The latest governmental activity relating to rent-to-own.
But, first, a word from our sponsor – APRO, the Association of Progressive Rental Organizations, the national RTO trade association whose primary reason for existence is to promote and protect the rent-to-own industry:
One might suppose that all of you have expensive antivirus protection software running silently in the background of your computer systems, systems you rely on to run your business. If not, you are probably writing checks or disclosing your account number to Nigerian princes and, sadly, are not long for this world.
Think about APRO like you think about your antivirus software. APRO is running in the background, behind the day-to-day business of renting and collecting, making sure that the RTO terrain is safe so that you can continue renting and collecting and, from time to time, offering information, advice, and other assistance to help you rent and collect better. APRO is watching your RTO back every day all day, just like that antivirus software.
You mustn’t forget that APRO is out there, and you really should not take her for granted, even if you are not focused on everything she’s doing on your behalf. And, if you don’t renew your software subscription, you will lose your antivirus protection and likely be infected shortly thereafter. Likewise, APRO relies on dues to do its work – so don’t forget to renew your APRO membership.
And, now, on with our regularly scheduled programming.
The country has lately undergone a changing of the guard, much to the delight of half the country and much to the dismay of the other half. A fair question for rental dealers is whether the changes wrought in Washington, D.C., and various state capitals are likely to have an impact on the rent-to-own industry and its current business practices. Rental dealers might prefer to be “left alone to do their own thing,” but regulators gotta regulate, and the time may be coming when RTO gets another turn in the regulatory barrel.
By way of example, in Washington state, when the Department of Commerce got a share of the federal pandemic relief money, it decided what kinds of businesses qualified for chunks of that money by way of grants, intended to help small businesses overcome losses due to the pandemic. The Department played favorites deciding who was eligible for grant money and decided that rental dealers were not. Among the 20 or so industries listed as being ineligible for the money, RTO was singled out as “socially undesirable.” Washington State Department of Commerce: Businesses engaged in any socially undesirable activity or activity that may be considered predatory in nature (such as rent-to-own businesses and check cashing businesses).
Overall, however, life has been pretty good for most RTO dealers lately. There are some glitches in the supply chains, and some dealers report having to scramble a bit to get product, but the government, by and large, has been staying out of rent-to-own’s hair, and has been spending its time (and your money) regulating and over-regulating other industries, not to mention the population at large with all of the mask and social-distancing edicts. But, as the pendulum swings, it is possible that rent-to-own will come up for additional rounds of regulatory scrutiny and negative press.
Already, Senator Elizabeth Warren (D-MA) wants to revise the Bankruptcy Code, and part of that revision concerns how RTO transactions are to be treated when a customer files for bankruptcy. Today, rent-to-own transactions are deemed executory contracts that the customer who files must either affirm or reject within a certain time after filing. Affirming means the customer will comply with the RTO agreement as written, paying the full rental rate for each rental period, most often through the bankruptcy trustee. Rejecting, in a word, means the customer does not want the rent-to-own deal and, therefore, must surrender the rental property back to the dealer. The customer still owes back rent through the date of return, and the dealer is an unsecured creditor for that amount.
If the customer tries to mischaracterize the RTO transaction as other than an executory contract, the dealer can protest with an objection to plan confirmation or a motion to lift the stay.
Under the Warren proposal, rent-to-own transactions will no longer be deemed executory contracts. Rather, rental dealers will be relegated to the status of unsecured creditors. They will have claims for back rent and possible additional future rents, but unsecured creditors in a bankruptcy often recover only a tiny percentage of their claims – literally pennies on the dollar.
The Bankruptcy Reform bill is the only federal effort so far that would affect RTO directly, but then the new administration is still settling into its new federal powers, and dealers may see more federal efforts directed at the business this year and next.
Perhaps to spur the government along, there has been a definite uptick in negative rent-to-own press lately. These have not been frontal assaults – rather more akin to glancing blows – but anti-RTO shots nonetheless. The Washington Post recently ran a piece lumping RTO in with payday lenders, calling both “predatory businesses:” Millions of Americans conduct their day-to-day financial business outside the banking system, leaving many to be preyed upon by payday-loan companies or rent-to-own establishments.
Cass Sunstein, author of the book Nudge, in which he advocates having the government “nudge” or push people in the direction of what he and other progressives deem better behavior, has a new book, Sludge, in which he examines dark patterns in U.S. culture that need to be identified and called out. Rent-to-own, again linked to payday, is criticized as an example of dark patterns – or sludge – in the financial world: In the financial advice industry, we take great care to help people understand the best products and services to assist them in reaching their goals. It can be equally beneficial to help them recognize and avoid dark patterns when choosing financial products and services. Obvious offenders are payday loans and exorbitant rent-to-own schemes, but there are many other forms dark patterns can take.
State legislatures, where the RTO industry has had such good results over the years, have what may be a renewed interest in RTO. Two years ago, in the face of considerable negative press, the Texas Legislature wrote rent-to-own transactions out of the theft-of-services law, effectively ending Texas RTO dealers’ ability to file criminal charges against rental thieves under most circumstances. Bills similar to the new Texas law were introduced in Arizona, New York, and Pennsylvania, although to date none has passed.
In 2019, Arkansas amended its rent-to-own statute to deal with an issue involving the tire-and-wheel rental industry in the state. Tire and wheel dealers often butt heads with banks and other creditors who repossess vehicles with rented tires or wheels on them. Rental dealers want their stuff back, and the banks, naturally enough, want to keep them. An Arkansas legislator, who also happens to be a buy-here-pay-here car dealer, introduced a bill that would have taken the rental property away from the dealers and given it to the banks. Arkansas dealers were able to negotiate a satisfactory compromise, requiring banks either to cooperate with rental dealers and allow them to recover their property in exchange for satisfactory substitute tire or wheels, or else pay the dealer for the rental property.
Also in 2019, Indiana continued its tradition of nearly annual amendments to the state RTO statute. This time clarifying the elements of an “initial payment” in a rent-to-own transaction to include any payments to third parties – e.g., delivery fees paid directly to a retailer. The amendment also clarified that while tires and wheels qualify as legitimate RTO property, other automotive accessories do not – nor do pets.
In other states, RTO-specific bills have been introduced, but as of this writing, none has passed.
“The Bankruptcy Reform bill is the only federal effort so far that would affect RTO directly, but then the new administration is still settling into its new federal powers, and dealers may see more federal efforts directed at the business this year and next.
North Carolina remains a burr under the saddle of some multi-state rent-to-own dealers. North Carolina has never had a stand-alone RTO statute as such. When the fur was flying around the rent-to-own issue in Raleigh during the early 80s, what emerged was a compromise of sorts – a definition of credit sales in the North Carolina Retail Installment Sales Act. It included RTO transactions, unless those transactions have a final balloon payment purchase option equal to more than 10% of the original cash selling price of the rental property. The logic behind the balloon payment was that no one, and certainly not rent-to-own customers, could really understand RTO – rent something with no obligation for long enough and you own it. So it was deemed important to segregate the rental aspect of the transaction from the purchase aspect, the balloon being intended as the actual purchase. And the size of the balloon – more than 10% of the cash price of the property – being plucked out of thin air. (You were warned about watching laws or sausage being made; you should listen to that advice.)
Ever since the law was changed in North Carolina in 1983, rental dealers there have all had final balloon purchase options in their agreements. Most state rent-to-own statutes prohibit balloon payments, and so for multi-state dealers, the North Carolina balloon is awkward and anathema to the goal of uniform business practices to which multi-state dealers aspire.
There have been two recent attempts to craft RTO legislation for North Carolina to bring the state into line with the other states with rent-to-own statutes. Multi-state dealers have championed the efforts. Dealers with stores in North Carolina and nowhere else have been lukewarm about the efforts, but have generally gone along to get along. Their lack of enthusiasm is because with the balloon, the transaction is otherwise unregulated – no caps on any fees, no mandated grace periods, no type-size requirements, no disclosure requirements, really. Rather just the free enterprise marketplace at work in all of its messy glory.
To date, the North Carolina RTO bills have failed to gain traction and have not moved.
More recently, earlier this year, there was a rent-to-own-specific bill introduced in Wyoming that would have repealed the RTO statute in its entirety. It was a curious bill, the first of its kind anywhere, and it died by a close vote of 5 to 4 in committee. The bill’s genesis came from the regulatory body that has the licensing authority over rent-to-own dealers in the state (both Wyoming and Oklahoma require RTO dealers to be licensed). The Wyoming regulators, after 25 years of licensing and monitoring the rent-to-own industry and getting zero customer complaints, decided the law was toothless, ineffective, and should just be repealed. Call it a near-miss, because if RTO transactions become unregulated, there is an increased risk that the nanny-state do-gooders will step in and try to regulate the industry by making the transaction a credit sale under the state retail installment sales act or its equivalent.
Rental dealers are reminded to continue watching their inboxes for APRO Alerts, the quickest and most efficient means of communicating legislative and legal news to members. It’s a little too early to tell for sure whether we are in for more business as usual or whether the regulatory wheels are starting to grind in rent-to-own’s direction. Whatever comes, APRO will be watching your back.
Ed Winn III serves as APRO General Counsel. For legal advice, members in good standing can email legal@rtohq.org.
