Neither Fish Nor Fowl But Some Call It Foul

Charlene Mathis wanted to buy a 19-inch television set to keep her three children entertained. But when she walked five blocks to a store near the housing project where she lives in Jersey City, N. J., and offered to pay cash, the store wouldn't sell her one. Instead, a friendly salesman said, she could have a TV and a videocassette recorder for just $20 a week. "He just said over and over, 'You can just rent these for a couple of months, then they're yours,' " says the 30-year-old clerical worker, who agreed to the deal. What she didn't realize until many payments later--and what the salesman didn't point out--she says, was that payments would add up to $1,840 for items whose retail price was maybe $500.

The business of providing TVs, stereos, microwaves, washing machines, furniture--even jewelry--for rent with the option to own has grown into a thriving, $3.6 billion industry. Largely because it is very loosely regulated, rent-to-own, as executives call the business, has generated a firestorm of controversy among consumer advocates and is keeping courtrooms and state legislatures humming with activity.

The rent-to-own industry says it provides a valuable service by making a wide range of goods available for short-term rentals, often to low-income consumers who don't have credit and wouldn't have access to such items any other way. According to critics, though, rent-to-own preys on the unsophisticated poor through exorbitant pricing and seeks to evade usury and consumer-protection laws by structuring contracts as short-term leases, which fall outside of most regulation. The transaction, say critics, is more like a credit sale, which is covered under existing laws.

NO-MAN'S-LAND. While many rent-to-own stores are small outfits, larger players are increasingly dominating the market. The largest nationwide company, Rent-A-Center USA, has grown from a chain of about 200 stores in 1987, when Thorn EMI PLC paid $594 million for its stock and took it private, to 1,400 stores today. As part of Thorn EMI, which also has rental stores in Britain, Rent-A-Center USA is one of the largest buyers of durable consumer goods in the world. The company says its annual earnings growth has been in excess of 20% during its 20 years in existence.

One of the few public companies in the rent-to-own industry is also expanding aggressively. Atlanta-based Aaron Rents Inc., which says it is the nation's largest furniture rental company, sees "the RTO business as a very large, growing market," says Gilbert L. Danielson, chief financial officer for the company, which had revenues of $144.5 million in 1992. "We feel a big part of the future growth of Aaron Rents will be in that business." After lining up financing agreements with ITT Commercial Finance Corp., it has started franchising.

The rent-to-own industry has long operated in a kind of regulatory no-man's-land. There is no federal legislation governing the industry, and until 1985, there was little legislation on the state level, either. Because of the unique structure of RTO contracts, they've largely avoided being characterized as credit sales, which would require disclosure of an annual percentage rate and trigger other consumer-protection laws.

The industry's reasoning goes like this: If there is no debt created in a transaction and a consumer isn't obligated to pay for the full value of goods, then rent-to-own transactions aren't covered by the federal Truth in Lending Act and state acts governing retail installment sales. As renewable one-week or one-month leases that can be terminated at any time, RTO contracts don't fall under the Consumer Leasing Act, which covers leases that exceed four months.

TAKEN TO THE CLEANERS. Consumer advocates have been trying to remove the industry from regulatory limbo. They argue that while the form of the rent-to-own contract may be a rental, the intent is to make a sale, so it should be treated as a credit sale. "In our view, they're trying to sell and are convincing consumers that they're buying. But the contract is one of the worst purchases you could make, and that's the problem," says Ed Mierzwinski, a consumer advocate with the U. S. Public Interest Research Group in Washington, D. C.

But the industry argues, and many courts have agreed, that since the contracts can be terminated at any time, the laws governing credit sales don't apply. "Our defense is in the statistics," says Ronald Waters, director of government affairs for the Association of Progressive Rental Organizations (APRO), the Austin (Tex.)-based industry group. "Only 25% or less keep the items to full term." Consumer advocates say that figure is greatly understated.

The industry exploits low-income consumers, say its critics. APRO, which represents 3,600 stores, says the client mix is becoming more upscale but that the working poor are still an important segment. Rent-A-Center USA says that its clientele is a mix of middle- and lower-income clients. It says that about 20% of its customers get some form of state or governmental aid.

Consumer groups are most infuriated by pricing that can be double to triple the stated cash price for an item, which is already marked up from the wholesale price. For example, an April, 1992, study by the California Public Interest Research Group found washing machines listed at a cash price of $150 offered at $40 a month for 18 months, or $720. A refrigerator with a cash price of $350 was offered for $16.99 a week for 69 weeks--total price, $1,172.

Add-on fees are common in the industry. An ongoing lawsuit in New Jersey is a case in point. In April, 1988, Iris Green signed a contract with a rent-to-own store near where she lives in public housing in Paterson, N. J. She agreed to pay $64.29 a month for 18 months for a living room set she wanted to own. But not included in that number was $3.86 a month in sales tax, $4 a month for a waiver-of-liability fee, a $25 delivery and installation fee, a $7 fee to have someone come to her home to collect payments, and late-payment fees that were $1 a day. Industry critics say there is much consumer confusion over such fees and that consumers may not be aware of them until the merchandise, along with the contract, is delivered.

Green's story highlights another aspect of the business that generates a lot of controversy: Consumers build no equity in rent-to-own items. If payments are missed, merchandise can be repossessed even though consumers are close to owning them. For example, Green made total payments of $964.35, excluding fees, for the living room set, not far from the $1,157.22 she would have had to pay to own the furniture, which had a listed cash price of $499. But when she was hospitalized and became unable to make the payments, it was repossessed and she lost all her money.

The industry argues that high costs justify its pricing. Dealers say providing repairs for the life of a contract is expensive, as are collection and repossession efforts on items rented weekly or monthly. They also cite borrowing costs that are higher than traditional retailers. "They do have some higher business costs, but it's hard to believe that justifies what we call interest rates and they call 'time-price differentials' that are more than three times the amounts charged by finance companies, which were set up to provide very small loans to risky borrowers," says Margot Saunders, managing attorney for the National Consumer Law Center in Washington, D. C.

The RTO industry has been very effective in fending off restrictive legislation. In the past eight years, 31 states have passed laws regulating the rent-to-own industry. Some have limited fees, but few have done much to restrict pricing. "The industry has clearly won the game," says James P. Nehf, an associate professor teaching commercial and consumer protection law at Indiana University's School of Law in Indianapolis. "Industry forces are better funded and have stronger lobbyists than consumer groups, so they can get their views heard more effectively." Christopher A. Korst, director of legal affairs for Rent-A-Center USA, says the legislation consumer advocates seek (table) would put the industry out of business.

Consumer interests dismiss that claim. And they're far from discouraged about the few significant reforms to date. "We need to escalate our effort," says Ed Mierzwinski. With RTO legislation kicking around on the federal level and 19 states without legislation, one thing is clear: Consumer advocates and RTO lobbyists will be battling for years to come.

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