[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]





         H.R. 1701--THE CONSUMER RENTAL PURCHASE AGREEMENT ACT

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
               FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 12, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-33

                  U.S. GOVERNMENT PRINTING OFFICE
74-030                     WASHINGTON : 2001

____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman  MAXINE WATERS, California
MARGE ROUKEMA, New Jersey            CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware          KEN BENTSEN, Texas
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             MAX SANDLIN, Texas
BOB BARR, Georgia                    GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio                FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas                     DENNIS MOORE, Kansas
BOB RILEY, Alabama                   CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina      DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania      BARBARA LEE, California
ERIC CANTOR, Virginia                HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York        RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia  RONNIE SHOWS, Mississippi
MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 12, 2001................................................     1
Appendix:
    July 12, 2001................................................    33

                               WITNESSES
                        Thursday, July 12, 2001

Beales, Howard, Director, Bureau of Consumer Protection, Federal 
  Trade Commission...............................................     7
Byrd, James E., owner, Byrd's TV Sales, Florence, SC.............    20
Gilles, David J., Assistant Attorney General, Wisconsin 
  Department of 
  Justice........................................................    18
Harper, Manuela S., Secretary, Board of Directors, Association 
  for Progressive Rental Organizations, (APRO), on behalf of the 
  rent-to-own industry...........................................    22
Saunders, Margot, Managing Attorney, National Consumer Law Center    23
Smith, Dolores S., Director, Division of Consumer and Community 
  Affairs, Board of Governors, Federal Reserve System............     9

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    34
    Oxley, Hon. Michael G........................................    36
    Carson, Hon. Julia...........................................    37
    Maloney, Hon. James H........................................    39
    Beales, Howard...............................................    40
    Byrd, James E................................................    85
    Gilles, David J. (with attachments)..........................    57
    Harper, Manuela S............................................    88
    Saunders, Margot.............................................    92
    Smith, Dolores S.............................................    49

 
         H.R. 1701--THE CONSUMER RENTAL PURCHASE AGREEMENT ACT

                              ----------                              


                        THURSDAY, JULY 12, 2001

             U.S. House of Representatives,
            Subcommittee on Financial Institutions 
                               and Consumer Credit,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus, 
[chairman of the subcommittee], presiding.
    Present: Chairman Bachus; Representatives Barr, W. Jones of 
North Carolina, Biggert, Tiberi, Waters, Watt, Sandlin, Moore, 
Gonzalez, Kanjorski, J. Maloney of Connecticut, Lucas and 
Shows.
    Chairman Bachus. At this time, we're going to convene the 
hearing so the hearing of the Subcommittee on Financial 
Institutions and Consumer Credit will come to order. Without 
objection, all Members' opening statements will be made a part 
of the record. In order to permit us to hear from our witnesses 
and engage in a meaningful question and answer session, I'm 
encouraging all 
Members to submit their statements for the record.
    I'm going to recognize myself for an opening statement. 
Then we anticipate recessing, unless there are other Members 
that have opening statements at that time. There will be some 
floor votes, and then we will reconvene probably 5 minutes 
after the last vote on the floor.
    The subcommittee meets here today, not for a mark-up, but 
for a hearing, and those of you familiar with the process know 
that there is a difference. Before we proceed to a mark-up, we 
want to hear from different parties representing diverse 
interests, and we will take your comments and at that time, or 
after considering your comments, we may or may not schedule a 
mark-up.
    But, this is an important issue for Members of the 
subcommittee and I do anticipate at some point a mark-up in the 
future.
    The subcommittee meets today to consider the merits of 
bipartisan legislation introduced by our colleague from North 
Carolina, Walter Jones, to establish uniform standards for so-
called ``rent-to-own'' transactions.
    The rent-to-own industry, which has experienced dramatic 
growth in recent years, provides consumers with immediate 
access to household durable goods, such as furniture, 
appliances and computers, usually with no downpayment required. 
In a standard rental purchase agreement, the customer leases 
the product for a week, or for a month, and at the end of that 
period, can do one of three things: one, return the product 
without obligation or penalty; two, keep the goods and rent for 
another period; or three, purchase the item.
    A customer who continues to lease the goods for a specific 
period of time eventually acquires ownership of the item, 
usually after 18 months. An estimated three million consumers 
enter into rent-to-own transactions every year. The typical 
customer for these services is someone who cannot afford to 
purchase the property outright, and may not qualify for credit.
    In addition, some customers rent merchandise to meet short-
term needs or for the purpose of trying out a product before 
deciding whether to buy it. Some consumer advocates have 
questioned whether the rent-to-own industry exploits consumers 
who may not have access to low-cost alternatives, either 
because of bad credit history, or because they live in 
neighborhoods forsaken by traditional retailers.
    Prompted by these concerns, the Federal Trade Commission, 
(FTC), staff conducted a nationwide survey of rent-to-own 
customers, releasing its findings in April 2000.
    While I will defer to the FTC representative who is here 
this morning to summarize the agency's work, it is worth noting 
that the FTC's staff's conclusions contradict some, if not 
many, of the claims of the industry critics.
    For example, according to the survey, 75 percent of 
customers expressed satisfaction with their rent-to-own 
experience, causing the FTC staff to conclude that the rent-to-
own industry, and I quote: ``The rent-to-own industry provides 
a service that meets and satisfies the demands of most of its 
customers.''
    Currently, there is no Federal law governing rent-to-own 
transactions. While most States have enacted laws regulating 
the industry, the level of consumer protections afforded by 
these statutes varies widely from State to State.
    I've looked at Mr. Jones' bill, and will tell you that the 
consumer protections in that bill exceed, by a great extent, 
the protections in my own State of Alabama.
    Mr. Jones' bill, H.R. 1701, fills a void that presently 
exists in Federal law by imposing uniform standards requiring 
the merchant in rent-to-own transactions to make a 
comprehensive set of disclosures regarding the total cost of 
the transaction to the consumer. These disclosures must appear 
on product labels or tags, in advertising and the rental 
purchase agreement itself. The customer protections included in 
H.R. 1701 are drawn largely from the recommendations made by 
the FTC staff in its April 2000 report on the rent-to-own 
industry.
    The bill also establishes, as a matter of Federal law, that 
rent-to-own transactions are leases, rather than credit sales, 
which is consistent with their treatment under the laws of 46 
of the 50 States.
    Consumer advocates take exception to this approach. And we 
will have testimony here today consistent with their position. 
They argue that rent-to-own arrangements should be considered 
credit sales, subject to the wide range of Federal and State 
consumer credit laws, including the Truth-In-Lending Act.
    The subcommittee, in close, and I stress that, in close 
consultation with the Minority, has invited both proponents and 
opponents of H.R. 1701 to testify at today's hearing, as well 
as representatives of the Federal Reserve and the FTC, which 
would be responsible for interpreting and enforcing the 
legislation if enacted.
    Before recognizing other Members for opening statements, 
let me commend the gentleman from North Carolina, Mr. Jones, 
and the gentleman from Connecticut, Mr. Maloney, for tackling 
what has historically been a contentious issue in this body and 
crafting a bipartisan bill, that to date has attracted 20 
Democratic co-sponsors, including eight Members of this 
subcommittee.
    At this time, I'll recognize any other Members who have 
opening statements. Are there any opening statements?
    The gentleman from Connecticut.
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 34 in the appendix.]
    Mr. Maloney. Chairman Bachus, Ranking Member Waters, 
Members of the subcommittee, I want to thank you for holding 
this hearing today. I also want to thank Mr. Jones and his 
staff for all the work they've done to craft a bipartisan bill.
    I am pleased to be the lead Democratic co-sponsor of this 
legislation. In April of 2000, the Federal Trade Commission 
issued a staff report that addressed many of the issues 
surrounding the rent-to-own industry. Generally speaking, the 
FTC report concluded that clear and comprehensive disclosures 
of the rental purchase transaction would benefit both the 
industry and consumers.
    Additionally, the FTC made some specific recommendations 
regarding the types of disclosure that would benefit consumers. 
The Consumer Rental Purchase Agreement Act before us today is 
an effort to begin to implement those recommendations.
    I would hope that everyone would agree that giving 
consumers the information they need to make informed decisions 
is both good public policy and ultimately, good economic policy 
as well.
    I would also like to address a concern of some that H.R. 
1701 would preempt State law. The legislation we are discussing 
is intended to provide consumers with a minimum level of 
protection. That is, we intend that H.R. 1701 serve as a 
uniform Federal floor for consumer protection.
    States would maintain the right to offer additional 
consumer protections that they deem appropriate in their 
individual State circumstances.
    This legislation both provides the protections to consumers 
and leaves the appropriate room in our Federal system for State 
legislatures to chart their own direction for the people they 
so diligently represent.
    Thank you, Mr. Chairman. I am hopeful that we can reach 
consensus and make progress to improve consumer protection 
regarding rental purchase agreements. I look forward to hearing 
from our witnesses during the course of the day.
    Thank you.
    [The prepared statement of Hon. James H. Maloney can be 
found on page 39 in the appendix.]
    Chairman Bachus. Thank you.
    At this time, I'm going to divert from the regular order, 
if I can, and recognize the Ranking Minority Member, Ms. 
Waters.
    Ms. Waters. Thank you very much, Mr. Chairman. I'm sorry 
we're a little late. We, as you know, our whip Government is on 
Thursdays, and we ran a little bit over. But I would like to 
thank you for calling this hearing on the rent-to-own.
    Virtually all first-year law students learn about the rent-
to-own industry in contracts class when they study the case of 
Williams versus Walker Thomas Furniture Company. Walker Thomas 
sold furniture and electronics on an installment basis here in 
the District of Columbia. In the Walker Thomas case, customers 
who had purchased multiple items had their payments credited on 
a pro rata basis. This had the effect of keeping a balance due 
on every item as long as there was a balance due on any one of 
them. Therefore, if a customer defaulted on a debt, no matter 
how small, Walker Thomas would repossess every item that 
customer had ever purchased.
    This case stands for the doctrine of an unconscionable 
contract. Unconscionability has been recognized as the absence 
of meaningful choice on the part of one party, along with 
contract terms which are unreasonably favorable to the other 
party.
    In this case, the District of Columbia Court of Appeals 
found that when a party of little bargaining power signs a 
commercially-unreasonable contract with little or no knowledge 
of its terms, the court can determine that the terms of the 
contract are so unfair that enforcement should be withheld.
    While Walker Thomas is no longer in business, the tradition 
continues today. According to the FTC study, 59 percent of 
rent-to-own customers have household incomes of $25,000 or 
less, and 73 percent have a high school education or less.
    These consumers often cannot qualify for credit and have 
little bargaining power. Rent-to-own merchants generally do not 
permanently disclose the total cost of a purchase, and rarely 
disclose a cash price that is based on the reasonable price at 
which merchandise is sold by other dealers.
    Customers today frequently pay effective annual percentage 
rates of 100 to 500 percent, and are often unaware of the true 
cost of the merchandise or what they would pay if they 
purchased it in a more traditional method.
    The industry claims that these are primarily rental 
transactions and that only 25 to 30 percent of contracts end in 
ownership. However, the industry is counting paper and 
merchandise to determine customer behavior.
    If this method were applied to the purchase of homes, the 
rate of homeownership would dramatically decline every time 
someone refinanced without paying off the debt in full.
    In addition, if the industry's ``keep rate'' statistic is 
based on an accurate count of the disposition of merchandise, 
it is important to know that Rent Way, the second largest rent-
to-own chain, has recently discovered that its corporate books 
show considerably more merchandise than in its store inventory 
system indicated in the stores.
    Rent Way is now under investigation by the Securities and 
Exchange Commission, (SEC), and the Federal Bureau of 
Investigaton, (FBI), after misstating their earnings by more 
than $125 million.
    If the second largest company in the industry, representing 
1,134 stores, can't trust its own numbers on this issue, how 
can we?
    According to the FTC study, which to my knowledge has had 
no accounting irregularities, 70 percent of customer 
transactions end in ownership.
    Furthermore, in a case against Rent-A-Center in 1997, the 
Minnesota Attorney General found that rent-to-own companies 
obtain 70 percent of their income from customers who obtain 
ownership of goods as opposed to those who do not. These 
transactions look like sales on credit, and act like sales on 
credit, and therefore should be regulated like sales on credit.
    H.R. 1701 provides insufficient protection to consumers, 
and, in fact, preempts a number of protections that are in 
place in State law. But I will let the witnesses address those 
concerns.
    I would like to place in the record a letter from the 
Attorney General of Vermont, strongly opposing H.R. 1701. 
Because I believe that rent-to-own consumers deserve strong 
Federal protection, I'm introducing legislation I previously 
co-sponsored that was originally introduced by Chairman Henry 
Gonzalez, the Rent-To-Own Reform Act.
    I believe that the most effective way to protect consumers 
is to subject rent-to-own transactions to the same treatment as 
credit sales or retail installment sales under Federal and 
State laws.
    The bill that I'm introducing today does that, thereby 
outlawing 300 percent interest rates and mandating disclosure 
of key contract terms. This bill recognizes a unique feature of 
rent-to-own contracts, the consumer's ability to unilaterally 
terminate the contract. This bill would permit a rent-to-own 
operator to charge a reasonable termination fee and in return 
provide the consumer with the unique right to terminate the 
contract without penalty. This bill also recognizes that rent-
to-own operators may provide services that some customers find 
attractive. Under this bill, rent-to-own operators would be 
permitted to offer such services, but they would be required to 
disclose those services up front, and estimate their value.
    By requiring such disclosure, the consumer will be able to 
determine the true cost of renting the product. In short, my 
bill will provide rent-to-own consumers with the moderate 
safeguards extended to consumers of credit sales, limits on 
interests and other fees, mandated disclosures, warranty 
protections, and prohibitions against abusive collection 
practices.
    The rent-to-own industry, like other fringe banking 
industries, including payday lenders and pawnshops, has 
operated outside the boundaries of Federal law.
    I agree with the proponents of H.R. 1701 that the time has 
come to federally regulate this industry. However, I believe 
that my legislation will provide real protection to consumers.
    I look forward to hearing the testimony of the witnesses 
and, Mr. Chairman, I certainly appreciate the time that you 
have allotted me to get this full statement out, and I look 
forward to hearing from the witnesses. Thank you very much.
    Chairman Bachus. Thank you.
    At this time, we'll hear from Mr. Jones.
    Mr. Jones. Mr. Chairman, thank you. I will be brief. I 
would like to thank you first for holding this hearing. I would 
also like to thank the gentleman from Connecticut, Congressman 
Jim Maloney, and his staff for their leading role in bringing 
this bill forward.
    Mr. Watt. We don't have many microphones in North Carolina, 
Mr. Chairman, that's the problem.
    Mr. Jones. To the gentleman from Charlotte, thank you.
    Mr. Chairman, I will be brief. I would like to thank you 
again for holding this hearing. I would like to thank the 
Congressman from Connecticut, Jim Maloney, and his staff for 
their leading role in bringing this bill forward.
    H.R. 1701 is a common-sense approach to protecting the 
rights of consumers and to giving certainty to those involved 
in the now-mature rent-to-own industry.
    The bill was first introduced by a Democrat, former 
Congressman Larry LaRico of Idaho, and has enjoyed a history of 
broad bipartisan support.
    Today, the bill's cosponsorship, as you made reference to, 
reflects broad bipartisan, geographic, and ideological support. 
It is a balanced bill that is a win for all concerned, in my 
opinion.
    H.R. 1701 provides for Federal regulation of the rent-to-
own industry. It clarifies that the rent-to-purchase 
transaction is fundamentally different from a credit sale, as 
is now the case in Federal tax law, as well as in the law in 47 
States. It also provides for tough consumer disclosure and 
protection.
    Mr. Chairman, let me add that there are some who believe 
that this bill is intended to limit, or put a ceiling on, the 
rights of States to provide consumer protections. Nothing could 
be further from the truth. This bill is intended to set a 
minimum standard, or a floor, on protections. If there is 
legitimate concern that it may do something else, then I will 
be more than happy to work with all concerned to make sure that 
our intent is clearly reflected in this bill.
    Mr. Chairman, I look forward to working with you, Mr. 
Maloney and the subcommittee and with everyone else who wants 
to make this bill even better than what I think it is.
    Thank you.
    Chairman Bachus. Are there any other opening statements?
    [No response.]
    Chairman Bachus. Let me stress what I did at the beginning 
of this hearing. This is not a markup on legislation. This is a 
hearing. The first witness, in fact, will be the Federal Trade 
Commission witness, who will testify as to their report.
    There is no subcommittee text. We welcome any comments of 
the witnesses as to what may be needed, in addition to the only 
bill we have filed addressing this, and I think maybe now we'll 
have two pieces of legislation.
    But, I hope to use the experience we had with the antifraud 
network to see if we can build consensus on this subcommittee 
for something that will protect consumers.
    I think the appropriate starting point is to listen to the 
FTC and the Federal Reserve. We're going to recess at this 
time. Ten minutes after the last vote, we will reconvene. Some 
of you can follow that on monitors, or you can listen for the 
second vote to go off and then 10 minutes later, we will 
reconvene.
    And at that time, we will take the witnesses. The published 
text was that we would hear from the Federal Reserve first, but 
in fact, we're going to hear from the Federal Trade Commission 
first, Mr. Beales. And I think the Federal Reserve is more 
comfortable with that approach too.
    So at this time, we're going to recess to meet 10 minutes 
after the last vote is posted on the House floor.
    Thank you.
    [Recess.]
    Chairman Bachus. The Subcommittee on Financial Institutions 
and Consumer Credit will come to order. I appreciate your 
patience as we went through two votes on the House floor. The 
first panel is made up of representatives from the Federal 
Trade Commission and the Federal Reserve System, the relevant 
divisions or bureaus of those two Federal agencies.
    Our first witness will be Mr. Howard Beales, Director of 
the Bureau of Consumer Protection at the Federal Trade 
Commission.
    The second witness will be Director Dolores Smith, Division 
of Consumer Affairs of the Board of Governors of the Federal 
Reserve.
    We welcome both of you to the hearing, and look forward to 
hearing your testimony. At this time we will hear from Director 
Beales.

   STATEMENT OF HOWARD BEALES, DIRECTOR, BUREAU OF CONSUMER 
              PROTECTION, FEDERAL TRADE COMMISSION

    Mr. Beales. Mr. Chairman and Members of the subcommittee, 
thank you very much. I'm Howard Beales, Director of the Federal 
Trade Commission's Bureau of Consumer Protection.
    I appreciate the opportunity to appear before you today on 
behalf of the Commission to discuss a recent report by the 
FTC's Bureau of Economics entitled ``Survey of Rent-To-Own 
Consumers.''
    I will discuss the findings of the survey and the 
conclusions of the report, which I hope will be helpful in 
informing the discussion of rent-to-own issues and policies.
    At this point I should add that the views in my prepared 
statement are the views of the Commission, but my oral 
statement and my responses to any questions you may have are my 
own, and are not necessarily those of the Commission or any 
individual Commissioner.
    The rent-to-own industry consists of dealers that rent 
furniture, appliances, home electronics, jewelry, and other 
items to consumers. Rent-to-own transactions provide immediate 
access to household goods for a relatively low weekly or 
monthly payment, typically without any downpayment or credit 
check.
    Customers enter into a self-renewing weekly or monthly 
lease for the rented merchandise, and are under no obligation 
to continue payments beyond the current period.
    The lease also provides the option to purchase the goods. 
The terms are attractive to customers and consumers who cannot 
afford a cash purchase, who may be unable to qualify for 
credit, and are unwilling or unable to wait until they can save 
for a purchase.
    It is estimated that there are approximately 8,000 rent-to-
own stores in the United States serving nearly three million 
customers and producing $5 billion in annual revenues.
    In the past decade, there has been debate regarding the 
rent-to-own industry. Noticeably absent, however, was an 
independent examination of the results of the typical rent-to-
own transaction.
    The FTC staff attempted to fill this gap by conducting a 
nationwide survey. The survey examined the results of rent-to-
own transactions, rather than the transactions themselves. 
Thus, it did not examine whether rent-to-own customers were 
aware of the total cost of purchase of the rent-to-own item 
when they began renting, or whether they performed comparison 
shopping prior to entering the transaction. The current extent 
and format of actual industry disclosures were also outside of 
the scope of the survey.
    Regarding customer demographics, as the chart over here 
shows, the survey found that rent-to-own customers were more 
likely to be African-American, to have a high school education 
or less, to live in the South, and to live in a non-suburban 
area compared to households that had not used rent-to-own 
transactions.
    The financial characteristics of rent-to-own households are 
also different from most households. Fifty-nine percent had 
household incomes less than $25,000. Sixty-two percent rented 
their homes or their residences, compared to 35 percent of all 
U.S. households. Forty-four percent had a credit card compared 
to about two-thirds of all households, and 49 percent had a 
savings account.
    A key factual issue in the debate over whether rent-to-own 
transactions are sales or leases has been the extent to which 
rent-to-own consumers purchase the rented merchandise. The 
industry has maintained that around 25 to 30 percent of rent-
to-own merchandise is purchased, and that the rest is returned 
to the dealer after a relatively short rental period.
    The FTC survey found that approximately 70 percent of the 
rent-to-own merchandise is purchased by the consumer. 
Regulation of the rent-to-own industry should recognize that 
important fact.
    Regarding the products involved, the most commonly rented 
items were televisions, sofas, washers, VCRs and stereos. 
Together, those items were about half of all rented 
merchandise. Thirty-eight percent of rented items were home 
electronics products; 36 percent were furniture; and 25 percent 
were appliances.
    In the end, 75 percent of rent-to-own customers were 
satisfied with their experience. They gave a wide variety of 
reasons for their satisfaction, noting many aspects of the 
transaction. Nineteen percent were dissatisfied. Most of those 
cited rent-to-own prices as the reason.
    Federal legislation, which would specifically regulate 
rent-to-own transactions, has been proposed several times in 
the past decade. Currently, however, the transactions are not 
specifically regulated by the Federal laws that govern other 
credit or leasing transactions. Instead, they are governed by 
State law.
    Given the high purchase rate that the Bureau of Economics 
Report found, the report concludes that it is important that 
consumers know the total cost of the purchase before entering 
an agreement. Information on the total cost, including all 
mandatory fees and charges, would allow consumers to compare 
the cost of a rent-to-own transaction to alternatives, and 
would be most useful while the customer is shopping.
    The best way to provide information at the shopping stage 
would be to provide it on product labels or tags. Other basic 
terms of the transaction, including the weekly or monthly 
payment amount, the number of payments required to obtain 
ownership, and whether merchandise is new or used, should also 
be provided on product labels.
    The report does not recommend disclosure of cash price. 
Cash prices are largely arbitrary, because rent-to-own dealers 
make few cash sales.
    Based on the Bureau of Economics Report, the Commission 
does not recommend Federal legislation regarding the rent-to-
own industry at this juncture. Determining whether legislation 
is needed requires information regarding the transactions 
themselves in addition to the results of the transaction that 
were considered in our report.
    The Commission needs to know, for example, whether 
consumers currently understand the total cost of rent-to-own 
transactions, what information they have available at present, 
and what alternatives to the rent-to-own option they typically 
consider.
    We hope the survey results are helpful to the subcommittee 
and look forward to working with Congress on rent-to-own 
issues.
    Thank you very much.
    [The prepared statement of Howard Beales can be found on 
page 40 in the appendix.]
    Chairman Bachus. Thank you.
    Director Smith.

 STATEMENT OF DOLORES S. SMITH, DIRECTOR, DIVISION OF CONSUMER 
      AFFAIRS, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM

    Ms. Smith. Chairman Bachus, Members of the subcommittee, 
I'm pleased to offer comments on H.R. 1701, the Consumer Rental 
Purchase Agreement Act, which would amend the Consumer Credit 
Protection Act.
    H.R. 1701 would establish cost disclosures and substantive 
protections, among other provisions, for rental/purchase or 
rent-to-own transactions.
    I am the Director of the Federal Reserve Board's Division 
of Consumer and Community Affairs. We administer a number of 
the laws that make up the Consumer Credit Protection Act.
    The Federal Reserve Board has not taken a position on H.R. 
1701, but I'm glad to share the Board staff's views. Rental 
purchase transactions, as has been described, involve short-
term, renewable rentals of personal property, typically for 
less than 4 months initially.
    Rental purchase transactions are not covered by the 
Consumer Leasing Act, which applies only to leases that 
initially exceed 4 months, and these transactions are not 
credit sales under the Truth-In-Lending Act, because the 
consumer is not obligated to purchase the property rented.
    Since 1984, 47 States have adopted laws governing rental 
purchase transactions, 24 of these States, since 1990.
    Given the existing body of law, the subcommittee is to be 
commended for holding this hearing to explore the need for 
Federal legislation with interested parties, including industry 
representatives, consumer advocates, and State agencies.
    Much can be learned about the efficacy of the existing laws 
and about the States' experience in enforcing them. I expect 
you will find the FTC's report on rent-to-own customers 
particularly useful. It has been an important source of 
information for the Board staff.
    Several provisions of H.R. 1701 focus on disclosing 
information to consumers. Disclosures are most effective when 
received early enough in the process that consumers can use 
them as a shopping tool and when they enable the consumer to 
focus on key costs and terms.
    As to the content of disclosures, in this case, the fact 
that rental purchase transactions have characteristics of both 
sales and leases is important to keep in mind. Under H.R. 1701, 
merchandise tags would provide key cost disclosures for 
property displayed or offered in a dealer's place of business.
    Only 18 States currently require merchandise disclosures, 
so this is one aspect in which Federal law could directly 
enhance State law protections. We concur with the FTC's 
assessment that, because many customers may purchase the 
property, merchandise tags should show the total cost to 
purchase the item, as H.R. 1701 provides, and not just the 
rental fee.
    Besides merchandise tags, H.R. 1701 requires more detailed 
disclosures in connection with the rental purchase agreement. 
Most of the cost disclosures would be segregated from other 
information. We believe this approach is effective in calling 
the consumer's attention to the most important terms.
    Let me next say something about preemption. In existing 
statutes under the Consumer Credit Protection Act, a specific 
provision in State law generally is preempted only to the 
extent that the provision is inconsistent with the Federal 
statute. H.R. 1701 adopts this language. It omits other 
language used in those statutes which says that a State law is 
not preempted if it gives greater protection to consumers.
    H.R. 1701 would expressly preclude States from requiring an 
annual percentage rate disclosure, and from subjecting rental 
purchase transactions to State credit laws, including usury 
limits. Because of the omitted language, we have had a question 
about whether the bill intended to limit the State's ability to 
retain or adopt more protective rules on other aspects of 
rental/purchase transactions.
    Both Congressman Jones and Congressman Maloney have stated 
this morning that it is not their intent to bar more protective 
laws; we encourage clarification on this point.
    Finally, you asked us to comment on whether the Federal 
Trade Commission or the Federal Reserve Board should write the 
rules to implement H.R. 1701. The Federal Reserve Board has no 
supervisory relationship with rent-to-own firms. They are not 
generally subject to Board rules governing credit, leasing, or 
other financial services, and hence our staff has no direct 
knowledge of industry practices in the rental purchase market.
    Given the Federal Trade Commission's long history in 
regulating trade practices of commercial firms, the FTC is, we 
believe, the more logical choice for writing regulations.
    And, again, thank you for the opportunity to offer comments 
on H.R. 1701.
    [The prepared statement of Dolores S. Smith can be found on 
page 49 in the appendix.]
    Chairman Bachus. Thank you. We very much appreciate your 
testimony.
    And let me say, Ms. Smith, one thing you mentioned, which 
my staff had also mentioned to me, was the preemption. There is 
a question in my mind whether the text of H.R. 1701 provides 
that a State law is not inconsistent with the Federal statute 
if it is found to give greater protection to the consumer. I 
look forward to working with other Members of the subcommittee 
to make sure that, at least in their expressions, they do not 
wish to preempt statutes which give greater protection.
    I appreciate you pointing that out.
    Ms. Smith. Thank you.
    Chairman Bachus. I'd also made note of that.
    Consumer advocates argue that rent-to-own merchants should 
be required to disclose to consumers an APR equivalency 
interest rate prior to consummation of the transaction. 
Industry representatives contend that such disclosures would be 
misleading in the rent-to-own context.
    Mr. Beales, what is your view on that?
    And, then, Ms. Smith, I'll ask you.
    Mr. Beales. Well, Mr. Chairman, I think the primary 
difficulty with disclosure of something like an annual 
percentage rate is the starting point. I mean, it depends on 
the amount that's financed, or the principal, and the amount 
that is the additional charges or credit charges. That's very 
hard to separate out in this kind of a transaction, because the 
ability to stop payment at any time is an important part of the 
deal, and something that consumers would surely be willing to 
pay for, but very hard to price.
    And the cash price that you can start with is not a price 
at which very many transactions actually occur, so it's not a 
real price in the sense that a market price typically is.
    So the allocation between principal and interest is itself 
somewhat arbitrary and we think that makes the APR-kind of 
disclosure very difficult to implement and enforce.
    Chairman Bachus. And I think that the States that have 
looked at that have agreed with what you are saying.
    Ms. Smith. I would, first of all, agree with the technical 
difficulties that Mr. Beales has pointed out, and will just say 
by analogy that the Board did consider a similar question when 
we were in the process of revising the regulations to the 
Consumer Leasing Act. And there, after much deliberation, what 
the Board finally did decide to do was not to have a 
requirement for an annual lease rate, and further, we still 
then had to deal with the question of what if State law 
requires such a disclosure, what should the lessor be permitted 
or required to do?
    And what the Board ultimately did was to permit the 
disclosure, if required by State law, but also to require that 
there be a disclosure alongside to the effect that this 
percentage may not measure the overall cost of financing the 
lease. And moreover, the regulation prohibits the use of the 
terms ``annual percentage rate,'' ``annual lease rate,'' or 
``equivalent terms.''
    Chairman Bachus. As you said, the Federal Reserve Board, I 
think what you're saying is that you don't want to write the 
regulations for the rental-purchase industry?
    Ms. Smith. That is what we said.
    Chairman Bachus. Would that change if you not only wrote 
the regulation, but you had the enforcement powers too?
    Ms. Smith. Well, that would be a little unusual in the 
sense that currently we enforce regulations through our bank 
examinations. We have regular examinations of banks. They take 
place with the frequency usually from once a year to one-and-a-
half years and so forth.
    With the rent-to-own firms, it would be difficult to 
envision an enforcement process where we would be venturing 
into new territory as far as this particular market is 
concerned.
    Chairman Bachus. Director Smith has testified, Mr. Beales, 
that your agency has more experience with rent-to-own. Do you 
agree with that assessment?
    Mr. Beales. Well, we have probably more experience with the 
transactions themselves and with the rent-to-own industry as it 
currently exists. Where the Federal Reserve would have a very 
clear advantage over us in writing regulations is in making 
sure that they fit with the rest of the consumer credit 
protection structure. I mean, those regulations need to use 
terms consistently and not create uncertainties under Truth-In-
Lending, or under the Consumer Leasing Act, and the Fed's 
comparative advantage would be in making sure that regulations 
under rent-to-own legislation were consistent with the rest of 
the regulatory structure.
    Our comparative advantage would be familiarity with the 
nature of the transactions and the nature of the industry, and 
I think wherever jurisdiction would write the rules, we would 
work together to figure out what they should look like.
    Chairman Bachus. And I'll just close with maybe a yes or 
no, and I don't like to ask that, and if you feel uncomfortable 
then you can decline. But, you're disinterested in writing some 
regulations, are you?
    Mr. Beales. No, we're not.
    Chairman Bachus. OK, thank you. I appreciate your 
testimony.
    Ms. Waters.
    Ms. Waters. I guess this is for Howard Beales. You state in 
your testimony that the Board agrees with the FTC's conclusion 
that consumers need to know the total cost to purchase for 
purposes of comparison shopping. The bill before this 
subcommittee, H.R. 1701, proposes to provide consumers with a 
disclosure, which it terms the rental/purchase costs that it 
excludes, among other things, all charges or fees otherwise 
payable in a cash transaction for comparable property. Any 
insurance or liability waiver premiums are charges that are not 
a factor in the merchant's initial approval of the transaction, 
all initial payments to be paid up-front to initiate their 
agreement, and any sales or other taxes.
    Can this be characterized in any way as meeting the Board's 
idea of providing the total cost of purchase to the consumer?
    Ms. Smith. I think that question was really directed to me 
rather than to Mr. Beales.
    Ms. Waters. OK, all right.
    Ms. Smith. And I would say that from my understanding--
well, that you have a point about whether it represents the 
total cost of credit, and that is something that would have to 
be considered.
    Ms. Waters. I'm sorry. Are you saying that what is 
disclosed at this point is not adequate if you consider that 
the total cost of credit should be disclosed?
    Ms. Smith. I'm not sure I understand the question. But that 
may have to do more with my understanding of the exact wording 
of the text in the statute.
    Ms. Waters. You do state that, I suppose it was you who 
stated that consumers need to know the total cost to purchase. 
Is that correct?
    Ms. Smith. Yes.
    Ms. Waters. Both of you did. Does the bill, H.R. 1701, does 
it meet that test?
    Ms. Smith. Well, my understanding is that some of these 
items are items that are optional, or that are otherwise, even 
under Truth-In-Lending, are not included in the cost of credit. 
So that's the standpoint from which I am approaching it, which 
may be different from a general understanding of what total 
cost of credit means.
    Ms. Waters. What is your definition of total cost to 
purchase?
    Ms. Smith. Total cost to purchase to me would signify the 
costs, including all mandatory costs, that the consumer would 
be paying to the rent-to-own dealer.
    Ms. Waters. So if we look at H.R. 1701, can we make a 
determination about whether or not there is disclosure that 
would give the consumer all of the information that would 
determine total cost? Do we need to have more in H.R. 1701? If 
H.R. 1701 was to become law, do you think it should have more 
information in it so that consumers could know the total cost 
to purchase based on your definition?
    Ms. Smith. I would have to defer to witnesses on the next 
panel who have greater familiarity with this area and who would 
better tell you what exactly are the items that ought to be 
included in the total cost disclosure.
    Ms. Waters. OK, thank you.
         [Ms. Smith subsequently provided the following 
        information:
         [Rep. Waters essentially asked whether the ``rental 
        purchase cost'' as defined in the bill provided 
        adequate disclosure to consumers of the total cost to 
        purchase an item.
         [Under Section 1002, the rental purchase cost would be 
        disclosed to consumers on merchandise tags or labels 
        for items displayed in a dealer's showrom and would be 
        disclosed also in connection with each rental purchase 
        contract. The term, as generally defined, is the sum of 
        all charges payable as a condition of entering into a 
        rental purchase agreement or acquiring ownership of the 
        property covered by the agreement. Under the bill, this 
        general definition does, however, specifically exclude 
        certain items from the rental purchase cost: (1), costs 
        payable in a cash transaction for comparable property; 
        (2), taxes and fees paid to public officials; (3), fees 
        for optional products and services; and (4), fees paid 
        for voluntary insurance or liability waivers if the 
        consumer requests the coverage after receiving a cost 
        disclosure.
         [To the extent that the definition of ``rental 
        purchase cost'' includes all charges required to 
        purchase the property, the term is comparable to 
        retail-store price tags (which similarly exclude taxes 
        and optional amounts such as certain insurance 
        protection). Thus, it could suffice for disclosures to 
        consumers on merchandise tags or labels.
         [Board staff believe the rental purchase cost 
        disclosure would not suffice as a disclosure of total 
        purchase cost under a particular rental-purchase 
        agreement. We believe that, in that case, the required 
        disclosure should include items such as taxes and 
        optional fees, such as insurance premiums, that the 
        consumer would be paying in the transaction.
         [Under H.R. 1701, the total purchase price is 
        disclosed as part of the payment schedule, which may 
        not sufficiently highlight the information. It would 
        probably be better given as a separate disclosure.
         [Similarly, the multiple cost disclosures required 
        under Section 1005, in connection with the rental-
        purchase agreement, may obscure key pieces of 
        information that consumers need in deciding whether to 
        enter into an agreement. Among items listed, for 
        example, it may not be necessary to include the rental 
        payment and rental purchase cost if the periodic 
        payment and total sale price are disclosed. The bill 
        would also require disclosure of the difference between 
        the cash price and the rental-purchase cost. The 
        significance of this disclosure is not clear.]
    Mr. Barr: [Presiding]. Does the gentlelady yield back the 
balance of her time?
    Ms. Waters. OK, we have some other stuff here.
    Your survey indicates that 70 percent of the merchandise 
leased by rent-to-own outlets is purchased by the customer, and 
that 67 percent of customers intended to purchase the 
merchandise at the outset of the transaction.
    This corresponds to the finding of the Minnesota Attorney 
General that 70 percent of all the revenues received by rent-
to-own operations in Minnesota came from individuals who 
acquired ownership of merchandise. If these findings show the 
overwhelming majority of rental/purchase transactions are, in 
fact, alternative installment purchases, why shouldn't they be 
regulated the same and have the same consumer protections as 
other rental installment sales transactions? Should they be on 
entirely different terms, as proposed in H.R. 1701. If they're 
purchasing, if really they end up as purchases, why wouldn't 
they be regulated in the same way?
    Mr. Barr. The time of the gentlelady has expired, but 
certainly the witnesses can take time to respond to the 
question.
    Mr. Beales. Well, if we think about the purchase rate as 
indicating that this is credit, then I guess the ones that 
aren't purchased would be defaults, and that would be an 
extraordinarily high default rate in a credit kind of 
transaction.
    There's clearly a credit element to these transactions, and 
the fact that 70 percent of them result in purchases, I think, 
demonstrates that. But there are also elements that aren't 
credit and that are very hard to fit into the credit framework.
    Mr. Barr. Thank you.
    The gentleman from North Carolina, Mr. Jones, is recognized 
for 5 minutes.
    Mr. Jones. Thank you, Mr. Chairman.
    Mr. Beales, how well do the consumer protections in H.R. 
1701 address some of the concerns in your report?
    Mr. Beales. Well, I think conceptually, the approach that 
it takes is certainly the kind of approach that is consistent 
with what our report recommended. I think there are some issues 
about what's included and what's not included where we're not 
clear on which items should be part of the rental/purchase 
cost.
    The language, for example, talks about taxes and other 
costs that are payable on sales would not be included. The 
taxes are clear, but the other costs that might be in or out, 
we're not sure about.
    Some charges have to be taken into account under the 
statute, but under the approach in most of the credit 
legislation, a particular charge is either in or out, and we're 
not sure whether what's taken into account fits with that other 
legislation.
    We're also not clear on how voluntary charges would be 
handled for optional kinds of services or add-ons, and whether 
those are in or out, or whether ``voluntary'' has the same kind 
of meaning and structure as it does under Truth-In-Lending, or 
whether there's something different here.
    But conceptually, the approach is the kind we recommend. In 
the details we're not so clear.
    Mr. Jones. Well, let me say, and again I want to thank 
Chairman Bachus, who is not here, this was the purpose that Mr. 
Maloney and I, in introducing this legislation, we realize that 
there is a problem that needs to be dealt with, and that 
starting with this hearing gives us an opportunity on both 
sides of this issue to see if we can move forward with 
legislation that does protect the consumer, but also, in my 
opinion, helps the rent-to-own business.
    So, Mr. Chairman, I just wanted to get that statement from 
Mr. Beales and we'll look forward to going forward, and I yield 
back my time.
    Mr. Barr. I thank the gentleman from North Carolina.
    The gentleman from North Carolina, Mr. Watt, is recognized 
for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman.
    I want to focus on two separate things. One is the question 
of whether there ought to be a Federal standard or a Federal 
law on this. There has not, as I understand it historically, 
been any kind of Federal law in this area.
    Is that correct?
    Ms. Smith. Right. There was mention of a Federal law for 
the first time in the early 1980s.
    Mr. Watt. OK. I'm looking at page two of your testimony, 
Ms. Smith, your printed testimony, not necessarily the 
testimony you gave.
    But you say in the middle of the page there, in the second 
full paragraph, ``For firms operating in multiple States, a 
uniform regulatory framework eases the compliance costs.''
    I'm prepared to concede that, but I'm wondering whether 
that, in and of itself, creates a compelling Federal interest 
in having a Federal standard at all or whether this ought be 
left to the States?
    Ms. Smith. I was not offering that as a reason----
    Mr. Watt. OK. I didn't mean to imply that you were offering 
it as a reason. I guess the point I'm trying to ask is, are 
there other compelling Federal interests that the Fed has 
identified that would justify having a Federal statute on this 
issue, other than the ease of compliance cost?
    Ms. Smith. We are not expressing support for a Federal law 
per se.
    Mr. Watt. But----
    Ms. Smith. But are there other reasons.
    Mr. Watt. This is a different question. The question is, 
are there any other compelling reasons for having a Federal 
standard?
    Ms. Smith. A compelling reason might exist if the Federal 
law provided greater consumer protections than are available 
under State law.
    And our position basically, I think, coincides with this 
subcommittee's view or approach, which is that there is a 
balancing that needs to take place in considering the 
protections that consumers have under existing law, the 
potential effect of preemption if preemption were to occur of 
the State law, and then and balance that against benefits to 
the industry that would result from this.
    But, it truly is a balancing of these factors before you 
could reach a conclusion that Federal legislation is warranted.
    Mr. Watt. OK. I'm not sure I got exactly where I was trying 
to get to on that, but I'll go in another direction, because 
I'm going to run out of time.
    On the report, or the study that you did, Mr. Beales, you 
indicate--and I'm on page five of your written testimony, the 
fifth bullet down--``merchandise purchased from the rent-to-own 
store was rented for an average of 14 months before it was 
purchased, with 47 percent purchased in less than a year. 
Merchandise returned to the rent-to-own store was rented for an 
average of 5 months before being returned, with 81 percent 
returned within 6 months.'' I presume these are the ones that 
were actually returned.
    I'm wondering whether inside that time framework, there may 
be some rational basis for setting up two different standards, 
one for shorter-term rent-to-own situations and one for longer-
term rent-to-own situations which typically result in purchase.
    Mr. Beales. I think the difficulty would be figuring out at 
the time the transaction occurs, whether it's short-term or 
long-term. I mean, we can look after the fact and say, if you 
didn't buy, you typically returned it fairly quickly, but we're 
looking after the fact.
    To regulate the transactions differently, we'd have to look 
before the fact and figure out how we could tell whether this 
was a short-term transaction or a long-term transaction. And 
what may happen in some chunk of cases is, they start out 
short-term, but people like the merchandise and don't want to 
replace it, keep it longer and longer, and then end up buying 
it. So it may switch from one to the other in midstream as 
well.
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Barr. The time of the gentleman from North Carolina has 
expired.
    The gentleman from Connecticut, Mr. Maloney, is recognized 
for 5 minutes.
    Ms. Maloney. Thank you, Mr. Chairman.
    I think what I'll do is just follow up on Mr. Watt's line 
of questioning in a sense. We have a number of States that have 
virtually no regulation at all so this legislation provides, as 
Mr. Jones and I had indicated earlier, a floor for that.
    We also have, and this will be in the form of a question, 
we also have an industry which is certainly not localized to 
any State. This isn't necessarily done outside of interstate 
commerce. The merchandise is procured from the stream of 
interstate commerce is my understanding. And in fact, the 
industry is organized, if not on a fully national basis, it's 
certainly organized on a regional basis with companies that 
have outlets in a variety of States.
    So, is it correct to say that certainly the rent-to-own 
industry is quite deeply engaged in interstate commerce?
    Mr. Beales. I would agree with that.
    Ms. Maloney. Any dispute over that?
    Mr. Beales. I don't think so.
    Ms. Maloney. Thank you. That's the only question I had, Mr. 
Chairman.
    Mr. Barr. Thank you.
    There being no further questions, we very much appreciate 
Mr. Beales and Ms. Smith, you both being with us today, and if 
there are any additional materials you wish to submit, the 
record will remain open for 5 days.
    Ms. Smith. Thank you very much.
    Mr. Beales. Thank you very much.
    Mr. Barr. Thank you very much.
    Now I would like to effect a transition here and invite our 
second panel of witnesses to come forward, taking their seats.
    I would like at this time to introduce to the subcommittee, 
Mr. David J. Gilles, the Assistant Attorney General, Wisconsin 
Department of Justice;
    Mr. James Byrd of Byrd's TV, d/b/a Curtis Mathes, Inc., a 
rent-to-own businessman;
    Ms. Mamie Salazar Harper, Secretary, Board of Directors, 
Association for Progressive Rental Organizations--APRO--on 
behalf of the rent-to-own industry;
    Ms. Margot Saunders, Managing Attorney with the National 
Consumer Law Center.
    On behalf of Chairman Bachus and all Members of the 
subcommittee, I would like to extend a warm welcome to the four 
of you today. We appreciate your taking time from your very 
busy schedules to be with us today to provide background 
commentary and answers on this important piece of legislation, 
H.R. 1701.
    As I think you all know from sitting through the previous 
panel, your statements, as submitted, will be included in their 
entirety in the record, and if each one of you would like to 
take 5 minutes or less to highlight those portions of your 
testimony which you believe are most important for purposes of 
discussion this morning, we certainly invite you to do so.
    And then, as with the previous panel, for those Members of 
the subcommittee that are present and do have questions, each 
Member of the subcommittee will be recognized for 5 minutes of 
posing questions, making comments, and receiving your answers.
    And with that, Mr. Gilles, if we could start with you, 
please?

   STATEMENT OF DAVID J. GILLES, ASSISTANT ATTORNEY GENERAL, 
                WISCONSIN DEPARTMENT OF JUSTICE

    Mr. Gilles. Thank you very much, Mr. Chairman, Ranking 
Member Waters, and Members of the subcommittee, on behalf of 
Wisconsin Attorney General Jim Doyle, I would like to thank you 
for the invitation to appear before you today concerning 
Federal regulation of the rent-to-own industry.
    General Doyle has asked me to testify today in opposition 
to the bill that's drafted, because it would take away 
significant and meaningful protections from Wisconsin 
consumers, and particularly from rent-to-own customers who are 
among low-income customers in our State who have very few other 
choices.
    My name is David Gilles, and I am an Assistant Attorney 
General with the Wisconsin Department of Justice, and I work in 
the Office of Consumer Protection. For more than 25 years, I've 
prosecuted consumer protection cases, including a number of 
cases involving the rent-to-own business.
    There are three main points I would like to make this 
morning to explain why the proposal that you're considering to 
provide Federal regulation for rent-to-own programs would take 
away existing protections from Wisconsin consumers.
    Those three points are as follows:
    First, Wisconsin is one of the three or four States that 
treats rent-to-own programs as consumer credit sales; this bill 
would preempt that.
    Second, this Wisconsin law has helped consumers, and 
particularly rent-to-own customers in the past.
    And third, from the perspective of a consumer prosecutor 
who enforces consumer protection laws, while well-intended, 
this proposal would not provide a meaningful tool for State 
Attorneys General to prosecute unscrupulous rent-to-own 
companies that are trying to circumvent the standards that 
you're looking to establish.
    Turning then to the first point. In Wisconsin, and this is 
perhaps the most important point, rent-to-own transactions have 
been regarded as consumer credit sales under three Court of 
Appeals decisions that have been in place for almost 15 years. 
Under these decisions, rent-to-own companies have to disclose 
the annual percentage rate of interest. Illustrations of what 
this means are included as attachments to my prepared remarks, 
but let me give you an example.
    In 1998, a customer obtained used living room furniture 
that cost a cash price of $525 under a rent-to-own program. 
After 24 months of weekly payments of about $25, that customers 
wanted to own the merchandise and would have paid $2600. The 
effective rate of annual interest was 270 percent.
    Now under the Consumer Act in Wisconsin, interest rates are 
not limited. Rent-to-own companies could continue to charge as 
much as they want. In fact, lenders in Wisconsin routinely 
disclose interest rates of 500 percent and they are doing a 
fairly good business, I understand.
    For those consumers who intend to purchase, this would be 
very useful and helpful information. In Wisconsin, there is a 
rent-to-own contract form that is approved for use that 
includes interest rate disclosures so the industry would know 
exactly how to compute these requirements.
    Turning to the second point. The Wisconsin Consumer Act has 
helped low-income customers in Wisconsin. Our office, in the 
mid-1990s, had a lot of complaints about overreaching and 
unfair collection practices. We had complaints that described 
rent-to-own collectors going into people's houses when they 
were gone and taking merchandise that they were late in paying.
    We had complaints about people receiving letters from rent-
to-own companies threatening criminal prosecution. We filed a 
case, a complaint against one of these companies and eventually 
settled the case where the company paid $25,000 in forfeitures 
and was subject to an injunction and made restitution. If we 
had not had the Consumer Act in place, we could not have done 
that.
    In Wisconsin, under the Consumer Act, before someone goes 
out and repossesses merchandise, they have to go to court to 
get a judgment, or at least afford due process opportunity to 
the customer. This Act would take that away.
    Another example of how the Consumer Act has helped is that 
rent-to-own customers who have allegedly suffered violations of 
the Consumer Act have been represented in private class actions 
that have returned over $16 million to thousands of rent-to-own 
customers in Wisconsin. These remedies that are used to help 
those people would be taken away by this Act.
    The third point I wish to make is that the bill, in my 
opinion, does not provide very helpful useful tools to deal 
with unscrupulous practices by rent-to-own companies, setting 
aside the question of whether or not there should be interest 
rate disclosure. I want to point out three main problems.
    The first is preemption. It's clear today that it is 
uncertain as to the scope of preemption under this bill, but 
what is certain, and I can assure you I can guarantee will 
happen, that any defense attorney faced with a prosecution by a 
State attorney general will raise preemption and that will 
delay prosecution.
    The second point is that the bill does not provide 
traditional consumer protection remedies. There's no provision 
for a State attorney general to get an injunction. There's no 
provision authorizing restitution. There's no civil penalty 
involved and if the bill preempts all State law, then the 
attorney general really doesn't have many tools to go in to 
deal with fraudulent operations under this bill.
    The third point is that particular provisions, some of them 
don't provide meaningful protections, and the example I would 
like to give is the requirement that television commercials and 
radio announcements, when they make a specific statement about 
how much you have to pay, have to include other information. 
That's similar to what I call trigger terms in a credit 
transaction where someone says, if you pay so much a week, you 
can own a car or something like that. In that context, when 
those trigger terms are made, additional information has to be 
provided.
    Well, if you look in this bill, although it says additional 
information has to be provided, the way it has to be provided, 
it's permitted to be provided by disclosing only an 800 number 
that someone has to call to get the other information. Now, if 
the initial information is deceptive, if a rent-to-own company 
says, ``Own a TV for $5 a week or $10 a week, come visit us,'' 
and the only way you get the other information, well, the 
deception isn't cured, the harm has been done, someone has been 
influenced by that ad, without it having been put in a 
meaningful context.
    And I submit that the only type of ads that you would see 
under this proposal are ads that say, rent to own this for $20 
a week, and give an 800 number, and who is to know when you 
would get the meaningful information or the additional 
information when you call that 800 number?
    In summary, and in conclusion, I would like to again say 
that this proposal does not set a floor, it certainly doesn't 
set a floor for consumer protection in Wisconsin. It would take 
away Wisconsin's Consumer Act prohibitions against deceptive 
advertising that require disclosure, it would take away 
protections against deceptive and overreaching sales practices, 
it would take away protection against unauthorized, involuntary 
repossession. It would take away protections against 
overreaching collection tactics, and it would eliminate 
remedies currently existing under Wisconsin law.
    And for these reasons, the Wisconsin Department of Justice 
and Attorney General Jim Doyle oppose this bill.
    Thank you very much. I again appreciate the opportunity to 
be here today, and I'd be happy to answer any questions that 
Members of the subcommittee may have.
    [The prepared statement of David J. Gilles can be found on 
page 57 in the appendix.]
    Mr. Barr. Thank you very much, Mr. Gilles.
    They've called a vote on the floor so that we'll have to, 
hopefully very briefly, adjourn the hearing here so Members can 
go vote. I'm informed it is just a single vote, so it shouldn't 
take too long, certainly long enough if you all need to take a 
quick break, and we'll reconvene as soon as the vote is 
concluded.
    [Recess.]
    Mr. Barr. If we could reconvene please. Thank you again, 
Mr. Gilles.
    Mr. Byrd, if you would please, sir.

STATEMENT OF JAMES E. BYRD, OWNER, BYRD'S TV SALES, SERVICE AND 
                      RENTAL, FLORENCE, SC

    Mr. Byrd. Thank you.
    Mr. Chairman, Members of the subcommittee, I would like to 
thank you for inviting me to testify today regarding H.R. 1701. 
My name is James Byrd and I am the owner and operator of Byrd's 
TV Sales, Service and Rental in Florence, South Carolina. I'm 
also a member of the Association of Progressive Rental 
Organizations, (APRO).
    I have been in the consumer electronics business for 42 
years. I started in 1959 after graduating from Denmark 
Technical College with an electronics and television technician 
diploma. At first, I opened my business doing radio and 
television repair service only. In 1963, I expanded my business 
into radio and television sales and service, and I have been at 
the same location since that time.
    Byrd's TV is a family business. Over the years, all four of 
my children and my grandson have worked in the business. By the 
early 1980s, increased competition from large electronic 
dealers and discount stores forced me to re-evaluate my 
business strategy. In 1982, I added furniture and appliances to 
my product mix. This helped me to make up the loss of the 
electronics business.
    I found that some of my customers could not qualify for 
credit and some had temporary needs. To meet these special 
needs, I also began to offer rent-to-own. Since I began to 
offer rent-to-own in 1983, my business has grown substantially. 
Today, about 70 percent of my business is rent-to-own, and the 
other 30 percent is a combination of retail sales and repairs.
    You might wonder why a rental dealer in South Carolina is 
interested in Federal rent-to-own legislation. This may seem 
like a matter that only the large companies would care about. I 
am supporting this legislation for two reasons. First, it will 
raise the standards in the rent-to-own industry. Because of my 
concern about the well-being of this industry, I have been an 
active member of APRO for approximately 15 years, and I have 
supported its effort to improve the industry through 
legislation and dealer education. I believe improving the 
standards in this industry will increase the public confidence 
in rent-to-own and help the industry grow and prosper.
    Second, the long-term viability of this industry is of 
great importance to me. If you think about it, from my 
perspective, I have more at stake than large companies do. My 
entire livelihood and future and my whole life earnings are in 
my business in South Carolina.
    Reclassification of the transaction as a credit sale, 
rather than a lease in South Carolina would destroy the 
business I have worked hard to build. That is why Federal 
recognition of the transaction as a lease is important to me.
    I hope that someday my grandson, Derrick, will take over my 
business and continue to provide the high level of customer 
service and satisfaction that I have provided for 42 years. 
Passing H.R. 1701 would help ensure that is possible.
    Thank you for your consideration. If you have any 
questions, I will be glad to answer.
    [The prepared statement of James E. Byrd can be found on 
page 85 in the appendix.]
    Chairman Bachus. [Presiding] Thank you, Mr. Byrd. You 
actually almost gave a 5-minute statement, which is unusual, so 
I want to compliment you on that.
    Very good.
    Mr. Byrd. Thank you.
    Chairman Bachus. Ms. Harper.

STATEMENT OF MANUELA S. HARPER, SECRETARY, BOARD OF DIRECTORS, 
ASSOCIATION FOR PROGRESSIVE RENTAL ORGANIZATIONS, ON BEHALF OF 
                    THE RENT-TO-OWN INDUSTRY

    Ms. Harper. Thank you, Chairman Bachus and Members of the 
Financial Institutions Subcommittee. It is my pleasure to have 
this opportunity to talk to you today about my business and 
H.R. 1701.
    My name is Manuela Salazar Harper, but my friends and 
customers call me ``Mamie.'' I'm a businesswoman from El Paso, 
Texas. I own and operate four rent-to-own stores. I've had my 
own business for 10 years. My company employs 14 persons to 
work for me, and we've served the citizens of El Paso and 
Canutillo, Texas, and Sunland Park, New Mexico, during that 
time.
    I'm extremely proud of the fact that I, a second-generation 
Hispanic-American woman, have built my own business from the 
ground up. I can provide my employees with a middle class 
lifestyle while offering a package of services and goods for my 
customers.
    For many of you, the concept of rent-to-own may be 
unfamiliar. Basically, APRO members rent household durable 
goods such as appliances, furniture, electronics, and 
computers. We rent by the week or by the month on an agreement 
that's renewable at the option of the customer, but does not 
obligate the customer even to make another payment.
    Our customers never go into debt with us. Likewise, other 
merchants use this transaction for other types of goods. For 
example, the music and band instrument business. If my son 
tells me he wants to learn how to play the trumpet, I'd rather 
not go out and spend a thousand dollars to purchase the 
instrument, when I can go on a rental/purchase transaction and, 
with the convenience and flexibility that it offers, I can rent 
that trumpet with no obligation to own, but with the option to 
own.
    We also provide full service on the rented goods during the 
term of the agreements. If, for any reason, we are unable to 
repair the item in the customers homes, we provide temporary 
replacement items or loaners, while we repair the original 
rented item.
    This commitment to provide full service and replacement 
merchandise extends as long as the agreement is in effect and 
additionally applies whether the merchandise is new or used.
    When our customers choose to terminate their rental 
agreements, and they can do this at any time for any reason or 
for no reason, we simply pick up the merchandise and there are 
no charges to the customer.
    The predominant portion of our business involves serving 
customers who need and want nice things for their home and 
their family, but they may not have the cash, the credit, or 
the present desire to go out and buy these directly. Due to 
past credit problems, financial instability, and future 
uncertainties that many of our customers face each and every 
day, they need and want quality products, financial flexibility 
and convenience that our transaction affords them.
    APRO members support H.R. 1701, the Consumer Rental 
Purchase Agreement Act, because we believe that it balances the 
interest of the consumers and the concerns of the industry. 
H.R. 1701 incorporates consumer-oriented improvements over 
Federal bills introduced in prior years. It adopts the FTC 
policy recommendation on how best to disclose the total costs 
of a rental/purchase transaction.
    For instance, we ensure that all rental merchandise would 
bear a label or tag that provides the price of the merchandise, 
if purchased for cash, the rental payment amount, the total 
number of payments required to acquire ownership, whether the 
merchandise is new or used, and the total cost of ownership 
that consists of the sum of all rental payments and any other 
mandatory fees or charges.
    This is full disclosure that is also applicable to any of 
our advertising that in ads that we run, whether they are 
print, radio, or television, we disclose the cost outline for 
the merchandise, that it is a rental/purchase transaction, the 
amount, the timing, the number of the merchandise payments, and 
informing the customer whether the product is new or used. So 
this is full disclosure.
    Also, H.R. 1701 strengthens the enforcement provisions in 
response to concerns raised by consumer advocates. H.R. 1701 
would raise the standard for disclosure and other practices in 
many States. This enhanced, but fair regulation would add to 
the on-going efforts of dealers like myself and Mr. Byrd, who 
are trying to upgrade the image of our industry.
    Additionally, long-term benefits accrue of having a Federal 
stamp of legitimacy akin to a ``Good Housekeeping Seal of 
Approval'' that this bill would provide. For some of our 
dealers, this would provide better financing options for 
startup and expansion plans. The bill would provide stability 
and certainty for the five publicly-traded companies.
    Enactment of H.R. 1701 would represent a final, unambiguous 
legal determination that our transaction is not properly 
characterized as a form of consumer credit, but is something 
entirely different and unique. Every day, we face the threat of 
lawsuits alleging that the Federal Truth-In-Lending Act or the 
Consumer Leasing Act, applies to our transactions.
    Many of our members have operations in more than one State 
and this bill will help reduce the burden of regulatory 
compliance. Even if I'm doing business in one State, like I do 
in Texas, but I also have customers in New Mexico, with H.R. 
1701, I can use one set of agreement forms and one version of 
advertising disclosures instead of two or more.
    For these reasons, we ask you to support H.R. 1701.
    Thank you, Mr. Chairman, and Members of the subcommittee.
    [The prepared statement of Manuela S. Harper can be found 
on page 88 in the appendix.]
    Chairman Bachus. Thank you, Ms. Harper.
    Ms. Saunders, we look forward to your testimony.

   STATEMENT OF MARGOT SAUNDERS, MANAGING ATTORNEY, NATIONAL 
                      CONSUMER LAW CENTER

    Ms. Saunders. Thank you, Mr. Chairman, Members of the 
subcommittee. My name is Margot Saunders and I am here 
representing the low-income consumer clients of the National 
Consumer Law Center, the Consumer Federation of America, 
Consumers Union, and the United States Public Interest Group.
    Since I graduated from law school 23 years ago, I have had 
the privilege of representing low-income consumers almost 
consistently, first in legal services in North Carolina, and in 
the last 10 years, up here in DC with the National Consumer Law 
Center.
    Something is wrong with this picture. The consumer 
advocates are not asking for this bill. In fact, if you would 
like our input on a truly consumer-oriented bill to protect the 
rent-to-own customers that we represent, we would be very happy 
to work on one.
    But this is not a consumer protection bill. The one single 
purpose of this bill is to protect this industry from potential 
liability.
    There are a myriad of things wrong with the bill, and I 
will go through the problems. There has been a lot of 
discussion about preemption. The language in the bill leads us 
to believe that it would preempt many better State laws. I went 
through the State laws of almost every State, and found, in the 
largest 15 States, which represent 55 percent of the 
population, that there are better consumer protection 
provisions in those State laws.
    If the intent of this bill is not to preempt these better 
provisions, that's great, but the bill needs to be amended to 
say that. I think there's also a misconception about what the 
rent-to-own industry really is. There are 5,000 stores that are 
members are APRO.
    According to the Association of Progressive Rental 
Organizations, 4400 of those stores are owned by five 
companies. This is not an industry that is all mom and pop 
shops. It is almost completely dominated by five large 
companies.
    I would also like to address very quickly the difference 
between the FTC figure on the keep rate, how many rent-to-own 
customers actually achieve ownership, and the industry's 
statistic. The industry says 26 percent, the FTC says 70 
percent.
    We believe that the distinction is because the industry is 
counting contracts. They look at each contract and say, how 
many of these contracts result in an ownership? The FTC is 
counting customers. They asked the customers, when you entered 
this, how many of you did achieve ownership? Those two numbers 
are entirely consistent based on this different perspective, 
and the scary thing--when you realize the different 
perspective--is that 50 percent of rent-to-own customers are 
then paying more than the minimum required on a single rent-to-
own contract to actually achieve ownership. So it costs them 
even more.
    In terms of meaningful consumer protections, we do think 
that these transactions should be credit sales. However, even 
if we walk away from that position, we can develop significant 
consumer protections while treating these transactions as rent-
to-own. But the first such protection requires a limit on the 
total of payments. There's got to be a definition of cash 
price, which actually means something. There's got to be 
reinstatement provisions that protect the consumer after a 
default.
    There's been a lot of discussion about disclosures. My seat 
mate next to me, Ms. Harper, just talked about the tag 
disclosures. We agree. Tag disclosures that a consumer can look 
at right in the store, while they are deciding whether or not 
to buy or to rent-to-own a particular item, are the single most 
valuable disclosures one can make.
    It is very interesting that this House bill, H.R. 1701, 
provides no liability for failure to make tag disclosures 
unless the consumer can show actual damage for the failure to 
provide them. Now how can a consumer show actual damage for the 
lack of disclosures? That standard is impossible to meet.
    I'd like to highlight one other point very quickly. This 
industry pushes on when a rent-to-own customer agrees to a 
number of additional charges over and above the simple cost of 
buying or renting to own the item.
    One of those charges is LDW, Lost Damage Waiver coverage. 
This is a particularly heinous fee. The common law says that 
when a lessee rents a piece of property and the property is 
destroyed or lost through no fault of the lessee, there is no 
liability on the lessee; the loss falls to the lessor.
    But this industry deliberately, by contract, switches the 
burden of loss, putting it on the lessee, the customer, and 
then says to the customer, if you want to avoid that potential 
for loss, you've got to pay an additional fee, the LDW fee, 
which is often a significant portion of the total cost. Under 
this bill, that fee itself would not even be included in the 
total of payments.
    I represent a number of consumer groups in this town and 
many, many consumers across the country. We stand unalterably 
opposed to this bill, but we are very happy to work on a true 
consumer protection bill.
    Thank you.
    [The prepared statement of Margot Saunders can be found on 
page 92 in the appendix.]
    Chairman Bachus. I appreciate that.
    Mr. Gilles, I was an Assistant Attorney General, too, from 
the State of Alabama. My question, reading your testimony, I 
take it you are here representing the consumers of the State of 
Wisconsin, or the people, citizens of Wisconsin.
    Mr. Gilles. Well, I'm here at the direction of Wisconsin 
Attorney General Jim Doyle, who is responsible, as elected by 
the citizens of Wisconsin, and is responsible for enforcing 
Wisconsin's consumer protection laws.
    Chairman Bachus. And I know it sounds loud to you, but if 
you will pull those microphones closer to you. Just yank on 
them and pull them right up to you. You can't be too loud.
    I know you are concerned about the enforcement of your 
existing Wisconsin law which, according to your testimony, is a 
strong law and is attempting to protect consumers as the people 
of Wisconsin have chosen.
    Your main concern--or is this fair to say? Your main 
concern is that we don't do anything in this legislation which 
preempts Wisconsin law?
    Mr. Gilles. That certainly is the primary concern that we 
have, Mr. Chairman.
    Chairman Bachus. And would you be willing to work with us 
to see that the bill does that?
    I think also, Ms. Saunders, you mentioned, that you gave a 
figure that you believed 15 States, representing 52 percent of 
the consumers, may have stronger laws today. I know you both 
expressed that this is major concern of yous.
    Mr. Gilles. Mr. Chairman, we would certainly be willing to 
work with the subcommittee to ensure that Wisconsin's approach 
to rent-to-own practices is not preempted.
    Chairman Bachus. OK. Let me move on to another thing Ms. 
Saunders mentioned, and I actually had questions for the first 
panel, and I was limited to 5 minutes too. I'm not sure anyone 
asked, but there is a discrepancy in the purchase rate. The FTC 
says one thing, the industry says another.
    Now I might say, Ms. Saunders, that maybe with my legal 
background, I would--as opposed to a survey which is the FTC, I 
think I would be more inclined to look at the hard data, the 
transactional data that the industry supplies, as opposed to a 
memory of a consumer over the phone. You know, a survey can 
misstate, depending on how the question is posed. How would you 
respond to that? Do you believe there's misrepresentation?
    Ms. Saunders. Mr. Chairman, I think the problem is not the 
memory of the customer, I think it's the different way they are 
counting. I think the FTC is counting, ask the customer, did 
you achieve ownership, and the answer is, yes, they achieved 
ownership. But the customer may not distinguish, and is 
probably not distinguishing between contracts. The fact is that 
the dealer is distinguishing the achievement of ownership 
between each separate contract. So that's a way to explain the 
discrepancy.
    Also, in a number of lawsuits, and I can get you the 
citations for those lawsuits, the discovery indicated in 
Minnesota, and perhaps in Wisconsin, that the ownership keep 
rate is closer to the 70 percent rate rather than the 26 
percent rate.
    In other words, the discovery provided the plaintiffs in 
the lawsuits from the industry itself has showed the number is 
closer to the higher number.
    Chairman Bachus. Let me ask Ms. Saunders, and Ms. Harper 
can respond to this, the 15 States you mentioned, Texas or 
South Carolina, were they included in those 15 States?
    Ms. Saunders. Texas and South Carolina were not included, 
no.
    Chairman Bachus. Texas is?
    Ms. Saunders. I did not look at South Carolina. I'm sorry, 
I had only one day to prepare the testimony, so I didn't look 
at every State. I do not recall looking at South Carolina or 
Texas.
    Chairman Bachus. OK. The 15 States you're talking about, 
are any of them Southern States?
    Ms. Saunders. West Virginia, Tennessee. Actually Texas I 
did look at. I'm sorry. Texas includes limitations on late fees 
and fees for reinstatement that are not found in this bill. 
West Virginia has a limitation on total of payments and a 
definition of cash price, which is better than this bill. North 
Carolina has a much better bill than this bill, which is 
certainly a Southern State.
    Chairman Bachus. What about those States like Alabama, in 
which the law doesn't rise to H.R. 1701? What if we did put a 
provision in that said any State law that has stronger 
enforcement survived, then would not legislation of this type 
be a step forward?
    Ms. Saunders. Yes, sir. But then I don't think it satisfies 
the industry's need for certainty and uniformity.
    Isn't the purpose of this bill----
    Chairman Bachus. I think what it provides is uniformity in 
those States which have very little law, and then at States 
going above that, at least there would be a floor of 
protection.
    Ms. Saunders. Well, if that's the intent, then that would 
be great, but what would the effect be in New York, New Jersey, 
California where there are higher----
    Chairman Bachus. No, I'm saying, if you've got a stronger 
statute like Wisconsin, and we craft language--and I'm not 
saying the industry, I don't speak for the industry, but I 
think there's bipartisan support for a uniform national 
protection of a floor on these transactions and some definition 
and a national standard.
    Certainly, I would be very hesitant to disregard State law, 
and I will tell you the sponsors, in talking with them, they're 
saying that's not their intent. I'll take them at their word.
    Sometimes the language in our bills, you know, we think 
that it does something, but Mr. Gilles has pointed out, and you 
pointed out, that the language may need to be strengthened.
    Ms. Saunders. That's great, Mr. Chairman. We appreciate 
that. What would happen, in your opinion, to those States that 
still called these transactions credit sales, like Wisconsin 
and Minnesota and New Jersey.
    Chairman Bachus. I think that's a harder question. I know 
we rely on the Federal Reserve and FTC on that, and I think 
that's going to be something that we're going to have to hash 
out as a subcommittee, and we look forward to your input.
    Ms. Harper.
    Ms. Harper. I wanted to state on behalf of the Association 
that our intent is that H.R. 1701 does not preempt State law. 
If that's a concern my colleague has, we want to set the record 
straight. We aren't going to preempt stronger State laws, 
they'll be free to add more stringent regulations if they wish 
to.
    We do know that H.R. 1701 sets that Federal floor, sets 
that Federal standard and the States have the ability to add 
more stringent regulations, more consumer protections in the 
areas of collection laws, rent-to-own pricing, cash price, and 
other fees and charges.
    What H.R. 1701 really boils down to is that this 
transaction that we have, the rental purchase transaction, is a 
lease and not a sale. And we leave it up to the individual 
States to put in whatever consumer protections, disclosures and 
advertising pricing collection practices that they need to do 
to protect their citizens. We're in total agreement with that.
    Chairman Bachus. Thank you. What we are talking about, I 
think we all agree, is a floor, not a ceiling of protection. 
Thank you.
    The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    First of all, Ms. Waters asked me to please extend her 
apologies for having to leave. This is a terrible day for, as 
you probably see, it's a very important subject we are dealing 
with here, but few Members are able to come, because people are 
tied up in various meetings about campaign finance reform, 
trying to see whether some agreement can be reached, 
negotiations, other things.
    And I want to applaud the Chairman for calling the hearing. 
You always take your chances around this place. You just don't 
know what competing things are going to be going on.
    But, Ms. Waters had an absolutely important commitment to 
be in a meeting and I told her I would stay here and kind of 
hold down the fort in her absence, because I knew she needed to 
go to that meeting.
    I, like the Chairman, would like to take Mr. Jones and Mr. 
Maloney at their word that this bill is not going forward, 
certainly will not be intended to preempt either substantive 
State law or procedural State law or even the law where there 
is a conflict between whether these are rental transactions or 
purchase transactions, all of which, if we did all of that, I 
think we would deal, I think, with what the State of Wisconsin 
is concerned about.
    I take that to be the case. Am I correct in that?
    Mr. Gilles. I believe so.
    Mr. Watt. But beyond that, I still am not--and I don't have 
an opinion on this--I'm trying to figure out what my opinion 
should be. I'm still not convinced of the substantial Federal 
interest in legislation in this area.
    I know that this industry is, to some extent, very highly 
concentrated and a number of companies that control the 
industry, or the bulk of the sales in the industry, operate 
interstate. Well, I take that back. They operate individual 
stores in different States, and may do some interstate 
operation.
    But, I'm trying to find whether there is some other 
compelling Federal interest that we have here. And I don't have 
a handle on that or a brief for or against that. I'm just 
trying to find out what the compelling Federal interest is. Is 
there some compelling interest?
    Mr. Gilles, you deal with this every day. I take it most of 
what you do is inside the State of Wisconsin, so what's the 
interstate commerce connection that I think would be one 
logical reason for having Federal regulations?
    Mr. Gilles. Well, it's true that there are companies that 
operate in many States. The industry is very, very localized, 
and it's like any other industry, particularly those that are 
being considered for consumer protection purposes, as well as 
for credit purposes.
    That has been a matter that's been traditionally subject to 
State regulation, and I don't see any overriding Federal 
concern beyond the commercial interests of these companies that 
would require this industry to be singled out specially for 
separate regulation, let's say, different than people who sell 
cars, different than people that sell stereos.
    I mean, there's no reason to single out this particular 
industry that is providing consumer goods.
    Mr. Watt. That's a double-edged sword there, I would think, 
if that is the case. Suppose we define this as a sales 
transaction or a credit transaction. What would be the 
compelling reason to have them subject to the fair credit 
reporting laws or the disclosure laws?
    Mr. Gilles. I think if you view this as a credit sale, as 
we do in Wisconsin, then it is important to provide people 
information so that they can really compare these transactions, 
and it's not being done throughout this country, other than in 
a couple of States. I believe that's a compelling interest in 
providing people with useful information.
    Mr. Watt. Let me ask the question to Mr. Byrd, because he's 
my South Carolina neighbor right across the line there from 
North Carolina.
    Do you have customers outside South Carolina typically 
regularly?
    Mr. Byrd. All of my customers are within South Carolina.
    Mr. Watt. Do you realize that if this statute----
    Well, first of all, does South Carolina have a statute that 
governs rent-to-own at all?
    Mr. Byrd. Yes, they do.
    Mr. Watt. Do you realize that to the extent this is a 
stronger statute than the South Carolina statute, or even 
possibly even if it's not stronger, and litigation is brought 
under this Federal statute, you're probably going to have to 
defend all your lawsuits in Columbia, rather than Florence, in 
the Federal court, rather than the State court.
    Mr. Byrd. That much is so, but what we are concerned about 
is South Carolina is pretty well close to this H.R. 1701.
    Mr. Watt. I'm talking about convenience now. I'm not 
talking about substantive law. I'm just talking about in terms 
of your own personal convenience. I assume you periodically 
every once in a while, probably not often, get into some legal 
dispute. If this statute is in effect, a Federal statute, I 
presume that litigation is going to be brought in the Federal 
court, rather than in the State court of South Carolina, and 
the question I'm asking is, wouldn't that be less convenient 
for you, as a local business owner, dealing with local business 
customers, than having a State statue in place where the 
disputes would be litigated under State law in the State court?
    Mr. Byrd. That wouldn't bother me any, but I can't foresee, 
in a sense, that happening because of the fact, as I mentioned 
with a sales contract, and I do both, I've been in business for 
42 years. With any of my sales contracts that I had any 
litigation on or whatever, it was settled right there in 
Florence, and they do have a Federal court right there in 
Florence. I don't have to go to the State capital.
    Mr. Watt. You do have Federal court in Florence? OK, I 
didn't realize that. I'm sorry. I just assumed that all your 
litigation in Federal court took place in Columbia or some 
place away from Florence. I didn't mean to misrepresent it. I 
just didn't understand that.
    I'm still wrestling with this, Mr. Chairman, as you can 
see. I appreciate the Chairman having the hearing. I too have 
to leave.
    Chairman Bachus. I think this is a good place to wrestle 
with these issues.
    Mr. Jones.
    Mr. Jones. Thank you, Mr. Chairman.
    Mr. Gilles, let me ask you, how many rent-to-own businesses 
do you have in Wisconsin?
    Mr. Gilles. I'm not certain.
    Mr. Jones. How many have you taken to court?
    Mr. Gilles. The State of Wisconsin has had enforcement 
actions against four companies.
    Mr. Jones. Are they still in business?
    Mr. Gilles. Two of them are.
    Mr. Jones. If you would, would you submit to the 
subcommittee how many rent-to-own businesses are in the State 
of Wisconsin?
    Mr. Gilles. I can certainly try and get that information. 
I'll try and get it, they aren't required to file with the 
State, but I think I can get it from the trade association in 
Wisconsin.
    Mr. Jones. Thank you.
    Mr. Byrd, let me say to you, as a person who strongly 
supports the individual that can develop a business, you are to 
be commended, you and your family, for being in the business 42 
years. And I would imagine in this 42 years, I can't imagine 
you remaining in business, quite frankly, for 42 years if you 
had not treated your customers fairly.
    Mr. Byrd. That's right.
    Mr. Jones. Maybe it's because you're from South Carolina, I 
don't know, but you just seem to be that type of person that 
you're going to treat your fellow man as fairly as you can and 
still try to make a profit and stay in business.
    Mr. Byrd. That is right, Representative Jones. And that's 
why I am in business, I believe, by having satisfied customers. 
We treat the rent-to-own customers no different than I would 
treat a sales customer, because I predict right now about 85 
percent of my customers in rent-to-own are repeat customers and 
sales. That's what keeps me in business, because advertising 
has got so high, I can hardly afford to advertise, so I have to 
keep the customers happy and keep them coming back.
    Mr. Jones. Thank you.
    Mr. Chairman, what Mr. Maloney and I were trying to do in 
working on this bill, this is the year 2001. I think the rent-
to-own business has made so many advances over the past few 
years, to help improve their industry, and you can only improve 
your industry if you improve your customer base. You're not 
going to be in business if you don't have customers. And to Ms. 
Saunders, whom I know from my days in Raleigh, North Carolina, 
when I was in the General Assembly, we put this bill in a year 
ago, and one of the biggest pleasant surprises I had was then-
Congressman, and now United States Senator Charles Schumer, 
came in on this bill.
    I don't really believe there is a bigger advocate for the 
consumer than Charles Schumer. You might disagree or agree, but 
I think you see bipartisan support for this bill, and none of 
us would want to preempt States' rights, I am a States' rights 
Congressman.
    Many times I voted against our leadership here in 
Washington. I'm a Republican simply because I don't want to 
take from the States. I think truthfully, wherever that might 
be a problem, we're going to work with the Democratic side and 
the Chairman, to make sure that we clarify anything that needs 
to be clarified.
    I would like to say to Ms. Harper that when I hear some of 
the comments, is it not true that the industry was willing to 
work and improve consumer protection and expand disclosures so 
that maybe you could finally bring the question to a finality 
of whether the definition of lease versus sale?
    Ms. Harper. Absolutely. We have wanted to work with 
consumer advocates and everyone else to address the concerns, 
and we did take the FTC's recommendation that we add more 
information about the full disclosures, all the fees, all the 
other charges. That's what H.R. 1701 provides.
    Mr. Jones. I think, Mr. Chairman, again, I want to thank 
each and every one that is on the panel and thank you for this 
hearing, because I really believe from this hearing that there 
is a need for this legislation.
    Now, again, H.R. 1701 is the start, but I believe there is 
a problem that needs to be fixed and I want to thank you for 
holding this hearing, and we look forward to working with the 
Democrats on this subcommittee, we look forward to working with 
you in moving this bill forward.
    So, I want each and every one on the panel who has a 
concern to know that Mr. Maloney and I are very sincere when we 
say that we are looking to work with you to make this bill so 
that each side on this issue comes out a winner.
    With that, I yield back my time.
    Chairman Bachus. Thank you.
    I'm going to start a second round of questioning, and I'll 
probably just ask one question.
    Mr. Gilles, we've got the Truth-In-Lending Act, (TILA), and 
the Consumer Leasing Act. The rent-to-own industry predates 
that, but they're not covered in it. Do you think that was 
intentional?
    Mr. Gilles. My understanding, Mr. Chairman, is that there 
were decisions applying Truth-In-Lending to the rent-to-own 
industry in the 1980s, and at some point in time, the rent-to-
own industry was effective in securing an administrative 
determination that they were outside the scope of Truth-In-
Lending.
    So my understanding is that at the time Truth-In-Lending 
was enacted, it was intended to cover all sorts of transactions 
that had time-price differences, where people wound up owning 
merchandise, and it was intended to deal with a wide disparity 
of credit terms that were in the marketplace. So people, if 
they wanted to pay for something on time, would be able to 
compare the various offers out there.
    But at the present time, it's my understanding of the 
current status of Federal law, and I believe that dates from a 
point in time in the 1980s, that there was a definitive ruling 
by Federal authorities that Truth-In-Lending did not apply to 
rental/purchase contracts.
    Chairman Bachus. That's my understanding.
    Let me close by saying this. We have an industry that, at 
least according to the FTC, 75 percent of the people are 
satisfied with. And those that aren't, aren't satisfied with 
the price. You know, that to me would be pretty close to what, 
if you walk in the store and bought an item outright.
    At least, that is according to what the FTC says. Now maybe 
what the FTC is saying is flawed, but that's what we're 
hearing. We are also hearing, and I am aware of this, that 
people make rent-to-own decisions and are repeat customers. 
They continue to come back.
    Now, I won't have to tell you this. This is America and we 
give people choices. They make judgments and sometimes we 
question their judgments.
    The Dave Matthews Band came to Birmingham a few weeks ago 
and about 300 students at the University of Alabama went to 
pawnshops and left items, and a lot of them didn't retrieve 
those items. Some of them did, and those that did paid a 
tremendous interest rate.
    Yes, I wouldn't have done that, I'd have passed up on Dave 
Matthews if it took pawning something. But the talk, according 
to my son, is at the university that this is a great way in the 
future that more students are going to take advantage of 
pawnshops.
    [Laughter.]
    Chairman Bachus. Most of them hock stuff, you know. That 
wouldn't have been my judgment, and there are three million 
Americans, poor Americans, that are making this judgment. I 
don't think it's the role of Congress to do what my sons also 
say. When I find they do something I disagree with, they say 
``Dad, don't give me another self-improvement book.''
    You know, I don't think it's our role to take away 
somebody's option or choice, even though we may disagree with 
it. I do think it's our role, and I think there is a Federal 
role in establishing a floor protection for those people.
    And I will tell you at the same time, I feel very strongly 
that our role should not be preempting the States which want to 
offer stronger protections. But I don't think it's our role to 
say people shouldn't go to pawnshops; they shouldn't go to 
rent-to-own; they shouldn't make these transactions. That's 
part of freedom. That's part of what we enjoy in a democracy, 
the right to give people these choices and not condescend in 
our judgment.
    So, I very definitely believe that we have a Federal role, 
and I believe that the bipartisan support on this bill reflects 
that this body believes that the right kind of legislation 
needs to address this.
    And I think every industry, as long as it is a legitimate 
industry--and I don't question the legitimacy or legality of 
this industry--deserves predictability or some uniformity. 
Every other industry has it. I don't think this industry ought 
to be any exception. I want to work with all groups to see that 
consumers are treated fairly under any legislation we pass.
    Again, I'm going to say that we don't preempt the citizens 
of Wisconsin and what they have chosen to do.
    Thank you. We appreciate your testimony. The hearing is 
adjourned.
    [Whereupon, at 1:00 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             July 12, 2001


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