Try as it might, the rent-to-own industry has never been able to get a one-size-fits-all federal law defining RTO as the unique transaction that it is and standardizing regulation of the transaction in all 50 states. It hasn’t been for a lack of trying. That effort has been ongoing, on and off, for the past 42 years, despite any number of Members of Congress warning rental dealers that whatever they did, they did not want the federal government regulating the business.
In the absence of a federal law, the states have stepped in to define and regulate RTO transactions, occasionally in inventive and distinctive ways. The patchwork of state RTO laws surely frustrates multi-state RTO dealers, who must digest and ultimately comply with the numerous state variations in RTO regulation. If patchwork quilts are often works of art, the same cannot be said of patchwork laws, and certainly not RTO laws.
While the definition of an RTO transaction has been fairly uniform among the states, the disclosure dictates and other consumer protections made part of the RTO statutes vary widely. If cumbersome, complying with this patchwork of laws has not proven unworkable. We have computers these days that can analyze the lessor’s and lessee’s locations, the type of product being rented, the terms of the rental – rate, time period, total cost, etc. – and spit out the appropriate RTO agreement for the parties to execute.
In a perfect RTO world, there might be one agreement that works everywhere, but we all live in a world that is far from perfect, and must therefore wrestle with and ultimately master the patchwork.
North Carolina: Quirks in the rent-to-own laws arrived early. In 1983, the industry was involved in a life-and-death struggle with legal aid lawyers in NC. Industry critics had been able to move a recharacterization bill far along the legislative process in Raleigh before the industry became aware that the game was afoot. Votes were already committed to add RTO transactions to the definition of “credit sale” in the state Retail Installment Sales Act before the industry was able to organize any opposition. At the last minute, furniture manufacturers, long a powerful political force in NC, came in asking for a definition of “nominal consideration” more precise than a “mustard seed.” The legislature ultimately agreed that an unambiguous definition was appropriate and settled on “not more than 10% of the cash price of the property [at the time the contract is entered into].”
No sooner was the new definition of “credit sale” with the new definition of nominal consideration enacted, than the NC rental dealers all immediately added to their rental agreements a final balloon purchase payment of 11% of the cash price, thus leaving the bowdlerized RTO transactions once again unregulated in the state. Some dealers adjusted rental rates down to allow for the balloon; others just made more money on the transaction.
A number of state RTO statutes prohibit final balloon payments. Consumer advocates abhor them, as a general matter, because the lessee, if he cannot come up with the balloon – often quite large in farm equipment leases, for example – does not get to keep the property and must return it to the lessor. While the revised NC law does not require a balloon unless NC dealers want to be subject to the state RISA with its 18% finance charge cap, they must add the balloon to their agreements. NC is the only state where balloon payments exist in RTO transactions.
There have been efforts from time to time to amend the NC law and create a standalone RTO statute like those in most other states, but those efforts, to date, have not succeeded.
Michigan: In the waning hours of December 31, 1983, the MI legislature enacted the first-ever comprehensive rent-to-own statute with this peculiar reinstatement language:
“[A lessee can reinstate] if both of the following apply:
- the lessee has not missed more than three periodic payments; and
- more than one periodic payment has been missed, and the lessee has surrendered items to the lessor during the time in which payments were missed.”
Understandable, by the hardest, but awkward. That language endured until MI amended the RTO statute in 2013 with the current language that recalibrates reinstatement rights so that the customer has 7 days after the renewal date either to get caught up on payments or to return the property. If the property is returned, the customer then has 90 more days to reinstate by paying all amounts due.
South Carolina: SC was another state to enact rent-to-own legislation early on (1984). The SC law requires rental dealers to register with the state Department of Consumer Protection. (Four other states have registration requirements: CO, IA, IN, and ME. Two states require RTO dealers to be licensed: OK and WY.) SC dealers have managed the registration requirements without issue, but they have had several confrontations with the Department regarding “other charges.” The Department challenged dealers’ ability to offer a Liability Damage Waiver (LDW) option, as that option and its fee were not specifically authorized in the statute. A lawsuit involving an RTO company and the Department went all the way to the state Supreme Court, where the Department lost, and the industry won. More recently, the Department has challenged convenience fees using the same misbegotten logic. It is not known how hard the industry will fight over convenience fees. LDW fees are more important to the bottom line than convenience fees.
Interestingly, the SC RTO statutory scheme allows for increases in late fees every two years, and they have risen from $4.00 (monthly) in 1984 to $18.40 (monthly) after July 1, 2022. Other fees listed out in the statute do not have automatic hikes and processing fees; for example, delivery fees remain capped at $15, while in-home collection fees are capped at $7.
Georgia: Another state rent-to-own statute from the early 80’s, GA has its own RTO vocabulary that rental dealers must use in their agreements. The cash price of the property must be labeled the “Estimated Fair Market Value of the Leased Property.” The total RTO price must be labeled “Cost of Lease.” GA was the first state to require disclosure of the difference between the two amounts, labeled “Cost of Lease Services.” (Nine other states require this disclosure in RTO agreements: AZ, CA, CT, MD, MN, NY, PA, VT, and WV.) GA even requires the Cost of Lease Services to be disclosed in advertising if there is language in the ad that triggers the RTO advertising disclosures.
West Virginia: Another state with its own vocabulary, and, indeed, among the quirkiest, is WV. In WV, rental dealers must call the cash price of the property, “retail value.” The difference between retail value and the total of payments must be labeled “the rent-to-own charge.” WV requires 7 disclosures relating to the economics of the rent-to-own transaction: number of payments for ownership; amount of each payment; rental period (week, month, etc.); new/used; plus the 3 above. These disclosures must be on price tags, rental agreements, “in any telephone conversation with a potential customer,” and in any radio, TV, or print ads when the amount of a rental payment is in the ad.
WV, along with CA, HI, and NY, has a curious Early Purchase Option (EPO) formula: cash price multiplied by the number of rental payments remaining for ownership, divided by the total number of rental payments necessary for ownership. In real life, such a formula might require a calculation like this: $748 times 41/78. Thank goodness for cell phones with built-in calculators.
LDW in CA, CT, and TX: The LDW option has had an interesting evolution in the rent-to-own industry. Early on, insurance vendors approached rental dealers with a product, leased property insurance that, if customers paid the premiums, the policy would pay dealers the value of the property when it was lost, stolen, or damaged. Dealers initially were fearful that having the insurance product would result in too many claims and too many losses to make it worthwhile.
When losses did not accelerate as predicted, sale of the insurance product took off in the industry. But there were issues with offering insurance in RTO stores. Some states, for example, required each location to have a licensed insurance agent on the premises. Other states required an agent to be employed somewhere in the company. Dealers and insurance companies wrangled over how premium payments should be split. With losses being sustained at a manageable level, dealers began, in effect, to self-insure with LDW provisions in the agreements instead of the insurance product.
The LDW option today is ubiquitous in the RTO industry. However, LDW provisions are outlawed under the CA RTO statute because RTO customers are not generally liable if the property is lost, damaged, stolen or destroyed while being rented – unless the dealer can prove the loss was due to customers’ negligent, reckless, or intentional acts.
On the other side of the country and at the other end of the LDW spectrum, the CT RTO statute provides that an LDW provision must require the dealer to replace the property for the consumer if it is lost, stolen, damaged, or destroyed. The replacement property must suit the customer.
In 2005, the TX legislature added an LDW provision to the RTO statute that required dealers to be licensed in order to offer the LDW option. Dealers had to undergo annual licensing renewals and pay a license fee to the state, not to offer RTO transactions, but rather for the privilege of offering an LDW option in those transactions. That situation lasted for a decade until the licensing requirement was repealed.
Minnesota: MN deserves mention, however briefly, because while MN does technically have a stand-alone RTO statute, enacted in 1990, there are no rental dealers in the state. There are no dealers complying with the MN rent-to-own statute because no dealer can comply with that law and remain in business. In the early 90s, the MN Supreme Court determined that an RTO transaction as defined in the RTO statute is also a consumer credit sale under state law and is subject to an 8.5% APR cap. When the defendant RTO company pointed out to the Court that having to comply with both sets of laws would compel the company to sell its product well below cost, the Court ruled that it was not the Court’s problem and that it had no obligation to help companies stay in business. Politics in MN have not improved any since then, and indeed, seem to have gotten worse. RTO dealers have had to find other markets for their transaction.
New Hampshire: NH was one of the later states to adopt rent-to-own legislation, in 1995. NH (along with WV and Vermont) requires that the transactionbe labeled “Rent-to-Own.” NH regulators insisted on some language in RTO agreements that the industry deemed anti-RTO at the time. The choice was finally to acquiesce to the language or not get the law passed. As a result, RTO agreements in NH must contain this sentence: “If you want to purchase this or similar property now, you should consider cash or credit terms that might be available to you.” Not the end of the world, and the disclosure has not really hurt business in the state, but it is irritating to have to remind customers that they should be sure to shop around when the store is trying to close a deal.
Maryland: Over time, regulators and critics have determined that consumers should be reminded of the economic details of the rent-to-own transaction, which in principle pose no offense to rental dealers. The industry has nothing to hide, else it would not have survived and prospered as it has for the past 60 years. In 2013, MD added a separate disclosure to RTO agreements there. This separately signed “Summary Costs Chart” has four items: cash price, timing of rental payments, total cost, and cost of lease services – disclosures that are already being made in the body of the RTO agreement.
Oklahoma: Similarly, the OK Uniform Consumer Credit Code Commission, the agency that oversees rent-to-own licensing in the state, agreed to a separate disclosure: “Acknowledgement of Rental Purchase Transaction,” when an RTO agreement is entered into for property that was not “displayed or offered primarily for rental purchase prior to the rental-purchase transaction.” The language in the Acknowledgement clarifies that the transaction is an RTO transaction and is not a credit sale. The no-obligation feature is repeated along with other information to remind customers they are renting and not buying the property. The Acknowledgement is aimed at the “kiosk” RTO situation, where RTO transactions are offered through retail stores, as neither the commission nor the industry want consumers confused in any way about what they are doing when they sign an RTO agreement. (OK insists that RTO agreements be called “rental purchase” and not “lease purchase,” as the state has a separate consumer lease statute.)
California, again: CA, being CA, has more than its fair share of quirks in its rent-to-own statute. When describing the rental property, dealers must disclose the model year, if there is one, or else the date the rental dealer acquired it. Used property must show the age or the model year.
As noted above, there is no LDW in CA RTO agreements. The CA law codifies a consumer’s “3-month-same-as-cash” option.
CA dealers have the obligation to maintain the property while it is being rented, with time limits for doing repairs. Dealers have 2 business days to fix a broken item, or they must give the customer a loaner. If the item cannot be fixed within 30 days, the dealer must replace it with property satisfactory to the customer. NY has a similar maintenance provision in its RTO statute.
CA and NY consumers also have reinstatement rights that can last a year, the longest reinstatement period anywhere.
CA (along with NY and PA) consumers have Income Interruption Rights. Under certain circumstances involving job loss, layoffs, illness, and the like, RTO customers can reduce periodic payment amounts by up to one-half. The total cost for ownership does not change; rather, customers get longer to pay.
CA requires dealers to send customers several notices. The law says they must be sent either via first-class mail or personal delivery, which poses a problem in the Internet world. The first notice must go out within 10 days after the agreement is signed, reminding customers of their 3-month-same-ascash option. Another notice must go out when the customer is halfway through the deal, reminding customers of their EPO options. Finally, there is a notice for co-signers reminding them of what it means to co-sign a contract and hinting that co-signing is dangerous.
CA has the financial disclosures of an RTO transaction highlighted in boxes in the agreement, just above the signature lines. That same box serves as the price tag for units and must be affixed to the items for rent. NY has these same kind of boxed disclosures.
Mississippi: MS has a curious proviso that requires the customer either to sign or to initial every provision in a rent-to-own agreement.
Indiana: IN requires rental dealers to register with the Department of Financial Institutions. Over the years, dealers have had a constant and largely amicable relationship with the Department, largely because the Department audits every rental dealer every year – for which dealers pay – examining payments histories and other details of each rent-to-own customer. One result of all of these audits is that the Department has determined that the RTO statute has needed adjustments from time to time. While most states have never amended their RTO statutes, IN has amended its RTO statute 15 times and counting. The latest amendment concerned initial payments and what kinds of products can be rented. IN has officially approved tire and wheel rentals, but has condemned dealers trying to rent any other kinds of automotive products.
Vermont: The latest state to enact stand-alone rent-to-own legislation is VT. In 1997, the VT legislature debated the RTO issue and chose to demur, telling the Attorney General to regulate the industry as he saw fit with the proviso that he could not regulate it as a credit sale. The AG came up with a comprehensive regulation that required, among other things, the disclosure of an “effective annual percentage rate,” calculated by assuming that the difference between the cash price and the total RTO price for the property was “effective interest.” The industry chafed under this rule for years, many offering a consumer lease transaction that fell outside the AG’s rule. Finally, in 2015, the industry was able to get the legislature to do its job, and it enacted a stand-alone RTO law that superseded the AG’s rule.
Because this law came relatively late in the day, VT legislators had the opportunity to look at all of the other RTO laws on the books in other states, and pick and choose the disclosures and other consumer protections that they liked.
VT caps both RTO dealers’ cash prices and total RTO price. No real surprise there, as 5 other states (CA, HI, ME, NY, and WV) have been doing the same thing for years, albeit with different caps. The difference between the cash price and the total cost in VT must be disclosed and labeled the “rent-to-own charge.”
VT consumers have the right to review a completed RTO agreement and to take it from the store to review with a third party.
Price tags on rental property must disclose when the dealer acquired the item and the number of times it has been previously rented. This disclosure must appear if the property is used: “The merchandise is in good working order, is clean and is free of any infestation.”
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There are surely other quirks among the details of the 47 state RTO statutes, but these are some highlights. If your state did not get a mention, you can smile and be grateful that you are not having to fool with RTO quirks in your state.
Ed Winn III serves as APRO General Counsel. For legal advice, members in good standing can email legal@rtohq.org.
