Older Uniform Acts

Commentary on Cost of Credit Disclosure Act 1998



PART 5 - LEASES OF GOODS

37 Definitions

(1)

"assumed residual payment"

This refers to a payment that the lessee is assumed to make at the end of the term for the purpose of calculating the implicit finance charge and APR. This assumed payment might be an actual cash payment (to exercise a purchase option), a notional payment consisting of the lease-end value of the goods or a combination of the two (as where the consumer must pay a "disposition fee" upon returning the leased goods).

(a) If the lessee has an option to purchase the leased goods at the end of the lease term for an amount that is less than the estimated residual value (the estimated lease-end wholesale value), he will presumably exercise the option at the end of the term in order to capture the built-up equity. If the lessee does not exercise the option at the end of the term, it is presumably because the value of the goods to the lessee at that time is less than the option price. In either case, the option price seems like the best benchmark for the assumed end-of-term payment when calculating the APR and implicit finance charge.

(b)    This paragraph would apply where there is either no option to purchase or the end-of-term option price exceeds the estimated residual value.See footnote 12 12 In this case the assumed residual payment potentially has two components. The first component is the estimated residual value of the leased goods. This is treated as an end-of- term payment because the definition of "implicit finance charge" and the formula for calculating the lease APR (see section 4 of the Schedule) both assume that the value received by the lessee at the beginning of the term is the entire cash value of the leased goods: the amount that a buyer would pay to buy the goods. Having made that assumption, the definition and formula also make the converse assumption that a lessee who returns the goods at the end of the term is giving back the remaining value of the leased goods: their estimated residual value.

Paragraph (b) also contemplates the possibility that the lessee will be required to make an additional payment "in the ordinary course of events" upon returning the goods to the lessor at the end of the term. The reference to payments required in the ordinary course of events is meant to exclude contingent payments such as payments for damage to or excess use of the goods or a payment that would be required under a "residual obligation lease" if the realizable value of the goods at the end of the term is less than it was anticipated to be at the beginning of the term. An example of a payment that might be required in the ordinary course of events is a "restocking charge" or a "disposition fee," if such a charge is provided for by the lease. Another example is an "estimated residual cash payment" that might be provided for by a "residual obligation lease."

"capitalized amount"

This is analogous to the initial outstanding balance on a credit sale, after taking any down payment or trade-in into account. The capitalized amount must be disclosed in disclosure statements but its main role is as a building block for determining the implicit finance charge and APR for a lease.

Paragraph (b) refers to the cash value and "any other advances" made before the beginning of the lease term. The term "advance" is defined in section 1 as value received within the meaning of section 2(3) and (4).See footnote 1313 An example of "other advances" is where a consumer who is leasing a new car trades in an old vehicle upon which there is still an outstanding balance under a previous credit agreement. The trade-in value of the old vehicle represents a payment under section 2(5), while the amount of the preexisting obligation paid off by the lessor represents value (i.e., an advance) received by the borrower under section 2(3)(c).

A charge such as an "administration fee" would only be treated as an advance if a similar charge would be payable by a customer who paid cash to buy the goods. More precisely, if a cash customer would not have paid an administration fee, an administration fee payable by a lessee is not regarded as an advance. But the payment of that fee would have to be accounted for when calculating the APR and implicit finance charge. In other words, the administration fee would increase the APR and implicit finance charge.

Under paragraph (c) any payments made by the lessee before the beginning of the lease term, except for payments referred to in subparagraphs (i) and (ii) are subtracted in determining the capitalized amount. The exclusion of refundable security deposits in subparagraph (c)(i) reflects a policy decision by the Committee that is embedded in the definition of "capitalized amount" in section 35 of the DHA's drafting template proposal. The policy decision is that refundable security deposits will not be accounted for in the APR.See footnote 1414

The effect of subparagraph (c)(ii) (which corresponds to the second exclusion in the parenthetical material at the end of the definition of "capitalized amount" in section 35 of the drafting template proposal) is that any periodic payments paid at or before the beginning of the lease term are not subtracted when determining the capitalized amount. Obviously, though, if some of the periodic payments are paid before the beginning of the term, this should be accounted for when calculating the APR. This is accomplished by the lease APR calculation formula in section 4(1) of the Schedule.

"cash value"

The cash value of leased goods must be disclosed in disclosure statements, but the major function of the concept of cash value is in determining the implicit finance charge and APR for a lease.

The definition of "cash value" is similar but not identical to the definition of "cash price" in section 1(1). Both branches of the definition tie the cash value to an amount that fairly represents what a cash customer would pay to buy the leased goods. As is the case with "cash price" for credit sales, the reference to representative amounts allows some flexibility where different cash customers would pay different prices. Again, the representative price serves as the benchmark unless the parties to the lease agree on a lower amount as the cash value.

Unlike the definition of "cash price," the definition of "cash value" does not say that it includes taxes. Including GST and PST that would be payable by cash customers could unnecessarily complicate APR calculations for some leases. What the Act does require is consistent treatment of taxes when calculating the APR and implicit finance charge: see section 4(2)(a) of the Schedule.

"estimated residual cash payment"

This term is used only in the context of residual obligation leases. See commentary on the definition of "residual obligation lease."

Ordinarily, the estimated residual cash payment will be zero (or might consist of a modest restocking charge or disposition charge, as discussed in the comment on the definition of "assumed residual payment"). However, the estimated residual cash payment could be substantially greater than zero if the periodic payments are deliberately set at an amount that will not cover the lessor's cost of capital and the anticipated depreciation on the leased goods. Such an arrangement might be entered into in order to make the lease more attractive to a consumer who wants the lowest possible monthly payments. This arrangement would be somewhat analogous to a "balloon payment" credit sale in which the amount outstanding at the end of the term will exceed the anticipated wholesale value of the goods at that time. In either case, the credit grantor or lessor will be under-secured in the event of default: the realizable value at the goods at the end of the term will not cover the amount owed by the consumer.

"estimated residual value"

The estimated residual value plays a role in determining the assumed residual payment, which in turn is used to calculate the implicit finance charge and APR.

"implicit finance charge"

This is analogous to the total cost of credit for a credit agreement: value given minus value received by the lessee.

"option lease"

This definition does not necessarily require that the lease formally provide for transfer of ownership: a right to retain possession at the end of the term will suffice.

"option price"

The option price might be a nominal amount or even zero.

"payment period"

The definition accommodates payment periods of any length, although monthly payment periods would be typical.

"periodic payment"

Under a lease the periodic payment will generally be made at the beginning of the payment period to which it relates. However, in some leases the payment in respect of a particular payment period will not be made in (that is, at the beginning or end of) that payment period. Instead, the periodic payment for one or more end-of-term periods is paid at the beginning of the term. For example, a lease might call for the periodic payment in respect of the last month (payment period) of the term to be paid at the beginning of the term, instead of the beginning of the last month.

"realizable value"

This concept is relevant in the context of residual obligation leases. The definition is

simply a pointer to the definition of realizable value in section 7(2) of the Schedule.

"residual obligation lease"

The type of lease contemplated by this definition is sometimes called a "financing lease" or, as in the U.S. Consumer Leasing Act, an "open-end lease." The major functional difference between a residual obligation lease and an ordinary lease is that the risk of unexpected depreciation in the market value of the goods is borne by the lessee rather than the lessor. That is, if the actual realizable value of the goods at the end of the term is less than their estimated residual value, the lessee must compensate the lessor for the difference. At least, that is how such leases would work if the parties were left entirely to their own devices. In fact, the extent of the risk of unexpected depreciation that can be transferred from the lessor to the lessee is limited by section 41 and section 7 of the Schedule.

"term"

[No comment]

"total lease cost"

The reference to "non-refundable payments" would exclude a security deposit. The reference to payments that will be required "in the ordinary course of events" is intended to exclude contingent payments such as charges for damage to or excess use of the goods or an amount that would be payable under a residual obligation lease if the lease- end value of the goods is less than anticipated.

38 Application of this Part

This section reflects section 36 of the drafting template proposal, which constitutes Proposal 11. Paragraph (b) will bring standard rent-to-own arrangements within the ambit Part 5.

In reading this section it should be kept in mind that section 3, the Act's general application section, also applies to leases. The Act as a whole, and hence Part 5, applies only to leases to natural persons for consumer purposes.

39 Advertisements

This implements and is similar to section 41 of the drafting template proposal ( Proposal 15).

(1) Paragraph (e) refers to other payments that the lessee would be required to make "in the ordinary course of events." This is an interpretation of the reference to "other required payments" in section 41(1)(d) of the drafting template proposal. The wording of paragraph (1)(e) is based on the assumption that the Committee's reference to "other required payments" is not meant to require disclosure of contingent payments such as charges for early termination, damage to the goods and so on. It is presumed that the Committee only means to require disclosure of payments that will be required in the ordinary course of events. The wording of paragraph (e) parallels the wording of the definition of "total lease cost" in section 37(1).

(2) The rationale for relaxing the disclosure requirements for advertisements in radio, television and other media with similar time and space restriction seems to be that the nature of those media constrains the amount and type of information that can be conveyed. Conceding the existence of such constraints, it might be doubted that a requirement to disclose the term (subsection (1)(b)) and APR (subsection (1)(f)) for a lease would actually test those constraints. The statement, "Lease this Widget: 36 months, $3000 down, $500 per month, 4.9% APR!" contains all of the information required by paragraphs (1)(a), (b), (c), (d) and (f). We suspect that many lessors would find it as convenient to disclose the term and APR for the lease in a radio or television advertisement as to provide that information by telephone, as contemplated by paragraph (2)(b).

This subsection does not provide the option of referring to "an advertisement in a publication of general distribution covering the area of the broadcast", as contemplated by section 42(1)(g) of the DHT's drafting template proposal. At the time the CCDA and this Commentary were finalized, it was the ULCC's understanding that each jurisdiction would decide for itself whether to provide advertisers with the option of referring to a publication rather than providing the relevant information in the advertisement or through a toll-free number.

40 Disclosure statement for lease

This is very similar to section 37 of the drafting template proposal ( Proposal 12.1). We comment on only a couple of the items in subsection (1).

(1)(e) The commentary on the definition of "capitalized amount" in section 37(1) gives an example of "other advances" that might be received by the lessee at the time of entering into the lease.

(1)(f) Assuming that periodic payments are made at or before the beginning of the term, the first periodic payment would be made at or before the beginning of the term. Other payments that might be made at or before the beginning of the term could include a refundable security deposit, a down payment, and a payment in respect of one or more end-of-term payment periods.See footnote 1515

(1)(l) This implements the first paragraph of Proposal 14.

(1)(m) An example of a contingent payment that would be disclosed under this paragraph is a"per kilometre" charge for a leased vehicle that is driven more than a specified number of kilometres during the term of a lease: see subsection (2).

41 Residual obligation leases


This section, together with section 7 of the Schedule, implements Proposal 15. See commentary on section 7 of the Schedule.

42 Early termination

This implements the second paragraph of Proposal 14.

Cost of Credit Disclosure Act

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018