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This chapter addresses the use of a lease with a purchase option as a way of financing the purchase of consumer goods. It focuses on the use of such leases as a fringe lending product.

This chapter does not address mainstream motor vehicle leasing, which is addressed primarily in other books in this series.¹ Nor does it address short-term rentals of consumer goods—transactions in which the customer seeks only temporary use of an item such as home equipment or a daily rental car.

In a credit sale, ownership of the goods is transferred to the buyer at the beginning of a transaction, but the creditor retains a security interest in the property to secure payment of the purchase price plus the finance charge. By contrast, the transactions addressed in this chapter are lease transactions where the consumer is given the ability to purchase the leased goods. The customer obtains legal title to the goods only after successful completion of all the terms of the contract to establish ownership.

Because they are structured as short-term, renewable leases with a purchase option, RTO transactions fall outside the scope of several important consumer protection statutes. But most of those statutes do apply to LTO transactions. In addition, some statutes and common law doctrines apply to both.

The following chart summarizes what statutes apply to which type of lease transactions. However, this chart does not capture all the nuances, and advocates should refer to the more detailed discussions of these issues elsewhere in this book.

RTO transactions typically involve appliances, furniture, electronics, computers, and similar goods. These transactions are described in more detail in § 13.3, infra.

The RTO industry aims its marketing efforts at low-income consumers by advertising in minority media, on buses, and in public housing projects.¹⁰ Its advertisements stress features of RTO transactions that will be attractive to low-income consumers: quick delivery, weekly payments, no or small down payments, quick repair service, no credit checks, and no harm to one’s credit rating if the transaction is canceled.

As of the middle of 2017, the Association of Progressive Rental Organizations (APRO), the RTO trade association, reported that RTO is an $8.2 billion a year industry in the United States, serving about four million customers.¹⁷ Thus, the average RTO customer is spending about $2,050 per year or $170.83 a month on RTO merchandise. The industry is dominated by large national companies.¹⁸

Renting computers from an RTO company can bring an additional risk, other than losing the computer in the event of non-payment and the personal information it contains if not erased. A number of consumers have brought suit against Aspen Way, a franchisee of Aaron’s, Inc., which leases laptop computers.

State Retail Installment Sales Acts (RISAs), if they applied to RTO transactions, would impose a number of important consumer protections. For example, often state RISAs will cap the allowable interest rate and fees, limit late charges, and restrict unfair repossession. Many state RISAs provide that they apply to a lease that allows the consumer to acquire ownership of the property for no or only nominal additional consideration at the end of the lease term, so they could encompass RTO transactions.

Three states—New Jersey,⁴⁵ Minnesota,⁴⁶ and Wisconsin⁴⁷—are exceptions and continue to apply their RISAs to RTO transactions. In Minnesota, the courts have determined that RTO agreements are disguised credit sales, and that state retail installment sales acts (RISAs)⁴⁸ should apply to them.

There are four basic components of the price charged to purchase an item through an RTO contract: (1) the dealer’s actual cost for the item—the “wholesale price;” (2) the retail price that would be charged for the item if it were sold in a cash or traditional credit sale transaction—called the “cash price”; (3) the cost of renting to own the item—which is the difference between the cash price and the total of payments the consumer must pay in order to achieve ownership of the item; and (4) additional fees that the consumer must pay before and during the tra

RTO dealers usually charge the same periodic payment whether the item is used or new but adjust the total number of weekly or monthly payments required to achieve ownership of the used item. This means that the weekly amount that rental consumers are paying for used goods is the same as for new goods. For example, a low-end new stereo may be priced at $15.99 a week for seventy-eight weeks for a total of $1,247.22, while a low-end used stereo may also be $15.99 a week but only for sixty weeks, for a total of $959.40.

As explained in § 13.3.5.1, supra, the two primary ways that dealers charge customers in RTO transactions is (1) by marking up the cash price of the items from the price the dealer paid and (2) by charging for the lease services.

A widespread abuse involves the inclusion of so-called “optional fees,” such as liability damage waivers (LDW) in RTO contracts. LDW programs purport to relieve customers of any further responsibility for the fair market value of the property if the property is stolen or destroyed by certain specified acts.

The value of LDW is highly questionable.⁷¹ RTO dealers rarely, if ever, sue customers. They expect their customers to be judgment proof.

In RTO transactions, consumers do not obtain any ownership rights in the items until they complete the RTO contract. Regardless of whether the customer has made payment for one week or for seventy weeks on a seventy-two-week contract, the customer has the exact same ownership interest in the goods: none. The income levels of most RTO customers provide ample opportunity for bumps in the road that adversely affect their ability to consistently pay $19.99 a week to an RTO dealer over a period of eighteen to twenty-four months.

RTO companies have been known to use aggressive repossession tactics. Consumers have several possible approaches when an RTO company has wrongfully or abusively repossessed the property.

RTO practices are almost always within the scope of a state UDAP statute.

The state RTO statutes are designed to protect the industry. Nonetheless, they typically include some minimal protections for consumers.¹¹¹

The federal Consumer Leasing Act (CLA) requires disclosures of the terms of consumer leases, and the Truth in Lending Act (TILA) requires disclosure of the terms of consumer loans and credit sales. However, neither is likely to apply to RTO transactions.

There is some evidence that RTO dealers treat delinquent customers differently based on their race.¹³⁴ African-American customers may experience more rapid repossession and may be less likely to have late fees waived than white customers.¹³⁵

The distinction between a rent-to-own (RTO) transaction and a lease-to-own (LTO) transaction is that in an LTO transaction the consumer is obligated to make payments for a longer period of time.

State retail installment sales acts typically include a number of protections for consumers, such as caps on finance charges, protections against repossession, and limits on late charges and other fees.¹⁴¹ As noted in § 13.3.4.1, supra, RTO companies have obtained legislation in most states immunizing them from RISA p

The Truth in Lending Act (TILA) requires disclosures regarding the terms of credit sales and loans, and the federal Consumer Leasing Act (CLA) requires disclosures regarding the terms of leases. As discussed in § 13.3.10, supra, RTO transactions are structured so that neither of these federal disclosures applies.

Article 9 of the Uniform Commercial Code governs secured transactions, and Article 2A governs leases. Both provide some protections against wrongful or abusive repossession, but Article 9 has far more protections when the lessor seeks to recover and sell the property, and also stronger remedies for consumers. If an LTO transaction is a security agreement rather than a true lease, then consumers who file bankruptcy also have greater rights under the Bankruptcy Code.¹⁵⁶

The unconscionability doctrine has three sources that are relevant to LTO transactions.

State UDAP statutes typically apply broadly to the sale or lease of goods or services. Their application to LTO transactions should be straightforward. The potential UDAP claims that are applicable to RTO transactions are discussed in § 13.3.8, supra, and are equally applicable to LTO transactions.