Consumer Leasing Act (Regulation M)

Leasing is an alternative to buying personal property with cash or on credit. A lease is a contract between a lessor (the property owner) and a lessee (the person who leases and uses the property) for the use of personal property. The lease has stated terms and limitations, is made for a specified period of time, and requires a specified lease payment.

The Consumer Leasing Act (15 U.S.C. § 1667 et seq.) (CLA) was passed in 1976 so consumers get meaningful and accurate disclosure of lease terms before they enter into a contract. With this information, consumers can more easily compare one lease with another, and compare the cost of leasing with the cost of buying on credit or the opportunity cost of paying cash. In addition, the CLA limits balloon payments due at the end of the lease, and regulates advertising for leasing transactions.

The CLA was Part E of the Truth in Lending Act, originally implemented by Regulation Z. When Regulation Z was revised in 1981, Regulation M was issued, governing consumer leases.

On November 9, 2007, amendments to Regulation M and the official staff commentary were issued to simplify the regulation and provide guidance on the electronic delivery of disclosures consistent with the Electronic Signatures in Global and National Commerce Act (E-Sign Act), 15 U.S.C. §§ 7001 et seq.

The Dodd-Frank Act gave the Consumer Financial Protection Bureau (CFPB) authority to make rules under the CLA. For entities under its jurisdiction, the CFPB also enforces compliance with the CLA and its implementing regulation. The CFPB restated the implementing regulation at 12 CFR Part 1013 in December 2011 (76 Fed. Reg. 78500).

NOTE: NCUA Rules and Regulations § 714 provides additional standards and requirements a federal credit union must follow when engaged in the leasing of personal property.

You can find the full text of the CLA here.

You can find the full text of Regulation M here.

You can find the full text of § 714 of NCUA Rules and Regulations here.

Associated Risks

Compliance risk can occur when the credit union fails to implement the necessary controls to comply with the CLA and Regulation M.

Reputation risk can occur when the credit union incurs decreased member confidence as a result of failures resulting from leases, or incurs fines and penalties.

Strategic risk occurs when the board of directors fails to perform necessary due diligence in reviewing existing and prospective products and services for compliance.

Examination Objectives

Examination Procedures

General Disclosure Requirements

  1. Review the credit union’s procedures for providing disclosures to ensure that there are adequate compliance controls and procedures.
  2. Review the disclosures provided by the credit union.
    1. Are the disclosures clear and conspicuous and provided in writing in a form the consumer may keep? For disclosures provided electronically (other than in advertising), are they provided in compliance with the consumer consent and other applicable provisions of the E-Sign Act? For advertisements accessed in electronic form, are the disclosures required by § 1013.7 provided in electronic form in the advertisement? (§ 1013.3(a))
    2. Are disclosures dated and in the prescribed format? (§ 1013.3(a)(1))
    3. Is the information required by § 1013.4(b) through (f), (g)(2), (h)(3), (i)(1), (j), and (m)(1) segregated, and in a form substantially similar to the model in Appendix A? (§ 1013.3(a)(2))
    4. Are the disclosures timely? (§ 1013.3(a)(3))
    5. If there is more than one lessee, are the disclosures provided to any lessee who is primarily liable? (§ 1013.3(c))
    6. If additional information is provided, is it provided in a manner that does not mislead or confuse the lessee? (§ 1013.3(b))
    7. Are all estimates clearly identified and reasonable? (§ 1013.3(d))
    8. Are the disclosures accurate and do they contain the information required by § 1013.4(a) through (t)?
    9. Are disclosures given to lessees when they "renegotiate" or "extend" consumer leases? (§ 1013.5)

    Lessee Liability

    1. Review the lease estimates and calculations to ensure that there is no unreasonable balloon payment expected in the following circumstances:
      1. At early termination:
        1. Does the lessor disclose the conditions under which the lease may be terminated early, and the amount and method of determining any early termination charges? (§ 1013.4(g)(1))
        2. Are any early termination charges reasonable? (§ 1013.4(g)(1), (q))
        1. If the lessor sets standards for wear and use of a leased vehicle, are the amounts or method of determining any charge for excess mileage disclosed? (§ 1013.4(h)(3))
        2. Are standards for wear and use reasonable? (§ 1013.4(h)(2))
        1. Does the lessor disclose limitations on the lessee’s liabilities at the end of the lease term? (§ 1013.4(m)(2))
        2. Are the lessee and lessor permitted to make a mutually agreeable final adjustment regarding excess liability? (§ 1013.4(m)(3))
        1. Does the lessor disclose penalties or other charges for default or late payments? (§ 1013.4(q))
        2. Are the penalties or charges reasonable? (§ 1013.4(q))

        Advertising

        1. Review the credit union’s advertising policies and procedures to ensure adequate compliance controls and procedures.
        2. Review a sample of the credit union’s consumer leasing advertisements.
          1. Do the advertisements advertise terms that are usually and customarily available? (§ 1013.7(a))
          2. Are the disclosures in the advertisements clear and conspicuous? (§ 1013.7(b))
          3. Do catalogs, multiple page advertisements and electronic advertisements comply with the page reference requirements? (§ 1013.7(c))
          4. When triggering terms are used, do the advertisements contain the required additional information? (§ 1013.7(d))
          5. Do merchandise tags that use triggering terms refer to a sign or display that contains the required additional disclosures? (§ 1013.7(e))
          6. If television or radio advertisements use triggering terms but do not contain the additional terms required by § 1013.7(d)(2), do they use alternative disclosure methods (i.e., direct consumers to a toll-free number or written advertisement)? (§ 1013.7(f))

          Miscellaneous

          1. Are records and other evidence of compliance (other than for advertising requirements under § 1013.7) retained for not less than two (2) years? (§ 1013.8)

          Consumer Leasing Act (CLA)
          (Regulation M)
          Checklist

          Item Description YES NO N/A
          1 Does the credit union engage in consumer leasing or purchase consumer leases from lessors? (§ 1013.2(h))