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Empire Justice Memo of Support: Provide Consumer Protections in the Rent-to-Own Industry

May 29, 2015


S.5476 (Comrie)

Empire Justice Center strongly supports this legislation, which will have a real and substantial effect on low income consumers seeking to rent or purchase essential family appliances, furniture, and related items from RTO stores operating in New York State.  We have long been concerned about the predatory nature of the rent-to-own industry.  Found predominantly in low income neighborhoods, rent-to-own stores have grown from a small fringe business into a major consumer industry, with about 10,000 stores in North America used by 4.8 million households, and generating $8.5 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.” [3]  Unfortunately, the statutory price cap provisions were imprecisely drafted and, after enactment, the industry contended that a literal statutory interpretation actually eliminated all RTO price limitations.  Consumer advocates countered that the New York State legislature never intended such an absurd result when enacting a statute specifically designed for consumer protection.  Meanwhile, RTO stores openly ignored any statutory price caps, forcing consumers to pay three to four times (or) more for the same merchandise sold by merchants at the retail price.

To legalize their predatory practices, RTO industry-backed legislation was enacted by the State Legislature in June 2010.  Once again the legislature promised to cap RTO prices and protect consumers from economic exploitation.  These new price caps have proved to be virtually worthless, and New Yorkers continue to pay three to four times more than the retail price for RTO merchandise. 

Although he signed the 2010 RTO legislation into law, Governor Patterson was openly critical of the inadequate consumer protections.  He stated that “the pricing provisions in the bill will not provide an adequate shield against the predatory practices that they purportedly seek to address”, and the legislation “will permit unscrupulous merchants to take advantage of low-income consumers.” [4]  He recommended new legislation, “imposing lower price ceilings,” “stricter price limitations and closer regulation that this industry requires.”  id.

The proposed Rent-to-Own Fair Practices Act addresses these deficiencies, and for the first time, provides for concrete, effective, and measurable pricing for consumer goods ultimately sold by local rent-to-own stores.  The most important provision in a rent-to-own transaction is cost.  Under this legislation, the cost of the RTO merchandise is determined by looking to the fair market value of the same or similar merchandise offered for sale by a reasonable number of merchants in the surrounding area.  “Fair market value” is expressly defined as the “price at which a seller is willing to accept and a buyer is willing to pay on the open market at in an arm’s length transaction.”  These definitions will eliminate the industry’s exemption from the free market system, allowing prices for RTO household goods to be set freely by consent between venders and consumers.  Under this legislation, rent-to-own pricing will now be governed by the laws and forces of supply and demand, free from artificial and harmful government price-setting intervention and polices.

Additionally, the proposed legislation categorizes a rent-to-own agreement as “loan transaction,” thereby limiting the lawful amount of interest charged to a maximum of 16% per annum.  Application of this approach will eliminate much of the mystery and complexity of RTO merchandise pricing, and provide consumers with a uniform and straightforward method to determine the total purchase cost of RTO merchandise. 

The legislation further provides for important consumer protections when determining late charges and reinstatement fees, adequate notice of reinstatement rights to consumers after repossession, and prohibits the use of mandatory arbitration to resolve disputes arising under the statue.  The proposed legislation strengthens consumer protections against unfair and deceptive business practices.  Most significantly, the legislation restores a consumer’s private right of action and the right to recover damages and attorneys’ fees, important rights which were eliminated in the 2010 Act.  This provision will empower consumers to enforce their rights under the statute by acting as private attorney generals, thereby allowing scarce government enforcement resources to be directed towards other priority areas.             

We believe S. 5476 will be effective in protecting low income consumers trying to achieve ownership of basic household goods.  As drafted, the Rent to Own Fair Practices Act may finally achieve what Gov. Mario Cuomo promised the people of New York in 1986, “the strongest protections in the country for consumers who enter into rental-purchase agreements.” 

End notes:
 [1] RTO customers are overwhelmingly poor.  Available customer data 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.  According to consumer credit advocate Dr. Robert Manning, rent-to-own contracts are designed to maximize the likelihood of consumer default, to avoid consumer ownership.
 [3] Davis v. Rent-a-Center of America, Inc., 568 N.Y.S.2d at 532 quoting McKinney's Session Laws of 1986 at 3198
 [4] Governor’s Approval Memorandum, No. 15 Chapter 309 filed with Assembly Bill Number 3083-E, Aug. 10, 2010.

For more information, please contact:

Peter Dellinger

Empire Justice Center
Telesca Center for Justice
One West Main Street, Suite 200
Rochester, NY  14614 

(585) 454-4060
(585) 454-2518