[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
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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
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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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