PIRG Analysis: The Rent To Own's Industry Campaign To Roll Back State Consumer Laws

Summary Charts of Rent to Own Industry Lobbying, Soft Money, Individual and Soft Money Donations

Letter from national consumer groups and labor unions opposing HR 1701

Letter from state and local consumer and justice groups opposing HR 1701

Testimony of National Consumer Law Center, Consumers Union, CFA and U.S. PIRG opposing HR 1701

Link to full hearing (12 July 2001)

Consumers League of New Jersey anti-rent to own page

MEDIA BACKGROUNDER: The Rent-To-Own Industry
Besieged By Accounting, Sex Discrimination Problems, Rent To Own Industry Seeks Congressional Immunity From Strong State Consumer Protection Laws, Despite Opposition From 52 State and Territorial Attorneys General And Every Major Consumer Group.

House Rules Committee to vote on rule for consideration of rent to own industry protection bill allowing only limited amendments in the week of September 16th. Bill on whip notice for Wednesday September 18th.

In this backgrounder:
(1) Recent Rent-to-own Industry Accounting and Sex Discrimination Lawsuits and Investigations, Including Government Investigations and Shareholder and Customer Lawsuits Against Rent-A-Center and Rent-Way, the two principal rent-to-own companies lobbying to roll back consumer laws.

(2) Analysis of the industry's $3.9 Million Campaign (lobbying expenses, soft money, individual and PAC contributions) since 1997 to pass HR 1701 (sponsored by Walter Jones (R-NC) and James Maloney (D-CT). This special interest legislation is designed to immunize the industry from stronger consumer protection laws in Minnesota, New Jersey, Vermont and Wisconsin. When full lobbying expenses are reported for the first half of 2002, the campaign costs will total well over $4 million. back to top

This memo includes:

1) General background on the rent-to-own industry.

2) A summary of the current legal problems faced by the industry's two biggest players, Rent-A-Center and Rent-Way, which include the following:

-- An SEC investigation and shareholder class action suit against Rent-Way, which was forced to restate its books by at least $98 million in 2000 after an accounting scandal.
-- The shareholder lawsuits pending against Rent-A-Center for alleged practices designed to deceive investors.
-- The recent $47 million settlement paid by Rent-A-Center for sex discrimination claims, which required intervention by the U.S. Equal Employment Commission.
-- The 2001 finding by the New York City Department of Consumer Protection that Rent-A-Center had violated city consumer laws 310 times.
-- Ongoing litigation against Rent-A-Center by the Wisconsin Attorney General for violations of Wisconsin consumer laws. Back to top

3) Detailed summary charts of the industry's massive lobbying expenses and PAC and soft money donations.

Summary

On Tuesday, 10 September 2002, the House of Representatives was tentatively scheduled to consider HR 1701 the extremely controversial proposal to preempt stronger state consumer protection laws, under so-called "suspension of the rules," a procedure usually reserved for consensus legislation. The industry's leading patron, House Majority Leader Dick Armey (R-TX), has received by far the most contributions from the industry. Most of the contributions are to his leadership PAC.

But, on Thursday 5 September, the industry-supported bill only narrowly passed the Judiciary Committee, 14-12, with opposition from Chairman Sensenbrenner (of Wisconsin, one of the states that would be preempted). The bill went to Judiciary on a sequential referral from Financial Services, where the industry's largesse had helped it gain much broader support. Back to top

The Financial Services committee began a subcommittee markup of the bill on 5 September 2001 (last year) and finally forced the bill through full committee on 27 June 2002 after numerous fits and starts. The industry's targeted campaign contributions have enabled it to obtain 83 cosponsors including numerous Democrats.

The narrow Judiciary passage, however, began to demonstrate cracks in the industry's campaign. It also took the proposal off the suspension of the rules calendar. Now, the Rules Committee may bring it up under a semi-closed rule (extremely limited amendments) the week of September 16th. According to a letter from Rules Committee ranking member Martin Frost (D-TX) "This is to notify Members that the Rules Committee intends to meet the week of September 16th to report out a rule which may limit the amendment process on the Consumer Rental Purchase Agreement Act."

Bills that are opposed by every consumer group and nearly every Attorney General and only pass committee 14-12 don't normally deserve to get to the "Suspension calendar," which is generally festooned with proposals to name post offices, commend Little League teams and other bills with no opposition. The proposal was withdrawn from suspension, but its proponents still are working hard to seek final House passage and a vote could occur the week of 16 September.. They are also working hard to obtain a Senate sponsor for a similar bill.

Although no similar bill has yet been introduced in the Senate, the industry's likely alternative strategy is to have its patron, Majority Leader Dick Armey (R-TX), attach the bill as a rider to an appropriations bill, thus bypassing the Senate. He attempted this in the 105th Congress, but the effort was rejected. The industry, however, is investing significant PAC contributions in the Senate, apparently hoping to obtain a sponsor for a similar bill. Back to top

How did such a controversial bill from such a scandal-plagued industry make it this far, especially in the wake of industry scandals like Enron, Worldcom, and ImClone? The answer: massive lobbying expenses and targeted campaign contributions. The industry has invested over $3 million in lobbying key legislators, and this year the industry added Lannie Davis, former attorney for Bill Clinton, of Patton Boggs, to its massive stable of free-lance House Financial Services Committee lobbyists (including John Raffaelli and his Washington Group; Royer and Babyak, Butera and Andrews, and others) in an effort to obtain more Democratic co-sponsors. So far, its efforts in the House have been successful.

This memo describes the $5 billion plus rent-to-own industry, which sells appliances and furniture to low and moderate income consumers on a weekly or monthly rent-to-own basis, its recent financial and legal troubles, and its efforts to enact the controversial proposal, HR 1701 (introduced by Reps. Jones-R-NC, Maloney-D-CT), which is designed to immunize the industry from strong state consumer protection laws requiring disclosure of interest rates and compliance with usury ceilings. V

Letter from national consumer groups and labor unions opposing HR 1701

Letter from state and local consumer and justice groups opposing HR 1701

Testimony of National Consumer Law Center, Consumers Union, CFA and US PIRG opposing HR 1701

Link to full hearing (12 July 2001)

Consumers League of New Jersey anti-rent to own page

PIRG's 1997 national survey of rent to own stores

Background on the Rent To Own Industry and the Proposed Legislation

The rent-to-own industry rents televisions, appliances and furniture on a weekly or monthly basis, on a rent-to-own basis. According to the industry's trade association, the Association of Progressive Rental Organizations (APRO) and Rent-way,

"at the end of 2000 the US rental-purchase industry comprised approximately 8,000 stores providing 7.0 million products to 3.1 million households. APRO believes that its customers generally have annual household incomes ranging from $20,000 to $40,000. Based on APRO estimates, the rental-purchase industry had gross revenues of $5.3 billion in 2000." (Source, Rent-Way Form 10-K, filed with SEC 28 Dec 01).

These revenues and accompanying profits, however, are made through the high prices the industry charges its customers. A television with a market value of $220 typically requires 78 weekly payments of ten dollars, meaning that a customer who purchases the television has paid $560 of finance charges at an imputed annual percentage rate (APR) of 220%. But the industry contends it does not sell, therefore no finance charges or interest exist, so it refuses to comply with usury ceilings or interest rate disclosure laws. Back to top

Because, however, the rent-to-own industry aggressively markets the notion of ownership over time, state and national consumer advocates and labor unions as well as 52 state and territorial Attorneys General contend that its transactions should be treated in law as credit sales, or purchases over time. Credit sale laws require disclosure of APRs and finance charges. In some states, such as New Jersey, rent to own contracts are also subject to the same usury ceiling, 30% APR, as other small loans. The rent-to-own industry denies, however, that these transactions are credit sales and contends that it should not be subject to either interest rate (APR) disclosure or usury ceilings. It has convinced forty-six states to enact protective legislation based on the concept of leasing, not buying, that do not require strong consumer protections.

However, four states - Minnesota, New Jersey, Vermont and Wisconsin - strictly regulate the rent-to-own industry as they do other predatory small loans. These states variously require compliance with strict consumer protection laws, compliance with usury ceilings and/or disclosure of APRs.

The bill before the House, HR 1701 (Jones-R-NC, Maloney-D-CT), was designed solely to immunize the rent-to-own industry from these strong state consumer protection laws. The bill finally passed passed the Financial Services Committee on 27 June despite strong opposition from consumer groups, labor unions, and state attorneys general. On 5 September, the Judiciary Committee passed it on a narrow 14-12 vote. Link to House Financial Services Committee Report. Neither the Federal Reserve nor the Federal Trade Commission supported the bill at a 2001 hearing. The bill was strongly opposed in testimony by the Wisconsin Attorney General's Office at that hearing. Back to top

If HR 1701 is enacted, all states would be required to treat rent to own sales as if they were leases, subject to minimum disclosures. While the industry has claimed that HR 1701 creates only a federal floor, not a preemptive ceiling, this notion is false. It is true that states could add limited lease disclosures, or increase penalties for violating the weak provisions described in HR 1701.

But states could not require disclosure of APRs or subject the rent-to-own industry to interest rate ceilings or pass laws otherwise similar to those now in Minnesota, New Jersey, Wisconsin or Vermont. Back to top

Ultimately, the bulk of HR 1701 is intended merely as a cover for its true intent. Most of the bill is a set of unnecessary Trojan Horse provisions which merely duplicate the existing weak rent-to-own laws in forty-six states. Inside that Trojan Horse, however lurks HR 1701's core provision to preempt the strong laws in Minnesota, New Jersey, Vermont and Wisconsin.

One reason the industry has grown from ma-pa stores and consolidated into larger publicly-traded firms may be increased profitablity linked to 1997 IRS changes to accounting rules (link to IRS) that grant rent to own the the fastest (3-year) depreciation schedule available to any business (race horses are also depreciated on a three year basis). Part of the basis for this decision by the IRS is the industry's argument that it is predominantly in the rental, not sales business (it tells the IRS one thing and customers another). Some observers believe the industry may be concerned that continued credit sale treatment by some states may create undue exposure to this highly-favorable tax position, adding yet another reason (unstated by the industry publicly) for its fierce attempts to roll back consumer laws. Back to top

EEOC: 47 Million Settlement With RAC

Rentway: $98 Million accounting restatement results in SEC/DOJ investigation, class action litigation.

RAC: $59 million class action award in New Jersey for violating consumer laws.

RAC: 310 violations of New York City consumer law.

RAC: Ongoing lawsuit by Wisconsin Attorney General

Looking at this industry's sordid practices, it becomes clear that the only reason Congress would consider its request to be immunized from strong state laws is the massive lobbying and PAC expenditures described below.

In addition to litigation over the usurious and unfair lending policies this bill is designed solely to immunize the industry from, the industry's two biggest players have significant other legal troubles. In a year when Congress seeks greater corporate responsibility, the rent to own industry does not appear to be a poster child for Congressional favors. Back to top

1). Rent-A-Center is the subject of a recent $47 million US-EEOC sexual discrimination settlement.
The US Equal Employment Opportunity Commission (EEOC) recently forced Rent-A-Center to pay $47 million to female employees for the company's policy of removing women employees from stores. The EEOC intervened to help 5,000 class members overturn an insufficient decision of $12 million dollars, which would have prevented many women from receiving their fair share of the settlement. The settlement required that Rent-A-Center dramatically change its employment procedures and develop equal employment opportunities for female job applicants and employees. From the December 2001 EEOC release:

In May, 1999 the EEOC filed a lawsuit (EEOC v. Rent-A-Center, 99-2427-TU-V) in Memphis, Tennessee, charging that Rent-A-Center, when it acquired a competitor named Rentronics, terminated female employees and refused to hire female applicants in Tennessee and Arkansas because of their sex. That suit is ready for trial.

In August 2000, 21 female employees, later joined by 6 others, filed a nationwide class action (Wilfong et al v. Rent-A-Center, 00-680-DRH) in East St. Louis, Illinois, claiming that, after Renters Choice acquired 1,400 Rent-A-Center stores and assumed the name of Rent-A-Center, the new Rent-A-Center systematically eliminated women from its workforce. The class complaint alleged that Rent-A-Center got rid of job classifications previously held by women, imposed an unfair weight-lifting requirement, harassed and unfairly disciplined female employees, assigned them cleaning and clerical duties, demoted and failed to promote them, refused to hire them, and discharged them or forced them to resign. Back to top

2.) Rent-Way faces SEC investigation and a class action lawsuit following a $98 million restatement of its accounts:
In October 2000, RentWay announced inaccuracies in its books totaling $98 million. Investors saw their stock earnings plummet from RentWay's prediction of $1.88 to $.88 to $1.14 per share for fiscal year 2000. July 12, 2002, a federal judge decided that there was enough evidence for shareholders to move forward with the lawsuit against RentWay.

According to Rentway's most recent 8-K filed 13 August 2002 with the Securities and Exchange Commission:

Uncertainties, risks and other factors that may cause actual results or performance to differ materially from any results or performance expressed or implied by forward-looking statements in this news release include: ... (8) the outcome of the class action lawsuit and the shareholder derivative lawsuit commenced against the company and (9) the outcome of the continuing investigations involving the company commenced by the SEC and the US Department of Justice. Back to top

According to Rentway's most recent 10-K for the fiscal year ending September 2001 filed with the Securities and Exchange Commission:

"Investigations. There are currently pending federal governmental investigations by the SEC and the United States Attorney involving the Company's financial reporting...

Securities Litigation. Rent-Way and certain of its current and former officers have been served with a consolidated class action complaint filed in the US District Court for the Western District of Pennsylvania. The complaint alleges that, among other things, as a result of accounting improprieties, the Company's previously issued financial statements were materially false and misleading thus constituting violations of federal securities laws by the Company, by its auditors and by certain officers."
(Rent-Way FY 2001 10-k, filed with SEC 28 DEC 01)

3.) Rent-A-Center Faces Shareholder Lawsuits Alleging Securities Fraud:

A number of shareholder suits were also filed earlier this year against Rent-A-Center, Inc., charging the company with making false statements regarding quarterly earnings and future prospects that were intended to mislead the public and benefit secondary stock offerings by company executives. The suits allege that Rent-A-Center made repeated public statements during the spring of 2001 that highlighted the company's "record" quarterly results and long term growth prospects while concealing a dramatic increase in costs. These hidden costs would force the company to restate both prior and future quarterly earnings in October and in the interim, the company's top executives sold over 9 million of Rent-A-Center shares, with the company's chairman making at least a $150 million profit. Back to top

4.) The Industry Faces Litigation/Penalties for Lending Violations
The rent-to-own industry also has numerous problems with its rental practices, which have led to its attempts to enact HR 1701. Among the recent highlights:

In New Jersey in 1999, the Superior Court in Camden County ruled that rent-to-own transactions violated the N.J. Consumer Fraud Act and the NJ Retail Installment Sales Act. In an ensuing class action case, Rent-A-Center was found guilty of consumer fraud and ordered to pay former customers $59 million. (Robinson v. Thornamericas and Rent-a-Center, No. L-06397-95 (1997). See the Consumers League of New Jersey page for details on New Jersey litigation. Back to top

In August 2001, the NYC Department of Consumer Affairs found Rent-A-Center guilty of over 310 violations of city consumer protection laws. See press release. Excerpt:

A Department investigation of 16 Rent-A-Centers in the five boroughs revealed that the national rental chain was charging consumers prices up to 225% over the Manufacturer's Suggested Retail Price. Additionally, Commissioner Steiner Hoffman advised consumers that Rent-A-Center's rent-to-own program can really be an expensive "loan" program.

The Wisconsin Attorney General has sued Rent-A-Center. According to this excerpt from RAC's most recent 10-Q filing (30 June 2002) with the SEC, trial is scheduled for 2003:

Wisconsin Attorney General Proceeding. On August 4, 1999, the Wisconsin Attorney General filed suit against us and our subsidiary ColorTyme in the Circuit Court of Milwaukee County, Wisconsin, alleging that our rent-to-rent transaction, coupled with the opportunity afforded our rental customers to purchase the rented merchandise under what we believe is a separate transaction, is a disguised credit sale subject to the Wisconsin Consumer Act. Accordingly, the Attorney General alleges that we have failed to disclose credit terms, misrepresented the terms of the transaction and engaged in unconscionable practices. We currently operate 26 stores in Wisconsin.

The Attorney General seeks injunctive relief, restoration of any losses suffered by any Wisconsin consumer harmed and civil forfeitures and penalties in amounts ranging from $50 to $10,000 per violation. If the Attorney General's theory on damages prevails, the Attorney General's claim for monetary penalties would apply to at least 18,772 transactions through March 31, 2002. On October 31, 2001, the Attorney General filed a motion for summary judgment on several counts in the complaint, including the principal claim that our rent-to-rent transaction is governed by the Wisconsin Consumer Act. Our response was filed on December 17, 2001. A pre-trial conference and hearing on the motion for summary judgment took place on January 22, 2002, at which time the court ruled in favor of the Attorney General's motion for summary judgment on the liability issues and set the case for trial on damages for February 2003. Back to top

See a detailed PIRG analysis of the industry's massive and growing lobbying expenses, totaling $3,395,000 from 1997-2002 and its recent PAC, soft money and individual contributions totaling an additional $500,000 for a total of $3.9 million.

The Senate Office of Public Records has so far only posted midyear lobby reports (totaling $200,000) for three of the industry's contract lobbying firms. Reports are not yet available for either in-house lobbying by the Association of Progressive Rental Organizations, the industry's trade group, or its largest lobby shop--the Washington Group. The Senate and House regulations under the 1995 lobbying law revisions allow firms 6 weeks (until August 14th) to file the extremely limited lobby reports required (income from each client to the nearest $10,000 is all that is required to be filed). Then the House and Senate allow themselves an additional 6 weeks or more (until October) to complete the filing of these vague materials on their web site (Senate) or viewer system (House) for public review. Back to top