Progressive Rentals June-July 2007

In Defense of Rent-To-Own by Ed Winn III
Electronic Shut-Off and Monitoring Devices in Rent-To-Own by Ed Winn III
American {Anything But} Idle: An APROfile of Sandi Whited by Kristen Card

In Defense of Rent-To-Own
by Ed Winn III

Rental dealers can thank APRO and Rent-A-Center for their efforts to educate the U.S. Department of Defense about the rent-to-own industry’s business practices. The team successfully staved off efforts to have the new “Military Annual Percentage Rate” applied to RTO transactions with military personnel. H On April 6, 2007, the Department of Defense issued draft regulations entitled, Limitations on Terms of Consumer Credit Extended to Service Members and Dependents. These regulations are required by the terms of the enabling legislation passed last fall, the John Warner National Defense Authorization Act for Fiscal Year 2007 (10 USC section 987). The draft regulations address certain predatory lending practices that are negatively impacting military personnel and their families and seek to curb excessive fees and annual percentage rates.

The U.S. Secretary of Defense has until October 1, 2007, to implement the provisions of the new act through its regulatory powers. While rent-to-own transactions are identified in the regulations as one of five predatory lending industries—along with payday loans, vehicle title loans, military installment loans and tax refund anticipation loans—the regulations do not touch RTO practices directly. Rent-to-own transaction incorrectly characterized as “predatory lending” Rent-to-own/military personnel lending issues were first raised in a Department of Defense report submitted to Congress in August 2006. Congress had directed the department to study predatory lending practices directed at members of the Armed Forces and their families and to notify Congress of its findings. The report defined a “predatory lending practice” as any “unfair or abusive loan or credit sales transaction or collection practice.”

The report catalogued “rent-to-own lending” as one of the industries studied by the Department of Defense, having used old U.S. Public Interest Research Group statistics that showed rent-to-own transactions having annualized interest rates of more than 200 percent. The report also noted that RTO transactions are treated like credit sales in New Jersey, Vermont, Minnesota and Wisconsin. As soon as the report was published, both APRO and Rent-A-Center sent letters to the Department of Defense challenging the report’s conclusions that rent-to-own transactions can appropriately be characterized as “predatory lending” or even lending at all, in light of the opposite conclusions reached by the Federal Reserve Board, the Federal Trade Commission and the Internal Revenue Service.

The industry’s efforts paid off and RTO transactions, while criticized, are otherwise left alone in the proposed department regulations. The chart below indicates how the Department of Defense characterized the various “lending products” it studied. New APR protections established for military personnel The law that Congress passed last fall limits the interest rate on loans to military personnel and their dependents to 36 percent APR. The statute directs the Department of Defense to develop regulations to implement the statute, explain how the disclosures are to be made to service members, how to calculate the APR, set limits on all fees associated with extensions of credit to service members and, most important, define what transactions are to be covered by the new law by defining “creditor” and “consumer credit.”

The department elected to conform its definition of “creditor” with the term’s definition in the Truth In Lending Act. The enabling statute defined “consumer credit” more narrowly than the term as defined in TILA by excluding residential mortgage loans and purchase money loans for cars or other personal property. The Department of Defense came down hard on the three chief culprits of predatory lending to service members as defined in the department’s initial report: payday loans, vehicle title loans and refund anticipation loans. Payday loans are defined as closed-end loans for $2,000 or less with a repayment term of 91 days or less and where the consumer provides a check or debit authorization to the consumer’s bank account for repayment. Vehicle title loans are defined to cover loans with a term of 180 days or less and secured by the title to a motor vehicle. Refund anticipation loans are closed-end loans in which the consumer grants the creditor the right to receive all or part of the debtor’s income tax refund.

The regulations create a new disclosure term and calculation, called the “Military Annual Percentage Rate.” The MAPR includes all interest, fees, credit service charges, credit renewal charges, credit insurance premiums, fees for debt calculation or debt suspension agreements and fees for credit-related ancillary products sold in connection with a loan. The MAPR does not include late fees, default fees or other fees of a contingent nature. Creditors covered by the regulation will have to make both an APR calculation in accordance with TILA and a MAPR disclosure under the Department of Defense regulations. In addition, the regulations require the following statement to appear on all loan documents to service members: “Federal law provides important protections to active duty members of the Armed Forces and their dependents.

Members of the Armed Forces and their dependents may be able to obtain financial assistance from Army Emergency Relief, Navy and Marine Corps Relief Society, the Air Force Aid Society or Coast Guard Mutual Aid. Members of the Armed Forces and their dependents may request free legal advice regarding an application for credit from a service legal assistance office or financial counseling from a consumer credit counselor.” Disclosures must be made to service members in writing and the two interest rate disclosures plus the repayment terms for the loan must also be made verbally. The TILA and MAPR APR percentages will be different in many cases, because what is and what is not deemed interest under the two calculations is different. Creditors cannot roll over, renew, refinance or consolidate a loan to a service member unless the new transaction offers more favorable terms, such as a lower MAPR.

Creditors cannot require service members to submit disputes arising from the loan to arbitration nor can they require “other onerous legal notice provisions” that are not defined in the regulations. Violations of the regulations render the transaction void from its inception, which means that the service member has no obligation to repay the loan.

A substantial distinction Rental dealers can look at the Department of Defense actions and conclude that the department made the correct assumption in that rent-to-own transactions with the military are quite different from predatory lending. And, indeed, the department arrived at this correct conclusion, but not without some help. The department’s concern, after studying service members’ financial situations in detail, is and has been that certain predatory business transactions threaten some service members with an unending cycle of debt that can imperil the military preparedness of the country’s fighting men and women. As APRO and Rent-A-Center both pointed out to the department rather insistently, rent-to-own does not contribute to any consumers being trapped in a cycle of debt, since RTO is a completely non-debt transaction.

The worst that can ever happen in a rent-to-own transaction is that the customer has to quit using the product and give it back to the store. Many RTO dealers enjoy good relationships with their military customers and with the military bases where those service members are stationed. The war and the deployment of thousands of military personnel overseas for extended stays have caused hardships on many service members and their families. The rent-to-own industry has been there to help where it can and will continue to offer its products and services to soldiers and their families on flexible terms that serve both parties. As a result of our good education, the Department of Defense decided not to intrude into RTO customer relations, which is the only proper conclusion given the nature of the rent-to-own transaction.

Ed Winn III is APRO’s general counsel. His e-mail address is edwinn@mwvmlaw.com.

Electronic Shut-Off and Monitoring Devices in Rent-To-Own
by Ed Winn III

There has been some discussion among rental dealers, for years in some quarters, about the feasibility and practicality of inserting devices into electronic products that would render the product unusable if the customer failed to renew the rental agreement. One variation of monitoring products has developed where dealers install a GPS tracking device on rental property so that the dealer knows where the product is at all times. Some dealers have long yearned to be able to drive by a recalcitrant— i.e., non-paying, won’t-answer-the-telephone, won’t-come-to-the-door—customer’s house and with a click of a button, disable all of the unpaid-for electronic rental products. Some buy-here/pay-here used car dealers have used shut-off devices to decrease default rates in their industry. Mel Farr, former Detroit Lions running back and owner of a dozen used car lots in Michigan and Ohio, has explained unapologetically that his use of such devices allows him to sell cars to people to whom he would otherwise not be able to do business, because he can get his cars back more quickly from defaulting customers. He has compared his business to that of the utility business.

In a New York Times article, in response to criticism from Ralph Nader and others about how he sells and leases cars, Farr is quoted as saying, “You don’t have to have good credit to have lights and electricity. If you don’t pay your light bill, they will cut it off—they don’t care what you’ve got in your refrigerator.” In the used car business, these devices are hidden under the hood, attached to either the ignition circuit or the starter. There is a keypad attached to the dashboard and the customer must punch in a new code when another car payment is due or the car will not start. The device starts blinking a few days before the payment is due. Plaintiff’s lawyers sued Farr over this practice, arguing that the devices were inherently unsafe both to the customers and to other motorists. Two customers testified that their cars shut off in traffic because of the devices. The dealer countered that if the cars shut off, it must have been due to a mechanical failure of some kind and not because of the shut-off devices. The judge ruled in favor of the car dealer as the devices are engineered only to prevent a car from starting after a certain date, not to shut off an engine that is running.

In the rent-to-own context, there are several issues that dealers must consider if contemplating the implementation of shut-off devices. One is a competitive issue. If computers without a shut-off device rent for $25 a week in town and computers with a shut-off device rent for $28 a week (to cover the cost of the device), then customers who shop around are likely to choose the lower priced computer. The dealer who wants to use shut-off devices must then accept either lower revenues from fewer rentals or lower profits if he eats the cost of the devices. There is also the issue of notice. Shut-off devices can be installed in electronic equipment without the customer’s knowledge. This is certainly the case with computers that can be shut down from a remote location via the Internet with hidden software. If the dealer merely wants to install a tracking device to know where his product is, what obligation does he have to tell the customer that such a device has been planted in the plasma television? Maybe none. The customer has already promised not to move the TV without the dealer’s prior consent in the rental agreement and so, if the customer breaches the agreement by moving the TV without consent, all bets are off between the parties.

The customer would have a difficult job complaining to the dealer that he should have been told about the tracking device and that it was going to be harder to steal the TV than he thought. There have not been any lawsuits against rent-to-own dealers involving shut-off devices yet, but there could be, especially if the dealer has not told the customer that the product has a shut-off device installed. Mere unhappiness on the part of a customer who cannot get the TV to work will not likely launch such a suit, but a little imagination can concoct significant damages when an appliance or other electronic device that is being rented suddenly quits working—and the insulin in the refrigerator goes bad or a novel-in-the-works or the secret formula for hair growth gets erased from a computer. If a dealer thinks that installing a shut-off device in rent-to-own products will help the business, then the dealer should probably tell the customers in advance of such a practice. This can be accomplished with a new paragraph in the rental agreement:

The rental property has been equipped with [describe the device] that will allow us to render the property inoperable if you fail to make a timely rental renewal payment and do not return the property to us promptly. If you obtain ownership of the property, we will remove the device at no cost. Please do not attempt to disable the device yourself as opening the product can result in serious bodily injury or death. Beyond the issue of competition, there is no good reason not to tell the customer about the device. Customers who know that their product will quit working if they do not make timely renewal payments may be more likely to pay than if they don’t know.

Customers who suddenly encounter a TV or other product that has quit working with no explanation may quickly become angry, dissatisfied customers who will never pay. One state, Connecticut, has specifically addressed the legality of both shut-off and tracking devices on leased products with an amendment to its version of the Uniform Personal Property Leasing Act, Article 2A of the Uniform Commercial Code, which law applies to rent-to-own dealers. Connecticut is the only state to have adopted this amendment so far. The amendment sets out the procedures that lessors must use if they install devices on property that they rent. Here is the language: 2A-702(e)

1. In this subsection, “electronic self-help” means the use of electronic means to exercise a term of the lease agreement with respect to the lessor’s right to take possession of the leased goods or, without removal, to render the leased goods unusable on the lessee’s premises, and includes the use of electronic means to locate leased goods.
2. Electronic self-help is permitted only if the lessee separately agrees to a term of the lease agreement authorizing electronic self-help that requires notice of exercise as provided in subdivision (3) of this subsection. Except in a consumer lease, the lessee is deemed to have separately agreed to a term of the lease agreement authorizing electronic self-help if a clause is included in the lease agreement that specifically states that electronic self-help is authorized.
3. Before resorting to electronic self-help authorized by a term of the lease agreement, the lessor shall give notice to the lessee stating:
   
   • That the lessor intends to resort to electronic self-help as a remedy on or after fifteen days following communication of the notice to the lessee;
   • The nature of the claimed breach which entitled the lessor to resort to electronic self-help; and
   • The name, title, address and telephone number of a person representing the lessor with whom the lessee may communicate concerning the lease agreement.
4. A lessee may recover damages, including incidental damages, caused by wrongful use of electronic self-help. The lessee may also recover consequential damages for wrongful use of electronic self-help even if such damages are excluded by the terms of the lease agreement.
5. Even if the lessor complies with subdivisions (2) and (3) of this subsection, electronic self-help may not be used if the lessor has reason to know that such use will result in substantial injury or harm to the public health or safety or grave harm to the public interest substantially affecting third parties not involved in the dispute.

This is the law, then, for rental dealers in Connecticut. The language I suggested above for insertion into a rental agreement will not work in Connecticut as the law there requires a separate notice that the customer signs in consumer leases. This law was enacted in 2003 and there has not been a rush in other states to enact similar legislation. Rental dealers elsewhere may find the 15-day notice requirement cumbersome, but the idea of telling the customer before shutting off the property may be a good idea if the goal is to get the customer to pay and keep the account current as opposed to having several houses full of rental units that no longer work. Another issue can arise if a customer files bankruptcy and the dealer activates the shut-off device after the customer has filed. An Arkansas bankruptcy court had no difficulty concluding that a car dealer had violated the automatic stay by activating a shut-off device in a car owned by the bankrupt debtor.

The car company was assessed damages of nearly $3,000 plus attorneys’ fees. There is no reason to suppose that a bankruptcy court confronted with a rent-to-own transaction and a shut-off device would reach a contrary conclusion and dealers are advised that once a customer has filed bankruptcy, they should not use a shutoff device without getting the court’s permission. Shut-off devices have not inundated the used car business, probably because they are still relatively expensive and car dealers just do not want to fool with them. There is some effort and expense involved with the installation and removal of the devices.

The law is not completely settled as to how these devices are to be treated and car dealers have been selling and repossessing cars for more than 100 years successfully without them. Shut-off devices have made even fewer inroads into the RTO industry so far. For RTO dealers, they may be perfect additions for the back side of the business. For others, they may be too much trouble and cost too much. Rental dealers should be aware that legal aid lawyers, not surprisingly, do not like these devices and are spending their time thinking up legal theories to attack them, mainly in the used car arena, so far.

Ed Winn III is APRO’s general counsel. His e-mail address is edwinn@mwvmlaw.com.

American {Anything But} Idle: An APROfile of Sandi Whited
by Kristen Card

Rent-to-own is kind of an addiction,” observes Sandi Whited, owner of a Premier Rental-Purchase (www.premierrents.net) franchise in Altoona, Pennsylvania. “You either like it or you don’t. I like it because every day it’s the same job, but every day is different. Every call is different; every circumstance is different. There’s always something to do and I love that. I hate being idle.” That, as it turns out, is an understatement. Working relentlessly and with considerable success for about a quarter century, the 39-year-old’s résumé begins with a job at the mall cookie store and, for now, ends with the June 2005 launch of her own rent-to-own business. In between, there have been four moves along the East Coast, three children and at least as many career changes, but through all the ups and downs, the steady thread running through Whited’s life is her work. “My parents always taught us that you’ve got to pay for what you want,” says Whited. “They told us, ‘We’ll provide you with what you need, but you’ve got to pay for everything else yourself.’

So work is what I’ve always done.” Born in Rhode Island and raised in New Hampshire, Whited is the youngest of five children. A self-described “good kid,” it seems she never had time to be anything but. Whited began working at the mall at 14, then as a secretary at Carol Cable, where her dad was the plant manager. She worked dual jobs at 16 and spent her high school years mostly shuttling between school and work or between jobs during the summer. “I didn’t do a lot of extracurricular activities or have a lot of friends,” says Whited, “because I worked.” Whited went to one semester of college close to home, then married an Army serviceman, moved to Fort Meade, Maryland, and continued her education at Bowie State University. During college, she worked at various restaurants, a day-care facility and a McDonald’s. Eventually, she earned her degree in elementary education. Whited and her husband moved to Altoona to be closer to her parents.

She was working at McDonald’s and as a substitute teacher when she gave birth to her first two children, who are just 15 months apart. She quit her full-time, fast-food job to stay at home with her daughters—still with the occasional teaching gig, of course. However, when finances began to buckle, staying at home was no longer an option. It was then that Rainbow Rentals hired Whited to stand behind a counter and accept payments three days a week. “I’ve been in the industry 15 years now,” says Whited. “I went from three days a week at Rainbow to full time, to office manager, to store manager. I managed the store from 1999 until Rent-A-Center bought Rainbow. Within a year, I was opening up my own Premier store.”

The leap from being a single-store manager to becoming a franchisee initially seemed immense to Whited. “I was really skeptical about Premier at first,” says Whited, “because all I knew was how to run the store. I didn’t know human resources or advertising or anything. But a few guys who had worked at Rainbow with me—Perry Reese, Dave Jones and Rich Bagoly—were all doing it and said, ‘Premier has human resources and payroll and all these things that will help you. You don’t have to worry about it.’ “I’m of Christian belief and prayed for things to work out,” says Whited. “I prayed that if I was meant to open a Premier store, then things would go through; that I’d get financing. If I didn’t, then I understood that maybe I wasn’t intended to pursue it. Well, I got financing within a couple of weeks. And I believed it was time to move on and make a change.” Today, Whited’s leap is paying off, quite literally. With a dedicated staff of seven, her Premier Rental-Purchase store quickly has evolved from surviving to thriving.

Best of all, Whited feels the store reflects her values and exceptional work ethic. “Our staff, quality of product and customer service are all excellent,” she says. “The store looks like retail; everything is decorated and always seasonal. It’s an extremely comfortable environment to come and shop.” Whited offers a six month, same-as-cash option in a market where other stores typically offer only three months. The real difference between her Premier store and its competitors lies not in their marketing, but rather in their moral approach, according to Whited. “The key to everything is gaining the trust of your customer,” she says. “My motto is ‘Do what you say when you say you’re going to do it.’ It works dealing with my kids, my customers and my employees. It helps you hold yourself accountable, gain confidence in yourself and gain others’ confidence in you. “I believe honesty really is the best policy,” she continues. “If I mess up or miss something—or one of my employees does—then that’s what we tell the customer. I don’t want anyone to be deceptive whatsoever. No surprises. When it’s a surprise, people think you’re being deceptive.

They wonder what else you’re going to be deceptive about. There should be no question of your integrity. It’s invaluable.” Whited’s industrious nature is an undeniable part of who she is—but it’s only part of who she is. This workaholic is also a woman—a woman working within a strongly male-dominated industry. So, it’s not surprising that her proudest professional moment was when she became the first female manager to have a store ranked fifth of more than 100 Rainbow Rentals stores. “I was the first person at Rainbow—male or female— to go from office manager to store manager,” says Whited. “Typically, you went to account manager, assistant manager, then store manager. Rainbow also never let anyone manage the store they trained in; you always had to move. Moving wasn’t an option for me, so I went from office manager to managing the store I trained in. And in my second year managing, my store was ranked within the top five. I said to those officers, ‘You trusted in me. I said I would deliver and here you are.’”

Whited says, like most situations, being a woman in a man’s working world has its upsides and downsides, particularly when it comes to communication differences. “I think women are more personable and just naturally chattier,” she says. “I love all my customers. I’m concerned about all of them. I build my relationships with them by getting to know their family, their interests, and their worries. With my employees, I feel I’m more sensitive to their concerns and their environment. I know a lot about everybody because they’re important to me. “The other side of that is that as a woman among men, you’re perceived differently,” she says. “From what I’ve seen, many male co-workers don’t know how to approach you or talk with you. It’s either a direct business question or nothing. It’s difficult for me to go into meetings sometimes because I don’t feel accepted. If there’s a problem, then let’s resolve it. But sometimes, it’s like they don’t know how to just have a conversation with me.” As Whited continues to strive for professional success, she also must balance that drive with the personal responsibilities of motherhood. For example, while she’d like to open more stores, Whited must temper that desire with the realities of parenting. “I don’t want to be a big, multiunit operation because it’s too time consuming,” she says. “I’m not out to make a million dollars. I’m out to make a good living for my family.

Right now, if I were working at a big corporation, I’d probably be working 52 hours a week. But since I’ve got my own store, if the kids really need me, I can drop and run. I don’t think I’d be able to do that at a corporation. I still struggle with drawing the line between work and home life. It’s a battle for me, especially while I’m building the business, because sometimes, I’ve just got to choose between my company and my kids.” Just because she has chosen not to plow full-speed-ahead with her business for now doesn’t mean Whited isn’t developing a presence and reputation within the rent-to-own industry. Last January, Whited was elected president of the newly reorganized Pennsylvania Association of Rental Dealers. Pennsylvania’s rental-purchase law, enacted in 1998 as one of the last state RTO statutes, has continued to come under attack off and on through the years. The Keystone State’s smaller rental dealers recently decided they wanted to reunite as a group and adopt a proactive position. “We’re fortunate that there’s nothing really happening in Pennsylvania for us right now,” says Whited. “But New York is heated and there’s a theory that what happens there might bleed into something similar here. If something happens and you’re not organized, then it’s extremely difficult to put it all together spur-of-the-moment. With PARD, we’ll have a mechanism in place, so that if something comes about, then we’ve got the information, the process and the relationships to respond appropriately.”

Currently, the organization is collecting membership dues and planning for an October annual meeting featuring legislative and legal updates. The group also is planning a trip to the Capitol to help educate decision-makers about the benefits of the rent-to-own industry. Whited, who as a Premier franchisee is required to belong to the national Association of Progressive Rental Organizations, believes trade groups are vital for the success of the industry and individual businesses alike. “Being a franchise owner has given me new insight into the meaning of trade associations,” Whited says. “You’re only as good as the people around you; you only know as much as they know. We all want to know what legislation is going around and what we’re up against. It’s essential that we realize, ‘Wow—this can really make me or break me.’ APRO and PARD let me surround myself with incredibly knowledgeable people and what I’m learning from them feeds me. I’m the sort of person who always needs to be learning.” As she approaches a mid-life milestone—her 40th birthday—later this year, Whited feels like it’s all coming together for her. Her business is buzzing and within the past few months, her children—Ebony, 16, Nicole, 15, and 11- year-old Matthew—have begun helping out at her Premier Rental-Purchase store, merging the two worlds Whited has spent so much energy trying nurture. “The girls come in and help with filing and process our mailings,” says Whited proudly. “They clean and are learning to accept payments.

My son went out on the truck for the first time a couple of weekends ago to help with deliveries and he’s excited about that. I put out the idea of them helping at the store about a year ago and no one took an interest, but now they’re coming around. They want to earn a few bucks and there’s a remote chance they might want to get into the business. I’m excited about that!” At home, Whited’s love of getting to know people often is extended to foreign students. For years, her family has hosted deaf students from Central America (no language barrier, as everyone in Whited’s family knows how to sign) and recently hosted a student from Germany for four weeks. In exchange, Nicole will go to Germany next year and stay with the girl’s family for a month. When she’s not working, Whited also enjoys camping, scrap booking and other crafts. Her work brings her daily challenges, a sense of connection and it’s brought her to where she is today—a place with which she seems wholly satisfied. “I’m really ahead of where I thought I’d be at this stage,” Whited says. “I have a nice home. I have three children. We have everything we need and my kids are happy. It’s a good place to be and I’m happy where I am.”

Kristen Card is an independent business writer in Austin, Texas.