TO THE EDITOR:
As a much acclaimed chair of the Federal Reserve Board and chief economic adviser, Janet Yellen, President-elect Joe Biden’s nominee to become the next secretary of the Treasury, has received many accolades and press attention. Nevertheless, her critical role in protecting consumer vehicle leasing from a required interest rate disclosure has never been recognized.
During drafting of the 1993 Truth in Leasing Regulation M landmark revisions, the major bone of contention between consumer groups and the industry was a lease rate disclosure analogous to the APR in credit sales. At the invitation of Yellen and as managing directors of the Association of Consumer Vehicle Lessors, Randall McCathren and I met with then-Fed Gov. Yellen in 1994 to discuss the issue.
“We’d all love to have a lease rate disclosure, but here’s the problem,” I told Yellen. “In order to have an interest rate, we would need to have the final value, which in this case is the residual value. But the purchase option can differ from the RV.”
She stopped us there. Oh, I get it, she noted. Unless the residual value is tied to the purchase option, the residual value would be meaningless for rate disclosure. A lessor could then set an artificially low residual resulting in a high rate of amortization and a low interest rate. That would be both meaningless and deceptive by making the lease appear more attractive than it really is. So to have a rate we would have to require the residual value to be the same as the purchase option. But the Federal Reserve Board does not have the authority to mandate a residual value purchase option or to even require a purchase option. That would take an act of Congress and at best be a difficult task, she said.
Randall and I looked at each other in astonishment. Over our entire 30-year-plus consulting career, no one ever demonstrated that level of instant analytical ability. This may help us understand why Yellen has received such broad support, ranging from Elizabeth Warren to The Wall Street Journal.
RONALD LOSHIN, Founder, past president, BLC Associates
RANDALL McCATHREN, President, BLC Associates, Nashville BLC Associates is a consulting firm specializing in retail vehicle leasing, financing and dealer services.