Federal Trade Commission Testifies on Rent-To-Own Industry in the United States

Testifying on behalf of the Federal Trade Commission today before the Financial Institutions and Consumer Credit Subcommittee of the U.S. House of Representatives' Financial Services Committee, Bureau of Consumer Protection Director J. Howard Beales III presented the key findings of the Commission's recent survey of the rent-to-own industry in the United States.

As described in the testimony, rent-to-own dealers rent furniture, appliances, home electronics and jewelry, typically without a down payment or credit check. Consumers make weekly or monthly payments, and can return the merchandise at any time without further obligation. Consumers obtain ownership of the merchandise if they continue payments for a specified period of time, usually 12 to 24 months. The total cost of purchasing merchandise through a rent-to-own transaction is usually significantly higher than retail store prices. According to the Association of Progressive Rental Organizations, the rent-to-own industry trade association representing more than half of all rent-to-own stores, there are currently about 8,000 such stores in the United States, serving nearly three million customers and generating $5 billion annually in revenue.

The testimony presents the key findings of a staff report by the Commission's Bureau of Economics on the rent-to-own industry and its customers. To develop the report, FTC staff surveyed more than 12,000 randomly selected U.S. households, identifying 532 rent-to-own customers who were interviewed about their experience with rent-to-own transactions. The primary goals included: 1) examining which customers use rent-to-own transactions and how they differ from consumers who do not; 2) determining whether rent-to-own transactions typically result in the purchase of merchandise; and 3) determining whether abusive collection practices are widespread in the industry.

The survey found that:

• 2.3 % of U.S. households used rent-to-own transactions in the last year, and 4.9% did so in the last five years.
• 31% of rent-to-own customers were African American, 79% were 18 to 44 years old, 73% had a high school education or less, 59% had household incomes less than $25,000 and 53% lived in the South.
• 70% of rent-to-own merchandise was ultimately purchased by the customer. 67% of customers intended to purchase the merchandise when they began the rent-to-own transaction, and 87% of the customers who intended to purchase the merchandise actually did so.
• 75% of rent-to-own customers were satisfied with their experience with rent-to-own transactions, and 19% were dissatisfied. High prices were the most common reason for dissatisfaction.
• Nearly half of all rent-to-own customers had been late making a payment. 64% of late customers reported that the treatment they received from the store when they were late was either "very good" or "good," and another 20% reported that the treatment was "fair." 15% of late customers reported being treated poorly, including 11% who indicated possibly abusive collection practices.

The staff report concluded that providing information on the cost of purchasing merchandise through a rent-to-own transaction is important because most rent-to-own merchandise is ultimately purchased by the customer. In addition, the report concluded that disclosure of the total cost and other key terms of purchase would allow potential customers to compare the cost of rent-to-own transactions to alternatives, and would help ensure that consumers choosing rent-to-own transactions do so on an informed basis.

The testimony notes that rent-to-own transactions are not specifically regulated by the federal laws that govern other credit transactions, namely the Truth in Lending Act (TILA) and the Consumer Leasing Act (CLA). Federal legislation that would specifically regulate rent-to-own transactions has been proposed several times in the past decade; some of the proposed legislation would have applied federal and state credit laws to the rent-to-own industry, while other proposed legislation would have regulated rent-to-own transactions as leases. The testimony also stated that the report noted that 46 states had laws that regulated rent-to-own transactions in a manner similar to leases, but that the laws varied from state to state.

One key factual issue in the debate over whether rent-to-own transactions are sales or leases has been the extent to which rent-to-own customers purchase the rented material. While the industry has maintained that about 25 or 30 percent of rent-to-own merchandise is eventually purchased, the staff's survey found that approximately 70 percent was bought by customers, and the report recommended that the industry recognize this important fact. In reiterating the report's conclusions, the testimony states that because of this high purchase rate "it is important that consumers know about basic terms of the rent-to-own transaction, in particular the total cost of purchase, before entering an agreement."

According to the testimony, the staff report found that because rent-to-own dealers "do not typically use abusive lending practices in collecting overdue rental payments" and because few customers were found to have lost merchandise through return or repossession after making substantial payments toward ownership, "federal regulation of industry collection practices and reinstatement rights may be unnecessary at this time."

Based on the survey results, the testimony concludes, "Based on the Bureau of Economics' report, the Commission does not recommend federal legislation regarding the rent-to-own industry at this juncture" and that "Determining whether legislation is needed requires information regarding these transactions in addition to that considered in the report." The testimony noted that the Commission needs to know, for example, whether consumers currently understand the total cost of rent-to-own transactions, what information they have available at present, and what alternatives to the rent-to-own transaction they typically consider.

The Commission vote to approve the testimony and provide a copy for inclusion in the formal record was 5-0.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the testimony are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the online complaint form. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No. P014809)