CONSUMER PROTECTION; LEASES;

LEASING;

You asked if any other state prohibits or otherwise regulates balloon payments in consumer leases.

SUMMARY

A “balloon payment” is a payment occurring at the end of the lease term that is larger than the normal periodic payment. It may refer to an exact amount stated in a lease, such as in a closed-end lease, or it may refer to an amount to be calculated at the end of the lease term, as in an open-end lease. A balloon payment is different than other typical lease-end charges.

The federal Consumer Leases Act limits the amount of a balloon payment in leases in which a consumer’s lease-end liability is based on the leased property’s estimated residual value at the end of the lease (open-end leases). It does so by establishing rebuttable presumptions that the estimated residual value is unreasonable and not in good faith if the balloon payment is more than three times the monthly payment. Further, it prohibits lessors from recovering as a balloon payment an amount larger than three times the average periodic payment unless they successfully sue concerning the excess liability.

We identified 19 states with laws regarding consumer leases. Six of these have provisions concerning a consumer’s liability at lease-end (California, Maine, New Hampshire, Oklahoma, South Carolina, and Washington).

California, New Hampshire, and Washington generally take the same approach as federal law. They establish a rebuttable presumption of unreasonableness if the balloon payment in an open-end lease is more than three times the average monthly payment.

Maine, Oklahoma, and South Carolina are more restrictive. They prohibit balloon payments from being more than two times the average monthly payment.

Washington makes it an unfair trade practice to misrepresent the value a leased vehicle will have at the end of the lease term.

Federal law limits its application to leases with a total contractual obligation of $ 25,000 or less. Maine and Washington have the same limit. Oklahoma applies its law to consumer leases in which the total contractual value is $ 45,000 or less. California, New Hampshire, and South Carolina do not limit the application of their laws in this way.

BALLOON PAYMENTS

In an open-end lease, a consumer is responsible for any deficiency between the anticipated value (or “estimated residual value”) of the consumer goods at the end of the lease term and their actual or realized value. This may mean that a consumer must pay a larger-than-normal payment at the end of the lease. This is sometimes called the “balloon payment. ” The estimated residual value is stated in the lease and used to calculate the consumer’s periodic payment.

In a closed-end lease, the consumer’s liability at the end of the lease is a fixed amount. Sometimes, the final payment is larger than the periodic payments. This, too, is sometimes called a “balloon payment. ”

Balloon payments are different than, and in addition to, other typical lease-end charges. For example, lease-end charges in a motor vehicle lease for excess mileage or excess wear and tear are imposed at the end of a lease-term, but they are not balloon payments.

FEDERAL LAW ON END OF LEASE LIABILITY

Federal law on consumer leases applies to leases of personal property to an individual to be used primarily for personal, family, or household purposes for a period of more than four months and with a total contractual obligation of no more than $ 25,000. In leases in which the consumer’s liability is based on the leased property’s estimated residual value, the federal Consumer Leases Act (CLA) requires it to be a reasonable approximation of anticipated actual fair market value at the end of the lease term. The residual value is considered unreasonable if it exceeds the realized value by more than three times the base monthly payment (this is sometimes called the “three-payment rule”). Specifically, the CLA establishes rebuttable presumptions that the estimated residual value is (1) unreasonable and (2) not in good faith if it violates the three-payment rule. It prohibits lessors from collecting more than this amount except after successfully proving in court that the estimated residual value was reasonable at the time it was established. In all such actions, the lessor must pay the consumer’s attorney’s fees.

These presumptions do not apply to charges for damages to the property beyond reasonable wear and use, or to excessive use. The law allows leases to set reasonable wear and use standards.

The law permits a willing lessee to make a mutually agreeable final adjustment with respect to excess residual liability, as long as the agreement is made after the lease has expired (15 U. S. C. A. § 1667b).

Relationship to State Law

Federal law provides that it does not annul, alter, affect, or exempt any person from complying with state consumer leasing laws that are not inconsistent with federal law. The Federal Reserve Board has the authority to determine if inconsistencies exist. The law prohibits the board from determining that a state law is inconsistent if the board determines that it gives consumers greater protection and benefit.

The law requires the board to exempt by regulation any class of leases within a state if it determines that, under the state’s law, the class is subject to requirements that (1) are substantially similar to those imposed by federal law or (2) give greater protection and benefits to the consumer, and that there is adequate provision for enforcement (15 U. S. C. A. § 1667e).

CALIFORNIA

California’s statute applies to open-end lease contracts. It declares that it is intended to provide relief to a consumer when an “ostensibly inexpensive lease contract establishes an excessively low level of periodic payment which results, conversely, in an excessively high liability being imposed on the lessee at the expiration of the lease term” (Cal. Civil Code § 2988). Lessors do this, the statute states, by failing to act in good faith in either estimating the residual value or establishing a level of periodic payment that bears no reasonable relation to the reasonably anticipated rate of depreciation. It requires lessors to act in good faith and places the burden of proof on lessors to show that the estimated residual value was determined in good faith.

In leases in which a consumer bears the risk of depreciation and his lease-end liability is at least partially based on the estimated residual value (an open-end lease), the law requires it to be a reasonable approximation of the anticipated fair market value. It creates a rebuttable presumption that the estimated residual value is unreasonable to the extent that it exceeds the actual residual value by more that three times the average monthly payment. The presumption excludes charges for physical damage beyond reasonable wear and use, or to excessive use. For this purpose, the law defines “fair market value” as the value the vehicle would have when sold in a commercially reasonably manner in its customary market.

For these leases, the law requires the lessor, when disposing of the vehicle at lease-end for the purpose of setting the fair market value, to act in a commercially reasonable manner in the vehicle’s customary market (Cal. Civil Code § 2989. 2). The lessor must give at least 10 days written notice to the consumer of his intent to sell, unless (1) the consumer has agreed in writing to the amount of his liability after returning the vehicle or (2) the consumer has fully paid his liability. The notice must state (1) charges due, (2) that the charges will be imposed at the end of the lease term, and (3) that the consumer may make a cash bid to buy the vehicle.

MAINE

Maine limits the consumer’s obligation at the end of a lease to twice the average monthly payment (M. R. S. A. 9-A § 3-401). The law applies to leases of personal property to an individual to be used primarily for personal, family, or household purposes for a period of more than four months and with a total contractual obligation of no more than $ 25,000 (M. R. S. A. 9-A § 1-301(13)).

NEW HAMPSHIRE

New Hampshire requires open-end motor vehicle leases to state that the lessee will be liable for the difference between the vehicle’s estimated residual value and its actual realized value at the end of the lease (N. H. Rev. Stat. Ann. § 3612-D: 3(p)). This is in addition to other required disclosures. These include stating the amount of, or method of determining, liability at the end of the lease and whether the lease includes a purchase option. If so, the lease must state the purchase option price or method of determining it.

New Hampshire requires the estimated residual value to be a reasonable approximation of the anticipated fair market value at the end of the lease (N. H. Rev. Stat. Ann. § 361-D: 15). It creates a rebuttable presumption that the residual value is unreasonable to the extent that it exceeds three times the average monthly payment. The presumption does not apply to charges for physical damage beyond reasonable wear and use or to excessive use.

Regarding open-end leases, New Hampshire requires lessors to act in a commercially reasonable manner in the vehicle’s customary market when disposing of it at the end of the term. The lessor must give the consumer 10 days notice of its intent to sell the vehicle unless (1) the lessor and consumer have agreed in writing to the consumer’s liability after the consumer has returned the vehicle or (2) the consumer has paid his full liability under the lease. The notice must state other due charges and that the consumer is liable for the difference between the amount of outstanding liability and the net proceeds from selling the vehicle (N. H. Rev. Stat. Ann. § 361-D: 25).

OKLAHOMA

Oklahoma prohibits a lessor from charging a consumer more than twice the average monthly payment at the expiration of a lease. This limit does not apply to charges for damages or other lease violations (Okla. Stat. § 14A-2-406).

It also requires consumer leases to disclose, among other things, certain information about end-of-lease charges. These include statements about the charges the lease imposes at its end of term, including (1) whether the consumer is liable for the differential, if any, between the anticipated fair market value of the leased property and its appraised actual value at lease termination; (2) if the consumer end-lease imposes liability based the estimated residual value of the property, that the estimated residual value is a reasonable approximation of the anticipated actual fair market value; and (3) if the lease has a residual value provision, that the consumer may obtain, at his own expense, a professional appraisal of the property by an independent third party agreed upon by both lessor and consumer (Okla. Stat. § 14A-2-311).

SOUTH CAROLINA

South Carolina prohibits a lessor from charging a consumer more than twice the average monthly payment at the expiration of a lease. It provides that this limit does not apply to charges for damages or other lease violations (S. C. Code § 37-2-406).

WASHINGTON

In open-end leases, Washington requires the estimated residual value to be a reasonable approximation of the property’s anticipated actual fair market value at the end of the lease. There are rebuttable presumptions that the estimated residual value is unreasonable and not in good faith to the extent that it exceeds the actual residual value by more than three times the average monthly payment. The law prohibits a lessor from collecting more than this amount at the end of the lease unless the lessor successfully sues with respect to the excess amount. It does not prohibit a willing consumer from making a mutually agreeable final adjustment concerning the excess residual liability, if the agreement is made after the lease has expired (RCW § 63. 10. 030).

If the lease has a residual value provision, the law gives a consumer the right to obtain, at the termination of the lease and at his own expense, a professional appraisal by an independent party agreeable to both parties (RCW § 63. 10. 030).

In open-end leases, Washington requires lessors to disclose, among other things, that the consumer is liable for the difference between the property’s estimated and realized value and that the law establishes the rebuttable presumptions described above (RCW § 63. 10. 040).

Washington makes it an unfair trade practice to misrepresent the amount of any equity or value a leased vehicle will have at the end of the lease (RCW § 63. 10. 045).

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