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Truth in Lending: 13.5.2.4 Unconscionability

UCC Article 2A’s unconscionability provision applies to unreasonable lease early termination formulas.475 The provision is stronger than the unconscionability provision found in UCC Article 2, and allows the court not only to refuse to enforce unconscionable lease provisions, but, in the case of consumer leases, to give the consumer “appropriate relief”476 and attorney fees.477

Truth in Lending: 13.5.3.2.3 The adjusted lease balance method

The adjusted lease balance method is one way to calculate this difference between actual and paid-in depreciation. It assesses the consumer for the difference between the “adjusted lease balance” and the car’s realized value at early termination.

Truth in Lending: 13.5.4.1 General

As described at § 13.5.3.2, supra, critical to both the adjusted lease balance method and the remaining payments formula is the calculation of residual and realized values. This is obvious for the remaining payments methodology that assesses the consumer for the residual value and provides a credit for the realized value.

Truth in Lending: 13.5.4.2 Realized Value Must Exceed the Residual Value

The lessor should never compute early termination liability using a realized value less than a 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 its calculations.

Truth in Lending: 13.5.4.3 Inflated Residual Values

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

Truth in Lending: 13.5.4.5.2 Does Regulation M condone using a sale price to compute early termination charges

Lessors point to language in the official interpretations to Regulation M defining a realized value as a price received at disposition, the highest offer, or the fair market value at the end of lease term.508 But Regulation M scrupulously avoids discussing whether any particular early termination charge method is reasonable. Realized value is defined because Regulation M requires disclosure of a realized value in certain instances, but does not mention realized value as a permitted part of a reasonable early termination formula.

Truth in Lending: 13.5.4.5.3 Sale price, if used, should be reasonable

A realized value is clearly unreasonable if the sale itself is not reasonable. Both the CLA and UCC Article 2A require the early termination charge to be reasonable if the realized price is a major component of that charge. Use of an unreasonable sale to produce a realized value should thus violate both the CLA and Article 2A.

Truth in Lending: 13.5.4.6 Alternatives to Lessor’s 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.519 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.520

Truth in Lending: 13.5.4.9 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.523 This result applies even when the lessor has a practice of crediting the consumer for that value—if the formula does not provide for a credit for the residual value, the formula is unreasonable and also creates a disclosure violation.524

Truth in Lending: 13.5.5.1 Capitalized Cost Manipulation

Lease payments are based on the size of the adjusted capitalized cost and rent charges, but the same lease payment can be derived by increasing the adjusted capitalized cost and decreasing rent, or by increasing rent and reducing the adjusted capitalized cost. As a result, whether various lease fees are included in the capitalized cost or rent will have no impact on the total lease obligation or the monthly lease payment if the other factor is adjusted to offset it. The choice though has a dramatic impact on the size of the early termination charge.

Truth in Lending: 13.5.5.3 Extra Penalties

Leases sometimes include early termination penalties in addition to charges based on the adjusted lease balance or remaining payments methods, such as three times the monthly lease payment.

Truth in Lending: 13.5.5.5 Limits on Early Termination Charges for Servicemembers

The Servicemembers Civil Relief Act gives servicemembers the right to terminate leases early without an early termination charge.530 This right applies to all those who signed a vehicle lease before entering active duty and who then enter active duty under a call or order specifying a period of 180 days or more.531 Termination of a lease also terminates the obligations of the servicemember’s dependent under the lease.532

Truth in Lending: 13.5.5.6 Limits on Consumer Liability After Vehicle Loss

One of the more surprising early termination charges for consumers is when the vehicle is stolen or seriously damaged in a wreck, and the insurance pays the vehicle’s value to the lessor. Nevertheless, the lessor still seeks an early termination charge from the consumer. From the lessor’s point of view, the lease has been terminated early, the realized value is the insurance payment, and the consumer is liable for an early termination charge as computed under the lease’s early termination formula.

Truth in Lending: 13.6 Liability at Expiration of Open-End Leases

Unlike a closed-end lease, in an open-end lease, the consumer is liable for the difference between the residual value (what the lessor thought the property should be worth at the end of the lease term) and what the property actually realizes. The Consumer Leasing Act (CLA) limits this liability.

Truth in Lending: 13.7.1.2.1 Disclosure of an unreasonable early termination charge is a disclosure violation

“Reasonable” early termination charges must be disclosed.570 Disclosure of an unreasonable formula is thus a disclosure violation,571 triggering CLA remedies even without actual damage and even if the formula has not been utilized.572 Thus, even if a court were to find certain preconditions to an action under the CLA’s substantive provision regulating early termination charges,573 there shoul