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Statement by Griffith L. Garwood, Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Affairs and Coinage of the Committee on Banking, Finance and Urban Affairs of the U.S. House of Representatives, June 24, 1992.

Statement by Griffith L. Garwood, Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Affairs and Coinage of the Committee on Banking, Finance and Urban Affairs of the U.S. House of Representatives, June 24, 1992

I am pleased to appear before this subcommittee on behalf of the Board of Governors of the Federal Reserve System to comment on the "Lease-Purchase Agreement Act," H.R.4497, which would amend the Consumer Credit Protection Act. I am the director of the Board's Division of Consumer and Community Affairs. As you know, the Board is responsible for writing regulations for several consumer protection statutes, including the Truth in Lending Act and the Consumer Leasing Act.

If H.R.4497 is enacted, it would, for the first time on the federal level, impose disclosure and substantive requirements on transactions known alternately as "lease-purchase," "rental-purchase," or "rent-to-own" arrangements. Lease-purchase transactions typically involve shortterm renewable rentals of property, for example, week-to-week or month-to-month rentals of televisions or major household appliances. After a certain number of payments have been made, the consumer becomes the owner of the leased property.

The Congress enacted the Consumer Leasing Act in 1976 as an amendment to the Truth in Lending Act, based on findings that a trend toward long-term leasing existed as an alternative to purchasing certain consumer items on credit and that consumers were not receiving adequate leasing cost disclosures. Like the credit provisions of the Truth in Lending Act, the Consumer Leasing Act requires that lessors provide uniform cost disclosures about consumer leases, including several in advertising. The Consumer Leasing Act generally applies to leases of personal property that involve $25,000 or less with a term of more than four months. A long-term automobile lease is the most common type of lease covered by the act. Because lease-purchase agreements are for less than four months initially--though they are often renewed for a much longer period--they are not covered by the Consumer Leasing Act. They are not covered by the Truth in Lending Act either, because they do not obligate (although they do permit) the consumer to make payments equal to the total value of the property and services involved to acquire ownership.

In 1980, the Truth in Lending Simplification Act amended the credit provisions of the Truth in Lending Act. No substantive statutory changes were made to the leasing provisions. After implementing the Truth in Lending Simplification Act, however, the Board took the initiative in investigating the need for simplification and reform of the Consumer Leasing Act. Meetings were held with various industry and consumer representatives to learn about industry developments and to solicit comment on whether problems existed with the present law and on what improvements might be made. Representatives of the automobile leasing industry at that time strongly supported simplification of the disclosure scheme under the Consumer Leasing Act.

Both industry and consumers had considerable interest in expanding the act to cover lease-purchase transactions of the type subject to H.R.4497. Members of the Board's Consumer Advisory Council and other consumer group representatives were concerned that consumers, particularly those with lower incomes, were entering into these transactions without the benefit of adequate cost disclosures and perhaps without appreciating how much they would have to pay over time to acquire ownership of the leased goods. Representatives from the lease-purchase industry for home appliances also supported expansion of the law to cover rent-to-own transactions and preferred a single federal scheme to the prospect of different treatment at the state level. Thus, in the early 1980s, a commonality of interest existed in support of amending the act to simplify existing disclosure requirements and to expand its coverage to include rent-to-own transactions.

As a result, in 1983 the Board sent to the Congress proposed amendments to the Consumer Leasing Act that were intended as a starting point for congressional consideration of these issues. In seeking to simplffy the existing consumer leasing provisions, the proposal deemphasized the disclosure of terms that were considered less useful in comparison shopping between leases and more likely to be included in the lease contract. In addition, the Board's 1983 proposal added coverage of lease-purchase transactions under the Consumer Leasing Act.

The Board's proposal on lease-purchase transactions addressed the primary concerns associated with those transactions at the time. It provided for the disclosure of six basic terms, including the number and total amount of payments a consumer needed to make to acquire ownership of the leased property; a statement that the consumer acquires no equity in the property until the required payments have been made; whether the leased property is new or used; and a brief mention of certain charges such as reinstatement and late payment and default charges. The proposal also contained a provision that regulated the advertisement of lease-purchase transactions. Senate hearings were held in July 1983 to discuss a bill that incorporated the Board's proposal; however, amendments to the Consumer Leasing Act were never enacted.

Over the sixteen years that the Consumer Leasing Act has been in effect, the Board has received few formal consumer complaints regarding leases covered by the act. For example, since the beginning of 1991 only 15 of more than 3,500 complaints dealt with consumer leasing issues, and none of these complaints related to lease-purchase transactions. Information from the other federal regulatory agencies similarly indicates a small number of consumer complaints. Federal Reserve examiners have found few violations of the act and regulation in examining the limited number of state member banks that are involved in consumer leasing. Little interest has been expressed to the Board over the years by the banking industry, consumer groups, other federal agencies, or the leasing industry in general concerning any continued need to pursue simplification of the Consumer Leasing Act-one of the essential elements behind the Board's initiative in 1983. Thus, little indication exists that the Consumer Leasing Act, which has been in effect without change since 1976, is not working fairly efficiently.

With regard to lease-purchase legislation, most activity in this area over the past few years has been at the state level. More than thirty states now have lease-purchase laws that contain various required disclosure terms and, in some cases, substantive law provisions. Many of those requirements are similar to the provisions in the current bill. Notwithstanding state law, certain representatives of the lease-purchase industry continue to support federal legislation to cover lease-purchase transactions. But, unlike the situation in the early 1980s, it is unclear whether consumer group representatives continue to support federal coverage.

We have no doubt that disclosures to consumers of the most important features of leasepurchase transactions are beneficial--as recognized by the numerous state laws on the subject. These state laws may be sufficient. On the other hand, a uniform federal disclosure scheme for lease-purchase agreements that provides key information to consumers without causing a substantial compliance burden to lessors might prove beneficial, provided the various parties affected by such legislation can identify a genuine need for it. We think that the subcommittee should carefully consider these questions at the outset.

If it appears that federal legislation should be pursued, we would note that H.R.4497 goes beyond the Board's original lease-purchase disclosure scheme in several respects. For example, it adds additional disclosures about maintenance duties and warranties. These disclosures could have the effect of detracting attention from the essential cost information and would need to be explored. They also add a disclosure of the "cash price" yet seem to allow the lessor to set that price at any level-- which raises questions about the utility of the additional disclosure. At least ten state statutes have this requirement, and we suggest that the subcommittee investigate how well this procedure has worked. In addition, the Board has generally not favored federal provisions concerning substantive contract matters--a significant number of which are contained in H.R.4497--given the historical role of the states in regulating such matters.

Despite the Board's 1983 proposal addressing lease-purchase agreements, it is important to recognize that the Federal Reserve has no firsthand experience with the subject. We simply offered our ideas as a complement to our initiative to simplify the consumer leasing provisions and as a starting place for congressional review. The Board has no supervisory relationship with any entities that engage in lease-purchase transactions. Consequently we suggest that, should the Congress choose to go forward on this matter, it give strong consideration to whether the Board would be the most appropriate agency to implement rules for lease-purchase transactions. We believe that the Federal Trade Commission, which would have enforcement authority over all of the affected entities, would be the more logical choice.

On a technical level, the Board questions why section 3 (making certain "conforming amendments" to the Truth in Lending Act) strikes various references to "consumer leases," "lessors," and "lessees" that are found in the Truth in Lending Act, as consumer leases are--and would remain under H.R.4497--subject to the consumer leasing provisions found in chapter 5 of that act. Moreover, we wonder whether it is the intention of this bill to amend the Truth in Lending Act by eliminating statutory damages for violations of the consumer leasing provisions, as is the seeming result of section 3(e)(1)(C).

We commend the chairman of this subcommittee for calling this hearing on H.R.4497. We hope that it will bring some focus to any concerns in this area from both the industry and the consumer interests and to the question of whether federal legislation is needed to regulate leasepurchase transactions.
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Title Annotation:Statements to the Congress; comment on House Bill H.R. 4497, the Lease-Purchase Agreement Act
Publication:Federal Reserve Bulletin
Article Type:Transcript
Date:Aug 1, 1992
Words:1604
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