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 Consumer Handbook
to Credit Protection Laws Part 3
Leasing Costs and Terms
A lease is a contract between a lessor (the property owner) and a lessee (the property user) for the use of a vehicle or property subject to stated terms and limitations for a specified period and at a specified payment. Leasing has become a popular alternative to buying — under certain circumstances. For instance, you might consider leasing furniture for an apartment you'll use only for a year. The Consumer Leasing Act requires lessors to give you the facts about the costs and terms in their contracts, to help you decide whether leasing is a good idea.
A consumer lease is a contract between a lessor and lessee for the use of personal property 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. A lease meeting all of these criteria is covered by the Consumer Leasing Act. It covers, for example, long-term leases of cars, furniture, and appliances, but it does not cover daily car rentals or apartment leases.
- at the beginning of the lease - which means the amount you will pay at lease signing or delivery
- during the lease - that is, the monthly or periodic payments
- other charges that you will face
- and the total amount you will pay over the lease term.
For vehicle leases, the disclosures require an itemization of the amount due at lease signing and how that amount will be paid. The disclosures also provide a mathematical progression showing the way the monthly payment was determined. Starting with the agreed-upon value of the vehicle and the gross capitalized cost, this calculation shows the additions, subtractions, and divisions that lead to the monthly payment.
The final section of the segregated disclosures includes information on early termination, excess wear and use, mileage limits and excess mileage charges, and any purchase option at the end of the lease and directs you to other disclosures and lease terms.
Open-end and Closed-end Leases
There are open-end and closed-end leases and your rights and obligations at lease-end are different in each of these. Both types of leases estimate the lease-end value of the item and use this to project depreciation, which is the basis for calculating your base monthly payment. In an open-end lease, at lease-end, you are responsible for the difference between the estimated lease-end value (the residual value) determined at the beginning of the lease and the actual lease-end value (the realized value). In a closed-end lease, you are not responsible for the item's value at lease-end, but you are responsible for the condition of the item you lease (that is, an excess wear and use charge may be imposed). In an open-end lease, you may receive a refund of any gain and are responsible for any deficiency. In a closed-end lease the lessor usually keeps any gain and assumes any loss due to overestimating the residual value.
The Consumer Leasing Act provides consumers with some protections against unreasonable end-of-term charges in open-end leases. Assuming that you have met the wear-and-use standards, the residual value is considered unreasonable if it exceeds the realized value by more than three times the base monthly payment (the "Three Payment Rule"). If you believe the amount owed at the end of the lease term is unreasonable and refuse to pay, the lessor may attempt to prove that the residual value was reasonable when it was set at the beginning of the lease. However, if you cannot reach a settlement with the lessor, you cannot be forced to pay the excess amount unless the lessor brings a successful court action and pays your reasonable attorney's fees. For example, assume that the residual value in an open-end vehicle lease is $12,000, the realized value is $11,000, and the base monthly payment is $250. The end-of-term deficiency is $1,000. However, under the Three Payment Rule, the maximum charge should not exceed $750 (assuming that there is no excess wear-and-use charge) rather than the full $1,000 deficiency unless the lessor can prove the residual value was reasonable when set.
The Federal Reserve pamphlet "Keys to Vehicle Leasing: A Consumer Guide" also contains useful information on leasing and provides a sample of some of the disclosures you should receive when leasing a vehicle.
Costs of Settlement on a House
A house is probably the single largest credit purchase for most consumers, and one of the most complicated. The Real Estate Settlement Procedures Act, like Truth in Lending, is a disclosure law. The act, administered by the Department of Housing and Urban Development, requires the lender to give you, in advance, certain information about the costs you will pay when you close the loan. The act also requires that lenders give you the booklet "Buying Your Home: Settlement Costs and Information" to help you understand the closing process and shop for lower settlement costs. To get the booklet, write to:
Deputy Assistant Secretary for Housing
Attention: RESPA Enforcement
U.S. Department of Housing and Urban Development
451 Seventh Street, S.W.
Room 9416
Washington, DC 20410
Should you need to, phone: (202) 708-4560 
Credit Protection Laws
Part 1 - Part 2 - Part 3
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