Rent-to-own News - New credit card rules could be boon to rent-to-own industry

A proposal to crack down on the fees and interest rates credit card companies charge high risk accounts could radically prune the amount of credit those companies are willing to issue, according to financial analysts, forcing customers to secure goods and services through other means, including rent-to-own.

According to a May 2 Washington Post article, the new regulations -- unveiled today by the Federal Reserve, the Treasury Department and the National Credit Union Administration -- would label as "unfair and deceptive" a number of long complained about consumer practices.

The regulations, which could become law by year's end, ban the assessing of late fees when not enough time to make a payment has been given, the arbitrary raising of interest rates on outstanding balances and propose regulation of overdraft fees, among other practices.

The result, experts say, will be fewer financing options for consumers deemed more risky because of their current financial situation or credit rating.

"This is a very aggressive regulatory intervention in the marketplace that will lead to higher prices and less credit options for everyday consumers," says Ken Clayton, senior vice president of card policy at the American Bankers Association in the article. "It basically says we can't price for risk and we can't in a cost effective way provide these low cost options...because of the way they're mandating how these loans get paid back. We won't be able to make the loan."

According to APRO Public Affairs Director Richard May, the situation harkens back to the late 1970's when a recession, spiking gas prices and scarce credit left consumers with less disposable income and few financing options for their everyday needs.

It was in the grip of that sour economy the rent-to-own industry grew wings.

"The parallels are uncanny between those circumstances and what now appears to be happening," May says. "That's how stores like Remco and ColorTyme flourished in the 70's and rent-to-own became a bona fide industry. The credit card companies are saying, 'if you tighten regulations we can't provide those financing options,' the RTO industry is over here saying, 'we can.'"

APRO Legal Counsel Ed Winn III concurs with May's assessment, noting the number of rent-to-own stores jumped from around 400 in the late 70's to several thousand by 1983. The robust financial climate of the period was also marked by industry heavyweight Rent-A-Center's decision to go public in 1983.

With a nascent credit card industry, banks were still the primary lenders at the time, though they were doing little of that to consumers, Winn III says.

"Consumer credit basically dried up and that caused the rent-to-own explosion in the early 80's," Winn III says. "If it ends up being true, that these regulations restrict the issuing of credit cards by these companies, it should make rent-to-own more attractive to many customers."

Because it is not a credit transaction -- subject to changing interest rates and long-term payment obligations -- rent-to-own is ultimately less costly than financing with a credit card, May says. According to one research group estimate, American credit card debt now hovers around $850 billion. No debt is incurred in the rent-to-own transaction.

Flexibility is another benefit of rent-to-own over credit purchases, he says.

Because customers choose their own payment options, are never obligated to the term of the lease, and can return items at any time with no penalty, May says the credit crunch will prompt more Americans to discover the benefits of the rent-to-own transaction.

In addition, May says early purchase options -- which allow customers to purchase items during the early part of a lease agreement at a significant discount -- and reinstatement rights -- which allow consumers to resume making payments "where they left off" at a later time -- are just a few features of the modern rent-to-own transaction that make it a perfect fit for credit strapped consumers.

For full text of the Washington Post article, click here.

mevans@rtohq.org