N.J. high court restricts interest in rent-to-own contracts.

Rent-to-own contracts are subject to New Jersey's Retail Installment Sales Act (RISA), the interest rate cap in its criminal usury statute, and the Consumer Fraud Act, the state supreme court has held, reversing a lower court's decision. (Perez v. Rent-A-Center, Inc., 892 A.2d 1255 (N.J. 2006).)

People rent-to-own household items such as televisions, major appliances, and computers by paying low weekly or monthly amounts. Consumer groups say rent-to-own companies target low-income people who have difficulty obtaining credit, and they charge exorbitant interest without disclosing it. (Allison Torres Burtka, Rent-to-Own Companies Gouge Low-Income Consumers, Suits Say, TRIAL, July 2005, at 99.)

But the problem is not just the interest, said Abigail Caplovitz, a legislative advocate with the New Jersey Public Interest Research Group. The "cash" prices on which the interest is based are also inflated, and customers are charged numerous fees.

In many states, rent-to-own companies avoid consumer protection laws that would apply to installment sales or small loans by claiming that their transactions are leases. "Most other states have enacted special laws relating to the rent-to-own industry that allow exorbitant interest, inflated prices, and excessive fees," Caplovitz said. Seth Lesser, a New York City lawyer representing Hilda Perez, the plaintiff in the New Jersey case, noted that the industry has tried unsuccessfully to get such bills passed in that state.

"It's a really critical consumer rights issue," Lesser said. "The poor shouldn't have to pay more just because they're poor."

Perez signed five rent-to-own contracts at Rent-A-Center, and the interest she paid on them was higher than 30 percent (higher than 80 percent for some items). When she stopped making payments and did not return the items, Rent-A-Center filed a small-claims complaint against her. She then sued the company.

The trial court dismissed Perez's complaint. An intermediate court affirmed, but the New Jersey Supreme Court reversed and remanded the case to the trial court.

Rent-A-Center argued that its contracts are short-term leases, so RISA does not apply. The act defines "retail installment contract" as one "between a retail seller and a retail buyer evidencing an agreement to pay the retail purchase price of goods or services ... in two or more installments over a period of time." The statute also says the definition "includes a security agreement, chattel mortgage, conditional sales contract, or other similar instrument."

The court agreed with Perez that RISA applies. "[I]t seems to us that RISA's reference to 'similar instruments' was intended to sweep in cleverly drafted agreements like the one before us so that 'subtle distinctions' are not allowed to defeat the manifest purposes of the law," Justice Virginia Long wrote for the majority.

New Jersey's criminal usury statute prohibits charging more than 30 percent interest, a cap that Perez argued applies to RISA. Rent-A-Center argued it does not apply, because a statute separate from the one containing the 30 percent cap allows parties to agree on the amount of "time-price differential," which it said is not the same thing as interest. Long wrote: "According to Rent-A-Center, the statute, as written, entitles it to charge what the proverbial traffic will bear. We disagree."

The court said that the time-price differential is interest and that the legislature "intended, on the one hand, to free parties to retail installment sales contracts to agree to interest rates reflective of market conditions and, on the other, to protect consumers from overreaching merchants by imposing an absolute cap of 30 percent within which the parties to a RISA contract could negotiate."

Five justices joined Long's opinion; one concurred in part and dissented in part.

Christopher Korst, senior vice president and general counsel of Rent-A-Center, said in a statement that the Perez ruling "will limit consumer choices for people who would rather not incur large amounts of debt ... people for whom renting these products makes better financial or economic sense than buying them."

Consumer advocates say the industry takes advantage of people who are not financially literate. Even for someone who is financially literate, the interest rate being charged is not readily apparent, Lesser said. "No rational person can look at the transaction and tell what the interest is."

"The New Jersey Supreme Court has restored fundamental fairness to the sale of goods in New Jersey," said Neil Fogarty of the Consumers League of New Jersey in a statement. "The urban poor should not be charged 80 percent or 100 percent while the middle class pays only 20 percent at the mall."