Study: Between 2004 and 2012 Rent-to-Own Contracts Grew from 2.7 Million to 4.8 Million / A 2011 Consumer Reports Review Found That Some Rent-to-Own Contracts Carried Effective Interest Rates Of 92 Percent For A Television And Over 300 Percent For A Laptop / Interest Rates in Rent-to-Own Transactions Dwarf High Interest Credit Cards
Washington, DC- Today, U.S. Senator Bob Casey (D-PA) announced that he has sent a letter to the federal government’s top consumer watchdogs pressing the agencies to put protections in place for consumers engaged in increasingly popular rent to own transactions. A large and growing number of low-income Americans use these services as alternatives to traditional loan financing for personal purchases. Between 2004 and 2012, the number of customers using RTO deals grew from 2.7 million to 4.8 million, according to the Association of Progressive Rental Organizations (APRO). Most of these customers have low incomes and are financially vulnerable. A 2011 Consumer Reports review of several RTO deals found that they carried implied interest rates of 92 percent for a television and over 300 percent for a laptop. These rates not only dwarf those of high-interest credit cards; if RTO deals were classified as loans, they would also violate most states’ usury laws.
“It’s important that the FTC and CFPB carefully review the protections in place for consumers in rent-to-own transactions,” Senator Casey said. “These agreements can be a useful vehicle for consumers but it requires constant vigilance to ensure that consumers aren’t being treated unfairly.”
The full text of Senator Casey’s letter can be seen below:
Dear Chairwoman Ramirez and Director Cordray:
I write to express my concerns the growing use of rent-to-own (RTO) transactions by financially vulnerable consumers. A standard RTO transaction involves the lease of a consumer item for a short period of time, with the option for the customer to make payments to extend the lease and eventually purchase the item.
A large and growing number of low-income Americans use these services as alternatives to traditional loan financing for personal purchases. Between 2004 and 2012, the number of customers using RTO deals grew from 2.7 million to 4.8 million, according to the Association of Progressive Rental Organizations (APRO). Most of these customers have low incomes and are financially vulnerable. According to APRO, more than three quarters of users of RTO services had a household income of less than $36,000. In a 2013 survey, the Federal Deposit Insurance Corporation found that households without access to a traditional bank account were three times more likely than other Americans to use RTO stores.
RTO deals can be financially sensible for short-term rentals of certain items. However, if customers make the full number of payments required to own an item, the total expense is far higher than if they had financed the purchase through a consumer loan. A 2011 Consumer Reports review of several RTO deals found that they carried implied interest rates of 92 percent for a television and over 300 percent for a laptop. These rates not only dwarf those of high-interest credit cards; if RTO deals were classified as loans, they would also violate most states’ usury laws. Troublingly, the most recent government report that looked RTO deals in detail – an FTC report from 2000 – found that seventy percent of customers ultimately made the number of payments necessary for ownership,
I am concerned about the threat that the continued growth of the RTO market poses to the financial stability of millions of Americans. It is essential that customers entering into RTO deals are aware of the risks involved. Because RTO deals have elements of loan, leases and retail sales, both of your agencies are well-placed to provide consumers with adequate information about these risks, and consider subjecting RTO industry practices to greater scrutiny. However, for this same reason, I also understand that the RTO industry does not fit neatly into any single agency’s regulatory jurisdiction.
I therefore urge each of your agencies to closely monitor the growth of the RTO market. Additionally, I ask that you answer the following questions:
- What can each of your agencies do to better inform consumers about the risks posed by RTOs?
- What, if any, additional tools or authorities would your agencies need in order to adequately protect consumers from these risks?
- What, if any, legislative action would help ensure that users of alternative financial services such as RTOs have the same level of consumer protection afforded to users of traditional products such as bank loans?
Thank you for your attention to this matter. I look forward to receiving your reply.
Sincerely,
Robert P. Casey, Jr.
United States Senator
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