Do leases meet the definition of credit as defined in Regulation B?

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Opinions expressed are not necessarily those of my employer.

Paul Brinker CRCM
Director, Corporate Compliance
First National Bank of Omaha
402-964-8313

The FRB has never said clearly that leases are not credit. Neither has the FRB said that a lease is credit. The best practice is to treat a lease as credit and be certain that there are policies and procedures and training to prevent discrimination.

Arguments that a lease is not credit include the concept that the ownership of the goods -- let's use a car for purposes of illustration -- does not change hands. Instead, the consumer is paying on a monthly basis for the use of the car. The consumer also probably put in a down-payment that covers much or all of the lessor's risk. This also argues against the idea of credit.

But looked at in other ways, the lease meets the credit test. For starters, you evaluate the consumer's qualifications by looking at their credit history. From this perspective, the decision and the assumed risk is much like credit. Arguably also, the use of the car is a transfer of something of value even though title doesn't transfer. Looked at this way, leases look like and quack like credit.

So, unless and until the FRB says otherwise, the prudent bank will treat leases like credit.

Paul. There is some case law that supports the premise that consumer leases are subject to Reg B. I'm sure there is other case law that supports or may even reject the ruling below.

Below is a summary of Brothers v. First Leasing.

OVERVIEW: Plaintiff sought to lease an automobile from defendant lessor. Contrary to plaintiff's wishes, defendant insisted that plaintiff include her spouse's financial information on the lease application. Defendant rejected plaintiff's application because her spouse had previously filed bankruptcy. Plaintiff sued defendant alleging her application had been denied on the basis of sex or marital status in violation of the Equal Credit Opportunity Act (ECOA), 15 U.S.C.S. §§ 1691-1691f (1982). The trial court granted defendant's motion to dismiss for failure to state a claim on the grounds the ECOA did not apply to consumer leases. On appeal, the court reversed and remanded, reasoning because the language of the ECOA was broad and its antidiscriminatory purpose was overriding, and because the Consumer Leasing Act, 15 U.S.C.S. §§ 1667-1667e (1982) and the ECOA were part of a comprehensive umbrella statute designed to protect the interests of consumers, the ECOA applied to consumer leases.

OUTCOME: Judgment of the district court reversed and remanded, because in interpreting the relevant statutes, the appellate court determined it was the intent of Congress to make the Equal Credit Opportunity Act's antidiscrimination provisions applicable to all transactions covered by the Consumer Credit Protection Act.

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Trent Sorbe, CRCM
Director of Privacy & Compliance Management
1st Financial Bank USA
Dakota Dunes, SD

As I thought, the case cited above was not popular. The Federal Reserve discussed the Brother’s case during its periodic review of Reg. B in 1985. Below is the text from the Federal Register (50 FR 48018), dated November 20, 1985 (sorry for the length). The FRBs comments were cited later in Liberty Leasing Co. v. Machamer, (6 F. Supp. 2d 714), where the defendant tried to assert ECOA as a defense, which the court rejected, based partly on what the FRB said and the fact that they did not believe that her particular lease meets the definition of “credit.”
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In the review of Regulation B, the Board also addressed the issue of whether to establish a uniform rule extending ECOA coverage to consumer leases. In Brothers v. First Leasing, 724 F.2d 789 (9th Cir.), cert. denied, 105 S. Ct. 121 (1984), the U.S. Court of Appeals for the ninth Circuit held that consumer leases are defined by the Consumer Leasing Act are subject to the ECOA. The appellate ruling in Brothers is binding law in California and other states within the jurisdiction of the Ninth Circuit, and is being enforced in those states by the Federal Reserve and other regulatory agencies.
On policy grounds there is some support for a regulatory amendment to cover lease transactions. It seems inconsistent to allow lessors to consider marital status, sex, and other characteristics while creditors are prohibited from doing so. In addition, some lease transactions are similiar in many ways to credit transactions; indeed, financing leases, or open-end leases, have been held to be functionally equivalent to credit.
Nevertheless, the Board believes that the Ninth Circuit interpreted the ECOA's definition of credit too broadly when it concluded in the Brothers case that the granting of a lease is an extension of credit. The Congress has consistently viewed lease and credit transactions as distinct and mutually exclusive financial transactions and has treated them separately under the Consumer Credit Protection Act. The Board believes that the Congress did not intend the ECOA, which on its face applies only to credit transactions, to cover lease transactions unless the transaction results in a "credit sale" as defined in the Truth in Lending Act and Regulation Z. In addition, aside from the Brothers case there is little evidence of discrimination by lessors based on the personal characteristics of lessees, in contrast to the situation that existed with respect to credit transactions before the ECOA was enacted. Furthermore, core provisions of Regulation B if applied to leasing transactions could impose significant burdens for certain segments of the industry -- such as furniture and appliance leasing. (Other lessors would be less affected; financial institutions that engage in automobile leasing, for example, already comply with Regulation B in many cases.)
In light of those considerations, the Board has not applied Regulation B to leasing. Instead, the Board will monitor the practices followed in lease transactions through contacts with government agencies, the leasing industry, and consumers. The Federal Reserve's enforcement activities in the Ninth Circuit will also provide the Board with first-hand experience regarding the application of Regulation B to consumer leases. Should it later appear that action is warranted, the Board will engage in rulemaking or make legislative recommendations as appropriate.

We had a situation come up today in our bank. We do not offer consumer leases, but do offer commercial leases (trucks, equipment, etc.) A company was having their distributors obtain leases for trucks to deliver their products. The distributors applied for the leases in their individual names and the bank pulled credit bureau reports on them. Some of the distributors were denied and the leasing dept's question to us was how to do the adverse action. They did get written signatures on their applications to authorize the obtaining of the credit reports. However, we weren't sure how to handle the Reg B part of the notice or if it even applied. They went ahead and prepared the AA notices, but wouldn't these really be considered business purpose applications and the only notice would be the FCRA notice since they pulled the credit reports? This is a new area for us. As a side note, our leasing dept. does consider these leases "extensions of credit." Thank you.

It is probably better to give adverse action notices, consistent with the Reg B rules for business. An interesting historical fact: in the Brothers case, the plaintiff was leasing a mercedes for business purposes. That put the transaction outside of Regs Z and M. It was also outside of those regs based on the amount of the lease. However, that didn't stop the court.

So, without a clear rule from the FRB, it is best to treat denials in a way you are willing to defend in court. That probably means and FCRA notice, and a verbal explanation of reasons (if the business is large.)

Thanks to everyone for the responses. As it happens, the question surfaced originally related to a commercial lease transaction and the adverse action notice under the business rules.

I still don't know if a lease is an extension of credit for purposes of Reg B. But it doesn't cost us much to send the notice, and it seems to make sense to do so.