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Repossessions: 14.2.2.4 Other State Law Restrictions on When Lessor Can Repossess the Vehicle

Even if Article 2A authorizes seizure after default, statutes in a number of states create additional restrictions as to when a default can justify repossession of the leased vehicle. The Iowa, Kansas, Maine, West Virginia, and Wisconsin credit codes define a covered consumer transaction as including consumer leases, and thus their restrictions on repossession apply to leases as well as to credit sales.

Repossessions: 14.2.2.5.1 Protection against self-help repossession

The Servicemembers Civil Relief Act (known as the Soldiers’ and Sailors’ Civil Relief Act before its amendment in 2003) protects servicemembers against self-help repossession of property when the servicemember paid a deposit or installment toward the purchase price prior to entering military service.110 This prohibition applies not only to transactions governed by UCC Article 9, but also to any “lease or bailment of such property.”111 As a result, the prohibition applies to a typica

Repossessions: 14.2.2.5.2 Right to seek stay of enforcement of lease

Servicemembers also have the right to apply to a court to stay enforcement of a lease or other obligation for the period of time that the person is in military service and for 180 days thereafter.118 The court may, after appropriate notice and hearing, grant a stay if the ability of the service member to comply with the lease has been materially affected by reason of military service.

Repossessions: 14.2.3 Right to Cure Default or Reinstate Lease

UCC Article 2A provides no right for a consumer to cure a default or reinstate the lease. In fact, the lessor need not even notify the consumer that the consumer is in default on the lease or notify the consumer that the lessor will enforce default remedies.123

Repossessions: 14.2.4 Repossession Must Not Breach the Peace

UCC Article 2A allows a lessor to seize the leased item only if seizure can be done without breach of the peace.130 Courts will likely apply Article 9 breach of the peace standards to the same Article 2A requirement, meaning that the lessor cannot use the threat of force, seize the vehicle over the consumer’s objections, or break into a locked garage.131

Repossessions: 14.2.5 Sale of Leased Vehicle After Repossession

The sale of the repossessed vehicle has a different purpose in a lease transaction than in a secured transaction. In a secured transaction, the car belongs to the consumer, but is put up as collateral for a loan obligation. If the consumer defaults, the secured party can seize the collateral, but only to help pay off the obligation. If the collateral is worth more than the obligation then the consumer is owed the surplus, and if it is worth less the consumer owes a deficiency.

Repossessions: 14.2.6.1 Introduction

A lease may terminate early either because of the consumer’s default or voluntary decision to terminate early. At early termination the consumer will owe any past-due lease payments, plus any late fees and taxes. The lease will also specify that the consumer owes an early termination charge and set out a formula to compute that charge. This formula specified in the lease typically is in language that is incomprehensible to consumers and even to lawyers and judges.

Repossessions: 14.2.6.2 Key Terms

Lease terminology is quite different than that used in the credit context. Federal law requires that leases describe the lease terms using specified terminology. This subsection provides common sense meanings for some of the key required terms that appear in consumer leases. More precise definitions are spelled out in Consumer Leasing Act Regulation M and in NCLC’s Truth in Lending.156

Residual value is the lease property’s expected value at lease end, as determined and disclosed at lease inception.

Repossessions: 14.2.6.3 Lessor’s Core Damages, Expressed As Difference Between Actual and Paid-In Depreciation

Monthly lease payments are typically a fixed amount, and compensate the lessor for only two factors. First, the monthly lease payments compensate for the difference between the lessor’s initial investment in the lease (disclosed as the adjusted capitalized cost157) and the car’s value at lease end (disclosed as the residual value158). This difference is disclosed on the lease as the “depreciation and any amortized amounts.”159

Repossessions: 14.2.6.4 The Adjusted Lease Balance Method

Many consumer automobile leases use the adjusted lease balance method to compute the early termination charge. This formula assesses the consumer for the difference between the “adjusted lease balance” and the car’s realized value at early termination.

Repossessions: 14.2.7.2 Remedies When Method Utilized Deviates from That Disclosed in the Lease

Any significant difference between the methodology actually used to compute an early termination charge and the methodology disclosed in the lease is a Consumer Leasing Act (CLA) disclosure violation leading to CLA statutory damages and attorney fees, because the CLA requires disclosure of the actual methodology.166 This liability applies even if the deviation is in the consumer’s favor.

Repossessions: 14.2.8.1 General

As described in , supra, critical to both the adjusted lease balance method and the remaining payments formula is the calculation of residual and realized values. These figures’ importance is obvious for the remaining payments methodology which assesses the consumer for the residual value and provides a credit for the realized value.

Repossessions: 14.2.8.2 Realized Value Must Exceed the Residual Value

Lessors typically determine a vehicle’s realized value at early termination by selling it at a wholesale automobile auction that may produce a very low value. Nevertheless, the lessor should never compute early termination liability using a realized value that is less than the residual value. Whether the lessor has done so is easy to determine because the residual value is disclosed in the lease and the lessor seeking an early termination penalty will have to reveal the realized value used in making its calculations.

Repossessions: 14.2.8.3 Inflated Residual Values

Another way an early termination formula can produce unreasonable results is when the disclosed residual value is inflated, and then the formula compares this inflated residual value with a low realized value.

Repossessions: 14.2.8.4 Manufacturer “Supported” Residual Values

A special issue arises when a manufacturer “supports” an inflated residual value. In this case, inflating the residual value without manipulating rent payments allows the dealer to offer lower lease payments. When rent payments are not manipulated, the total payments can be lower because they need cover less depreciation between the initial capitalized cost and the (inflated) residual value. The manufacturer protects the dealer with a cash subsidy, as the vehicle at lease termination will be worth less than the inflated residual value.

Repossessions: 14.2.8.5.3 Sale price, if used, should be reasonable

The lessor owns the vehicle and can sell the vehicle as it chooses, either at wholesale or retail value.192 But the question is how it uses this price in computing an early termination charge. At a minimum, the assumptions underlying the realized value should be used to establish the residual value as well. The lessor should be comparing apples with apples as much as possible.

Repossessions: 14.2.8.6 Approaches to Avoiding a Sale to Determine Realized Value

One way to protect against inadequate realized values is for the consumer to request, in writing, that the car be appraised by an independent appraiser, and to suggest the name of such an appraiser. Regulation M requires that the consumer be told of the right to such an appraisal.201 The appraisal is performed at the lessee’s expense, by an independent appraiser agreed to by the lessor and lessee. The appraisal is final and binding on the parties.202

Repossessions: 14.2.8.9 When Formula Fails to Provide Credit for Realized Value

A lessee’s early termination liability formula is clearly unreasonable when the formula charges the consumer for the vehicle’s residual value or the adjusted lease balance, but fails to provide a credit for the vehicle’s realized value.205 This result applies even when the lessor has a practice of crediting the consumer for that value—if the formula does not contain a credit for the realized value, then the formula is unreasonable, which is both a substantive CLA violation and a CLA disclosure violation.

Repossessions: 14.2.9.1 Capitalized Cost Manipulation

Just as lease payments can remain constant even with different residual values (by manipulating the rent charge),207 two leases with identical payments and residual values can have different adjusted capitalized costs. The lease with the higher adjusted capitalized cost will have higher expected depreciation, but can offset this by lowering the rent charge.