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Repossessions: 14.1.3.2 The Federal Consumer Leasing Act

An important supplementary law to Article 2A is the federal Consumer Leasing Act (CLA).45 In the repossessions context, this statute has implications for the disclosure and calculation of charges after default or early termination of a lease. While these CLA standards have particular application to automobile leases, they also apply to solar equipment,46 furniture, alarm systems, and other personal property leases that are not terminable at will.

Repossessions: 14.1.3.4 State Deceptive Practices and Debt Collection Statutes

State deceptive practices (UDAP) statutes have special utility in dealing with lease transactions.70 UDAP statutes apply to RTO transactions, automobile leases (even those with lease payments in excess of the CLA’s dollar limitation or otherwise outside the CLA’s scope), and other forms of consumer leases. UDAP statutes also, at least arguably, apply to almost every type of abusive lease practice, and offer effective consumer remedies.

Repossessions: 14.2.1.1 Generally

The first step in analyzing the repossession rights and responsibilities of automobile lessors and lessees is to determine whether UCC Article 9 or 2A applies to the lease. If Article 9 applies, lessors must comply with the standards set out in , supra. If Article 2A applies, then the lessor has a separate set of obligations, set out in this section.

Repossessions: 14.2.1.2 Closed-End Automobile Leases

The typical automobile lease is a closed-end lease, meaning that at the end of the lease term (absent unusual wear or use) the consumer can return the vehicle without any additional liability. Courts generally find that closed-end automobile leases are not governed by Article 9, but by Article 2A.77

Repossessions: 14.2.1.3 Open-End Automobile Leases

Open-end leases assess the consumer for the difference between the car’s expected value at the end of the lease and the car’s actual value at scheduled termination. In part because of the federal Consumer Leasing Act restrictions on the consumer’s maximum end-of-lease obligation in an open-end lease, few automobile leases today are open-end.

Repossessions: 14.2.1.4 Rent-to-Own Automobile Transactions

Rent-to-own (RTO) automobile transactions are generally structured as a month-to-month or week-to-week rental, terminable at any time without penalty, with an option to purchase the vehicle at the end of the rental term for minimal consideration. As such, the analysis as to whether Article 9 applies is the same as for other RTO transactions.87

Repossessions: 14.2.2.1 Lease Agreement Defines What Conduct Results in Default

Article 2A provides that the lease agreement defines what consumer conduct is a default.95 Consequently, a lessor can only declare a default if its grounds for doing so are specifically and clearly stated in the lease agreement. When a consumer defaults, Article 2A has no requirement that the lessor notify the consumer as to the lease default or to the fact that the lessor will enforce default remedies.96 Any such requirement must be found in other law or in the lease agreement.

Repossessions: 14.2.2.2 Not All Defaults Justify Repossession

While the lessor can define in the lease agreement what conduct amounts to default, Article 2A provides that only certain defaults authorize the lessor to seize the leased vehicle. The lessor can seize the leased vehicle only if the consumer:

Repossessions: 14.2.2.3 Limits on Lessor’s Ability to Accelerate Lease Payments

Article 2A states that the terms accelerate “at will” and accelerate “when the lessor deems itself insecure” shall be construed to allow acceleration of payments only if the lessor in good faith believes the prospect of payment or performance is impaired.102 The lessor has the burden of proving its good faith.103 This provision parallels UCC § 1-309 [formerly UCC § 1-208] relating to security interests, which is analyzed in , supra.

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.