There is an assortment of fees that occur in rental agreements. They are most often labeled as “Other Charges.” Over time, either the law or the marketplace, sometimes both, change the name, popularity, profitability, and amounts of various fees. In order to minimize the wrath of consumer advocates, rental dealers are well advised not to make their “other charges” big profit centers. They should build their profits into their rental rates and use their “other charges” to recover some of the costs of those “other” services. Indeed, four states dictate that all other charges “must be reasonably related to the services performed.” Dealers who overreach with the fees may one day be called upon to prove their reasonableness with some inventive cost accounting. It is therefore useful to take a look at fees in rent-to-own transactions periodically so that rental dealers can measure their business practices against the legal requirements and marketplace realities.
Convenience Fees. One of the newer fees to arise in rent-to-own is the convenience fee, one rental dealers charge when a customer makes a payment using an alternative or non-standard payment channel. The best example is when a customer pays with a credit or debit card over the phone, a “card-not-present” transaction, when the standard credit/debit card payment method is to swipe the card in the store.
Credit card companies have their own rules about charging convenience fees and dealers are cautioned to consult them. Visa is perhaps the most restrictive. Payments must be for the bona fide convenience of using an alternative payment channel; the fee must be disclosed as a charge for the alternative payment channel; it can only be added to non face-to-face transactions; it must be a fixed amount and not a percentage of the payment; the fee must be disclosed before completion of the trans action and the customer must be given the opportunity to cancel; and it must be included as part of the total amount of the transaction. MasterCard, American Express and Discover each have similar policies in place for their merchants.
Convenience fees are different from credit card sur charges. A surcharge is a fee added to the amount due for paying by credit card instead of by cash or check. Surcharges are illegal in 10 states: California, Colorado, Connecticut, Florida, Kansas, Maine, Maryland, New York, Oklahoma and Texas. As the result of a lawsuit settlement last January, credit card surcharges are legal in the other 40 states, although the credit card companies have their own rules about when merchants can add surcharges. For example, Visa and MasterCard both require 30 days’ advance written notice to them before adding a surcharge. MasterCard limits the amount of the surcharge to the average merchant discount rate paid for MasterCard credit card acceptance. There is an absolute cap of 4 percent on credit card surcharges across the board. Even in the 10 states with laws prohibiting surcharges, dealers can offer discounts for payment made by cash or check, which has the same effect as a credit card surcharge. There is no limit on the size of the discount a merchant can give. Surcharges apply, if at all, to credit cards only-not debit cards.
Credit card surcharges have not found their way into the rent-to-own world yet, although convenience fees are becoming increasingly prevalent. Last year, Indiana amended its rental-purchase statute to add convenience fees to the list of permitted “other charges” and to cap the fee at $1.50. There are also notice requirements, both in-store and on rental agreements in the statute. Indiana is the only state so far to cap convenience fees in rent-to-own agreements by law. The Wyoming Supreme Court approved convenience fees of $9.50 for payments made by telephone and $5 for Internet payments in a case involving car note payments, which would ordinarily be substantially larger than payments on a rent-to-own account.
A word about standard payment methods: Traditional RTO dealers take rental payments in the store from customers using cash, check, money orders or credit/debit cards. Less often, they will get a payment by mail. Those are their standard payment methods, so those dealers are entitled to charge a convenience fee for payments made by telephone or over the Internet.
Internet-based rent-to-own businesses, however, have a different set of standard payment methods. They typically only take payments by credit/debit card or automated clearing house either via the Internet or over the phone. Those are their standard payment methods and so they cannot charge convenience fees for payments made using those methods.
Processing Fees. Processing or administrative fees used to be prevalent in the rent-to-own industry, “the fee for setting up your rental account with us.” They have declined in use over the years, due mainly to competitive pressures and dealers’ desire to keep the initial payment as low as possible in order to get the customer into the deal. Some Internet rent-to-own dealers are charging a processing fee without an initial rental payment as the initial payment to keep that payment low; then, they also require customers to make at least one rental payment before they can cancel. Processing fees are permitted everywhere but Michigan and West Virginia. However, in the states that cap the total cost of the rent-to-own transaction at a multiple of the cash price-California, Connecticut, Hawaii, Iowa, Maine, New York, Ohio and Pennsylvania-a required processing fee, and any other required fee for that matter, would have to go into the total cost cap calculation. For example, with a cash price of $1,000 and a $50 processing fee, the dealer could only collect $1,950 in rental payments to stay under a two times cash-price total cost.
Seven states cap processing fees, either per agreement or per customer, at amounts ranging from $5 to $15.
Delivery Fees. Like processing fees, many rental dealers have folded the costs of delivery into the rental rate to hold down the size of the initial payment. Every state permits delivery fees. Eight states cap delivery fees at amounts ranging from $10 to $60. Kiosk-and Internet based rent-to-own dealers are often frustrated when the retailer from whom the dealer is acquiring the goods charges more for delivery than the state RTO statute permits. Unfortunately, most of the rental-purchase statutes were enacted before there was significant Internet business and before there was any rent-to-own Internet business. Until the statutes are updated to recognize current business practices, those rental dealers are stuck with the statutory caps.
Internet buyers are used to seeing a fee, sometimes a large one, for shipping and handling. Shipping is almost certainly the same thing as delivery under rent-to-own statutes. Internet dealers might be able to uncouple shipping from handling and charge a fee for both. The problem arises if the RTO dealer does not, in fact, ever “handle” the goods. They are most often shipped directly from the retailer and the rent-to-own dealer never sees the goods, much less handles them. Rental dealers would have a stronger argument if the goods were shipped to the rent-to-own business and then repackaged before delivery to the consumer. Otherwise, uncoupling “shipping and handling” would be a risky practice.
Four states will only permit charging either a processing fee or a delivery fee, not both: Hawaii, Iowa, Nebraska and South Carolina.
Late Fees. Late fees, however denominated, are common, likely universal in the rent-to-own industry. Twenty seven states limit the amount of the late fee and most have statutory grace periods before late fees can accrue. Some states call the penalty for not making a timely renewal payment a late fee; others call it a reinstatement fee. Dealers use both terms and a few states authorize both late fees and reinstatement fees without really clarifying when they accrue. Rental dealers wanting to charge both fees would be safest, charging a late fee for rental payments not made in a timely fashion and a reinstatement fee when the store has picked up the goods and the customer later wants to reinstate the original agreement by catching up on payments due. If dealers try to assess both a late fee and a reinstatement fee merely for failure to make a timely renewal payment and nothing more, it could violate a cap on late fees or could be characterized as charging a “double” late fee, a possible deceptive trade practice, although there have been no cases.
In-Home Collection Fees. In-home collection fees were once ubiquitous in the rent-to-own industry. Rental dealers sent employees to run routes and collect rental payments from customers on their doorstep. Customers were used to seeing the rental guy come around to collect payments. This was in an earlier era when dealers generally did not accept checks or credit card payments. There were no debit cards. Dealers have since learned that having employees and trucks out all day, and sometimes at night, collecting payments is an expensive way to run the business. While in-home collections and their related fees have not disappeared entirely from the industry, both are rare. Given the payment alternatives that exist today, there is simply no reason to run routes anymore. No state prohibits in-home collection fees altogether. Several states disallow charging both an in-home collection fee and a late fee for the same payment. Nine states cap in-home collection fees at $5 to $10 and six states limit the number of times a dealer can collect the fee, usually not more than six times per year.
In-home collection fees have had an interesting progression in the shed-rental business. Delivering and picking up sheds can be an expensive proposition. Often, for a larger shed, a dealer will have to hire an 18-wheeler and driver. The initial delivery is most often folded into the rental rate. However, the situation arises when a customer is seriously past due and the dealer cannot make contact. As a last resort, the dealer may hire a truck and driver to go pick up the shed. Before the shed can be loaded onto the truck, the customer appears and offers to make a rental payment to avoid losing the shed. To keep from losing money, some shed dealers have put an eye-popping in-home collection fee of $200 to $300 to cover such situations and help pay for the truck and driver. Shed dealers claim that such a fee only covers their real costs of hiring the truck and driver. They cannot charge that kind of fee everywhere and there are no statistics showing how often shed rental dealers have waived the fee in order to keep the account on the books.
Non-Sufficient Funds Fees. Rental dealers will generally charge fees for bounced checks, the maximum allowable under state law. Two states, Indiana and West Virginia have NSF fees capped in their state rent-to-own statutes. For the most part, dealers have to look elsewhere for NSF fee limits. Visit goo.gl/02aX40 for a list of state-by-state NSF fee caps that will likely apply to bounced checks, including ones for rental payments. As with all other charges, while a sign in the store might be enough notice, dealers are advised to disclose in the rental agreement any NSF fees and when they accrue.
Pick-up Fees. The common wisdom in the rent-to-own industry is that customers can terminate their transactions at any time without penalty by returning the property and paying all past-due amounts. That is, indeed, the essence of the RTO transaction and is what separates it from a credit sale. Nonetheless, a few state rental-purchase statutes list the possibility of a rental dealer charging a fee for retrieving the rental property when either the customer or dealer terminates the agreement. Dealers are not generally charging pick-up fees, nor should they. The federal Truth in Lending Act defines leases to consumers as credit sales, “unless terminable without penalty at any time by the consumer.” If it costs the customer money to get out of a rent-to-own transaction, it may not be an RTO transaction after all, given the language in “Regulation Z.”
Liability Damage Waiver Fees. Most rent-to-own dealers offer some type of liability-damage-waiver coverage in their agreements, either as a stand-alone option or as part of a club program, or both. The details of what can and cannot appear in an LDW provision is beyond the scope of this article. Nine states cap LDW fees, often at a percentage of the rental rate, usually from 5 percent to 10 percent.
Other kinds of fees have popped up in the rent-to-own industry from time to time long-distance telephone fees, for example, when the customer lives in another area code. Some dealers have added a fuel surcharge when the cost of gasoline has risen suddenly. A few dealers have tried co-signer fees, although several states prohibit them. Most such fees have been short-lived. As the RTO industry continues to evolve, new issues with attendant costs will arise and dealers will experiment with new fees to cover some of those costs. Competitors, government regulators and consumer advocates will be attentive to new fees when they appear, so dealers will have to add them cautiously, with advance notice and good reason. Fewer disputes over other fees will arise if customers know in advance how much the fee is and under what circumstances it will arise. Rental dealers with questions about other fees in rent to-own transactions are welcome to contact the author.
Ed Winn III is APRO’s general counsel.
