Rent-to-own companies gouge low-income consumers, suits say.

Rent-to-own companies such as Rent-A-Center have come under fire recently for preying on low-income consumers and circumventing consumer protection laws. By treating their contracts as leases rather than installment sales or small loans, consumer advocates say, they avoid complying with usury ceilings and laws that require interest rates to be disclosed, such as the Truth in Lending Act.

Through these companies, people typically rent household items like televisions and furniture at low weekly or monthly payments, with the option to buy. Consumers can terminate the lease at any time and return the item. However, the interest rates they pay along the way can be higher than 200 percent, critics say.

For example: "Consumers are promised a dream of ownership at $9.99 a week, but you have to make 78 continuous payments--almost $780--to buy a television worth only $220," said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group (U.S. PIRG). "It doesn't register that you're paying $780 when you're just paying $9.99 a week."

The problem is that rent-to-own companies are not disclosing the cost of credit to consumers, he said. The companies' "view of reality is that they can take money from poor people without giving them the same rights that others have when they enter into business transactions."

The complaint in Colon v. Rent-A-Center, Inc., a consumer fraud class action pending in New York state court, says rent-to-own companies are part of the so-called fringe-banking industry, which targets "communities whose members have, or perceive that they have, more difficulty obtaining access to lower-cost credit, and sell these individuals goods or services at wildly inflated prices." (No. 25383/1997 (N.Y., Bronx County Sup. Ct. filed Nov. 26, 1997).)

When Rent-A-Center executives decide where to open stores, they look at demographics and target areas where credit-constrained people live, most of whom are minorities, said Darnley Stewart, a New York lawyer representing Tabitha Colon, the lead plaintiff.

Procedural issues have stalled the Colon case. In 2000, the plaintiff's claim that the company failed to disclose effective interest was dismissed. The class was certified in 2002 and includes hundreds of thousands of contracts. Now, the main allegation in the case is that Rent-A-Center sets its cash prices in bad faith, violating state law, Stewart said.

The complaint also alleges that Rent-A-Center uses a high-pressure sales scheme, which includes getting consumers to sign "applications" as soon as they walk into the store, to coerce them "into entering into adhesion contracts that do not inform consumers of the real economic cost of the transactions." The weekly or monthly rental prices customers pay, "in actual economic substance, constitute the charging of an annual interest rate far in excess of that permitted by law." At press time, the case awaited a ruling to clarify the class certification order.

Rent-A-Center has settled some consumer protection cases filed against it. A California court approved a class settlement in April, and more than 6,500 Wisconsin Rent-A-Center customers received settlement checks in 2004 after the state's justice department sued the company.

A proposed Consumer Rental Purchase Agreement Act, introduced in Congress this spring, specifies information that companies should disclose to consumers, but critics say it would override stronger state consumer-protection laws. The bill creates a safe harbor within which states cannot regulate and "basically legalizes predatory practices of the rent-to-own industry," Mierzwinski said. Under the bill, "rent-to-own can only be treated as a lease, not a purchase, and therefore any state laws dealing with credit sales, purchases over time, truth in lending, usury ceilings, or disclosure of interest rates would be preempted."

Forty-five states already have enacted a safe-harbor provision, but the bill would preempt the consumer protection laws the others have in place, Mierzwinski said. Minnesota and Wisconsin enforce violations of consumer protection laws through private rights of action, North Carolina has a similar but somewhat weaker system, Vermont has an interest rate disclosure rule, and New Jersey has a criminal usury ceiling, he said.

In February, a New Jersey appeals court found in favor of the defendant in Perez v. Rent-A-Center, Inc., holding that the state's Retail Installment Sales Act and usury statute, which cap interest rates, did not apply to rent-to-own contracts. The plaintiff, Hilda Perez, had argued that her contracts exceeded the 30 percent annual interest rate permitted in the state. (866 A.2d 1000 (N.J. Super. Ct. App. Div. 2005).) Perez appealed, and the New Jersey Supreme Court granted review in May.

In an amicus brief, the Consumers League of New Jersey wrote, "It is only fair to make rent-to-own sellers obey the same laws which other merchants obey. Consumers and competing merchants lose if one company may thumb its nose at the law."