, and the holder must provide it if the lease permits a purchase of the goods before scheduled expiration of the lease.

4. A lessee's inquiry about a payoff amount or a purchase option price typically will state or infer a specific "as of" date: "What is my current payoff obligation [as of today]?" or "What can I buy the car for on the first of next August?" A quoted figure satisfies the requirements of this section if it is as of the date of the lessee's request or as of a date specified or inferred in that request. The quoted figure may reflect limitations in the lease such as that early termination is always dated on the first of the month.

5. A lessee may want or need documentation to confirm that the lease obligation has been fully satisfied. Subsection (b) requires the holder to furnish such documentation within two weeks after the lessee has completed payments or other obligations under the lease. No request from the lessee is necessary, but the holder may rely on its own records to determine when the lessee's obligation is discharged. The record of satisfaction does not affect the lessee's liability for matters the holder does not discover until later, such as undetected physical damage or unpaid parking tickets on a leased vehicle.

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

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

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

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

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

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

02/01 Update: Paragraphs (1) and (2) recast to clarify duties to return trade-in and payments, and for the lessee to tender back the leased goods.

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

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

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

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

Comparable Uniform Statutory Provisions: None

Purpose: To assure consumers return of their trade-ins or advance payments if their lease applications are not approved.

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

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

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

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

SECTION 302. PROHIBITED LEASE TERMS.

(a) A consumer lease may not:

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

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

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

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

Comparable Uniform Statutory Provisions: UCCC §§ 3.305 [assignment of earnings], 3.306 [confessions of judgment].

Purpose: To outlaw certain contractual lessor remedy provisions.

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

SECTION 303. SECURITY INTEREST RESTRICTED; SECURITY DEPOSIT.

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

(b) A consumer lease may provide for:

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

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

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

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

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

02/01 Update: Specific time frame added per 10/00 Committee instruction.

Comparable Uniform Statutory Provisions: None.

Purpose: To set limits on when a lessor may take a security interest in property of the lessee, including security deposits, prepayments, and refunds and benefits of insurance, service contracts and the like.

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

2. A lease and a security interest are mutually exclusive characterizations under UCC §§ 2A-102(a)(24) and 1-201(b)(38). A lessor cannot simultaneously hold a security interest in the leased goods. Subsection (c) confirms, however, that the lessor/holder may file a UCC Article 9 financing statement as a protective measure under UCC Section 9-505. Such a permissive filing does not itself make the lease a security interest.

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

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

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

SECTION 304. LATE FEES; DELINQUENCY AND DEFAULT CHARGES.

(a) A consumer lease holder may impose on the lessee a late charge on a periodic payment that is delinquent for ten days or more in an amount specified in the consumer lease but not to exceed the greater of $10 or five percent of the unpaid portion of the late periodic payment. A late fee in excess of this limit is uncollectible.

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

02/01 Update: In (a) and (b), above, and (c) below: style change -- holders "impose" fees; leases "provide" for them.

(c) A consumer lease may impose provide for imposition on the lessee of charges for the lessee's delinquency or default (other than late payments), including collection, repossession, and court costs, but only at an amount that is reasonable in light of the anticipated or actual harm caused by the delinquency or default, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. Attorney's fees are collectible by the holder only on referral of the matter to an attorney who is not an employee of the holder.

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

Comparable Uniform Statutory Provisions: UCCC §§ 2.502, 2.507. Cf., federal Consumer Leasing Act § 183(b).

Purpose: To set limits on late charges and other charges for default, consistent with the federal law; and to provide for reciprocal attorney's fees.

1. The general rule of this section is in subsection (c), which replicates the rule stated in Section 183(b) of the federal Consumer Leasing Act. That provision recognizes that specified charges imposed by the lessor or holder for the lessee's default and delinquency are in the nature of liquidated damages and so must be reasonable in light of the stated factors. This means that while an appropriate charge is related to actual damages, it is not confined to that sum and may reflect other ingredients or purposes, such as permitting ease of calculation and discouraging breach. The language in this provision omits the reference in the federal Consumer Leasing Act to "penalties," and should not be read to authorize a charge that has no justification other than as a penalty for breach. As for the relationship between this "reasonableness" measure and the liquidated damages provision in UCC § 2A- 504, it is the intention of this Act to be at least as restrictive, on behalf of the consumer lessee, as the UCC provision. Thus default charges that are not reasonable under UCC § 2A-504 are not reasonable under this Act either. This section does not apply to charges in connection with early termination [section 405] or for excess wear and use [section 407], which are dealt with in those other sections.

It is implicit in this Section not only that default charges must be reasonable but that they must be specified in the lease. [See Regulation M, 12 C.F.R. § 213.4(q) for the required disclosure.] Thus it would be impermissible for a holder or a third party collector unilaterally to impose additional fees or charges in the course of collection.

2. This provision applies to any charge that may be imposed on the lessee for breach of terms of the lease, including default charges, collection, repossession, and court costs, and charges for incidental breaches such as remitting payment by a check that bounces . A lease may impose on the lessee the costs of collection after default, either as actual costs incurred, a fixed dollar figure, or as a percentage of the unpaid obligation, but always subject to the "reasonableness" standard in subsection (c). For example, a default charge of 15% of the unpaid balance may not be reasonable if default occurs early in the lease and the charge would far exceed the actual costs of collection. Collection costs may include the holder's attorney's fees but only where the matter is referred to a non-employee attorney and only for work actually performed.

3. Subsections (a) and (b) deal with late charges, which are typically applied routinely whenever a scheduled payment is overdue and where there is greater need for a bright-line test as to permissible amounts. Late charges specified in the lease must comply with subsection (a), which is a specific application and delimitation of what are reasonable charges. This requires at least a ten day grace period, and the amount of the late charge cannot exceed the larger of $10.00 or 5.0% of the late payment. Thus if a $150.00 payment is due on April 1, a late charge of $10.00 could be imposed on April 11. If the missed April 1 payment were $400.00, a $20.00 late charge could be imposed on April 11. But if, when a $400.00 payment is due, the consumer remits $200.00, the late charge is limited to $10.00 (5% of the unpaid $200.00 portion).

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

5. Since consumer lessees are rarely in a position to bargain for modifications in the leases they enter, most leases authorize the holder to collect attorney's fees as part of a default remedy but provide no reciprocal right to attorney's fees if the consumer lessee successfully defends a collection action. Subsection (d) adds that balance, as a matter of statutory reciprocity, as if the lease itself authorized attorney's fees to the successful litigant in the collection lawsuit. This is limited to the collection setting, and would not apply otherwise. Section 501(e) of this Act separately authorizes recovery of attorney's fees in an action against a holder for a violation of this Act.

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

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

02/01 Update: Styler: active voice.

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

02/01 Update: Since § 504 is deleted, so is the cross reference.

Comparable Uniform Statutory Provisions: UCC § 9-406(a); UCCC §§ 3.404.

Purpose: To confirm the lessee's right to pay a holder until notified that the lease has been assigned, and to assert against an assignee claims or defenses available against a prior holder.

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

2. By state law (e.g., UCCC §§ 3.307, 3.404, 3.405, and equivalents) and by FTC Rule (Preservation of Consumers' Claims and Defenses, 16 C.F.R. Part 433), "holder in due course" protections for assignees of consumer credit contracts have effectively been abolished for more than 20 years. Subsection (b) states the parallel proposition that there can be no "holder in due course" of a consumer lease. The rationale is that as a matter of policy the risk that the lessor will not perform properly under the lease and this Act is better borne by those entities that finance the transactions than by relatively powerless lessees. Assignees can, and do, establish recourse and indemnity responsibilities for the dealers they support, which shift the cost of consumer financial injury back to the dealer or earlier holder whose malperformance caused the injury.

3. This rule permits a lessee to defeat a holder's collection efforts by proving defenses such as non-delivery, failure of consideration, or fraud that could have been asserted against the original lessor or a prior holder. ( For this purpose "claims and defenses" include what the Uniform Commercial Code characterizes as "claims in recoupment" under UCC § 3-305(a)(3) with respect to negotiable instruments.) This section also permits a lessee to assert against the assignee-holder affirmative claims that originated against the lessor, e.g., for rescission or revocation of acceptance of the lease and refund of payments made [Cf., UCC 2A-517], or for statutory damages for violations of this Act [Section 501, infra]. The lessee may recover affirmatively from the holder up to the total of amounts paid under the lease (whether paid to the original lessor or to a subsequent holder). For example, assume that after several months a leased vehicle proves to be a lemon, and the lessee properly revokes acceptance under UCC§ 2A-517 and claims a refund and consequential damages. If the lessee proves that claim and sufficient damages, lessee may recover from the current holder all monies paid on the lease to that point, including capitalized cost reductions paid in the first instance to the original lessor. Recovery is limited to sums paid to a holder and would not include money paid directly to a third party such as a taxing authority.

4. This section affirms and limits the vicarious liability of holders for claims and defenses that arose from an earlier transaction between the lessee and the original lessor or a holder prior to the current holder. Nothing in this section limits the liability of that original lessor or earlier holder for the full range of remedies associated with its own conduct. Thus the "claims and defenses" assertable against an assignee-holder must be generated out of the lease relationship between lessee and the lessor or earlier holder. For example, if the lessee has a dispute with the lessor over a separate lease or purchase transaction, the lessee may not interpose claims or defenses from that transaction against the assignee in the current lease transaction. In the case of a finance lease, under UCC § 2A-209 the supplier's warranties flow through to the lessee, and the consumer lessee may assert a breach of the supplier's warranty against the finance lessor (usually a bank or other financial institution). Cf. UCC § 2A-407, Comment 2. Under this section, the consumer lessee may also assert claims or defenses arising from supplier warranties against an assignee of the finance lessor.

5. Since this Act prohibits warranty disclaimers and remedy limitations [Section 308], the lessor will always make the implied warranty of merchantability [UCC § 2A-212] and in some cases also the implied warranty of fitness for particular purpose [UCC § 2A-213]. Lessee rights based on a breach of either of these warranties are among the claims and defenses assertable against an assignee. But a breach of a manufacturer's warranty that accompanies the goods is not assertable against an assignee; that warranty is an obligation of the manufacturer and not the lessor, and the assignee's exposure under this section is limited to claims and defenses that the lessee could assert in the first instance against the lessor or subsequent holder.

6. The general rule that assignees are subject to claims and defenses assertable against the lessor or earlier holder includes lessee rights arising under this Act. That is, where the lessee's claim or defense is based on a violation of this Act, the assignee is subject to that claim or defense. By contrast, under the federal Consumer Leasing Act, an assignee is liable for violations of its disclosure provisions only if "the violation is apparent on the face of the disclosure statement." 15 U.S.C.A. § 1641(a). That protective rule of course continues to apply to violations of the federal act, but does not insulate assignees with respect to violations of this Act, including its disclosure requirements.

7. Both the UCCC [§ 3.405] and the FTC Holder Rule [16 C.F.R. § 433.2(b)] deal with a related pattern where a consumer borrows directly from a lender in order to pay cash to a dealer for goods or services. Where the lender and dealer are acting in concert to generate consumer sales, those provisions make the lender subject to claims and defenses arising out of the ostensibly separate sale transaction. It seems unlikely this pattern occurs very often with respect to leases. One possible instance would be where a consumer borrows from a lender in order to make a large front-end payment on a lease (a "single payment lease"). By its terms the UCCC provision, § 3.405, would subject this lender to claims and defenses arising from the lease if the lender and dealer had the requisite "interlocking" relationship. With this and the FTC Rule as guidance for courts, it seems unnecessary to develop a special version of that rule for this Act.

SECTION 306. SUBLEASE.

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

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

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

02/01 Update: Style, and to clarify that this is sole basis for withholding consent to sublease.

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

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

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

Comparable Uniform Statutory Provisions: None; but cf. UCC § 2A-305.

Purpose: To clarify when a consumer lessee may sublease the goods.

1. A lessor and lessee are always free to negotiate and agree on a modification of the lease, including a "sublease" or "assignment" by the lessee, comparable to an "assumption" of a mortgage. Subleasing the goods may be an efficient way for the consumer to adjust to changed circumstances, or to avoid a default. At the same time, the holder may have legitimate concerns about the creditworthiness and reliability of the sublessee, or about risks relating to relocation, use and maintenance of the goods by the sublessee. Thus a unilateral right to sublease would be incompatible with the lessor's expectations and with its residual ownership interest in the goods.

2. Under subsection (a), in short-term leases the lessee has no "right" to sublease unless the holder agrees to it in the lease or otherwise. For longer-term leases, while there is still no "right" to sublease, subsection (b) applies a good faith test to the holder's refusal to permit a sublease. The burden of proof is on the consumer to show the holder had no good grounds for refusing to consent to the sublease. A holder that improperly refuses to permit a sublease violates this Act.

SECTION 307. OPEN-END LEASE.

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

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

(c) A presumption does not arise under subsection (b) to the extent the excess of estimated residual value over realized value is due to physical damage to the goods beyond reasonable wear and use, or to excessive use, according to standards set under Section 407.

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

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

Comparable Uniform Statutory Provisions: UCCC § 3.401; cf. Federal Consumer Leasing Act § 183(a).

Purpose: To replicate the federal Consumer Leasing Act provision setting limits on lessees' end-of-term liability in open-end leases.

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

2. This section replicates the open-end lease rule from Section 183(a) of the federal Consumer Leasing Act. The federal Act effectively restricts the lessee's liability under an open-end lease to an amount no greater than three monthly payments, but does it through a "presumption" about what is a reasonable measure of liability. In the example in Comment 1, if monthly payments were $600, an end-of-term liability of $1,800 (3 monthly payments) would be lawful, but any amount above that figure would be presumptively unreasonable. The effect of using the language of the federal act is to make the same three-monthly-payment cap applicable to all consumer leases covered by this Act, including those between $25,000 and $150,000.

SECTION 308. WARRANTY DISCLAIMERS AND REMEDY LIMITATIONS UNENFORCEABLE.

(a) A provision in a consumer lease other than a finance lease that purports to disclaim the lessor's implied warranties of merchantability or fitness for particular purpose with respect to the leased goods, or to limit the lessee's remedies for breach of those implied warranties, is unenforceable.

(b) In connection with a consumer lease that is a finance lease, a provision in the supply contract that purports to disclaim the supplier's implied warranties of merchantability or fitness for particular purpose with respect to the goods supplied, or to limit the lessee's remedies for breach of those implied warranties, is unenforceable.

02/01 Update: Subsection (a) is by direction of the Committee in 10/00. Subsection (b) is Reporter's suggested addition to maintain a parallel rule for finance leases.

Comparable Uniform Statutory Provisions: None. Cf. UCC §§ 2A-214 and 2A-503, permitting disclaimers and remedy limitations.

Purpose: To ensure that lessors take responsibility for at least the basic merchantable quality of the goods they lease, and that lessees retain the full range of remedies for breach of warranty.

1. Outside of this Act, the traditional law has allowed sellers and lessors to avoid virtually all responsibility for the quality, performance and durability of the goods they market. A merchant who did not make any express warranty could avoid the implied warranties by appropriate explicit language of disclaimer, including short-hand phrases such as "as is." Even if the merchant made a warranty, the traditional law permitted the contract to specify and limit the customer's remedies, such as to repair or replacement, and to exclude consequential economic damages. The result, often, was to leave the customer frustrated and disappointed with inoperable goods, but without legal recourse against the merchant who sold or leased the goods, or against the current holder of the credit or lease obligation.

Recent decades, however, have seen substantial movement away from a dominant rule of "caveat emptor." Courts have struck down warranty disclaimers and remedy limitations as unconscionable and against public policy. Personal injury and property damage resulting from defective products are considered actionable as product-liability torts, disregarding any contractual limitations. A number of states have enacted non-uniform amendments to UCC Article 2 to nullify warranty disclaimers and remedy limitations. The federal Magnuson-Moss Warranty Act of 1975 enhances disclosure of warranty content, and proscribes disclaimers of implied warranties if any express ("written") warranty was provided. "Lemon laws" have been enacted in virtually every state, typically providing buyers or lessees of motor vehicles with a process to obtain a full refund or replacement of a vehicle that defies effective repair. Courts frequently find contractual remedy limitations (especially "repair") ineffective where the specified remedy "fails of its essential purpose" [UCC §§ 2-719(2), 2A-503(2)]. At the same time, competition has impelled the manufacturers of most consumer goods to offer "factory" warranties that run with the goods into the hands of consumer users; at times there is as much competition among factory warranty offerings as among the goods they cover. The inexorable drift of these efforts is to fulfill consumers' expectations that the goods they purchase or lease will meet at least a baseline level of quality. This movement is particularly relevant to leases where the essence of the lessee's contract is to acquire the functional use of the goods through the term of the lease.

2. This Section makes inoperative any attempt by a lessor to disclaim implied warranties or to limit remedies for their breach. Every lessor will, impliedly in the contract of lease [cf., UCC § 2A-212], warrant the merchantability of the leased goods, and in an appropriate case may also warrant their suitability for a particular purpose [cf., UCC § 2A-213]. The authorization for disclaimers in UCC § 2A-214 is inapplicable to consumer leases under this Act. Likewise, consumers will retain the full range of remedies for breach of warranty, including rejection [UCC § 2A-509], revocation of acceptance [UCC § 2A-517], damages (including incidental and consequential damages) [UCC §§ 2A-519, 2A-520], and offset [UCC § 2A-508(6)], and contractual limitations on these remedies will be disregarded.

3. The responsibility on lessors should not be onerous. Where the lease involves new goods for which there is a manufacturer warranty, the lessor's implied warranty of merchantability is largely redundant, and the economic consequences of breach remain primarily the manufacturer's. Where there is no manufacturer warranty applicable to the leased goods, the lessor will bear some legal risk that might previously have been avoided. This is in a sense a cost of doing business -- to satisfy legitimate customer expectations as to quality and performance of the goods they lease.

4. The standard of merchantable quality varies with the cost, age, and condition of the goods at the time of lease. A consumer cannot expect the same quality from a $500 computer as from one costing two or three times that amount. A three year old car may be merchantable although it is more prone to repair than a new one. As for remedies, a lessor may offer repair-or-replacement options consistent with the lessor's right to "cure" defects after rejection [UCC 2A-513]. In any case, the intended effect of this section is to require all lessors to stand behind the quality of their product to the extent of its merchantability under long-standing criteria in the UCC.

5. Nothing in this section precludes a lessor from offering extended warranty or maintenance contracts on the leased goods if those contracts afford greater protection and remedies than would be available under the general standard of merchantability.

6. " Finance leases" require somewhat different treatment. In a finance lease [defined in UCC § 2A-102(a)(16)], the nominal lessor is merely financing a transaction in which the lessee acquires the goods directly from a supplier. A finance lessor does not make implied warranties [UCC §§ 2A-212(a), 2A-213(a)]. Instead, the supplier's warranties (to the lessor) pass through for the benefit of the lessee [UCC § 2A-209]. To assure that equivalent protection is available to finance lessees, subsection (b) prohibits disclaimers or remedy limitations in the supply contract.

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

Comparable Uniform Statutory Provisions: UCCC § 3.309.

Purpose: To prevent deceptive "referral" inducements for consumer leases.

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

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

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

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

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

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

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

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

(1) refunded to the lessee; or

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

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

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

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

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

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

Comparable Uniform Statutory Provisions: UCCC §§ 4.107, 4.108.

Purpose: To prevent overcharges for insurance, including substitute ("force placed") insurance.

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

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

3. If required insurance lapses during the term of a lease, such as for non-payment of premiums by the lessee, the holder may cover its interest by obtaining its own insurance, at its own expense and on whatever terms the holder wishes. Subsection (c) also permits the holder to "force place" insurance in specific substitution for required coverages the lessee has failed to maintain. The substitute coverage must be substantially the same as the coverage required in the lease. For example, if the lease required liability insurance up to $300,000 and casualty insurance with a $500 deductible, the holder could not properly purchase substitute coverages with a $1 million liability cap or a $200 deductible. The cost of proper replacement insurance may, on notice to the lessee, be subject to a rent charge and otherwise added to the lessee's obligation under the lease. The adjustment of the lease obligation in this fashion is not a refinancing of the lease.

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

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

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

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

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

02/01 Update: Committee member suggests that deleted language is unnecessary: to the extent there is replacement insurance, there is no "gap" amount.

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

Comparable Uniform Statutory Provisions: None.

Purpose: To protect lessees against substantial liabilities for "gap" amounts when there is a total loss of the leased goods.

1. When leased goods are destroyed, stolen, or otherwise become a total loss during the term of the lease, this event constitutes a de facto early termination of the lease. Although insurance will usually cover all or most of the current market value of the goods, there is often a "gap" between that sum and the amount due to terminate the lease at that point. This is because the goods often depreciate faster than the lessee's payments reduce the capitalized cost. Cf., Section 405 [Early Termination Liability]. The question is whether the lease may shift that "gap" liability to the lessee, and whether lessors should then be able to charge the lessee for contractual protection against that liability. In the past some lessors have not imposed this gap liability on the consumer; instead the lessor protects itself through insurance or by absorbing these occasional losses internally. On the other hand, other lessors have contractually imposed this "gap liability" on the lessee, and used that as an opportunity to sell the consumer "gap liability waivers," "gap protection," or "gap insurance."

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

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

4. Under subsection (a) the determination of the gap amount begins by comparing two figures. One is the amount that the lessee would owe if the lease were considered to be terminated early, usually the unamortized capitalized cost on the date of the loss. Cf. Section 405(b). The other figure is the amount the lessor or holder actually receives from the lessee's casualty insurer (or from a third party, such as a tortfeasor's liability insurer) as representing the cash value of the goods. The difference between these figures is the basic gap amount. Subsection (a) also clarifies that certain other items are not part of the gap amount. These include insurance deductible amounts, amounts owed under the lease independently from the loss of the goods, and insurance proceeds reductions resulting from delinquent premium payments or write-downs of the value of the goods prior to the total loss. This latter exclusion [subsection (a)(3)] would apply if, for example, the insurer determined that prior to the loss of a leased vehicle it had been driven substantially more miles than the average for such a model, and the insurance proceeds were reduced accordingly. In any case the lessee cannot be required to make periodic lease payments beyond the date of loss of the goods.

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

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

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

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

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

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

02/01 Update: Clarity and style.

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

02/01 Update: Deleted language seems unnecessary; prior paragraph specifies that only payment defaults trigger cure procedure.

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

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

02/01 Update: Clarity. A lessee "may" cure as often as the holder is agreeable. The point here is that there is only one entitlement to cure each year.

Comparable Uniform Statutory Provisions: UCCC §§ 5.109-5.111.

Purpose: To limit the grounds for lessee default, and to permit the lessee to cure a payment default without terminating the lease.

1. Default clauses in consumer leases may include a number of "events of default" in addition to failing to make payments due under the lease. Subsection (a)(2) restrains the holder from acting on such a default (i.e., other than failure to pay) unless the holder is prepared to establish that the breach is a serious one. To be an actionable default, the lessee's conduct must threaten the holder's expectation of "payment, performance, or realization of the holder's interest in the goods." An example of the first would be the lessee's arrest and imprisonment. "Performance" might be impaired if the lessee moved the leased goods out of state without permission. The holder's "realization" interest would be impaired if the lessee failed to maintain required casualty insurance and substitute insurance was not obtained. The "significant impairment" standard is to be judged from the perspective of a reasonable holder at the time of the default; a judicial determination is not a pre-requisite. A holder may act on a "significant impairment" breach immediately, as by repossession or judicial action.

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

3. The details and timing of the mechanism are important. The holder can take no judicial collection or foreclosure action until 10 days after a payment is "in default"; this means 10 days after the nominal due date plus any contractual grace period. E.g., if a payment is due on April 1, and there is a ten day grace period to April 10 [cf. Section 304(a)], the "trigger' date is April 20. The holder may then send a cure notice, whenever it wishes - immediately or later (perhaps only after a second or third missed payment). The cure notice starts a cure date, which must run for no less than 20 days after the notice is sent and may be a longer time. If the lessee settles up by the due date, the lease is restored on its original terms. If the lessee fails to cure, only then can the holder repossess or sue.

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

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

SECTION 403. REPOSSESSION; APPLICATION OF REALIZED VALUE.

(a) Subject to Section 402 [Lessee's Right to Cure] and to subsection (d) of this Section, on a lessee's default the holder may repossess the goods by judicial process or by self-help without a breach of the peace;

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

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

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

(3) the early termination liability of the lessee.

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

(d) Electronic self-help is prohibited in connection with a consumer lease. "Electronic self-help" means the use of electronic means to exercise the holder's rights under subsection (a) of this Section.

02/01 Update: Subsection (d) and the cross reference in subsection (a) are added to prohibit electronic self-help. The prohibition itself, and the language used here, are directly from UCITA, Section 816(a) and (b). UCITA's ban on electronic disabling is applicable to "mass-market transactions," which includes consumer transactions.

Comparable Uniform Statutory Provisions: UCC §§ 9-503, 9-504.

Purpose: To control the manner of repossession on default, and to provide for the application of the proceeds after disposition of the goods.

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

2. Technology may permit a form of electronic disabling of leased goods that amounts to a repossession. This is already possible with respect to computers and computer information, where a lessor or licensor may build self-destruct or self-cancellation capabilities into the program features or software. See: Uniform Computer Information Transactions Act § 815(b). Similar remote disabling may become feasible for other kinds of electronic devices, and even perhaps for motor vehicles. In theory, electronic disabling could be a good thing if it saves repossession costs and reduces instances of confrontation or breach of the peace. But it also seems evident that such disabling could present unreasonable risks to lessees under some circumstances, for example if important computer records or programs were erased or rendered non-functional, if needed household appliances became unusable, or if vehicle ignitions could be made inoperable without regard to safety, weather or related considerations. Following the lead of the Uniform Computer Information Transactions Act, § 816(b), subsection (d) of this section prohibits electronic self-help.

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

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

SECTION 404. DETERMINING REALIZED VALUE.

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

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

(2) either:

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

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

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

(ii) the fair market value of the goods.

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

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

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

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

Comparable Uniform Statutory Provision: None

Purpose: To specify a consistent formula for determining the "realized" (i.e., current actual) value of the goods at lease termination.

1. When terminated early (voluntarily or upon default), most consumer leases measure the lessee's termination liability by reference to the then-value of the goods. (This is in contrast to comparing present-value equivalents of contract rents and market rents over the remaining lease term. Cf. UCC § 2A-528) The same is generally true at the scheduled expiration of an "open-end lease." This section permits "realized value" to be measured in alternative ways. In all cases, the realized value includes rebates from insurance or other charges if the holder actually receives and retains that money.

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

3. As an alternative, subsection (b) permits "realized value" to be set by agreement of the parties so long as the valuation is not unreasonable. This may be the preferable alternative for the parties where the holder either does not plan to, or cannot feasibly, dispose of the goods promptly. The agreement as to value must be made at the time of lease termination, or the lease may establish a formula or method for determining the value of the goods at lease termination, such as by reference to a standard "blue book" vehicle guide. This is to assure that valuation occurs when the condition and likely market-value of the goods can be assessed. What is not allowed is agreeing in the lease that the goods will be worth $x in three years. The second sentence provides a safe harbor for the holder if the realized value is based on an agreed appraisal or a standard price guide as of the time of lease termination.

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

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

6. This section does not prohibit the holder from selling the goods to related parties, at either public or private sales. But where the holder disposes of the goods to an affiliate, or to the originating dealer under a recourse agreement, there may be less incentive to maximize the yield on that sale. In the past such "insider" sales at reduced prices have been suspect and may be suggestive of collusion. The approach in subsection (d) is not to prohibit such insider sales, which in fact may be expedient modes of disposition. Rather, in an insider sale, whether public or private, the lessee must be credited with at least the fair market value as determined in the customary resale market for goods of the kind. Since the holder by definition owns the goods, a holder's purported sale of repossessed goods to itself is a non-event that should be disregarded in determining realized value.

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

SECTION 405. EARLY TERMINATION LIABILITY.

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

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

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

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

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

02/01 Update: per 10/00 Committee instruction, this cap applies only to vehicle leases.

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

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

(B) the greater of:

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

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

02/01 Update: Committee member suggests adding "reasonable."

(C) the amount by which the unamortized capitalized cost, calculated in accordance with the constant yield method or another generally accepted actuarial method, exceeds the realized value of the goods; and

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

(2) The sum of the amounts determined under paragraphs (b)(1)(C) and (b)(1)(D) may not exceed the total of the remaining periodic payments scheduled under the lease.

(3) As used in this subsection, "constant yield method" means:

(A) in a periodic payment lease, that method for determining the rent charge and depreciation components of each base periodic payment which is applied by (i) assuming that the rent charge for each computational period is earned in advance, and (ii) multiplying the constant periodic rate implicit in the lease times the balance subject to rent charge at the beginning of the period. The total of these periodic calculations to the date of early termination represents the earned rent charge as of that date. At any point during the scheduled term of a periodic payment lease, the balance subject to rent charge is the adjusted capitalized cost less the sum of all depreciation amounts accrued through the preceding computational periods and the first base periodic payment; or

02/01 Update: Is added sentence helpful, necessary?

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

Comparable Uniform Statutory Provisions: None

Purpose: To limit the lessee's liability to a "reasonable" charge on early termination of a lease, in general consistently with the federal Consumer Leasing Act but with an explicit cap for motor vehicle leases.

1. Leases of goods are generally written to bind the lessee for the full term of the lease. Some leases may end in default and repossession, and are terminated early for that reason. In addition, holders will often agree to an early termination of the lease at the lessee's request, perhaps to facilitate the lessee's buying or leasing of new goods. Technically, a lessee who terminates early is breaching the lease and, under UCC Article 2A or other general law, would be liable for damages. By comparison to real estate leases, or by reference to the default damages rule in UCC Article 2A, these damages could theoretically be measured as the present value of the lessor's expectancy under the lease. Cf., UCC § 2A-528(1)[present value of remaining scheduled rent less present value of market rent for remainder of term]. Or the lessor's damages could be "otherwise determined pursuant to agreement of the parties." Id. Previously leased consumer goods are not usually re-leased, and there is rarely a meaningful market in which to assess a "market rent" for used consumer goods over the irregular time periods that correspond to the remaining term of the lease. The common practice in commercial as well as consumer leasing markets has been to include in the lease a formula or other measure for calculating the lessee's payoff figure, in the nature of liquidated damages. Cf. UCC § 2A-504. These formulas are generally designed to assure the lessor or holder full recovery of the remaining unpaid capitalized cost of the goods, less their actual liquidation (resale) value at the time of lease termination. This section sets outside limits for the amount of such an early termination charge. It does so by replicating the "reasonableness" standard of Section 183(b) of the federal Consumer Leasing Act which applies the same standard to early termination formulas, thus adopting the federal standard for all leases subject to this Act.

The federal Consumer Leasing Act requires disclosure concerning early termination charges. Reg. M § 213.4(g). There must be "a statement of the conditions under which the lessee or lessor may terminate the lease prior to the end of the lease term; and the amount or a description of the method for determining the amount of any penalty or other charge for early termination, which must be reasonable." The Federal Reserve Board Staff Commentary ¶ 4(g)(1)-2 elaborates that "a lessor may use the name of a generally accepted method of computing the unamortized cost portion . . . of its early termination charges. . . .For example, a lessor may state that the 'constant-yield' method will be utilized in obtaining the adjusted lease balance." If such a short-hand description is used, the disclosure must specify how the resulting figure is used in computing the total early termination charge. And if the lessor merely refers to a named method in this manner, "the lessor must provide a written explanation of that method if requested by the consumer."

For motor vehicle leases, Regulation M § 213.4(g)(2) also requires a specific early termination notice:

Early Termination. You may have to pay a substantial charge if you end this lease early. The charge may be up to several thousand dollars. The actual charge will depend on when the lease is terminated. The earlier you end the lease, the greater this charge is likely to be.

2. Under subsection (a) an early termination charge must be reasonable in light of the stated factors. This is in lieu of requiring a complex calculation of damages based on guesstimates of market rent under the common law or UCC § 2A-528. The "reasonableness" of an early termination formula, therefore, is ultimately measured by whether it is an acceptable alternative to those other measures. This Act uses the wording of the federal act, rather than UCC § 2A-504(1), in order to maintain consistency of language and interpretation between the federal and state consumer leasing laws, but the intention is that any early termination charge that violates UCC § 2A-504 also violates this Act.

3. Certain charges that the lessee may owe at early termination are not attributable to that event and so are not part of the formula for a permissible early termination charge. This includes overdue periodic lease payments, late or delinquency charges, or other charges that have accrued under the lease. Those charges are due and payable regardless of the early termination, and remain so. In some cases the holder may not liquidate, i.e. sell, the leased goods (to produce a "realized value") when they are returned early, but may instead impose excess wear and use charges [cf., Section 407]. This too is not an early termination charge within this section.

4. The baseline test is whether the aggregate early termination charge is reasonable in light of the stated factors. The phrase "anticipated or actual harm" means that a proper early termination charge or formula may be specified in the lease based on a projection of likely future circumstances; or in some cases the amount of the early termination charge or a component of it may not be addressed at all until the termination occurs and "actual" harm can be assessed. The "difficulties of proof of loss" refer among other things to the lack of a readily ascertainable "market rent" that would be needed to compare the yield under a hypothetical substitute lease. The phrase "inconvenience and non-feasibility of otherwise obtaining an adequate remedy" implicitly recognizes that in the often fast-paced and high volume consumer leasing markets (including secondary market securitizations) it is important for holders to be able to clear their books of terminated leases without undue complexity or delay, and that an early termination formula may properly reflect this objective. Unlike usury laws for credit transactions, this Act does not regulate the amounts or manner of calculation of rents and related charges in consumer leases, and it is therefore not feasible to set precise dollar limits or formulas for calculating a maximum permissible "payoff" figure when a lease is terminated early. The test remains whether the early termination charge provided in the lease is reasonable as a form of liquidated damages.

5. Subsection (b) sets a more specific limitation for the early termination provisions in motor vehicle leases. The total early termination charge cannot exceed the sum of the enumerated "payoff" components. Subsection (b)(1)(A) refers to specific charges related to terminating the lease and payable to third parties. Subsection (b)(1)(B) allows recovery of either a fixed disposition fee (generally related to the expected expense of retaking, storing and disposing of the goods), or the actual costs expended in repossessing and foreclosing after default. Thus, a lease might provide a uniform "disposition" fee in a sum certain, regardless how or when the goods are returned to the holder. Or the lease might provide, alternatively, that the holder may recover a sum equal to actual out-of-pocket expenses where repossession is necessary. Or the lease might provide that the lessee will be obligated for the greater of these two measures (but not both).

6. Subsection (b)(1)(C) is the core component of an early termination charge; it is a sum comparable to the unpaid principal balance in a pre-computed credit transaction with a balloon payment. Part of each of the lessee's scheduled lease payments is attributable to depreciation, i.e., reducing the "adjusted capitalized cost" [Regulation M § 213.4(f)(3)], and part is attributable to the time-value of the lessee's right to defer payments for the use of the goods. This latter component is the "rent charge" [Regulation M § 213.4(f)(6)], which reflects an implicit interest rate structured into the lease. Together, the portions of "base periodic payments" that cover depreciation, plus the "rent charge," amortize the adjusted capitalized cost down to the projected "residual value" over the term of the lease. When a lease is terminated early, the lease typically fixes the lessee's payoff obligation by ascertaining the unpaid adjusted capitalized cost. This sum is then reduced by the realized value of the goods [Section 404(a)]. Under subsection (b) (1)(C) this calculation is made by applying a generally accepted principal-reduction formula to determine what is the remaining unpaid adjusted capitalized cost.

For purposes of this limitation provision, the baseline calculation method is the "constant yield method," which represents a FASB accounting standard for the leasing industry. Or the computation may use another "generally accepted actuarial method" if it is commonly used in the consumer leasing markets and is not otherwise unlawful. Actuarial (including constant-yield) calculations are generally more favorable to consumers; thus formulas based on a sum-of-the-digits [Rule of 78s], straight-line, and other non-actuarial variations do not meet this limitation. The lease of course must disclose the early termination charge methodology in accordance with Regulation M § 213.4(g).

FASB 13 refers to Statement of Financial Accounting Standards No. 13, promulgated by the Financial Accounting Standards Board. It represents the generally accepted accounting principles for various types of personal property leases, including the calculation of early termination liabilities. This "unpaid balance" component does not include charges to cover disposition expenses, tax recapture, and other losses a holder may suffer on early termination. (Recovery of these is authorized under subsections (b)(1)(B) and (b)(1)(D) of this Section.) The FASB 13 calculation is done on an actuarial basis with reference to the unpaid depreciation, the lease term, the residual value, and the base lease payments (i.e., the lessee's periodic payments less taxes, unamortized maintenance agreements, insurance, and the like.) It assumes rent payments are due in advance, and equal 30 day months (a 360 day year).

Example 1: Termination at lease mid-point: [check computations]

Assume a 24 month lease with an Adjusted Capitalized Cost (ACC) at consummation of $20,000, monthly payments of $336, and a projected Residual Value of $14,000 for the goods at the end of the lease term. If the parties agree to terminate this lease after 12 months, finding the early termination amount involves several steps. One is to determine the "internal rate of return" (IRR) implicit or specified in the lease as representing the time value of deferred payments, here 6%. A "future value" (FV) calculation then allocates each monthly payment of $336 into a component for interest and a component that reduces the Adjusted Capitalized Cost. In the first monthly payment, $100 went toward rent charge [$20,000 x (.06/12)] and the remaining $236 reduced the ACC from $20,000 to $19,764. From the second monthly payment, $98.82 went toward rent charge [$19,764 x (.06/12)], and the remaining $237.18 was applied to reduce the ACC to $19,526.82. Repeating this process through month 12, brings the unpaid ACC down to $16,732. That is the sum the lessor must realize to recover its investment and expected earnings from the lease.

If consumer goods depreciated at exactly the same pace as payments toward depreciation were made, the holder in this example would have collected 12 payments of $336 each (a total of $4,032 representing $3,268 in ACC reduction and $764 in rent charge), and would have a returned vehicle worth exactly $16,732. But the reality is that the vehicle has likely depreciated faster than the payment stream. If, on termination of the lease after 12 months, the vehicle is sold for, say, $15,400, this Realized Value when subtracted from the unpaid ACC leaves the amount of $1,332 unpaid. This $1,332 is the early termination liability component under subsection (b)(1)(C).

Example 2. Termination early in lease term:

Assume a 24 month lease with an initial ACC of $20,000, an internal rate of return of 8%, monthly payments of $442, and a Residual Value of $12,000. The lease is terminated at month 6. Using the same steps as in Example 1, the unpaid ACC has been reduced to $18,116 after 6 months. If the vehicle is sold for $16,000 at that point, the early termination charge component under subsection (b)(1)(C) is $2,116.

The amount of the early termination charge is subject to all the variables that go into its calculation, perhaps none more critical than the actual "realized value" when the goods are liquidated upon early termination of the lease. See Example 3, discussed in Comment 8, infra.

7. Subsection (b)(1)(D) acknowledges that an explicit prepayment fee may be provided for in the lease. This refers to a separate charge analogous to a "prepayment penalty" in a credit transaction, which generally compensates for the unrecovered overhead from the original lease and lost opportunity costs (including tax benefits) the holder incurs when an obligation is paid off early. In combination with paragraphs (A) through (C), the imposition of any such additional charge must assure that the total early termination charge remains reasonable.

8. Subsection (b)(2) sets an absolute cap on that portion of the early termination charge that is based on the difference between unamortized adjusted capitalized cost and realized value. In no case may the lessee be charged more for this component than what the lessee would pay if the lessee made all scheduled payments to the end of the lease term.

Example 3: Low Realized value; ET late in lease term.

Assume a 36 month auto lease with an initial ACC of $25,000, an internal rate of return of 6%, monthly payments of $379, and a projected residual value of $15,000. The lease is terminated after 30 months. At that point the unpaid ACC has been reduced to $16,360. But because of unexpected depreciation for that model vehicle, or an overstated Residual Value in the lease, it is resold for only $12,000. This leaves an apparent early termination liability of $4,360 [$16,360 - $12,000]. But under subsection (b)(2) the maximum ETL is capped at the total of remaining payments, i.e., 6 x $379 = $2,274.

In most closed-end leases, the holder contractually bears the depreciation risk only at the scheduled termination of the lease, when the lessee can simply surrender the goods and walk away. By this view, at all intermediate points the lessee bears the depreciation risk, and the lessee's early termination liability should reflect that allocation of risk. Subsection (b)(2) does not reject, but does qualify, this approach. The issue is whether the holder may use the occasion of an otherwise mutually agreeable early termination to shift dramatic depreciation risks to a lessee who may not appreciate how or why the payoff figure is so high. As a general proposition, the lessee can be held responsible for a sum that represents the full amount owing under the lease (the unpaid adjusted capitalized cost) less the current realized value of the goods. But if the goods have depreciated so dramatically as to leave a balance owing that is in excess of all remaining scheduled payments (toward depreciation and rent charge), the holder can collect no more than the amount of those remaining payments. In effect this allocates to the holder rather than to the consumer lessee a portion of the risk of bad judgment about depreciation at the time of early termination.

8. Subsection (b) does not require that an early termination provision in a motor vehicle lease be calculated or described in terms of the components set out in this subsection; it does require, however, that the aggregate dollar amount of the early termination be within the limit specified here. For example, a lease might provide that on early termination the charge to the lessee will be two monthly payments, or a flat dollar figure. So long as the amounts so specified are no greater than the amount that would be calculated under subsection (b) they are permissible forms of early termination charge.

9. This Act takes no position on whether a holder's conduct of the repossession or disposition of leased goods justifies a bar or limitation on recovery of an early termination charge. This follows the policy choice reflected in revised UCC Article 9 [UCC § 9-626(b)]. Whether a holder's misconduct in retaking or disposing of the leased goods justifies an "absolute bar" against recovery of any deficiency balance is left to the courts.

SECTION 406. REPORTING EARLY TERMINATION TO CONSUMER REPORTING AGENCY. If a consumer lease is terminated before its scheduled expiration by mutual agreement of the holder and lessee, the holder may not report the early termination to a consumer reporting agency as a default. This subsection does not preclude the holder from reporting to a consumer reporting agency a prior default by the lessee under the lease or a subsequent default under the early termination agreement.

02/01 Update: Per 10/00 Committee instruction this provision was removed from § 405 into this separate section. New language at the end is to clarify the holder can report defaults under the termination agreement itself.

Comparable Uniform Statutory Provision: None

Purpose: To assure that a voluntary early termination is not treated or reported to credit bureaus as a default under the lease.

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

2. This provision does not prevent the holder of the lease from reporting other previous delinquencies under the lease, such as missed or late payments. Nor does it prevent the lease holder from reporting as a default the lessee's failure to pay the early termination charge as agreed.

SECTION 407. EXCESS WEAR AND USE; EXCESS MILEAGE.

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

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

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

(2) damage or repair to the extent the leased goods are covered by warranty, or by a repair, service or maintenance agreement issued in connection with the lease and recovery or repair under the warranty or agreement is available to the holder.

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

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

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

(d) The time is reasonable under subsection (c)(2) if it is no less than 12 business days after the holder sends the notice under subsection (c)(1).

(e) In connection with the expiration of a consumer lease of a motor vehicle, if the lease provides for charges for excess wear and use, the following rules apply:

(1) The holder may impose a charge for excess wear and use only if, not more than 90 nor less than 30 days before the expiration of the lease, the holder provides sends the lessee notice in a record of

02/01 Update: Language added to clarify that following the prescribed procedure is a condition to collecting EWU charges.

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

(B) the identity of one or more persons, or a class of persons, authorized to inspect the vehicle for excess wear and use.

02/01 Update: "class of persons" added, to permit use of categories such as "any authorized Ford dealer."

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

(3) A report in a record of an inspection under paragraph (2) is binding on the holder if the lessee either pays the excess wear and use charges indicated, or has necessary repairs made at the lessee's expense, by the time the vehicle is returned at the expiration of the lease; but if the holder notifies the lessee in a record within [90] days after return of the vehicle the lessee remains responsible for excess wear and use that was not reasonably detectable by an inspection under paragraph (2), was incurred after the inspection and before return of the vehicle, or was the result of incomplete or improper repairs.

02/01 Update: 90-day notice limitation added for belated EWU claims.

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

(f) In addition to charges for excess wear and use, A a consumer lease of a motor vehicle may provide for the imposition of a reasonable charge for excess mileage.

02/01 Update: to clarify that excess mileage is separate from EWU.

Comparable Uniform Statutory Provisions: None

Purpose: To establish standards for charges for excess wear and use of the leased goods, and fair but expeditious procedures for imposition of such charges.

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

Explicit disclosure of EWU standards is required under the federal Consumer Leasing Act [Regulation M § 213.4(h)(2)], and this Act [Section 203(a)]. It is implicit, in any event, that EWU standards must be part of the contractual relationship between the parties in order to be enforceable.

2. Subsection (b) limits EWU standards in two ways. Some degree of wear and depreciation is inherent during the term of a lease; the goods will normally be used and will age, and these expected patterns may differ by type of goods, location, and lease duration. An off-road vehicle in Montana will likely have "ordinary" wear and use different from a sedan in Florida. A four year old car will likely be less pristine than a two year old vehicle. These normal patterns of depreciation cannot be treated as "excess" wear and use subject to a special charge. Likewise, a lessee cannot be required to pay as EWU charges amounts covered by a warranty or service contract under which the holder may claim. This assumes that the lessee has cooperated in any way reasonably necessary to submit, document and process the warranty or service contract claim.

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

4. For leases of goods other than motor vehicles, subsection (c) prescribes a basic level of due process. Within a reasonably brief time after lease termination, the holder must notify the lessee of EWU charges and permit the lessee (or lessee's representative) access to the goods for inspection. If the EWU charges are contested, the lessee has a reasonable period (at least 12 business days) to arrange a reinspection by a mutually agreeable inspector. Given the variety of non-vehicle goods potentially covered by this subsection, and the varying circumstances that may exist at lease termination, this subsection does not spell out a specific dispute resolution procedure or time frames for resolving an EWU dispute. It should be sufficient protection that, under subsection (a), EWU standards must be reasonably applied, as well as reasonable in their content. Nothing in this subsection precludes the parties from agreeing, in the lease or otherwise, to a more expeditious method of identifying and resolving EWU claims, such as by pre-termination inspection, as long as the lessee has an opportunity to inspect, contest the EWU charge, and obtain a reinspection.

5. Motor vehicle leases call for a somewhat different pattern to expedite resolution of EWU claims. This is partly because the vehicles themselves are more prone to damage or wear than "indoor" goods, and also because there is more justification for the holder to dispose of the vehicle quickly to maximize its value and avoid interim storage and other incidental expenses. A holder's right to collect EWU charges in a motor vehicle lease depends on following the prescribed procedure in subsection (e).

a.. Within a window of 30 to 90 days before the lease will end, the holder must notify the lessee of the EWU ground rules spelled out in paragraphs (2) through (4) of subsection (e). The notification must also identify inspectors authorized to evaluate EWU damages and the costs of repair. This may be by reference to particular inspectors by name, or to a class of such inspectors, such as "any authorized [brand] dealership," or "a certified [state] inspection station." If the lessee brings the vehicle in for pre-termination inspection within 20 days before lease end, and either pays any EWU charge or has the vehicle repaired to cure the excess wear and use, that satisfies the lessee's responsibility. For this purpose, if the lessee takes the car back to the originating dealer -- perhaps to trade it in as part of the purchase or lease of a new car, where the dealer may be inclined to minimize the lessee's EWU liability -- the holder is bound by that dealer's inspection whether or not that dealer was identified as an authorized inspector in the original lease. As a qualification, under subsection (e)(3), the lessee remains responsible for latent damage, post-inspection damage, or inadequately repaired damage, provided the holder notifies the lessee within 90 days after the vehicle is returned. These kinds of damage are not self-evident, and may not be discovered until after the vehicle has been resold.

b. The purpose of this subsection (e) is to permit and encourage EWU vehicle inspections before scheduled expiration of the lease, so that when the vehicle is turned in the existence and amount of any EWU liability have been resolved and the holder can dispose of the vehicle immediately. It is in the lessee's interest, as much as the holder's, to use this advance inspection procedure. If the vehicle lessee fails to use the pre-termination inspection process, subsection (e)(4) requires the holder to notify the lessee of any EWU claim within a specified period. The holder need not retain the vehicle, allow the lessee access to it, or agree to a binding reinspection, but its assessment of EWU charges remains subject to dispute by the lessee.

c. The notice and procedures required under subsection (e) are applicable only when a vehicle lease is about to expire, i.e., at the end of its scheduled term. Some leases may make the lessee responsible for EWU charges at other times, such as at early termination. No special notice or other rules apply in such a case, but the imposition of the EWU charge remains subject to the general standard of reasonableness in subsection (a).

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

SECTION 501. PRIVATE REMEDIES.

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

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

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

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

(1) a holder is liable for statutory damages of 25% of the amount of payments due scheduled under the lease, but no less than $500 and no more than $2,000, for a violation of any of the following provisions: Sections 202; 203; 204; 206; 301; 303(d); 304(b)-(c); 309; 310(a)-(b); 402(b); 403(a), (c), and (d); 404(c); 406; and 407(c) and (e)(1).

(2) a holder is liable for statutory damages of not less than $250 and not more than $5,000, as determined by the court, if the holder attempts to impose or enforce any term or obligation prohibited or made unenforceable by Sections 205; 302; 303(a); 304(d); 308; 310(c); 401(b); or 405(d), or attempts to collect an amount that is unreasonable under Sections 304(a); 405(b) and (c); or 407(a), (b), or (f).

02/01 Update: Per 10/00 Committee instruction, a separate category of statutory damages created for certain violations: trying to enforce or collect unlawful terms or amounts.

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

02/01 Update:. Q. Did we intend to retain criteria in (e)?

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

Comparable Uniform Statutory Provisions: UCCC §§ 5.201, 5.203.

Purpose: To establish civil sanctions for lessor or holders who violate provisions of this [Act], including actual and statutory damages and court costs and attorney's fees.

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

2. This Act adopts, in part, a "private attorney general" policy toward its enforcement, i.e., a structure of civil liability for violators that encourages consumers to act on their own initiative to protect their interests and also to police the marketplace and sanction violators. This structure includes recovery of actual damages, injunctive or declaratory relief in appropriate cases, statutory damages for certain violations. In addition a successful consumer litigant is entitled to recover attorney's fees and court costs. These sanctions, and defenses to them, are similar but not identical to those afforded consumers under § 185 of the federal Consumer Leasing Act [15 U.S.C. § 1667d] which incorporates the civil liability rules from § 130 of the Truth in Lending Act [15 U.S.C. § 1640]. See the comparison chart in Comment 1 to Section 503.

3. Actual damages are recoverable in all cases; this includes both direct and consequential damages proved. Lessees may also bring declaratory judgment or injunction actions where appropriate under the normal criteria for such actions. In addition, subsection (d) permits recovery of statutory damages for violations of certain provisions of this Act, even where no actual damages are proved.

4. For a violation of enumerated rules, subsection (d)(1) directs an award of statutory damages measured by 25% of the total of payments called for under the lease, but with a floor of $ 500 and a cap of $2,000. The "total of payments" refers to scheduled periodic payments, or the single payment amount in a single-payment lease. This is meant to be a non-discretionary award: once the violation is established the lessee is entitled to the dollar sum derived through this formula. The common ingredient of the violations subject to statutory damages under this subsection is that they constitute non- or mis-disclosure of important information about the lease or rights or obligations under it.

5. The violations collected under subsection (d)(2) are of a different type. In each of these instances this Act specifically prohibits, and declares unenforceable, a particular lease term or practice, or prohibits imposing a charge that is determined to be unreasonably high. If these provisions were treated as wholly self-policing, some lessors might risk committing violations on the theory that they could "get away with it" more often than not, and that the worst that could happen would be an occasional court refusing to enforce an unenforceable clause or ordering refund of an unreasonable charge. This subsection discourages such adventurousness. Attempts to impose or enforce terms, or collect amounts, that are illicit are subject to statutory damages set as a range ($ 250 to $ 5,000), to be fixed by the court in light of the factors specified in (e). In essence, the more serious and intentional the violation, the larger the statutory damages.

6. To achieve the private attorney general purposes of this Section, the successful consumer litigant needs to be able to recover litigation expenses, including attorney's fees and court costs. The consumer is "successful" in this sense whenever a favorable court judgment or settlement is based on a violation of this Act, regardless of the amount of the consumer's monetary recovery. The attorney's fee award should reflect actual time spent resolving liability under this Act, and should not be reduced in proportion to the consumer's recovery. This Act adopts the approach of cases like Bittner v. Tri-County Toyota, Inc., 569 N.E.2d 464 (Ohio 1991), and Jordan v. Transnational Motors., Inc., 537 N.W.2d 471 (Mich, App. 1995, and rejects the approach of cases like James v. Thermal Master, Inc., 562 N.E.2d 917 (Ohio App. 1988) [Double check these and other e.g.s]

SECTION 502. CLASS ACTIONS.

(a) At the time of filing a class action for a violation of this [Act], the private plaintiff shall serve a copy of the complaint on the [Administrator] who may intervene in the action.

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

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

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

Comparable Uniform Statutory Provisions: None

Purpose: To recognize that class actions are permissible under this Act, but to limit the amount of statutory damages recoverable.

1. Subsection (a) requires a private class action plaintiff to notify the "Administrator" [see Section 505] of the commencement of the action by serving a copy of the complaint. This allows the Administrator to monitor the progress of such class actions, and to intervene where it is in the public interest to do so. This requirement is not intended as a jurisdictional prerequisite for the class action; failure to give the notice may be sanctioned by the court in any appropriate manner.

2. Class actions for violations of this Act may be pursued under the normal rules for class actions in the forum court. Experience under the comparable provisions of the federal Consumer Leasing Act [15 U.S.C.A. § 1667d], and the Truth in Lending Act [15 U.S.C.A. § 1640(a)(2)(B)] provides guidance for such actions.

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

SECTION 503. LIMITATIONS ON PRIVATE REMEDIES.

(a) A holder has no liability for statutory damages under this [Article] if, within 60 days after discovering a violation of this [Act], and before commencement of an action under Section 501 or 502 or the receipt of written notice of the violation from the lessee, the holder notifies the lessee concerned and corrects the violation, including refund, restitution, or crediting of any charges improperly disclosed or imposed.

02/01 Update: I think Committee intended this "cure" provision to operate only to avoid statutory damages.

(b) A holder is not liable for statutory damages under section 501(d) if the holder proves by a preponderance of the evidence that the violation was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid the error. Examples of bona fide errors include clerical errors, calculation errors, computer malfunctions and programming errors, but an error of legal judgment with respect to a holder's obligations under this [Act] is not a bona fide error.

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

(d) An action under this Article may be commenced within one year after the termination of the lease that is the subject of the action. A lessee's claim for actual or statutory damages under this Article may be raised by way of recoupment in an action by the holder on the lease without regard to this period of limitations.

02/01 Update: Per 10/00 Committee instruction, statute of limitations set at one year after lease end -- same as federal CLA.

(e) Liability does not arise under this Article with respect to an act or omission in good faith conforming to:

(1) a rule or interpretation of this [Act], or to an approval by the [Administrator], even if after the act or omission occurred, the rule, interpretation, or approval is amended, rescinded, or determined by judicial or other authority to be invalid; or

(2) with respect to requirements based on the federal Consumer Leasing Act, a rule, regulation, or interpretation of that Act by the Federal Reserve Board, even if after the act or omission occurred, the rule, regulation, or interpretation is amended, rescinded, or determined by judicial or other authority to be invalid.

02/01 Update: Paragraph (2) added to provide parallel protection for compliance with the federal CLA or interpretations of it by the Federal Reserve or its staff. This applies in those instances where this Act incorporates compliance with the federal Act, such as in Section 203 for disclosure.

(f) Multiple Violations resulting from a holder's multiple failures to comply with the provisions enumerated in Section 501(d) of this [Act] with respect to a single consumer lease entitle the lessee to a single recovery of statutory damages under this Article, but continued failure to comply after a recovery has been granted gives rise to rights to additional recoveries.

02/01 Update: Clarification: Did we intend this single-recovery rule to apply to both paragraphs in 501(d), or only 501(d)(1)?

Comparable Uniform Statutory Provisions: None

Purpose: To set limitations on private remedies for violations of this Act.

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

UCLA TILA/CLA

501(f) 130(a)(3); 15 U.S.C.A. § 1640(a)(3)

502(b) 130(a)(2)(B); 15 U.S.C.A. § 1640(a)(2)(B)

503(a) 130(b); 15 U.S.C.A. § 1640(b)

503(b) 130(c); 15 U.S.C.A. § 1640(c)

503(c) 130(d); 15 U.S.C.A. § 1640(d)

503(d) 185(c); 15 U.S.C.A. § 1667d

503(e) 130(f); 15 U.S.C.A. § 1640(f)

503(f) 130(g); 15 U.S.C.A. § 1640(g)

1. Under subsection (a), a holder may avoid liability for statutory damages if it discovers and corrects a violation on its own initiative, before notice from the affected lessee. This encourages internal compliance audits by lessors and holders. The necessary corrective measures depend on the nature of the violation, but if there has been a mis-statement of any fees or charges, the correction must include monetary adjustment of those charges to the lesser of what was disclosed or would have been permissible under this Act.

2. Subsection (b) excuses from statutory damages liability violations that were genuinely inadvertent. The burden is on the holder to demonstrate two essential elements of this bona fide error defense: (1) the violation must have occurred unintentionally and in good faith, and (2) the lessor or holder must have maintained reasonable compliance procedures to avoid such violations. Misinterpretation of this Act and its requirements does not qualify for this protection.

3. Subsections (c) and (f) limit statutory damages liability where there are multiple lessees or multiple violations in the same lease.

4. Subsection (d) establishes a one-year statute of limitations for actions for violations of this Act, measured from the termination of the lease and not from the occurrence of the violation. (The limitations period under the federal Consumer Leasing Act is also one year after termination of the lease.) Violations may not be readily discoverable during the term of a lease, and are often likely to be detected only when the lease terminates -- either at scheduled expiration, or at early termination which may be voluntary or as a result of default. Consumer leases are not typically more than several years in duration and extending the statute of limitations a year past the end point is not an undue burden. In any case, a lessee may always raise a violation of this Act as a matter of recoupment against a holder's collection action based on the lease.

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

5. Under subsection (e) a lessor or holder may not be held in violation of this Act if its conduct conforms, in fact and in good faith, with official guidance from the [Administrator}. A lessor or holder who has relied on such guidance ought not be subject to liability even if the guidance is subsequently withdrawn, modified or over-ruled. Even if the holder or lessor is not aware of the Administrator's interpretation at the time of a particular act or omission, conduct "conforming" to it is protected.

6. This Article does not replicate the provision in the federal law (TILA Section 131, 15 U.S.C.A. § 1641) that protects assignees from liability for disclosure violations if the violation is not apparent on the face of the disclosure statement. This is consistent with the policy reflected in Section 305(b) of this Act that there is no "holder in due course" protection for assignees with respect to claims or defenses the lessee could assert against the original lessor or a prior holder. The initial assignee from a dealer/lessor is often a financial institution which prepared the disclosure forms and the software for executing them. That assignee can protect itself by reasonable due diligence in monitoring the dealer, reviewing the documentation assigned, and establishing recourse or indemnification rights against the dealer. Subsequent assignees, including through securitizations, can also establish recourse or equivalent charge-back rights with respect to violations in leases they purchase.

SECTION 504. EFFECT OF VIOLATION ON RIGHTS OF PARTIES; ELECTION OF REMEDIES.

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

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

Purpose: To clarify the effect of violations of this Act on the underlying lease contract, and on liability under other law.

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

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

SECTION 505. ADMINISTRATIVE ENFORCEMENT. The [Attorney General, Credit Code Administrator, or similar public agency] shall enforce this [Act]. For this purpose, the [Attorney General, Credit Code Administrator, or similar public agency] shall have has the powers and remedies provided in the [state Unfair or Deceptive Acts or Practices Act, or comparable consumer fraud law].

Purpose: To vest enforcement authority for this Act in appropriate State officials.

1. Administrative enforcement is critical to the successful implementation of this Act, and this Section assigns that responsibility to the [Administrator]. That officer or agency should have an array of investigative, injunctive, restitution and similar powers. Typically these powers are accorded under a generic Unfair or Deceptive Acts or Practices statute or similar consumer fraud statute. Since most states have assigned consumer protection responsibilities and enforcement powers to the Attorney General or other officer, there seems no need for a separate articulation of enforcement powers in this Act.

SECTION 506. ADMINISTRATION OF [ACT].

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

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

Purpose: To assure administrative oversight, interpretation, and coordination of this Act by appropriate State officials.

1. This provision establishes an administrative "traffic cop" to deal with the myriad issues of interpretation of this Act, coordination with other States adopting this Act, and avoidance of inconsistencies with the federal Consumer Leasing Act. Many of the requirements of this Act are complex, and their application to various lease patterns in the future may be uncertain. An administrative officer for this Act with appropriate authority to issue rules and interpretations should be useful in easing compliance burdens, maintaining uniformity with other States, and avoiding frictions with the federal Consumer Leasing Act.

2. As noted under the preceding section, most states have assigned consumer protection responsibilities generally to the Attorney General or other public official. Thus this Section need not create a new bureaucracy, or administrative procedure law, but rather assumes that the duties of Administrator under this Act can be combined with existing administrative structures in the State. The Administrator under this Section could also be the agency assigned enforcement authority under Section 505.

3. The instruction to the Administrator in subsection (b), to "take into consideration" the actions and interpretations of other states that enact this law, is not a cession of any authority with respect to this Act to officials of other states. Uniformity of interpretation is a general objective, but does not inhibit the Administrator from interpreting -- or enforcing under Section 505 -- this Act in a manner to enhance its effectiveness in this State.

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

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

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

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

SECTION 604. REPEALS AND AMENDMENTS.

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

(1)

(2)

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

(1)

(2)