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The New Rent to Own Law: History Repeats as Both Tragedy and Farce

May 26, 2011

Author: Peter Dellinger

With rent-to-own your paycheck’s blown, you keep paying ‘til you turn to stone”  - Consumer League of New Jersey

Found predominantly in low income neighborhoods, rent-to-own stores have grown from a small fringe business into a major consumer industry, with about 8,600 stores nationwide used by six million consumers, and generating $7 billion in annual revenue.  The industry is dominated by two major corporations, Rent-A-Center, Inc. and Aaron's, but there are also many smaller independent stores which operate throughout the state.

Rent-to-own (RTO) stores are popular with low income people because they provide access to basic consumer goods by using deceptively simple means: consumers can rent household items over time by paying small monthly, weekly or  biweekly payments, often as little as $10 to $20. 1 RTO stores offer brand-name products, don’t require down payments, don’t conduct background or credit checks, and promptly deliver and install household appliances as part of their services. 

RTO rental contacts generally extend for at least one year, and often span two years or more.  The catch is that unlike all other long term sales contracts, the RTO company retains legal title to all rented items until the consumer makes the final payment.  This means that the consumer does not own or obtain any equity in the rented item until the very last installment payment has been made, and only a small fraction of RTO consumers ever successfully finish their contracts. 2  Further, by structuring these contracts as “rental agreements” rather than “consumer credit transactions,” the RTO industry avoids compliance with all federal consumer protection laws and regulations.  This allows the RTO industry to be regulated exclusively by individual state laws.

The New York State legislature enacted one of the first rent-to-own regulatory statutes in 1986, Personal Property Law 500 et seq.  After a detailed study of consumer exploitation by the Consumer Protection Board, the legislature capped the rent-to-own purchase price at no more than two times the retail price for each item offered to consumers.  This was seen as a positive step towards restraining predatory lending, and when signing the new legislation, Gov. Mario Cuomo called the statute “the strongest protections in the country for consumers who enter into rental-purchase agreements.”  Davis v. Rent-a-Center of America, Inc., 568 N.Y.S.2d at 532 quoting McKinney's Session Laws of 1986 at 3198.  Unfortunately, the statutory price cap provisions were imprecisely drafted and after enactment, the industry contended that a literal statutory interpretation actually eliminated all RTO pricing limitations. 3 

Consumer advocates countered that the New York State legislature never intended such an absurd result when enacting a statute specifically designed for consumer protection.  Individual consumers brought court actions periodically (and successfully) challenging RTO company pricing as unlawful under the statute.  Large RTO companies responded to these suits by placing mandatory arbitration clauses in their contracts, eliminating judicial review.  Meanwhile, RTO stores openly ignored the statutory price caps, forcing consumers to pay three to four times (or) more for the same merchandise sold by merchants at the retail price.

After almost 20 years of rapacious exploitation, two Buffalo News reporters highlighted the RTO industry’s outrageous and predatory pricing practices in June 2005, as part of a series of articles entitled “The High Price of Being Poor.”  Legislative hearings were quickly organized in Buffalo and New York City, where for the first time, low income consumers testified about the unlawful, unfair and predatory practices of rent-to-own companies.  Reform legislation was introduced in the New York State Assembly.  New York City enacted its own supplementary rent-to-own laws, attempting to warn consumers about the dangers of rent-to-own contracts.  But the RTO industry fought back and with assistance of professional lobbyists, new rent-to-own legislation was stealthily enacted by the state legislature in June 2010, without support from consumer advocates.  As noted by Professor David Siegel, “money combined with words speaks louder than words by themselves.”

New Price Caps “Woefully Inadequate”

This new version of the New York rent-to-own statute went into effect on January 21, 2011, and once again the legislature has promised to cap RTO prices and protect consumers from economic exploitation.  Modeled after a California law, the New York State statue imposes price caps on rent-to-own merchandise using a complicated formula that begins with the wholesale cost.  Unfortunately, these new price caps are virtually worthless, and New Yorkers will continue to pay three to four times more than the retail price for RTO merchandise.  Even Governor Patterson recognized that under this new statute, “the restrictions on RTO pricing remain badly lacking, and [are] insufficient to address the worst excesses of this industry.” 4  Here are a few examples illustrating the effect of the new RTO statutory pricing scheme:

A refrigerator has a wholesale price of $400 and is sold at appliance stores for a retail price of $500.  Under the new statue, an RTO store can set the base price (called the “cash price”) for this refrigerator at 1.75 times the wholesale cost.  (Pers. Prop. Law §503(2))  In this case, the base price totals $700, and reflects the new lawful price a consumer would pay to immediately buy this item at a RTO store.  Next, the new statute lawfully permits RTO stores to increase the base price another 225% when setting the total rent-to-own cost for appliances.(Pers. Prop. Law §503(3)).  Utilizing this formula, the total rent-to-own cost for this refrigerator is $1575, more than three times the retail market price.

A set of children’s bunk beds has a wholesale cost of $200, and ordinarily sells at furniture stores for $300 retail.  Under the new RTO price caps, a rent-to-own store is allowed to charge 2.15 times the wholesale cost for base cost (“cash price”), $430. (Pers. Prop. Law §503(2))  The new statute permits the RTO to charge 225% more than the base price, for total rent-to-own purchase cost of $967.50 (Pers. Prop. Law §503(3)).

A Toshiba 15" TV costs has wholesale price of $200 and the retail price at $339, as listed on the Internet.  Under the new statute, an RTO store is permitted to increase the wholesale  price by 200% to $400, which becomes the base or “cash price”.  (Pers. Prop. Law §503(2)).  Next, under this legislation, the RTO is permitted to increase the base price by another 225%.  (Pers. Prop. Law §503(3)).  Applying the new RTO price formula, the total rent-to-own cost for a consumer is $900.

Although he signed the new RTO legislation into law, Governor Patterson specifically pointed out that “the pricing provisions in the bill will not provide an adequate shield against the predatory practices that they purportedly seek to address.” 5  The Governor further noted that these new price caps are “woefully inadequate, as the legislation allows for sizeable markups above the cost of acquisition, and will permit merchants to demand  payments many times the value of the item rented before equity passes to the consumer.”  Id

Governor Patterson was bluntly critical of the legislature’s attempts at consumer protection: “[T]his bill is no panacea, and will permit unscrupulous merchants to take advantage of low-income consumers.” Id.  He recommended new legislation, “imposing lower price ceilings”, “stricter price limitations and closer regulation that this industry requires”, id. but whether Governor Cuomo shares any of these concerns remains to be seen.  To date, no new consumer legislation has been introduced, and aggrieved consumers are still powerless; their RTO contracts include arbitration clauses precluding law suits.  Meanwhile, Edwin Winn III, legal counsel to the RTO industry, describes the 2010 New York law as "the strictest rent-to-own law in the country".  Just like the last one, 25 years ago. 


1  RTO customers are overwhelmingly poor.  Available customer data available indicates that between 20%-31% of rent-to-own consumers receive some form of public assistance, and 25% are unemployed. Creola Johnson, Welfare Reform and Asset Accumulation: First We Need a Bed and a Car, 2000 Wis.L.R. 1221, 1253-1254 and n. 174 and n. 178
2  Although the overwhelming majority of RTO consumers renting furniture, appliances, and computers enter into rent-to-own contracts with the intention of buying the item, according to the rent-to-own industry, fewer than 25% of consumers actually complete a rent-to-own purchase.  The largest RTO company, Rent-A-Center, Inc. has admitted that each item of merchandise in its individual stores, is rented on average, to four or five different consumers.  In his book, “Credit Card Nation”, professor and consumer credit advocate, Dr. Robert Manning maintains that rent-to-own contracts are designed to maximize the likelihood of consumer default, to avoid consumer ownership.
3  The 1986 law attempted to cap the rent-to-own price at two times the “cash price”. Pers. Prop. Law §503. “Cash price” was defined as “the price at which a merchant, in the ordinary course of business, would offer to sell the merchandise to the consumer for cash on the date of the rental-purchase agreement.” Pers. Prop. Law §500(2), and was “meant to reflect the retail market value.” 9727-B Bill Jacket at 33.  Unfortunately, Pers. Prop. Law §500(5) also defined “merchant” as a rent-to-own company.  This led RTO companies to argue that they were free to set any price they wanted as the cash price, and then double this sum when establishing the rent-to-own price.
4  Governor’s Approval Memorandum, No. 15 Chapter 309 filed with Assembly Bill Number 3083-E, Aug. 10, 2010.
5  Id.


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