New Fed Rules Aim to Make Automobile Leases Clearer

The Federal Reserve Board announced new rules Wednesday intended to make automobile leases clearer and requiring standard cost figures and contracts.

The rules will require leasing companies to prominently disclose the key elements of the deal, including the car’s cost, required down payment, and charges for excess wear and tear, excess mileage and terminating the lease early.

Perhaps most important, at the very top of the model lease disclosure form, the leasing company will have to delineate the total cost consumers will have paid by the end of the lease period, giving them a single number that can be used to compare the cost of one lease to another.

“Consumers will still have to look at the mileage limitations and charges for excess wear and tear or terminating the lease early,” said Rodney J. Couts, executive director of the National Vehicle Leasing Assn. in San Francisco, “but they’ll now have a good number to compare the cost. And they’ll benefit from the fact that this imposes uniformity across state lines.”

A few of the regulations were anticipated by automobile companies or required by state law and are partly reflected in current leasing agreements. But when fully effective--most likely in October 1997--the Fed rules will create a national standard.

The rules will allow auto makers to run a toll-free number in advertisements instead of listing lease disclosures in the ads, eliminating the need for the “fine print” disclosures that auto companies found particularly hard to use when producing television spots.

With television and radio ads, these lengthy lease disclosures were rattled off so quickly that many consumers didn’t have a prayer of catching all the pertinent data. But advertisers argued that doing anything else would have required purchasing extra air time at lofty broadcast rates. In the end, both consumer advocates and industry leaders decided that the information via toll-free phone number is likely to prove more useful.

“We think this is going to be good news both for consumers and the industry,” said Lynne Strang, spokeswoman for the American Financial Services Assn., a trade group that represents the auto leasing industry.

“Consumers will have more useful information upon which to make informed decisions about leasing. And the industry is likely to have better-satisfied customers who will come back in the future.”

While the rules were discussed in recent years, many big auto companies revamped their lease contracts in anticipation of tightened rules and in recognition of regulatory crackdowns on other fronts.

In particular, the Federal Trade Commission and as many as 20 state attorneys general are in the process of negotiating a settlement with four auto makers--General Motors Corp., Isuzu Motors Ltd., Honda Motor Co. and Mitsubishi Motors Corp.--over allegedly deceptive practices used in marketing car leases in the U.S.

Meanwhile, Ford Motor Credit and Mercedes-Benz Credit both launched consumer-friendly lease agreements during the last two years. And many other companies had begun to make an effort to educate both consumers and their own salespeople about how leases work.

The Fed, which oversees leasing transactions, began reviewing revisions to Regulation M of the Consumer Lending Act in November 1993 as car leasing increased in popularity. Today, about 30% of all new cars are leased--twice as many as four years ago--and this number is expected to grow as the cost of buying a car rises.

While the Fed was considering revisions to its rules, a number of states--including California, Florida and New York--enacted their own laws requiring certain disclosures in leasing agreements.

The changes have been controversial, with consumer-rights advocates pushing for increased disclosures that let those considering a lease know exactly how much it’s going to cost and what is expected of them.

A Fed spokesman said the board plans to formally vote on the rule changes Wednesday. The FTC would enforce the rule once it’s enacted.

Bloomberg Business News contributed to this report.