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Compliance Laws and Regulations > Consumer Leasing > Flashcards

Consumer Leasing Flashcards

1
Q

What is a lease?

A

Contract between lessor (property owner) and a lessee (property user) for the use of property subject to stated terms and limitations for a specified period and specified payment.

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2
Q

What does the Consumer Leasing Act apply to?

A

To consumer leases of personal property.

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3
Q

What is a lessee?

A

Person who enters in or is offered a consumer lease

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4
Q

What is a lessor?

A

Person or organization who regularly leases, offers to lease, or arranges for the lease of personal property under a consumer lease. (A person who leases/offers to lease 5+ times in preceding or current calendar year)

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5
Q

What criteria must a lease meet to be considered a Consumer Lease under CLA/Reg M? (4)

A

Contract between lessor and lessee:

  • for use of personal property by individual
  • to be used primarily for personal, family, or household purposes
  • for more than 4 months (week to week and month to month leases excluded)
  • with total contractual cost no more than $61,000 as of January 2022.
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6
Q

What types of leases are specifically excluded from coverage? (4)

A

Leases for:

  • businesses, agriculture, or made to org/gov
  • real property
  • personal property that is incidental to real property
  • for credit sales (bail money)
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7
Q

What are the two categories of consumer leases?

A

Open-end

Closed-end

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8
Q

What is Realized value? (3 options)

A
  • The price received by the lessor of the leased property at disposition
  • the highest offer for disposition of the leased property, or
  • the fair market value of the leased property at the end of the lease term.
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9
Q

What is Residual Value?

A

The value of the leased property at the end of the lease, as estimated or assigned at consummation of the lease by the lessor.

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10
Q

What is an open-end lease?

A

Lease where the amount owed at end of lease term is based on:

residual value-realized value

And the consumer may pay all or part or may get a refund depending on the difference being positive or negative.

RV greater-RV less= Pay
RV less-RV greater= refund

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11
Q

What is a closed-end lease?

A

Lease other than an open-end. Allows the consumer to walk away at end of contract with no payment obligation - unless property was damaged.

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12
Q

What is the gross capitalized cost?

A

Amount agreed upon by lessor and lessee as value of the leased property, plus any items capitalized or amortized during lease term. Like taxes, insurance, service agreements, outstanding prior credit balance.

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13
Q

What is a capitalized cost reduction?

A

Total amount of rebate, cash payment, net trade-in allowance, and noncash credit that reduced the gross capitalized cost. (down-payment)

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14
Q

What is the adjusted capitalized cost?

A

Gross capitalized cost - capitalized cost + amt base periodic payment.

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15
Q

When are applicable consumer disclosures required to be provided under CLA? (3)

A

Before lease signing
Renegotiation of Lease
Extension of Lease

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16
Q

What are the trigger terms for advertising disclosures? (4)

A

Payment amount
statement of capitalized cost reduction (down-payment)
Payment required prior to lease signing
no payment required

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17
Q

What must ads disclose if trigger terms are present? (6)

A
  • Transaction is for a lease
  • Total amount due prior to or at lease signing/delivery
  • number, amts, due dates, periods of scheduled payments
  • if security deposit is required
  • statement that extra charge may be imposed at end of lease term where the lessee’s liability is based on difference between residual value and realized value
  • any rates cannot be more prominent than other disclosures and include statement that “this percentage does not measure the overall cost of financing this lease”
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18
Q

What terms cannot be used if a rate is disclosed? (2)

A

Annual percentage rate

Annual Lease rate

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19
Q

What are the record retention requirements of CLA?

A

Maintain evidence of compliance (other than ads) for no less than 2 years after date of disclosures.

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20
Q

How are disclosures required to be provided?

A

Clear and conspicuous and provided in writing in a form the consumer can keep

Can be electronic as long as E-sign requirements are met

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21
Q

During what phases of a lease should examiners review lease estimates for unreasonable balloon payments? (4)

A

At early termination
At end of lease term for wear and use
At end of lease term for open ended leases
in delinquency, default, or late payment

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22
Q

In which types of documents can disclosures be provided? (3)

A

In a dated statement:

  • separate statement that identifies the lease transaction
  • in the lease contract
  • other document evidencing the lease
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23
Q

What information is required to be segregated on the model form? (in their own boxes) (10)

A
  • Amount due at Lease signing or delivery
  • Payment schedule and total amount of periodic payments
  • Other charges
  • Total of Payments
  • Payment Calculation (Gross capitalized cost, Capitalized Cost reduction, adjusted capitalized cost, residual value, Depreciation/Amortization, Rent charge, Total of base periodic payments)
  • early termination notice
  • Maintenance responsibilities notice of wear and use standard
  • purchase option at end of lease term
  • Statement referencing nonsegregation disclosures
  • Liability at end of lease term based on residual value (rent and other charges)
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24
Q

If there is more than one lessor who receives disclosures?

A

Lessors may provide the disclosures to any lessee who is primarily liable on the lease

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25
Q

True or false: Lessors can disclose items based on estimates?

A

True, If the amount needed to comply with the required disclosure is unknown or unavailable, the lessor may use a reasonable estimate based on the best information available.

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26
Q

What minor variations can be disregarded when making disclosures? (4)

A
  • Payments must be collected in whole cents
  • Dates of payments may vary based on scheduled day not including a business day
  • that months have different number of days
  • leap years
27
Q

What is required to be disclosed under the description of property?

A

A brief description of the leased property sufficient to identify for the lessee or lessor

28
Q

What should be disclosed under the Amount due at lease signing or delivery? (4)

For auto leases? (8)

A

Total amount to be paid prior to or at consummation/delivery.

Lessor must itemize each item by type and amount: Sum of the following

  • refundable security deposit
  • Advance monthly/periodic payment
  • capitalized cost reduction (down payment)
  • any applicable fees to be paid upfront (title fees, delivery/set up fees, registration fees, etc)

Itemize by type and amount: less the following for auto leases

  • net trade in allowance (non negative)
  • rebates
  • non-cash credits
  • cash payments
29
Q

What should be disclosed under payment schedule and total amount of periodic payments?

A

number, amount, due dates, or periods of periodic payments scheduled under the lease

total amount of periodic payments.

ex: rent, capitalized or amortized amounts, depreciation, taxes, maintenance, and insurance.

30
Q

What should be disclosed under other charges?

A

Total amount of other charges payable to lessor itemized by type and amount that are not included in periodic payments.

ex: amount of liability at end of lease term, potential difference between residual and realized values

31
Q

What should be disclosed under total of payments?

A

“the amount you will have paid by the end of the lease”

amount due at lease signing (less refundable amounts) + total periodic payments (less any paid at lease signing) + other payments

In an open-end lease, a description such as “you will owe an additional amount if the actual value of the vehicle is less than the residual value” shall accompany the disclosure.

32
Q

What must be disclosed under the payment calculation section? (10)

A
  • Gross Capitalized Cost
  • Capitalized cost reduction
  • Adjusted Capitalized cost
  • Residual value
  • Depreciation/Amortized amounts
  • rent charge
  • Total of base periodic payments
  • Number of Lease payments
  • Base periodic payment
  • Other charges
33
Q

What is disclosed as part of the gross capitalized cost?

A

“the agreed upon value of the vehicle and any items you pay over the lease term”

ex: service contracts, insurance, prior credit/lease balance)

34
Q

What is disclosed as part of capitalized cost reduction?

A

“the amount of any net trade-in allowance, rebate, noncash credit, or cash you pay that reduces the gross capital cost.”

35
Q

What is disclosed as part of adjusted capitalized cost?

A

“the amount used in calculating your base periodic payment”

gross capitalized cost-capitalized cost reduction

36
Q

What is disclosed as part of residual value?

A

“the value of the vehicle at the end of the lease used in calculating your base periodic payment”

37
Q

What is disclosed under depreciation and any amortized amounts?

A

“the amount charged for the vehicle’s decline in value through normal use and for any other items paid over the lease term”

Adjusted capital cost - residual value

38
Q

What is disclosed under the rent charge?

A

“the amount charged in addition to the depreciation and any amortized amounts”

total base periodic payments over lease term - depreciation and amortized amounts

39
Q

What is the total of base periodic payments?

A

Depreciation and amortized amounts + rent charge

40
Q

What is the base periodic payment?

A

Total base periodic payments/number of payment periods in lease

41
Q

What is the total periodic payment?

A

Base periodic payment + other charges

42
Q

What needs to be disclosed regarding Early Termination?

A

Conditions and disclosure of charges

Early Termination Notice

43
Q

What is disclosed as part of the Conditions and disclosure of charges under the Early termination disclosures?

A

Conditions under which the lessee or lessor may terminate the lease prior to end of lease term.
Amount of early termination penalty or charges

44
Q

What is disclosed under the early termination notice?

A

Notice that lessee may have to pay a substantial charge if the lease is ended early.

That the charge may be up to several thousand dollars and will depend on when the lease is terminated.

The earlier the lease is ended the greater the charge is likely to be.

45
Q

What needs to be disclosed under maintenance responsibilities? (3)

A

Statement of responsibilities
Wear and use standard
Notice of wear and use standard

46
Q

What is disclosed under the notice of wear and use standard?

A

Excessive wear and use. You may be charged for excessive wear based on our standards of normal use.

Amount or method of determining any charge for excess mileage

47
Q

What is disclosed under the purchase option?

A

Purchase prices at:

End of lease term
During Lease term and method for determining price

48
Q

What is disclosed under the statement referencing nonsegregated disclosures?

A

Lessee should refer to the lease docs for additional info on early termination, purchase options, maintenance responsibilities, warranties, late and default charges, insurance, and security interests.

49
Q

What is disclosed regarding the Liability between residual and realized values?

A

Statement of lessee’s liability, if any, at early termination or at end of lease term for difference between the residual value and realized value of the leased property.

Rent and other charges
Excess liability
Mutually agreeable final adjustment

50
Q

What is disclosed under excess liability?

A

Statement that if at the end of the lease term the residual value is unreasonable and not in good faith (residual value exceeds realized by more than 3x avg payment in a monthly period) the lessor cannot collect the excess amount unless through a successful court action.

51
Q

What charges are exempt from a excess liability presumption (balloon payment)?

A

Any charge that is not based on the difference between the residual value and realized value.

Ex: Disposition charges, excess mileage charges, late payment and default charges.

52
Q

What is a mutually agreeable final adjustment?

A

Lessee and lessor are permitted after termination of the lease to make any mutually agreeable final adjustment regarding excess liability.

53
Q

What is disclosed under fees and taxes?

A

Dollar amount for all license fees, registration, title, or taxes.

54
Q

Disclosed under insurance?

A

Identification of insurance through the lessor or through a third party.

55
Q

Disclosed under warranties or guarantees?

A

All warranties or guarantees through manufacturer or lessor.

56
Q

Disclosed under penalties and other charges for delinquency?

A

Amount or method for determining penalty or charge for delinquency, default, late payments.

57
Q

What is disclosed under the security interest?

A

description of any security interest other than a security deposit, that is held or retained by the lessor. And identified property that the security interest relates to.

58
Q

What is disclosed under limitations on rate information?

A

If a rate is included in documents evidencing the lease transaction, a statement that “this percentage rate may not measure the overall cost of financing the lease”

Cannot use term APR or annual lease rate

59
Q

What is a renegotiation?

A

When a consumer lease is satisfied and replaced by a new lease undertaken by the same consumer. (kinda like a refinance)

Requires new disclosures.

60
Q

What is an extension?

A

Continuation of an existing consumer lease beyond originally scheduled end.

Extension exceeding 6 months requires new disclosures.

An extension the result of a renegotiation is an exception.

61
Q

What is an assumption?

A

When a consumer lease is assumed by a new person.

New disclosures are not required.

62
Q

What scenarios do not require new disclosures, despite being renegotiations or extensions? (6)

A
  • Reduction in rent charge
  • Payment deferral
  • Extension less than 6mo on month to month basis
  • Substitution of leased property for property that has equivalent or greater economic value (no other lease terms changed)
  • Addition, deletion, sub of lease property on multi item lease (periodic payment cannot change more than 25%)
  • Agreement from court proceeding
63
Q

Of the required disclosures, which disclosures are specifically required for open end leases only? (3)

A

Rent and other charges
Liability at end of lease term based on residual value and excess liability
Mutually agreeable final adjustment.

64
Q

In 2004, Jane Doe paid $200 per month to lease a Ford. the residual value of which was calculated to be $11,000. But by the time the lease was up in 2007, the car was only worth $9,000.

What is the balloon payment Jane is facing?

Is the balloon payment a legal amt?

A

Jane is facing a $2,000 balloon payment.

Residual value - realized value

11K-9K=2K balloon payment

This balloon payment is in violation of Reg M because of the three payment rule. A balloon payment is deemed unreasonable if it amounts to more than 3 times the regular periodic payment. $200 x 3 = $600 the balloon payment cannot be greater than $600.

Jane may NOT be held liable for any more than $600 unless the lessor can prove in court that the $11k residual value was a reasonable estimate at the time AND the lessor pays jane’s attorney’s fees.

Compliance Laws and Regulations (35 decks)

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