Rent-to-own News - Economic meltdown demands flexibility of RTO

As the U.S. Congress scrambles to approve a proposed $700 billion Wall Street bailout to absorb enough bad housing debt to shore up the markets and allow banks to resume lending again, it's unlikely little if any of that "dislodged" credit will flow into the hands of the over 100 million "unbanked" and "credit under-served" consumers.

“The rent-to-own transaction makes more sense in financial times like these,” says Dr. Michael H. Anderson, Associate Professor of Finance UMASS at Dartmouth. “Rent-to-own can offer the financial bridge consumers need during these times when consumer credit will be adversely affected.”

Dr. Anderson notes that alternative financial institutions will also become much bigger factors in the economy and the market.

“A smart financial analyst is going to understand that alternative financial institutions such as rent-to-own will become a much more viable consumer option and should be looked at more closely in the market and from the investment community,” he says.

With legislators on the brink of approving a federal bailout bill, and with a panoply of regulatory bills likely to follow, APRO Public Affairs Director Richard May says if Congress is ready to address credit markets, lending and consumer debt, its high time rent-to-own were part of the discussion.

"The most difficult hurdle we've had to overcome is finding the right opportunity for leaders to talk about our transaction," May says. "Now the very national conversation is about the perceived value of credit. We are now on the radar screen and it's up to us to tell Congress who we are and what we do."

For twenty years, the rent-to-own industry, through its national trade association, APRO has worked to promote the improvements rent-to-own has made in its pricing, product quality and payment flexibility. Today, May says the current economic instability will provide yet another opportunity for this debt-free consumer transaction to prove itself out of market need.

The rent-to-own industry is currently regulated by statute in 47 states and the U.S. Congress has debated national regulations for the rent-to-own industry over the past fifteen years.

“We have asked the U.S. Congress to regulate our industry for more than a decade as it has worked successfully in the states,” says APRO President “Tiger” John Cleek of Cleek's Lease or Own. “The current economic conditions may lend a helping hand in finally passing a federal rent-to-own law that will help consumers, businesses and the economy.”

The current bill in the U.S. House, H.R. 1767, boasts 99 total sponsors, the largest show of congressional sponsorship of the bill since its introduction in 1993.

A total of 36 new co-sponsors joined the bill as a result of grassroots legislative efforts stemming from the 2008 APRO Legislative Conference in Washington, D.C., this February.

Due to the economic circumstances and the upcoming elections, movement on the bill this session appears unlikely, May says. However, even as Congress prepares to bail out the markets with tax dollars, experts warn there is no quick fix to stoking lending or breaking the economic vice that's squeezing consumers.

In short, the credit crunch is here to stay.

And as long as lenders remain stingy, rent-to-own is poised to provide an alternative financing mechanism to help a growing population of consumers get the products they need.

"This is not the end of the credit crunch -- the credit crunch is just beginning," says Larry Jeddeloh in a recent interview with Barron's. Jeddeloh is the publisher of the Market Intelligence Report and founder and chief investment officer of Minneapolis-based TIS Group, an independent research service.

"What we have seen thus far are just the first signs of de-leveraging at the banks, the consumer level and among corporations. Savings are in. Consumption based on leverage is going out of favor." Jeddeloh says.

Tightened lending, high fuel costs and recessionary forces are credited for the rent-to-own explosion of the late 70's and early 80's when credit strapped consumers discovered the rent-to-own transaction -- largely through companies like Remco and ColorTyme -- as a means to meet their everyday household needs.

And chances are, the ranks of the "unbanked" and "credit under-served" will continue to swell as lending standards and rates move out of reach for millions looking to establish or just maintain credit worthiness.

According to the Fed's quarterly survey of senior loan officers:

"About 65 percent of domestic banks (in July) -- up notably from about 30 percent in the April survey -- indicated that they had tightened their lending standards on credit card loans over the past three months, and about the same fraction of respondents -- up from roughly 45 percent in the April survey -- reported having tightened standards on consumer loans other than credit card loans."

American credit card debt now hovers around $850 billion and new regulations on the credit card industry are still pending. Those restrictions combined with credit tightening driven by the subprime housing crisis, make the demand for alternative financing mechanisms to serve this "unbanked" population all the more urgent.

However, these alternative financing mechanisms must be tailor made for individual consumers, according to new research from the TowerGroup -- a research and advisory services firm focused exclusively on the financial services industry.

Such predictions bode well for the non-credit, customer driven rent-to-own option in which customers can acquire merchandise under payment plans they choose, are never obligated to the term of the lease and can return items at any time without penalty.

Rent One President Larry Carrico says the economic meltdown on Wall Street should give credence to the rent-to-own transaction on Independence Avenue, and highlight the clear demand for the transaction in the marketplace and justificaiton of its pricing structure.

"There is no debt incurred in our transaction," Carrico says. "That message got through to 99 sponsors of our bill in the House. The current market situation makes it all the more important for us to talk about our transaction in terms of the debt it does not incur. The businessperson has all the risk in our transaction."

Robert Briley, APRO first vice president.

APRO First Vice President Robert Briley of Briley Investments -- an Aaron's franchisee -- likened the issue to one of short term versus long term commitment. There is need and room for both, he says.

Briley loosely compares home foreclosures with the collection process rent-to-own dealers contend with on a daily basis. The difference is the '"risk of return" is one built into the short-term rent-to-own transaction, but not in a 30-year mortgage.

Consequently, the cost of prepping these homes for resale is considerable, a fact which lays to rest consumer lobby objections over what RTO operators charge their customers.

"What's the true price of that home now Mr. sub prime lender?" Briley says. "You've got to have someone mow, put in new carpet, new paint, a new roof, landscaping, just to be able to resell the product. They didn't count on these homes coming back. We charge what we charge because we accept some people are going to return our product."

The concept of rent-to-own homes is not new, but with the one-two punch of the credit markets and housing crash, these contracts are becoming much more popular as well.

Ultimately, Briley and APRO Legal Counsel Ed Winn III share one viewpoint -- because of rent-to-own and the three million customers who take advantage of the consumer friendly transaction each year, the Wall Street bailout is at least $6.8 billion lighter.

"This is an excellent opportunity for the RTO issue to get a better hearing in Washington D.C.," Winn says. "Our industry in no way contributes to the economic peril we are in today. If everyone did RTO instead of taking on debt they can't afford to pay back, we would be less imperiled."

mevans@rtohq.org