Renting to Owe: Rent-to-Own Companies Prey on Low-Income Consumers

By Jake Lewis

Most consumers would feel that they had been badly cheated if they paid $1,000 for a washing machine that in reality carried a maximum retail price of $400.

But millions of low-income U.S. consumers face such costly scams daily. It is all part of a rent-to-own industry that preys on customers who lack the money to buy items like furniture, televisions, refrigerators, washer-dryers and other household goods — even pots, pans and dishes.

What few protections consumers have against rent-to-own abuses are being threatened by legislation pending in Congress. Under provisions lobbied by the industry, stronger state laws would be preempted (wiped out) by weaker federal provisions.

While many state laws provide less than ideal safeguards, the National Consumer Law Center says that a majority of the state laws which currently govern rent-to-own contracts provide consumers more protections than federal legislation being pushed by the industry.

The rent-to-own stores are attractive come-ons for the poor who can’t amass enough savings to pay cash for big ticket items and who lack access to credit or have flawed credit histories that rule them out as candidates for legitimate installment contracts.

Rental dealers advertise that consumers can buy any appliance (invariably the ads include big-screen televisions as an example) with no money down and without a credit check by simply agreeing to make regular (usually weekly) payments. But miss a payment and the store requires the item to be returned immediately. And that used item may go out the door again the same day to another cash-short consumer.

The consumer can eventually own the merchandise if the payments are made on time over an extended period. But, the rental payments add up astronomically. For example, with $13 weekly rent-to-own payments over 78 weeks, a $250 television set would cost $1,014 before the consumer owned the set. This represents an annual interest rate (APR) of 265 percent.

The same $250 television set bought through department store installment credit at 19.8 percent interest over 18 months would cost the consumer $291.06 — or $723 less than the purchase through a rent-to-own scheme.

The New York City Department of Consumer Affairs investigated Rent-A-Center in August and found the national rental chain was charging consumers up to 225 percent over the Manufacturer’s Suggested Retail Price (MSRP) for electronics items in the city’s five boroughs. The department filed 310 cases against the stores, charging Rent-A-Center with repeatedly committing deceptive trade practices under the city’s consumer protection law.

The chain, based in Plano, Texas, is the nation’s largest rental-purchase company with 2,400 stores nationwide. In its September 3 issue, Fortune Magazine lists Rent-A-Center as one of the 100 fastest growing companies in the United States with $1.7 billion in revenue during the last 12 months.

The Consumers League of New Jersey likens rent-to-own contracts to a “form of peonage (debt slavery) similar to sharecropping and the ‘company store’ where you pay and pay, but never get to the end.”

Ed Mierzwinski, of the U. S. Public Interest Group (PIRG) in Washington, says the rent-to-own business amounts to “legal loan sharking.”

“I have a hard time equating those kinds of comments with what consumers are saying,” says Robert Royer, a Washington, DC-based attorney who represents Rent-A-Center. “There isn’t an industry around that somebody isn’t going to complain about. [The rent-to-own industry] provides a service that, according to a Federal Trade Commission survey, over 75 percent of the people who responded felt that it is a valuable service that they would use again. That’s a higher rating than florists get.”

While Royer claims that “most of our customers are military people or government employees who have been transferred and don’t have their furniture when they arrive,” the Better Business Bureau says that most of the firms aim their marketing efforts at the poorest 40 percent of the nation’s population.

The Federal Trade Commission says that 2.3 percent of U.S. households used rent-to-own transactions in the last year, and 4.9 percent did so in the last five years. The FTC said 31 percent of the customers were African-American, 73 percent had a high school education or less, and 59 percent had household incomes less than $25,000.

(While abuses are prevalent, there are situations in which consumers and small business may find benefits from short-term rentals or leases of office equipment, furniture and appliances. Examples might include small businesses starting up with limited capital or a family moving to an area temporarily and deciding to rent furniture rather than incurring shipping costs in transporting their household items. “They rent a bedroom suite or whatever for a short period of time until their goods arrive,” says Royer.)

The rent-to-own stores write their contracts as “rental-purchase” agreements, not as credit sales.

“People have a hard time understanding this transaction,” Royer says. “You pay until you don’t want the item, then you turn it in. It’s not a lease; it’s not a sale — it’s a kind of hybrid. And 47 states have recognized it as such.” Critics say the technical distinction is designed to avoid state and federal credit laws such as the Truth in Lending Act that might subject the transactions to usury ceilings and disclosures to consumers about such key items as the annual percentage rate of interest (APR).

Royer counters that with rent-to-own transactions there is no determined APR because there is no defined period of time. “We don’t know if you’re going to rent [an item] for a year or only a week. So you can’t compute the APR, because there is no defined time period. The issue is not the APR, but whether you treat this as a lease or sale. Consumer groups will do whatever they can to try to obfuscate that.”

However, at least five states — Minnesota, Wisconsin, New Jersey, Vermont and North Carolina — have state laws that treat rent-to-own contracts in various ways as credit transactions.

Wisconsin and New Jersey, in particular, have been aggressive in attacking what they consider predatory practices by some rent-to-own operations.

As a result, the rent-to-own industry has launched a well-financed lobbying campaign in Congress in an effort to pass a federal law which would preempt — wipe out — state laws that regulate the companies. The law would set a ceiling — an extremely low one — on regulation of the rent-to-own industry and would prevent a state from enacting any restriction, protection or disclosure that would be in any manner stronger than the federal law. If the scheme works, the only protections and the only disclosures will be those drafted as a federal law by the rent-to-own industry.

The industry’s water is being carried by Representatives Walter Jones, R-North Carolina, and Jim Maloney, D-Connecticut, who introduced legislation (HR 1701) which is now pending in the Financial Services Committee of the House of Representatives. The legislation has 51 co-sponsors, 23 of them Democrats, including House Democratic Caucus Chair Martin Frost of Texas, who represents Rent-A-Center’s home district in Dallas.

Among the heavy hitters joining the rent-to-own lobbying team in support of the Jones-Maloney bill is Lanny Davis, former special counsel for President Clinton and now chief of the legal crisis team for Patton Boggs, one of Washington’s biggest lobbying law firms. Also at the center of the pro-rent-to-own forces is John Raffaelli, who was an aide to former Senator and Treasury Secretary Lloyd Bentsen and who has long padded the halls of Congress in efforts to peddle pro-industry amendments for rent-to-own operatives.

Fifty-two state and territorial attorneys general have signed a letter to the Financial Services Committee in opposition to the bill and the effort to wipe out state protections which protect consumers in rent-to-own transactions.

“This measure would take away state law protections from low-income consumers, particularly consumers who have few alternatives in the marketplace,” David Gilles, assistant attorney general of Wisconsin, told the Committee.

Even with the entry of the attorneys generals on the side of the consumers and the ongoing efforts of consumer organizations, the legislative odds are stacked against the poor in the battle to get a fair shake in rent-to-own transactions. The high cost of rent-to-own purchases –– everything from televisions to a baby’s crib –– adds new meaning to an old truth –– “the poor pay more.” And the industry’s lobbyists –– backed by ample campaign chests –– are willing to pay what it takes to make certain that this equation remains unchanged.

Jake Lewis is a banking specialist at the Center for the Study of Responsive Law.