Industry pushes measure that would ease rules on repossession, posting of rates
Contending that state law stymies its business in Wisconsin, the rent-to-own industry is pushing legislation that would establish new operating rules but exempt it from some key creditor regulations in the consumer code.
If the Consumer Rental-Purchase Reform Act is approved this fall, it would set the stage for the opening of more stores where people can rent products such as washing machines, televisions and furniture by making weekly installment payments, with an option to buy them. One industry estimate is that up to 150 rent-to-own stores could pop up in Wisconsin over time if the measure is approved.
That's what worries state Sen. Glenn Grothman.
"Why would we want to have 150 stores that take advantage of people?" asked Grothman, a West Bend Republican.
Grothman and consumer advocates contend that rent-to-own stores target the poor, signing up low-income consumers to agreements in which they often pay what amounts to enormous interest for items they eventually buy.
The industry denies the business takes advantage of poor people. Rather, it argues, it provides consumers who might have bad credit or no credit an opportunity to enjoy an appliance, furniture or other product they couldn't afford to immediately purchase.
"We think our consumers know very well what they are entering into and what they are doing on a daily basis, probably better than we do because every penny counts for them," said Christopher Korst, general counsel for Rent-A-Center Inc., of Plano, Texas, the nation's biggest rental-purchase company.
"We have a great deal of confidence in their ability to make good decisions and to think for themselves and spend their money the way they want to spend it."
A credit transaction or not?
In a typical rent-to-own transaction, a customer rents an item for a week at a time. If the customer makes the weekly payments over a certain period, say 18 months, he or she automatically becomes the owner, or in some cases takes ownership by making an additional payment.
While that plan gives people who don't have enough money to buy a big-ticket item the chance to use one and - if they choose - to eventually own it, the process often results in the renter paying much more than the product's true market value, consumer advocates say. On an annual percentage basis, the interest rate to buy a rent-to-own product over time can be in triple figures.
But the industry asserts that rent-to-own agreements aren't the same as credit transactions, in which a consumer is extended credit and immediately takes ownership of and responsibility for a product.
The industry says there are two key requirements of the Wisconsin Consumer Act, which regulates credit transactions in the state, that shouldn't apply to rent-to-own businesses:
Getting a court judgment before repossessing an item and disclosing the annual percentage rate, or APR, involved in a rental agreement.
The legislation would address those issues. It would exempt rent-to-own stores from posting the APR, and from going to court before retrieving merchandise from customers who stop making payments.
Repossession at stake
Korst said that if a customer isn't going to keep paying to use an item, it's important to get it back into the business' rental inventory as soon as possible. Retailers that issue credit for big-ticket items don't have that same level of concern, he said.
Korst said posting annual percentage rates is a thorny issue because APRs are tough to calculate on rental agreements that customers have a right to end at any time. Inaccurate APRs can leave the business vulnerable to lawsuits, he said. Korst said only 25% of rent-to-own agreements end with the customer taking ownership.
Industry lobbyist George Petak said a better and more understandable method of disclosing costs is the "price cards" that the reform bill would require. The cards would tell consumers the total dollar cost of each installment transaction as well as what the product would cost if the customer bought it immediately. The proposal would cap the total cost of rent-to-own items at twice their cash price.
Consumer advocates say, however, that knowing the annual percentage rate is important because it is the best benchmark consumers can use when comparing the cost of items acquired through credit. They say rent-to-own deals are indeed credit transactions to which APR notice should apply.
"The APR is a way for the consumer to get a quick read on whether or not a particular transaction makes economic sense for them," said Steve Meili, director of the Consumer Law Litigation Center at the University of Wisconsin Law School in Madison.
Meili said the current requirement that rent-to-own businesses go to court to repossess merchandise is necessary because it gives consumers an opportunity to object to a charge of default. He said, for example, that the company may be wrong in claiming a customer hasn't made payments. Or, he said, it may have put illegal terms in a contract or used unlawful debt collection practices. Meili said if the rent-to-own legislation becomes law, it would undermine consumer rights.
"It will allow creditors to repossess without that due process protection for consumers," Meili said.
Consumer advocates also are worried that if the rent-to-own industry can be exempt from the APR and court judgment provisions of the Wisconsin Consumer Act, other industries will use that precedent to seek their own exemptions. That will weaken a consumer law that they say now is one of the nation's best.
"It's called the consumer act for a reason. It's not the merchant act," said Gail Sumi, government affairs representative for the Wisconsin chapter of AARP. "I think it's important that we leave it intact."
Korst counters that the legislation protects consumers while putting Wisconsin in line with 46 other states in which rent-to-own transactions are considered different from credit sales.
The legislation has advanced to the Joint Committee on Finance and could come to the Legislature for a vote yet this month. Gov. Jim Doyle, who as attorney general sued and criticized the rent-to-own industry, is non-committal on the new legislation.
"He'll review it if it gets to his desk, but there's no position right now," Doyle spokeswoman Melanie Fonder said.
Appeared in the Milwaukee Journal Sentinel on Oct. 10, 2005.