The Consumer Leasing Act: What Is It?

The Consumer Leasing Act, 15 U.S.C. § 1667, et seq. (“CLA”) is a federal law that was passed in 1976 in order to ensure that potential lessees are provided with the accurate disclosure of lease terms before they enter into a contract. Since the CLA applies to personal property leases, one of the targets of the law is to regulate motor vehicle leasing practices as these leases make up a majority of personal property leases. The law contains many regulations that vehicle financing companies must adhere to when providing leases to their customers. The law also provides protection to consumers by laying out terms for remedies and damages.

According to the CLA, a consumer lease is defined as a contract for the use of personal property that extends for a period of over four months. The contractual obligation of a consumer lease cannot be greater than $50,000 (adjusted annually for inflation). The CLA applies to both open-end and closed-end consumer leases. An open-end lease is one where the consumer takes on the depreciation risk and is responsible for the value of the property upon its return. On the other hand, a closed-end lease is one where the consumer is not responsible for either the value of the property or the depreciation risk. Most vehicle leases are closed-end leases which means that the consumer would not be financially responsible for the vehicle’s depreciation. For the times when consumers enter into open-end vehicle leases, they would be financially responsible for the difference between the car’s residual value (value at the end of the lease) and its actual value.

The main goal of the CLA is to make sure that consumers are given sufficient information when shopping for a lease. Thus, lessors are required to provide consumers with certain disclosures that would give the consumer more information regarding their lease. These disclosures must be given to a consumer before they sign a lease and many of these disclosures are specific to motor vehicle leases. Lessors are required to provide information such as a description of the vehicle, total cost of the lease, the amount due at the signing of the lease, the total number of payments and its schedule, and the amount of possible penalties or fees. These disclosures allow consumers to compare the costs and terms of different leases and to determine the company that they want to sign a lease with. They also provide consumers with the opportunity to compare the terms of the lease with the terms of purchasing a vehicle with a loan or with cash.

Specifically, for vehicle leases, the lessor is required to itemize the payment type and the amount of the amount due (i.e. they must specify the prices allotted to trade-in, rebates, credits, and cash payments). Payment calculations for vehicle leases are also evaluated based on a specific formula that encompasses eleven elements: 1) gross capitalized cost, 2) capitalized cost reduction, 3) adjusted capitalized cost, 4) residual value, 5) depreciation, 6) rent charge, 7) total of base periodic payments, 8) lease payments, 9) base periodic payment, 10) itemization of other charges, and 11) total periodic payment. Motor vehicle leases must also contain notices regarding possible charges for early termination of the lease and excessive wear and tear of the vehicle. Additionally, if the consumer is given the option to buy out the vehicle at the end of the lease, the price calculation for the purchase should also be provided in the lease terms.

The CLA also contains rules on lease ads that lessors – including automobile dealers and vehicle leasing companies – must adhere to. According to the law, a lease ad is considered to be any message that announces the availability of a consumer lease to the public. These advertisements can be in visual, oral, or print form, and some examples include, but are not limited to telephone solicitations, messages on the TV, messages in newspapers and magazines, and direct mail. If a lease ad contains the amount of a lease payment or a statement of a capitalized cost reduction, the lessor is required to provide clear and conspicuous disclosures that state:

• That the advertised transaction is a lease; and
• The total amount that is due; and
• The number and amounts of payments as well as their due dates; and
• Whether or not a consumer must provide a security deposit.

Additionally, the CLA contains provisions that limit balloon payments on open-end leases and protect consumers from predatory balloon payment practices. A balloon payment is a payment that is higher than a consumer’s normal monthly payment and it is usually made towards the end of a lease. Balloon payments allow consumers to pay less expensive monthly payments due to the larger payment at the conclusion of the lease. However, because of this large lump-sum payment, balloon payment leases are considered to be riskier than traditional leases. For open-end vehicle leases, balloon payments usually include the amount that accounts for deterioration or wear and tear of the vehicle. When offering an open-end lease, lessors are required to tell the consumer that they may have to pay a balloon payment. Lessors are also required to make reasonable calculations and estimates in order to limit the balloon payment that a consumer would have to pay at the end of a lease. Specifically, the law limits a balloon payment to no more than three times the amount of a consumer’s average monthly payment.

Under the CLA, consumers have the right to sue lessors who do not adhere to fair leasing practices. Injured consumers can bring an individual action or a class action in any United States district court or a court of competent jurisdiction.