Academic literature and court decisions are replete with calls to ban or severely inhibit the rent-to-own industry. The argument is simple enough: Rent-to-own firms charge exorbitant prices to the most needy and vulnerable segments of society.
The case for burdensome regulations, however, is much more difficult to make out than past scholarship has admitted. For the most part, academics have proceeded directly to proposing specific regulations for the industry without first carefully analyzing the rent-to-own business or the reasons for imposing drastic regulations.
This Article examines the theoretical justifications for regulating the rent-to-own industry against the backdrop of interviews I conducted with key participants in the market, recent empirical data about the industry, and the industry's unique business model. I find that the case for completely banning the rent-to-own transaction is very weak. On the other hand, guided by insights from behavioral law and economics, policymakers have strong justifications for imposing regulations tailored to address the cognitive defects from which customers are most likely to suffer.
TABLE OF CONTENTS INTRODUCTION I. THE RENT-TO-OWN BUSINESS A. The Rent-to-Own Transaction 1. Disguised Credit Sales or True Leases? (Or Who Cares?) 2. Characteristics for Regulators To Consider a. A Single Decision for Goods and Terms of Acquisition b. Multiple In-person Payment Decisions c. Fee Bundling and Behavior-driven Pricing d. The Risk of Losing Equity e. High Switching Costs B. The Rent-to-Own Customer 1. The Merchandise Consumers Rent 2. The Lack of Market Segmentation Among Consumers C. The Rent-to-Own Market 1. The Market Participants 2. Competition II. JUSTIFICATIONS FOR REGULATION A. The Case for Severe Regulations 1. Bankruptcy 2. Price 3. Lost Equity 4. Rent-to-Own's Cross-subsidy 5. The Case Against Severe Regulations: The Problems of Unsatisfied Demand and Relative Inefficiency B. The Case for Narrow, Tailored Regulations: Paternalism 1. The Optimism Bias 2. The Anchoring Effect and Framing 3. Procrastination 4. Self-control, Miswanting, and Cumulative Cost Neglect III. INTELLIGENT REGULATING A. Annual Percentage Rate Disclosures B. Price Controls C. Lifetime Reinstatement Rights D. Behavior-driven Fees and Bundling E. Cooling-off Periods and Monthly Contract Defaults F. Disclosures CONCLUSION INTRODUCTION
At first glance, the case for banning or severely regulating rent-to-own transactions seems plain enough. The transaction, aimed at customers with lower incomes, is extremely expensive. In the typical rent-to-own transaction, a customer acquires ownership of a good by paying weekly rental payments for the duration of the rental agreement. The overall cost for the merchandise ends up doubling or tripling the cost of purchasing it outright at another store. Why should the poorest members of society pay more to purchase goods than the rich? If someone from the middle class can walk into Target and pay $170 for a television, why should a consumer with a lower income have to pay $500 for the exact same product at Rent-A-Center?
Academics, courts, and journalists often appeal to the high price of rent-to-own transactions as an automatic justification for regulation. The high cost of these transactions, however, turns out to be a deceptively hollow foundation for imposing burdensome regulations. The case for severely regulating the rent-to-own industry is harder to make than past commentary has admitted. In part, scholarship has failed to justify rent-to-own regulations because it has neglected to take account of the unique nature of the rent-to-own transaction, the customers who use this product, and the business environment in which the industry's firms operate. Instead of looking at the empirical data on the industry, policymakers, courts, and academics have relied on a faulty heuristic to evaluate the industry: They attempt to force this unique product into the conceptual category of either a credit sale or a lease.
Take two examples, one from the courts and the other from academic commentary. In 2006, the New Jersey Supreme Court, in Perez v. Rent-A-Center, Inc., (1) issued an opinion that determined the future of rent-to-own in that state. To conclude that rent-to-own products are really credit sales subject to harsher regulation, the court made several critical empirical assumptions about the rent-to-own industry: that customers always intend to obtain ownership of rent-to-own goods, (2) that customers do not value the ability to cancel their rental agreements, (3) and that the goods that rent-to-own stores rent are necessities of life. (4) The best empirical data on the industry, however, reveal that each of these critical assumptions turns out to be either patently false or at least highly debatable.
Recently, there has been a renewed academic interest in studying the fringe economy, (5) including the rent-to-own industry. (6) Just like the judges in Perez, academics have fallen into the same trap of drawing false conclusions from incorrect empirical assumptions. (7) For instance, Camerer et al.'s 2003 Pennsylvania Law Review article on asymmetric paternalism argues that requiring rent-to-own firms to disclose implied annual percentage rates (APRs) would not eliminate consumer choice by limiting the availability of the rent-to-own transaction. (8) Interviews I conducted with industry participants, however, reveal that this is not the case. Requiring APR disclosures eliminates almost half the market's participants because some companies refuse to operate in states with APR disclosures. (9) Consumers in Minnesota, a state that requires APR disclosures, (10) may have some choice to use rent-to-own, but it is severely limited--only seven rent-to-own stores operate in the entire state. (11)
This Article combines the best empirical research on the rent-to-own industry, most of which has gone unnoticed by legal academics, with interviews I conducted with key industry participants. It argues that regulations that prohibit or severely limit the rent-to-own industry are very difficult to justify. Instead, guided by insights from behavioral law and economics, policymakers have strong justifications for imposing narrow regulations tailored to address the cognitive defects from which customers are most likely to suffer. Whereas past rent-to-own scholarship has primarily offered regulatory solutions, (12) this Article proceeds on the premise that the best regulations are those that address real problems. Using the unique nature of the rent-to-own transaction and evidence of how the industry operates, this Article offers justifications for imposing regulation on this industry.
Much of the data presented in this Article comes from interviews I conducted with rent-to-own operators. Remarkably, past attempts to analyze this industry have never looked to the firms populating the market to understand how the industry functions. This Article presents the first-ever academic analysis of rent-to-own that is informed by industry participants.
Part I describes and analyzes the rent-to-own business, addressing the transactions, the customers, and the market itself. Far from being background material, this description and analysis unveil important aspects of this industry that have gone unnoticed in the literature. Furthermore, this Part drives my recommendations about optimal regulatory policy. Part II evaluates the best arguments for banning or severely regulating the rent-to-own industry. Concluding that the case for severe regulations is weak, I look to behavioral law and economics to chart out the conceptual justifications for narrow, tailored rent-to-own regulations. Part III concludes by critically analyzing specific rent-to-own regulations--some of which are currently law and some of which I propose as new regulations.
THE RENT-TO-OWN BUSINESS
Mapping out a basic analysis of the rent-to-own business turns out to be a relatively complicated task, but the work is well worth it. A rich understanding of how this business operates is essential to determining what regulations are justified. This Part considers three key elements of the industry in turn: the transaction itself, the customer base, and the market.
The Rent-to-Own Transaction
The basics of the rent-to-own transaction are easy to describe: Customers agree to pay weekly or monthly rental payments, and stores deliver merchandise to the customer's home and take on the responsibility to service the merchandise. (13) The store, however, retains title to the goods. (14) If the customer decides to terminate the contract or stops making the payments, the store takes back the merchandise. (15) Although the customer does not have any ownership interest in the property based on the prior payments, the customer also does not have any obligation to continue making payments. (16) If the customer makes all the payments required under the contract, the customer acquires title to the merchandise. (17) The customer can also obtain ownership at any point during the pendency of the contract by making a lump payment--usually the aggregate of the total remaining payments discounted by some percentage, depending on how early in the contract the consumer makes the payment. (18)
Disguised Credit Sales or True Leases? (Or Who Cares?)
Though the transaction is easy to describe, it is difficult to categorize. A debate has raged for years about whether rent-to-own transactions are leases or credit sales. (19) Traditionally, academics have allowed this debate to consume the discussion of renting-to-own: "The controversy about rent-to-own is based on identifying the essential nature of the agreement." (20) Like most debates about the rent-to-own business, this debate has the potential to have real consequences. If rent-to-own transactions are really credit sales under existing law, then they are subject to the Truth in...