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The High Cost of Poverty: Rent to Own

Audio Report (7:14) (RealAudio 14.4)

Third in a Series

Minnesota Public Radio's John Biewen reports.

Biewen: Most of the furniture and appliances in Donestra Morris's apartment, in a working-class section of St. Paul, came from the neighborhood rent-to-own store.

((Sound: opens door. Morris: "And on the back porch, the dryer that I originally got from Rent-a-center...."))

Biewen: Morris is a 34-year-old single mother. She works for a non-profit social service agency. She started shopping at Rent-a-Center 12 years ago, when she was on AFDC and had shaky credit.

((Morris: "I was one of those clients, for awhile, that basically did not have a choice. I have three children. I needed to have furniture for them to sit on, a washer and dryer to wash their clothes, and et cetera."))

Biewen: Morris hasn't kept track of how much she's spent at Rent-A-Center, but it's well into the thousands. Rent-to-own stores lease furniture, appliances, stereos and TVs for weekly or monthly payments, typically offering ownership if the customer keeps up the payments for 18 months. At the moment, Morris is paying about 300-dollars a month for her living room furniture and stereo system.

((Sound: music... Morris: "I have to admit it has good sound, and it serves its purpose, but I've probably paid way more money than I should have paid for it."))

Biewen: A study in 1994 by the U.S. Public Interest Research Group found rent-to-own customers typically pay two to five times what they'd pay at a retail store. Calculated as interest, rent-to-own charges can reach several hundred percent.

((Ramp: "Here you're charging the poorest people in our society a 200-percent interest rate and you sit around and scratch your head and say, 'Gee, I wonder why poverty is so intractable?'"))

Biewen: Attorney David Ramp has spent the last seven years suing Rent-A-Center, and another rent-to-own company, Colortyme, from his cramped Legal Aid Society office in Minneapolis. In the last year and a half Ramp and his clients have won two important rounds against Rent-A-Center, which controls one fourth of the 4-billion-dollar rent-to-own market.

In separate class-action cases, federal judges declared Rent-A-Center violated state interest rate limits, or usury laws, in Minnesota and Wisconsin. Ramp estimates the company will have to pay back 30-million dollars to its Minnesota customers alone. The company plans to appeal to the U.S. Supreme Court. Brad Denison is a vice president and general counsel with Thorn Americas, which owns 13-hundred Rent-A-Center stores.

((Denison: "Minnesota is one state and that's one court. Throughout the nation we're not losing those issues."))

Biewen: Denison points out more than forty states have laws that regulate and protect -- the rent-to-own industry. He maintains the judges in the Minnesota and Wisconsin cases misconstrued the rent-to-own transaction. Rent-A-Center cannot violate usury laws, says Denison, because it doesn't charge interest at all; customers rent merchandise, and if they choose to buy at the end of the weekly or monthly payments, that's a separate transaction.

((Denison: "Some people are trying to force an interest rate onto this transaction when it's not about interest and it's not about debt. If you never are required to continue, then there's no principal amount to base an interest rate on."))

Biewen: In other words, Denison says, the transaction is more like renting a car than buying one. But legal Aid attorney Ramp says for low-income shoppers who use rent-to-own as a way of furnishing their homes, the transaction looks and acts like a credit sale, and should be regulated as such. He says he's only advocating the same kind of regulations that protect middle-class borrowers from usurious interest rates.

((Ramp: "You couldn't get away with doing this in other kinds of transactions."))

Biewen: The rent-to-own industry grew quickly in the 1980's, along with pawnshops, check-cashing stores and other businesses that target low-income customers or those with bad credit. Now, analysts say, the industry is being consolidated, as corporations buy up the mom-and-pop stores that used to dominate the business. Rent-A-Center's parent company, Thorn, was recently spun off from Thorn EMI, the British corporation that owns the EMI music label. The company's North American operations earned 55-million-dollars in profits last year. Consumer advocates have tried for years to warn off low-income people who might be tempted by rent-to-own stores -- offering easy access to household goods for seemingly-manageable weekly payments.

((Tape: "Have you heard about the latest rip-off scheme/ it's called rent-to-own and it's really mean...."))

Biewen: The Consumers League of New Jersey distributes this public service announcement, the Rent-To-Own Rap:

((Tape: "...By the time you get to own it your paycheck's blown/ Cost five times what it's worth to own. Dumb-dumb-dee-dumb-dumb.... Don't rent to own."))

Biewen: The industry has defended itself aggressively against what it considers unfair criticism. After an unflattering article about Rent-A-Center in the Wall Street Journal in 1993, the company hired former U.S. Senator Warren Rudman, who in turn commissioned a report from Lexecon, a consulting group that includes Nobel-Prize-winning economist Gary Becker of the University of Chicago. Lexecon's report said rent-to-own is a good deal for consumers and Rent-A-Center's prices are justified. The report carried Becker's name, but, contacted last week, Becker had his assistant tell MPR that he doesn't know enough about the report, or the rent-to-own industry, to comment.

University of Georgia economist Roger Swagler has done several studies on rent-to-own and its customers. He says there are two sides to the story.

((Swagler: "It is in fact a bad deal. And if they have any decent options, consumers would be better advised to avoid this type of transaction. But in some cases they don't have better options, and there are certain things that are attractive about rent-to-own. Particularly, one, the lack of a credit check. Plus anybody who's income is uncertain. If you're not sure if you're gonna get paid next month or have a job next month, if your contract only runs for a month you don't have to worry about that."))

Biewen: People in the Rent-to-own industry say critics overstate the vulnerability of their customers; they say most choose rent-to-own despite having other options. Longtime customer Donestra Morris says she eventually figured out Rent-A-Center was taking advantage of her, as she puts it, but she continued to shop there.

((Morris: "People do things to make them feel better. One of the things that made me feel better is, I might be on AFDC, I have somewhat of a decent home to come home to, I'm gonna have some pretty nice-looking furniture. At least this is something that I can control. In a world where many times, being on AFDC, you can't control anything -- you don't have enough of anything to control."))

Biewen: Legal Aid attorney David Ramp says he doesn't want to put rent-to-own stores out of business; he just wants to limit what they can charge. Some other observers favor laws simply requiring rent-to-own stores to disclose their prices more clearly. Now, they usually post weekly rental payments prominently on the showroom floor, while disclosing the total cost of owning the product only in the small print of the contract.

So far Congress has declined to take a position on rent-to-own. Competing bills, for and against the industry, failed last year. Those on both sides of the issue say they may try again in the new congress.

I'm John Biewen, Minnesota Public Radio.

High Cost of Poverty Series - Fringe Banking - Minnesota Pawn - Low-Income Housing