April 2, 2012
As mentioned in last week’s round-up, the Maryland Consumer Rights Coalition recently released a new report documenting the predatory practices of “rent-to-own” (“RTO”) stores, which sell goods to consumers on installment plans with interest rates often exceeding 300 percent annually. As the report’s statistics demonstrate, greater regulation of the RTO industry is essential; however, regulation alone will not address the root of the problem, which is inadequate access to effective banking services, savings vehicles and credit by low-income consumers. Like SNAP’s Restaurant Meals Program, which allows certain elderly, homeless and disabled SNAP recipients to use their benefits to buy fast food, RTOs simultaneously fill a void in low-income neighborhoods and set consumers up to make choices that have harmful long-term effects.
In Maryland, rent-to-own stores are a $67 million industry; nationally, the figure jumps to $7 billion. 4.1 million consumers rented from RTOs in 2009, compared to three million in 2006. RTO stores lease appliances and furniture to customers who are unable to pay cash and either don’t have a credit card or don’t have a high enough credit limit. The customers pay for the items in monthly or weekly installments until the contract price has been fulfilled. However, if a customer misses a payment, the RTO store can reclaim the leased item immediately, re-lease it and keep the original customer’s money. Half of RTO customers have their goods repossessed before they’ve paid the full purchase price; others are subject to numerous and threatening collections calls. In Virginia, RTO stores are even allowed to bring criminal charges against delinquent customers, which has resulted in an increasing number of RTO customers facing felony charges.
The lack of regulation of RTO stores creates a major barrier to asset-building and self-sufficiency by ensnaring many families in a cycle of borrowing and debt—ironically in the name of facilitating ownership. This is especially problematic given that the majority of customers at RTO stores are already struggling financially; according to the MCRC study, most RTO customers have no more than a high school education and earn less than $36,000 a year. Furthermore, like payday lenders, RTO stores target low-income areas; in Baltimore City, 93% of RTO stores are located in areas where 51% to 100% of the households are low-to-moderate income. The practical effects of renting from an RTO are striking: in the study, the average non-RTO price for a refrigerator was $678, while the average rental price was $1,990. Likewise, the average non-RTO television cost $728.55, while the rental price soared to $2,543.
An editorial in the Baltimore Sun responding to the study recommended limiting the maximum amount an RTO store could collect to twice the leased item’s cash price; this would be a modest intervention, but nevertheless a significant improvement over the current system. Several states—including West Virginia, New York, Maine, New Jersey, and North Carolina—already have similar rules on the books. However, as an industry, the RTO business remains vastly under-regulated. Both federal law and the law of many states treat RTO sales as short-term leases rather than credit transactions, which means they are not subject to most lending regulations.
Greater regulation of both RTO stores and payday lenders—two of the main players in the “poverty business”—is essential. But we’ve known that for some time. Many states have already implemented more stringent regulations on these businesses out of recognition of their abusive practices, and the Consumer Financial Protection Bureau has made regulation of the industry a priority. Yet the deeper, foundational issue is a lack of access to better, appealing alternatives. Despite all the abuse within the industry, payday lenders have their defenders, who argue that these types of services are essential in providing some degree of autonomy and purchasing power to consumers who are underbanked and have little access to credit.
This “something is better than nothing” argument is but one example of how inadequate access to resources and services in low-income neighborhoods leads both low-income households and policymakers to resort to “band-aid” solutions. Because my background is in SNAP, this framing calls to mind the oft-maligned Restaurant Meals Program, which exists to give SNAP recipients who are either unable to cook or do not have a place to cook an opportunity to use their benefits at authorized restaurants—typically, fast food establishments. Few cities and states have implemented the Restaurant Meals Program because of the political and public backlash, particularly in light of increased calls for limiting choice for SNAP recipients; nationally, the controversy surrounding the program has divided advocacy groups that are typically aligned. And understandably, it’s counterintuitive and uncomfortable to think about the federal government sponsoring meals at Burger King in the name of nutrition.
But as with payday lenders, it’s about what’s available. The Restaurant Meals Program is far from an ideal solution to the problem of hunger among the homeless—but it fills a void. In Los Angeles, Restaurant Meals serves 64,000 SNAP recipients who otherwise couldn’t make much use of their benefits. The program wouldn’t be necessary if the foundational problems—inadequate shelters and services for the homeless, an insufficient number of elderly meal sites, and scarce access to fresh, healthy food in low-income areas—were resolved. Similarly, low-income consumers would not feel compelled to cash their checks at payday lenders or rent their refrigerators at RTOs if alternative, targeted financial services and paths to credit were available in their neighborhoods. Importantly, however, while the Restaurant Meals Program actually fulfills a need by satisfying a customer’s hunger (albeit temporarily), payday loans and RTOs typically create greater debt and thus exacerbate the very need that led the customer to the lender in the first place.
Regulating RTOs and payday lenders is crucial, though to some extent regulation is a superficial solution that will do little to fundamentally change the degree of control low-income consumers exercise over their money. For an exploration of alternative financial products that would best serve low-income customers, see Senior Policy Analyst Pamela Chan’s paper, “Beyond Barriers.” Likewise, for an analysis of the reasons many low-income consumers avoid relationships with banks, see NAF Fellow Rourke O’Brien’s piece, “We Don’t Do Banks.”