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Rent-A-Center Settles with California

Just before Thanksgiving, California Attorney General Bill Lockyer announced what normally would be good news: a multimillion dollar settlement with Rent-A-Center, the nation's largest rent-to-own business with more than 2,800 stores nationwide.

California took the Plano, Texas-based company to court, alleging it had failed to disclose the true cost of its rent-to-own program to California consumers and that it engaged in deceptive marketing around its "Preferred Customer Club." For example, it told consumers they would get up to $500 in grocery discounts without mentioning that in order to obtain the maximum discount they have to pay RAC more than $100 in additional fees.

Rent-A-Center agreed to pay $7 million restitution and $750,000 in civil penalties. As part of separate, private lawsuit, the company also said it would pony up another $7 million for a special consumer protection trust fund.

Just as important, California won changes to RAC's business practices, such as making the company clearly disclose the terms of its Club membership.

All good, right?

Well, it is for California consumers. But there are still the other 49 states and the District of Columbia.

Turns out that four years ago, Congress passed legislation that imposed consumer disclosure requirements on the rent-to-own industry. But it also pre-empted state efforts to regulate rent-to-own establishments and treat the business as credit transactions that require disclosing APRs. Consumer advocates argued they should be treated as such because most of the industry's consumers end up buying what they rent--at 50 to 200 percent over the normal retail price.

Not surprisingly, it's a very lucrative business for Rent-A-Center, which in 2005 posted $2.3 billion in revenue, making it a Fortune 1000 company, right up there with Tiffany and Linen 'n Things.

(Funny to think you can make as much money overcharging to rent futons as it you can selling $10,000 engagement rings.)

The company has been in something of a slump lately, at least as far as Wall Street is concerned. Earlier this year, investors weren't happy with RAC's stagnant revenue growth--less than 1 percent--and same-store sales growth of only 1.1. percent. But some of them perked up when the company said it is expanding into payday lending services. With the number of stores it has, RAC is poised to take its place among payday lending giants such as Advance America and First Cash Financial.

So, if you don't have the dough to pay 50 percent more for that washing machine you always wanted, you have the option of borrowing what you need--at 400 percent APR.

Okay, you contrarians lurking in the blogosphere: Tell me why rent-to-own is a good deal for consumers and how the marriage of rent-to-own and payday lending is a match made in consumer heaven.

By Annys Shin |  November 28, 2006; 9:00 AM ET Consumer News
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Wow. A match made in heaven - rental rip offs and paycheck loans. Bad for the poor, who will only get poorer, but great for the investors. Hmmm, better run call my broker.

Posted by: KarenB | November 28, 2006 9:49 AM

The first written laws in history attempted to codify fair business practices. Unfortunately, contemporary business standards glorify profitability over fair dealing. We should have legal protections from predatory lending practices that make poor people debt slaves, even if ostensibly they're doing so "voluntarily" (i.e., they have no other choice, but as long as they take the one choice available, they're volunteering to be exploited, ripped off, bamboozled).

Aside from the 400% APR cost to participating consumers, what is the overall cost of predatory lending and rent-to-own businesses? How do these businesses contribute to bankruptcy, taxpayer bailouts for medical care, etc.? Once we've determined that it's in EVERYBODY'S best interest to end these practices, then it's a matter of making common-sense changes to the laws regulating (or not regulating) predatory lendors.

Posted by: KimY | November 28, 2006 10:17 AM

OK, I'll be contrarian.

What about the poor person's choice? Isn't it his/her right to make financial decisions, even decisions that elitists think are bad for him/her financially in the long run? Hell, I thought libs were supposed to be pro-choice...

Obviously, nobody is in favor of deceptive anything, and I don't advocate violation of usery laws. However, isn't this a similar argument to that against so-called 'predatory loans'? If someone wants/needs to mortgage their house for whatever reason (for the sake of argument, let's pick an altruistic cause like an operation for an otherwise terminally-ill or handicapped kid), do we (the self-rightous intelligensia) have the right to deny them that opportunity? Are we going to be the morality police, telling people that 'yes, you can rent (or buy on installment) that couch, but not the DVD or TV'?

Does being poor translate to being stupid, or otherwise unable to make rational decisions? Isn't that what we're saying, if we take that tack?

Again, before you flamers start, read what I said at the beginning - don't violate usury laws, and don't be deceptive (I'd like a truth-in-lending style disclosure, seems reasonable to legislate that).

Posted by: JD | November 28, 2006 10:49 AM

JD- Unfortunately, thse types of companies prey on and take advantage of people. Heck, I was a victim of one of those fraudulent 'investment' deals back when I was in the Army- and I don't consider myself stupid. In that case, they sent around a Retired E-9 Sergeant Major (with his old rank printed nicely on his business cards) to the barracks to hit up new soldiers- knowing that the rank would make a hell of an impression on youngsters brand-new to the Army.

And he sold it very well, as an investment which would make so much money, and had a life-insurance benefit to boot... great deal, right? Wrong- but none of us realized that until the Government started investigating the company for their practices. Heck, I'd probably still be paying into it, if some good-minded people hadn't gotten in the way, and started looking at the company's practices.

The point? Basically, it's not all 'free choice'. Had I fully understood (i.e. not been misled) what I was getting into, I would never have signed up.

Same thing on the payday lender bit, or those massive charges which credit card companies like to tack on... If people really were fully informed, most wouldn't get into it in the first place (and, oh, the Government could do a nice little business of, say, getting into the micro-loan business itself, for reasonable rates...).

Posted by: Castor | November 28, 2006 11:00 AM

"Tell me why rent-to-own is a good deal for consumers."

Along the lines of JD's comment, it seems to me that the real question is, "is rent-to-own a better deal for consumers than the alternative?" It stinks to pay too much for a washing machine, but it also stinks not to have a washing machine at all.

Posted by: Tom T. | November 28, 2006 11:15 AM

I understand your concerns Castor, and I'm sorry you got ripped off when you were serving our country in the Army. It sounds like the scheme you participated in was actually illegal and outside the scope of this article (or you didn't read all the disclosures, and therefore didn't understand what you were getting into).

Still, there must be a way to *force* the relevant disclosures so people can make an informed decision about these things. Just because not everyone makes the same financial choices we would make, doesn't mean that it's necessarily a choice they shouldn't be allowed to make. People do stuff that's bad for them all the time - buy the bigscreen or Lexus when they cannot afford it, eat the wrong foods, smoke, gamble, drink too much, etc...

I hate the slippery slope of the Nanny State, and when in doubt, I say government shouldn't curtail freedoms (subject to the disclosures and usury issues I mentioned in my OP).

PS I really really really hope you're joking about the Gov getting into the payday lending business...

Posted by: JD | November 28, 2006 11:15 AM

"an educated consumer..."
Many people choose to use payday lenders and rent to own, both low income and middle class. How many folks purchase a car based on the monthly payment instead of the APR?
What's missing is the same type of short loan, combined with a forced savings program and education.
Several credit unions have such programs, and you should see an increase over the next several years.

Posted by: Credit Unions! | November 28, 2006 11:19 AM

"PS I really really really hope you're joking about the Gov getting into the payday lending business..."

Why not? As you say, as long as there's disclosure it's all good, right? Except for the fact that it's the government that could, but won't, force those disclosures you're in favor of (or better yet, let companies get away with hiding those disclosures in teeny, tiny print on the last page of a 20 page application.)

In examples you cited "buy the bigscreen or Lexus when they cannot afford it, eat the wrong foods, smoke, gamble, drink too much, etc... " those people know the risks and dangers they're facing and don't care. With payday lenders and Rent-A-Center they don't tell you the dangers, or worse, they intentionally make the dangers hard to figure out until it's too late for the consumer.

Posted by: to JD | November 28, 2006 11:35 AM

Rent-A-Center discloses all of their rules, regulations and fees in their contracts. It's up to the consumer to read ALL of the contract and understand it. If they don't and they sign it anyway, it becomes the consumer problem.

Pyramid schemes are a different thing all together (as the case with Castor). This was a scheme that was unregulated and therefore, preyed upon young, impressionable enlistees. There are laws in place to recover lost time and time in relation to these.

The question that was asked by Annys was does it make sense to have a company offer rent-to-own and pay check cashing services under the same roof. My answer to this is no. It's a problem that is going to get bigger when they are allowed to combine these two services. Consumer debt it already too high.
But the problem still remains with the consumer.

The golden rule is: Read it and understand it before you sign it.
Don't blame the company on this one. That's like blaming the pencil for misspelled words.

Posted by: Mike | November 28, 2006 12:33 PM

We have to distinguish between the Wahabbi capitalists who abhor all regulation of business and real capitalism. Real capitalism accepts governmental regulation because, as George Will admitted in a rare moment of lucidity, capitalism is a governmental program. Capitalism functions only within a legal framework provided by, and enforced by government. Society, through its government, has the right to impose reasonable terms and conditions on business. This includes real disclosure requirements, including disclosure in plain English (or Spanish, or whatever language the customer speaks and which the business uses to sell its products), and disclosures prominently displayed and clearly and effectively communicated to the customer. Some might say the customer is free to decide whether to enter into a particular transaction, but this assumes the customer understands the proposed transaction.

Having worked with rent-to-own, I know it is based on incomplete and misleading disclosures. The industry has fought disclosures tooth and nail, and agreed to federal regulation only in exchange for federal preemption of state laws. There is no policy reason for this, as federal preemption infringes on traditional state jurisdiction of such commercial activities. This is not like federal preemption of state banking laws, which is required for a national banking system. Dealing with patchwork state regulation will not hinder a national rent-to-own industry.

The disclosures I saw were written in language even I, with an LLM, had difficulty understanding. The average consumer will not understand them, nor does the industry intend them to be understood. The industry has always feared that a customer truly understanding rent-to-own transactions will balk at the gross overcharges (typically 400%) and realize they can save to make a cash purchase at a quarter of the price.

As for everyone being free to sign contracts, this ignores the fact that the consumer doesn't understand the deal. If we accept the argument that the consumer has no one to blame for something they don't understand, then we can easily extend this reasoning elsewhere. You go into a bad neighborhood and get shot. You could have researched the crime stats, but didn't, so don't expect a nanny-state gov't to come in and punish someone for doing something you could have easily avoided.

Sure, no one forces people to enter into rent-to-own contracts. But they sure trick them into doing this.

I'm sorry, all you Wahabbi capitalists, but the gov't has every legal, moral and ethical right to prevent this.

Posted by: Garak | November 28, 2006 12:42 PM

I don't know what Wahabbi capitalist means (must mean I'm dumb enough to use a Rent-to-own, eh liberals?), but if you take the time to re-read what I said, you'll see that as long as the disclosure is clear and consistent - like the Federal Truth in Lending disclosure you see in the consistent boxes for every credit card offer - then I don't see a problem. Or as Mike correctly states, the problem is with the consumer (willing to take on too much debt relative to their income).

Nobody is being tricked here, or if they are, then the challenge is to prevent the tricking - NOT to outlaw the practice. Don't throw the baby out with the bathwater. Do we outlaw tobacco because it can do damage or kill you? Do we outlaw alcohol because a small percentage can't use it responsibily? No, we regulate them - which is what I suggest here. The Government shouldn't go down this slippery slope of banning financial channels that can help certain people in certain situations.

As for the government getting into the payday lending, why? They shouldn't be doing something that private industry can do better (with regulation). They arent even willing to get into the college loan business (directly), and that's an objective with a clear public interest.

Posted by: JD | November 28, 2006 1:20 PM

Interesting discussion. Unfortunately, many people, and I include myself in this characterization, are stupid about money. I was in college and I relied on my financial aid advisor to help me identify the loan package that was best for me. It was simply too much for me to navigate and digest.

Now, for many lower and lower middle income folks, the obtuseness of lending practices is compounded by poor credit, which limits their ability to purchase things on credit...leaving them few options but these to rent to own places. Who are we to say that these families can't or shouldn't have conveniences such as washing machines?

JD - BTW - the federal government is involved in the college loan business. it's called direct lending. And, depending on who you believe, they do it better, at a lower cost to the fed, which guarantees these loans for college students, who are considered high risk.

Posted by: ex cap girl | November 28, 2006 2:08 PM

Rent-A-Center and payday loan places most definitely do not practice full disclosure. Yes, technically the information is there, but it really does take an accountant to decipher it. I know plenty of reasonably smart people that have fallen victim to these scams. And that's what they are. Scams. Either the paperwork is astonishly confusing and contradictory or the verbal sales pitch is a lie, or both.

Government has an obligation to protect people from this sort of crap. It's taking advantage of those that can least afford it.

At the risk of being too blunt, one role of government is to protect stupid people from themselves. So even if these outfits could only trap stupid people, we'd still have a moral obligation to make sure they aren't allowed to abuse them. As it is, both stupid people and reasonable smart people fall victim.

There should be a maximum amount over and above market rate that any group should be able to charge. Period.

However, one complicating factor is that these types of loans and deals are high risk. I would imagine (I don't know for sure) that a lot of people damage the items they rent, or they simply stop making payments. That's a factor that should be weighed.

Mainstream banks and whatnot set their rates on a sliding scale, based on credit reports and risk factors. These businesses should be able to do the same thing. But there needs to be a maximum limit. And 500% interest is not a morally defensible limit.

Posted by: Hillman | November 28, 2006 2:14 PM

By Wahabbi capitism, I mean extremist views that almost ALL governmental regulation is inherently evil and unproductive, the view that markets are always rational, and that the private sector can always do a better job than the public sector. These types worship the "invisible hand" of the markets (god's own Harvard MBA hand?) and seem to denigrate everything the gov't does. Even in the face of evidence this ain't so. You can decide for yourself if you are such a person.

I did read your post, and my post was not aimed solely at you. Your assuming it was shows that you think I'm dumb enough to not understand what I read, eh conservatives?

The gov't does ban recreational drugs like marijuana, which is less harmful than alcohol. The gov't does ban competition in certain markets--witness crop allotments, under which selling regulated agricultural products like, say, peanuts, is illegal. If the gov't can protect peanut farmers from themselves, it can protect consumers from themselves.

I never said outlaw RTO. I said regulate it. Just because RTO follows federal Truth In Lending laws doesn't let the industry off the hook if the federal rules are insufficient. The industry wouldn't accept them if they were truly effective.

As for regulating payday loans, gov't has always regulated banking and lending activities. Margin requirements for stock purchases limit the absolute amount of leverage, regardless of the quality of the disclosure. Limiting RTO or payday loans is no different. As for people being free to enter into these contracts, why not extend this reasoning to recreational drugs? Or even crack? No body makes you do it. But it's been deemed harmful to society, and thus banned. One person ragged out from a brutal day at work going home and burning a joint harms society less than a rapacious lender taking advantage of unsophisticated consumers.

And what about states banning internet car purchases? Several states--the libertarian leaning state of North Caroline comes to mind. These protectors of free enterprise made it a felony to point, click and buy a car from an out-of-state dealer. Again, gov't banning certain business practices. If NC can do this, then other states can ban RTO and payday loans.

As for RTO helping people, I doubt it really does help more than a handful of people. RTO simply preys on those who can't make themselves save for a cash purchase. Or who can't open a bank account because the banks have redlined their 'hoods. No credit, no TV. Arguably, banning RTO would force certain consumers to learn the benefits of saving.

You're absolutely right when you say that the gov't shouldn't ban RTO or payday loans completely. But society benefits when gov't regulates them to ensure clear, effective disclosure and limit usurious interest rates. Fewer people fall into bankruptcy, fewer US military personnel are deemed security risks because of excessive debt. Society as a whole comes out ahead. So let's regulate--effectively. The whole point of the California AG was that disclosures were not adequate. Certainly states should be able to regulate commerce within their borders if they find federal regulation wanting.

I would disagree with your conclusion that no one is being tricked into signing an RTO contract. Sure, they know what it is (keep the TV as long as you make the payments), but do they really know more than this? Do they really understand the deal itself? The California AG thought not, and went to court. I'm not saying the RTO and payday loan customers are fully aware of what they're doing. Maybe they are, and maybe they aren't. In any event, gov't should be able to regulate these industries as the public sees fit.

Finally, the gov't IS in the college loan business. It guarantees student loans for Sallie Mae and its ABS deals. But, of course, Sallie does not pass on this subsidy to the student borrowers. This is why Sallie is so profitable, why it can pay its CEO $250 million in one year even though it effectively is backed by the full faith and credit of the USA. This is unlike Fannie Mae and Freddie Mac, where the implied guarantee of the US cuts home mortgage rates by at least 50 basis points. In this instance, society as a whole would come out ahead if we just eliminated the middleman--Sallie--and lent directly to the students. In other words, the gov't can do a better job than the private sector in this particular instance. But until this happens, just keep in mind these massive subsidies.

Posted by: Garak | November 28, 2006 2:44 PM

"The industry has always feared that a customer truly understanding rent-to-own transactions will balk at the gross overcharges (typically 400%) and realize they can save to make a cash purchase at a quarter of the price."
The problem is that most of the people who patronize these businesses don't have a saving ethic, that's why they're there in the 1st place. Speaking as someone who fell victim to the "gotta have it now" mentality and just paid it off after 7 years, if people had the kind of self control of which you speak, these places wouldn't exist. And I agree with Hillman...having a ex who worked collections for these types of stores, people don't expect to continue to make payments on it until they buy it, just until the cop comes to take it from them because they stopped making payments. High risk doesn't even begin to cover it.

Posted by: bonnie | November 28, 2006 2:46 PM

Why would anyone rent a couch, a futon, or a TV set?! If you are OK using these items used, you'd be better off buying them for pennies from someone advertising in Pennysaver, or even look in the rich neighborhoods where people though these items away in good condition and you can get them FREE. That's what my husband and I did in the first years of our marriage. People must eat, and must have an apartment/room. No one NEEDS a TV, a DVD player, couch, china cabinet etc.

Posted by: Elle | November 28, 2006 4:29 PM

Thank you Elle! The part where "stupid" comes in is not when ppl can't read a contract's legalese, but when they borrow to the hilt for something they don't need.

Posted by: Karen | November 28, 2006 6:17 PM

"No one NEEDS a TV, a DVD player, couch, china cabinet etc."
For that matter, no one needs a Lexus or a 5 room house for 2 people. One could do the spartan/minimalist look and have an apartment with nothing in it but most people would like to have some place to sit when they come home.

If everyone just used what they NEEDED the world would be a far different place. And I can't help but laugh at the people preaching about who needs what as they sit at their computer typing away. Unless you're on your computer at work (and tsk-tsk if you are), you probably didn't NEED the computer you're typing on. But you have it, don't you? Or are you and Visa sharing ownership in which case you bought something you couldn't really afford, either.

Posted by: anon | November 29, 2006 12:06 PM

to anon: nope, my computer is paid for. In full. But it doesn't matter anyway. I don't want to decide for others what they need. If they need that DVD and TV that bad that they can't wait another month or year, sure, they can go ahead and pay for it 400% of the actual price. Just ask them to stop complaining that they are being ripped off.

Posted by: Elle | November 29, 2006 12:40 PM

Needs and wants are very different things. Needs are, specifically, food, clothing, and shelter. EVERYTHING else is a 'want'.

That being said, things like a payday loan service are, by their very nature, predatory. If someone is so in need of cash that they can't wait until their next payday, then they have a problem. Maybe it's their fault, because they can't manage finances well enough. But Maybe they are working minimum-wage jobs with no health benefits, have a kid who needs to visit a doctor...

And that second 'maybe' is much more likely. People who are financially secure wouldn't even have to think about visiting a payday loan vendor- they have enough in the bank (maybe not much, but enough to cover actual expenses until the next paycheck, or at least a credit card to float funds). Payday lenders cater to the poorest people and the creditless people- the least financially secure.

And that's a big problem. If we are concerned citizens, then we should be concerned about our least-fortunate citizens the most. And sitting by while companies rip off people merely because they can, is quite morally disturbing. Fortunately, I don't work minimum-wage, and am now relatively secure, but I haven't forgotten the touch-and-go times. And I positively hate to see others being ripped off as they go through the same.

Posted by: Castor | November 29, 2006 4:26 PM

The problem most of you have, is the same problem this country has. You speak but you don't know what you are talking about. You probably go to vote at the elections and don't have a idea who or what you are voting for. You base your decision upon the media, and what your friends say. Go do your homework.

Posted by: PM | November 30, 2006 12:03 PM

Yeah, you are absolutely right about this!! Let those customers spend aproxitmately $22 per week ging to the laundry mat and never acuire the machine instead of paying less than $20 per week and owning the washer and dryer in 15 months! And if they don't have a car,then they can take the bus while they leave their infant children at home unsupervised because they can't afford a babysitter!!
This type of elitest thinking brought the USSR to it's Knees in a short 100 years.You need to do your homework,because you got this one dead wrong!!!!!Top Line Revenue is not an indiction of the value to the consumer as much as it is the evidence of how popular it has become to acquire goods without the obligation of financing and debt. The industry net profit numbers are way below most other industries and that proves the value in this industry!!

Posted by: Larry | November 30, 2006 12:14 PM

Lets look at the whole package. Unless you have the cash to go and buy something straight out you are going to pay more, wait, or go without. Choices...Layaway...have to wait and very often the typical consumer defaults and looses their money and NEVER got any use of the product, Credit Card....Seems harmless...If you charged $1800 on a credit card and did what every red blooded American tends to do and paid the monthly minimum you wou be paying for 21 yrs!!!!. These figures are old and may not be exact, BUT the thought process is the same. You get NO service, you certainly get NO loaner if it breaks, and if you have a problem paying you CERTAINLY can't take it back!!!! Most rent to own customers do not even have credit option. Yes sometimes they make bad choices and bad decisions, but ....SHOULD someone go without a refrigerator? or a bed for their kids? Shouldn't they have an option to better the quality of their lives???? Rent to own companies provide more service AND they take more risk dealing with these customers....Who by the way for the most part are WONDERFULL, UPSTANDING PEOPLE!!!!

Posted by: J | November 30, 2006 12:38 PM

unfortunately, i happen to be own of the rent-to-own suckers. i really had no choice. my apartment came without a fridge, and the landlord wasn't required to provide one. we tried living out of a cooler for the first two weeks, but that's hell during the summer. plus we have a toddler who needs fresh milk daily. rather than waiting a month or two to save up for a fridge, we decided to do the rent-to-own option. granted, i'm not happy with the idea of paying twice what my fridge is worth retail-wise, but trying to live without a working fridge made me realize that i'd pay whatever the cost.

Posted by: chai | November 30, 2006 9:59 PM

if rent to own is 400

if rent to own is overcharging, what can you tell me about credit card company, walmart,kmart selling their product 4 to 5 time it cost. that is overcharging. but nobody cares becouse you spent no less than $10.00 per transaction.

we live in a credit sociaty.

if you have any question about renttoown fact. you can call at 210-421-0306

marvin rodriguez

Posted by: marvin rodriguez | December 1, 2006 1:20 AM

Having worked in the Rent to Own industry for over 10 years, the secrets of this industry need to come out. It needs to be more regulated and have more disclosures. The company mantra is that we're helping the people who need merchandise, but secretly they hope they never own it. And they treat good, upstanding people very poorly. I have left the industry for good reason...

Posted by: OnCB | December 4, 2006 7:04 PM

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