Shadow Credit and the Devolution of Consumer Credit Regulation

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SHADOW CREDIT AND THE DEVOLUTION OF CONSUMER

CREDIT REGULATION

Nathalie Martin* & Lydia Pizzonia**

Shadow credit is trending. Shadow credit has all the essential attributes of

regular credit except that it is unregulated. It operates in a world in which

products and services that look, act, and feel like credit products are deemed to

be something that is not actually credit. This legal sidestep is accomplished

either by passing industry-friendly legislation or by tweaking the shadow credit

product just enough to not be defined as credit, but “something else.” That

“something else” is often called a “lease,” an “advance,” or in the case of After-

pay, simply a “service.” At its essence, however, it is still credit. More and more

shadow credit products are popping up to take the place of actual credit prod-

ucts.

The purpose of avoiding being “credit” is to avoid consumer credit regulation.

We see this trend among purveyors of rent-to-own household goods, rent-to-

own real estate, employer payday advances, buy-now-pay-later services like Af-

terpay, income sharing agreements in higher education finance, and even bail

bonds, all of which seek to avoid complying with usury laws or interest rate

caps, Article 9 of the Uniform Commercial Code (U.C.C.), the federal Truth

in Lending Act, and all other consumer credit protection laws.

While some of these products are helpful to consumers, or at least not particu-

larly harmful, some are deeply predatory. They can operate outside the law.

Frederick M. Hart Chair in Consumer and Clinical Law, University of New Mexico School

of Law. The author thanks Stewart Paley, Adam Levitin, Bob Lawless, and colleagues Ernesto

Longa, Joe Schremmer, George Bach, Reed Benson, Jennifer Moore, Jen Laws, and Fred Hart for

their research and comments on earlier drafts; Clair Gardner and Jarrod Greth for their fine

research assistance; and the University of New Mexico School of Law for its generous financial

assistance. The authors are also grateful to the Lewis & Clark Law Review, particularly Lead

Article Editor John Mayer, Executive Editor Alexandra Giza, Submissions Editor Colin Bradshaw,

and Editor in Chief Connor B. McDermott.



J.D. 2019, University of New Mexico School of Law. The author thanks her husband and

children for their constant encouragement and support, and Professor Kenneth Bobroff for being

a sounding board, providing insight and new ideas, and supporting her desire to initiate change

in this area.

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1440 LEWIS & CLARK LAW REVIEW [Vol. 24.4

For example, classic rent-to-own contracts that were historically used for house-

hold goods are now being used in housing contracts in vulnerable Native

American communities.

Emerging shadow credit products are testing the limits of what should be per-

mitted in rent-to-own contracts and similar financing tools. The trend toward

shadow credit has the capacity to derail our entire consumer credit regulation

system.

I. Introduction ....................................................................................... 1441

II. The Essence of Consumer Protection and Credit Transactions ........... 1444

A. What is Shadow Credit? ................................................................ 1444

B. The Protections Consumers Need and Businesses Seek to Avoid ........ 1448

1. The Truth in Lending Act ....................................................... 1452

2. The Fair Debt Collection Practices Act ..................................... 1454

3. Other Federal Laws ................................................................ 1456

4. State Usury Laws .................................................................... 1457

C. Recourse Versus Non-recourse Debt, Article 9, and the Scope and

Legislative History of Article 9 ....................................................... 1458

1. Rent-to-Own Debt is Non-recourse Debt, but Debt Nevertheless 1458

2. The Side-Step Around Article 9 ............................................... 1459

III. The Anatomy of Rent-to-Own ........................................................... 1464

A. Rent-to-Own Fundamentals .......................................................... 1465

B. Unprecedented Self-Regulation ...................................................... 1465

C. Rent-to-Own Regulation ............................................................... 1468

1. The Substance (or Lack Thereof) of Rental Purchase Agreement

Acts ....................................................................................... 1468

2. Case Law on Rent-to-Own ...................................................... 1470

D. The Demographics of the Typical Rent-to-Own Customer ............... 1471

E. What do Customers Really Want in Rent-to-Own Transactions ....... 1472

IV. Rent-to-Own Housing and Shadow Credit ......................................... 1473

V. Rent-to-Own Housing Sheds and Native American Predation ............ 1475

A. Native Americans are a Vulnerable Target for Rent-to-Own Shed

Deals ...........................................................................................

1476

B. Housing Crisis in Indian Country .................................................. 1477

C. Rent-to-Own Shed Dealers: The New Predator of New Mexico’s

Native Americans ......................................................................... 1479

D. An Insider’s View of Rent-to-Own Predation .................................. 1482

E. Comparing the Cost of Credit in Shed Homes to Rent-to-Own Land

Sale Contracts and Mortgages ........................................................ 1484

VI. The Greater Implications of the Credit-No Credit Distinction on the

Future of Credit Regulation ................................................................ 1484

VII. Conclusion ......................................................................................... 1487

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I. INTRODUCTION

As we say in the law, if it looks like a duck and it quacks like a duck it is a

duck.

Sometimes products in the consumer credit market look very similar to other

products, but by tweaking that product in a tiny way, a provider of credit can avoid

a great deal of regulation, including consumer protection regulation. In this Article,

we identify a dangerous trend in consumer protection law, namely the expansion of

shadow credit. Shadow credit is credit disguised as something else. Sometimes the

disguise is unintended. Other times, it is designed to avoid consumer protection

laws.

When it comes to defining what constitutes credit, what is old is suddenly new

again. If one were to find the perfect designer, Covid-19 facemask on the internet,

like my family just did, the shopper would be told to add one more thing to the

shopping cart in order to qualify for Afterpay. Afterpay is a financing service that

claims not to be financing.

Similarly, education finance Income-Sharing Arrange-

ments (ISAs) allow lenders to advance funds to students for tuition/living expenses

in exchange for a percentage of that student’s future income. Again, these financiers

claim not to be financers and thus not to be providing credit.

Over 50 years ago, leading up to the passage of the Truth in Lending Act

(TILA) in 1968, what counted as “credit” and was thus subject to TILA was a big

question. At the time, many states had statutorily enacted the time-price differential

doctrine.

Under this doctrine, if a retailer sold goods for future payment, the dif-

ferential between the price of a cash sale and that of credit sale was not interest for

usury law purposes.

State retail installment loan acts eventually held these fees to

be finance charges that had to be disclosed in a certain way,

but as we discuss in

Part III.B below, some retailers found their way around these regulations. Fifty years

later, the dance continues. Indeed, these shadow credit products are proliferating

and putting our entire consumer credit regulation system at risk.

Joe Campbell & Richard Campbell, Why Statutory Interpretation Is Done as It Is Done 11–

12 (Sydney Law School, Legal Studies Research Paper No. 14/79, 2014),

http://ssrn.com/abstract=2484315.

David Chan, Afterpay: Consumer Advocates Fear ‘Instant Approvals’ Will Cause Serious

Financial Hardship, ABCN

EWS (Sept. 26, 2017), https://www.abc.net.au/news/2017-09-

26/afterpay-consumer-debt/8988394.

Adam Levitin, What Is “Credit”? Afterpay, Earnin’, and ISAs, CREDIT SLIPS (July 16, 2019,

1:31 PM),

https://www.creditslips.org/creditslips/2019/07/what-is-credit-afterpay-earnin-and-

isas.html#more.

Id.

Mourning v. Family Publ’ns Serv., Inc., 411 U.S. 356, 361(1973).

In his blog on the renewed importance of defining what constitutes “credit,” Adam Levitin

notes that products like payday advances, income sharing agreements for higher education finance,

and buy-now-pay-later products like Afterpay all claim not to be credit and not subject to the

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1442 LEWIS & CLARK LAW REVIEW [Vol. 24.4

While we discuss several modern examples as evidence of the rise of shadow

credit, we focus on rent-to-own transactions to demonstrate how an entire industry

can legislate itself out of consumer credit laws and restrictions. If one industry can

accomplish this, so can others. Before we know it, our entire system of protecting

consumers could disappear. Moreover, we have identified a small segment of the

rent-to-own industry that is taking advantage of consumers, raising the question of

whether it is time to revisit the entire framework for regulating consumer credit.

We start our inquiry by asking about the nature of credit, and then whether

rent-to-own transactions are essentially credit, or just leases as the rent-to-own in-

dustry claims. The implications of this question are far-reaching. If the transaction

is essentially a sale or purchase, the transaction is a credit transaction regardless of

what you call it. In that case, the transaction is subjected to many state and federal

laws regarding disclosures, default requirements, remedies, and so on.

If the main

point is to rent, but never to own, that is a lease that need not be regulated as credit.

Long ago, the rent-to-own industry passed enabling legislation to state explic-

itly that its transactions were outside the realm of credit.

This legislation removes

rent-to-own transactions from all state consumer credit regulation, TILA, all other

federal regulations, and state commercial law such as Article 9 of the U.C.C.

This

Article explores this industry-sponsored legislation in the context of a complex set

of consumer needs. It asks whether rent-to-own contracts are indeed outside of Ar-

ticle 9 and outside all of the protections that loan products have under both state

and federal law.

It further asks whether we need to revisit the nature of all rent-to-

Truth in Lending Act, as well as a slew of other federal and state regulations. Levitin, supra note

See infra Part II.A.

Id.

See infra notes 168–81 and accompanying text; see also James M. Lacko, Signe-Mary

McKernan & Manoj Hastak, Survey of Rent-to-Own Customers, F

ED. TRADE COMM’N ES-4 (April,

2000), https://www.ftc.gov/reports/survey-rent-own-customers/.

Id. at ES-4, 12–13.

Michael G. Bridge et al., Formalism, Functionalism, and Understanding the Law of Secured

Transactions, 44 M

CGILL L.J. 567, 599 (1999). As these scholars explain, from a functionalist

perspective:

a lease operates as a form of purchase money financing to the extent that it allows a lessee

who lacks the wherewithal to buy the leased goods to nonetheless obtain their possession and

use. The economic function of the transaction from the point of view of the lessor and the

purchase money secured party is similar: both obtain the right to a stream of payments dur-

ing the currency of the transaction and both can claim an in rem right to priority as against

other creditors in the event of insolvency.

Id. at 599; see also, e.g., Margaret Howard, Equipment Lessors and Secured Parties in Bankruptcy:

An Argument For Coherence, 48 W

ASH. & LEE L. REV. 253, 253–54, 279–83 (1991); John D.

Ayer, On the Vacuity of the Sale/Lease Distinction, 68 I

OWA L. REV. 667, 668, 681 (1983)

(discussing functionalist arguments in favor of the identity of leases and security).

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own contracts or simply find protections in situations in which the abuses seem

most egregious.

While our focus is rent-to-own, and ultimately a small niche market within

rent-to-own, the question of what constitutes credit has far-reaching implications

for the future of consumer credit regulation. We are watching a trend in which more

and more industries carve themselves out of the credit definition, further eroding

what consumer protection remains.

In Part II of this Article, we explore the essence of credit transactions, discuss

the goals of the consumer credit protection scheme, and examine the specific laws

through which these goals are met.

We then discuss the difference between re-

course and non-recourse credit and describe relevant portions of Article 9 of the

U.C.C., one of the main laws rent-to-own companies and other shadow credit pro-

viders seek to avoid.

In Part III, we describe the taxonomy of rent-to-own trans-

actions, how they work, how the industry regulated itself, and what these industry

regulations provide.

We then describe the demographics of a typical rent-to-own

customer and the goals of most rent-to-own customers in rent-to-own relation-

ships.

In Part IV we describe another form of the rent-to-own contract, those relating

to rent-to-own real estate.

We explore various predatory practices in these shadow

While many scholars have dabbled in rent-to-own scholarship, two have studied this

industry extensively: Professor Michael Anderson and Professor Jim Hawkins. Professor Anderson

has dedicated his career to studying rent-to-own. See, e.g., Michael H. Anderson & Raymond

Jackson, A Reconsideration of Rent-to-Own, 35

J. CONSUMER AFF. 295, 298 (2001),

http://www.thefreelibrary.com/A+Reconsideration+of+Rent-to-Own.-a080805982. Anderson

has deep ties to industry, but nevertheless is an honest scholar. In one article, he critiques a scholar

who shortens rental periods and inflates the value of rented goods in order to reduce the annual

percentage rate on typical rent-to-own transactions. Id. Professor Hawkins is a leading consumer

law scholar, who has written on many consumer products, including fertility treatment financing,

title lending, payday lending, rent-to-own, and most recently, employer payday advances. See, e.g.,

Jim Hawkins, Financing Fertility, 47 H

ARV. J. LEGIS. 115, 116 (2010) (fertility treatment

financing); Kathryn Fritzdixon, Jim Hawkins, & Paige Marta Skiba, Dude, Where’s My Car Title?:

The Law, Behavior, and Economics of Title Lending Markets, 2014 U

NIV. ILL. L. REV. 1013, 1016

(2014) (title lending); Ronald J. Mann & Jim Hawkins, Just Until Payday, 54 UCLA L. Rev. 855,

857 (2007)

(payday lending); Jim Hawkins, Renting the Good Life, 49 WM. & MARY L. REV. 2041,

2046 (2008) (rent-to-own).

Hawkins views rent-to-own from an extremely practical point of view,

expressing the desire to see the transactions as hybrids between typical credit transactions and basic

rental agreements. Id. at 2052–53. His goal is to avoid overly-paternalistic regulation in order to

maintain the rent-to-own option for consumers, and regulate with fee caps, lifetime reinstatement

polices, and other regulatory “light touches.” Id. at 2047, 2117. These are valuable contributions.

See infra notes 24–123 and accompanying text.

See infra notes 124–49 and accompanying text.

See infra notes 150–205 and accompanying text.

See infra notes 206–22 and accompanying text.

See infra notes 223–44 and accompanying text.

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credit transactions, sometimes called land sale contracts or contracts for deed.

Part V, we describe a recent trend that combines the classic rent-to-own contract

with the shadow housing market. More specifically, we explore predatory practices

in Native communities involving rent-to-own sheds used for housing.

These prac-

tices are largely unknown and thus have not been explored by previous scholars.

These rent-to-own shed transactions provide an opportunity to describe these un-

known practices and to examine the real dangers of shadow credit at its worst.

In Part VI, we discuss the greater implications of the credit/no credit dichot-

omy, focusing on the societal implications of sheltering shadow credit products from

regulation.

We provide a number of examples from other areas of the law in which

society elevates substance over form to protect various regulatory frameworks in our

complex legal system.

In Part VII, we conclude that the rent-to-own industry,

particularly as it morphs into areas beyond household goods, demonstrates the harm

that all shadow credit products can impart on the consumer credit regulatory sys-

tem, and perhaps even the entire credit regulatory system.

II. THE ESSENCE OF CONSUMER PROTECTION AND CREDIT

TRANSACTIONS

The purpose of this Part is to determine what our consumer credit regulation

system is designed to do for consumers, to which transactions it should apply, and

why. We discuss what makes a product or service “credit” as opposed to something

else. We explore why and how our legal system regulates consumer credit products

and briefly review some of the most important federal and state consumer credit

laws. We then describe the distinction between recourse and non-recourse credit,

which relates to the rent-to-own industry’s argument that rent-to-own contracts are

not credit because customers can terminate the contracts at any time without owing

more debt. We end with a Section describing Article 9 of the U.C.C. and the ways

it has been amended regarding what actually constitutes credit.

A. What is Shadow Credit?

As lawyers, we are comfortable with unsettled or grey areas in the law.

Indeed,

Id.

See infra notes 245–95 and accompanying text.

Id.

See infra notes 296–315 and accompanying text.

Id.

See infra notes 315–18 and accompanying text.

Raúl Jáuregui, Rembrandt Portraits: Economic Negligence In Art Attribution, 44 UCLA L.

REV. 1947, 1959–61, 2011–12 (1997); W. Bradley Wendel, Autonomy Isn’t Everything: Some

Cautionary Notes On Mccoy v. Louisiana, 9 S

T. MARY’S J. LEGAL MAL. & ETHICS 92, 111–13

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interpreting gray areas of the law is one of the skills lawyers bring to society.

This

interpretive process is also what makes our work interesting, more art than science.

Gray areas can either arise from the world at large or be created by law and lawyers

themselves, but however they arise, the law aspires to elevate substance over form

and to recognize reality rather than contort it.

Shadow credit operates much like regular credit but differs in small ways.

Shadow credit operates in the grey areas or shadows of the finance industry. When

we charge an item on a credit card, or take out a mortgage or a payday loan, we

know we are entering into a credit relationship.

Since creditors tend to have more

power in credit relationships than borrowers, a host of laws protect borrowers, par-

ticularly consumer borrowers.

What makes something credit? Starting with a basic dictionary definition,

credit is “the provision of money, goods, or services with the expectation of future

payment.”

Under this definition, credit is borrowing money and promising to pay

it back at a later time. Credit is a service, not a good,

and as Ayn Rand once pro-

claimed, credit transactions include the vast majority of economic transactions in a

complex industrial society.

Most of us have instincts about what constitutes credit

(2018). Our own experiences with rent-to-own come from a lifetime of interacting with low-

income consumers and first-hand knowledge of their experiences with consumer credit products.

Our experiences with actual consumers allow us to see not just the law, though that is critically

important, but also the effect of the law on human beings. Some of our reactions come from a gut

reaction, developed over three decades of teaching, writing, and law practice, about what does and

does not constitute credit.

Jáuregui, supra note 24, at 1963, 1986–87, 1990.

Id. at 1958–59, 1963, 1990, 2012.

See, e.g., Frank Lyon Co. v. United States, 435 U.S. 561, 581–82 (1978) (the Supreme

Court held that the title owner that acquired depreciable real estate, rather than a mere conduit

or agent, had the legal right to take tax deductions associated with depreciation on the building).

By shadow credit, we do not mean “shadow banking,” a phrase used during the Great

Recession of 2008 to mean activities that involved high-risk financing outside that provided by

traditional banks. See Stijn Claessens & Lev Ratnovski, What Is Shadow Banking? 3 (International

Monetary Fund, Working Paper No. 14/25, 2015), https://ssrn.com/abstract=2559504.

Elizabeth Renuart & Diane E. Thompson, The Truth, The Whole Truth, and Nothing but

the Truth: Fulfilling the Promise of Truth in Lending, 25 Y

ALE J. REG. 181, 184–85 (2008).

Id. at 185, 196–97; see also Anderson & Jackson, supra note 12, at 305 (describing rent-

to-own transactions and stating that “[d]ue to asymmetry in experience and depth of information,

the salesperson is at an advantage to the ordinary consumer regarding not only the product but

also, even more importantly, the legal and financial provisions of the contract.”).

Credit, MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/credit (last

visited Dec. 20, 2020).

Alexei Alexandrov, Daniel Grodzicki & Özlem Bedre-Defolie, Consumer Demand for

Credit Card Services 2 (Consumer Financial Protection Bureau Office of Research, Working Paper

No. 2018-03, 2018), https://ssrn.com/abstract=3135421.

AYN RAND, THE VIRTUE OF SELFISHNESS: A NEW CONCEPT OF EGOISM 111 (1961).

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as opposed to something else. Some of the less tangible attributes of credit include

transactions that get reported on a credit report,

transactions in which the con-

sumer puts down a deposit, transactions in which the item being paid for can be

repossessed, and so on. None of these attributes are determinative, however.

Federal consumer credit regulations contain numerous technical definitions of

credit. We discuss the substance of these laws later, but under Regulation Z,

which

regulates most consumer credit transactions including home mortgages, home eq-

uity lines of credit, reverse mortgages, credit cards, installment loans, and certain

kinds of student loans,

credit means “the right to defer payment of debt or to incur

debt and defer its payment.”

The Consumer Financial Protection Act of 2010

(CFPA), that created the Consumer Financial Protection Bureau, defines credit as

“the right granted by a person to a consumer to defer payment of a debt, incur debt

and defer its payment, or purchase property or services and defer payment for such

purchase.”

The Equal Credit Opportunity Act (ECOA) and the Fair Credit Re-

porting Act (FCRA) track this CFPA definition,

except that ECOA and the FCRA

limit a “creditor under these Acts to those who regularly extend credit, not those do

so only occasionally.”

The Fair Debt Collection Practices Act (FDCPA) lacks a

definition of credit but broadly defines a creditor as “any person who offers or ex-

tends credit creating a debt or to whom debt is owed.”

Debt is defined by the Fair

Debt Collection Practices Act as:

any obligation or alleged obligation of a consumer to pay money arising out

of a transaction in which the money, property, insurance, or services which

are the subject of the transaction are primarily for personal, family, or house-

Alexandra P. Everhart Sickler, The (Un)Fair Credit Reporting Act, 28 LOY. CONSUMER L.

EV. 238, 243 n.21 (2016).

Regulation Z, 12 C.F.R. § 1026.1 (2019).

Id.

Id. at § 1026.2(a)(14); see also Levitin, supra note 3. Regulation Z, section 1026.2(b)(3)

also states that “[u]nless defined in this part, opportunity words used have the meanings given to

them by state law or contract.” This means more transactions might fall within TILA/Reg Z than

it appears at first glance. Levitin, supra note 3.

Consumer Financial Protection Act (CFPA) of 2010 § 1002, 12 U.S.C. § 5481(7) (2018)

(definitions). Oddly, there is no definition of debt. Id.

Under ECOA, credit is defined as, “the right granted by a creditor to a debtor to defer

payment of debt or to incur debts and defer its payment or to purchase property or services and

defer payment therefor.” Equal Credit Opportunity Act (ECOA), 15 U.S.C. § 1691a(d) (2018);

Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681a (r)(5) (2018) (defining “credit” and

“creditor” as having the same meaning as in the ECOA).

Equal Credit Opportunity Act (ECOA) §§ 1692(a)–(e); see also Fair Credit Reporting Act

(FCRA) § 1681a(r)(5).

Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692a(4) (2018).

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hold purposes, whether or not such obligation has been reduced to judg-

ment.

While TILA’s definition of “credit” is similar to that of the CFPA and

ECOA/FCRA, providing that “the right granted by a creditor to a debtor to defer pay-

ment of debt or to incur debt and defer its payment,”

its definition of “creditor” is

entirely different:

The term ‘creditor’ refers only to a person who both (1) regularly extends,

whether in connection with loans, sales of property or services, or otherwise,

consumer credit which is payable by agreement in more than four installments

or for which the payment of a finance charge is or may be required, and (2) is

the person to whom the debt arising from the consumer credit transaction is

initially payable on the face of the evidence of indebtedness or, if there is no

such evidence of indebtedness, by agreement.

In describing all of these various definitions of debt and credit, Professor Adam

Levitin explains:

Credit is generally defined as the right to defer payment of an obligation. But

sometimes it has to be granted by a “creditor,” and “creditor” is defined sub-

stantially differently by statute. In particular, TILA requires either a possible

finance charge or payment in more than four installments.

Needless to say, much of this language is in conflict, even though many of these

federal laws apply to the same transaction.

When it comes to rent-to-own, many consumer law scholars and legislators

instinctively believe that rent-to-own transactions are credit transactions.

In his

discussion of whether rent-to-own is regulated by the Consumer Financial Protec-

tion Bureau, Jim Hawkins catalogues a list of congresspersons who assumed rent-

to-own was credit.

Many consumers also assume they are using credit to buy some-

thing when they enter into rent-to-own transactions, because they are not paying

Id. at § 1692b(5).

Truth in Lending Act (TILA), 15 U.S.C. § 1602(f) (2018).

Id. at § 1602(g).

Levitin, supra note 3.

Jim Hawkins, The Federal Government in the Fringe Economy, 15 CHAPMAN L. REV. 23,

31–32 (2011).

“For instance, consider this exchange between Senators Dodd and Schumer when

discussing the differences between the bill the House and Senate passed:

DODD: Could we try, I’m not going to—as I said I’m not going to offer the amendment

now but could we try to deal with the non-bank payday lenders and the non-bank rent to

own type people who escape regulation here?

DODD: Well, we’ve raised that with the other side . . .

SCHUMER: The House put it in. No, the House is OK with it. The House has it in their

bill.

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the full price at the moment of the purchase.

Even atypical rent-to-own customers

often assume that rent-to-own is credit.

So why aren’t rent-to-own transactions

credit? Primarily because the industry passed laws proclaiming that rent-to-own was

not “credit,”

as described in Part III.B below.

B. The Protections Consumers Need and Businesses Seek to Avoid

The point of being “not credit” is to avoid consumer credit regulation, but why

do we regulate consumer credit in the first place? Concerns include high fees, dis-

guised fees, repossession without notice, unfair default provisions, and unequal bar-

gaining power.

Consumer protection laws come in two types: disclosures and substantive reg-

ulations.

Various federal and state laws protect consumers from harm, including

inaccurate, misleading, or deceptive practices engaged in to gain an advantage over

consumers.

The policy behind disclosure is that consumers are less sophisticated

than businesspeople, but that if sufficient information is provided to consumers,

Testimony from people supporting the Military Lending Act (MLA) also assumes rent-to-own is

credit. In support of an amendment to the MLA, Senator Jack Reed stated:

Rent-to-own loans. This is where you go to a shop and you say I would like to rent a TV for

30 days because you am [sic] deploying in 45 days . . . then you don’t deploy so you keep it,

and in some cases, you end up paying two to three times the retail price of the appliance. At

least individual soldiers have to be informed of those practices and know about it. We have

to be sure they are getting that information . . . . That is what we want to do – coordinate

these activities through a military liaison at a consumer financial protection agency. We want

to do that because it is the right thing to do and because if we cannot protect the men and

women who are protecting us, then we have to ask seriously whether we are doing our job. I

know they are doing their job.

Id. at 30–31.

Lacko, supra note 9, at ES-4.

One friend, a law professor, was renting a piano and it ultimately was taken back by its

owner. She sought Professor Martin’s advice as a consumer. She assumed that once she had paid

the fair market value of the sued piano, she would own it. This was without any additional interest

or fees.

See infra notes 168–81 and accompanying text.

Lacko, supra note 9, at 3.

According to scholar Scott Burnham, consumer law serves three primary functions: “(1)

the disclosure function to provide consumers with essential information, (2) the representation

function to act as the bargaining agent for the consumer by mandating substantive provisions

consumers would otherwise be unable to obtain, and (3) the bargaining function to offer

consumers a choice.” Scott J. Burnham, The Regulation of Rent-to-Own Transactions, 3 L

OY.

CONSUMER L. REV. 40, 41 (1991).

Federal Trade Commission Act (FTCA), 15 U.S.C. §§ 41–77 (2019) (prohibiting “unfair

methods of competition and unfair or deceptive acts or practices”); Truth-in-Lending Act (TILA),

15 U.S.C. § 1602(a) (2018) (having among its goals to protect consumers against inaccurate and

unfair billing).

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this can help level the playing field.

We also want to ensure that consumers have

a way to compare the cost of credit being offered by various credit service provid-

ers.

Disclosure can be appealing because, theoretically, it encourages consumers to

be free agents and limits paternalism.

If it works, and consumers can read and

understand the disclosures, the disclosures can help market forces operate more ef-

ficiently.

In contrast, substantive protective regulation limits free choice, including the

choice to make bad decisions. Even if substantive regulation does limit free will,

where bargaining power is imbalanced, substantive regulation may be necessary to

achieve fairness.

In reality, substantive versus disclosure regulation is a false di-

chotomy because disclosures are critical to enforcing substantive regulations and be-

cause most consumer protection laws contain both.

The rent-to-own industry has been clear in its desire to avoid most consumer

credit regulation schemes. In describing the development of the industry, James

Nehf explains:

Eventually, entrepreneurs noticed an apparent void in consumer credit laws.

When read literally, many statutes applied only to transactions in which a

“debt” was created and the consumer was obligated to pay for the full value

of the goods. They did not cover a transaction in which the consumer was

obligated for only a week or two and then had the option of renewing the

agreement for a number of successive weeks or months in order to complete

the contract. By 1960, businesses had opened in low-income neighborhoods

offering short-term renewable leases, with no credit check, that promised im-

mediate possession of furniture and home appliances. Moreover, a consumer

renewing the lease long enough would obtain ownership of those goods. The

contract was thus styled not as a sale of goods on credit but as a weekly or

monthly lease that ultimately would lead to a transfer of ownership if the cus-

tomer continued leasing for a stated period, usually twelve or eighteen

months. A market for the [rent-to-own] service was quickly established.

If a product is not debt or credit, it escapes compliance with TILA,

the

Susan Lorde Martin & Nancy White Huckins, Consumer Advocates vs. the Rent-To-Own

Industry: Reaching a Reasonable Accommodation, 34 A

M. BUS. L.J. 385, 388 (1997).

Renuart & Thompson, supra note 29, at 184, 187.

Hawkins, supra note 12, at 2115.

Id. at 2116.

Id. at 2092–93; see also New Mexico ex rel. King v. B & B Inv. Grp., Inc., 329 P.3d 658,

669–70 (N.M. 2014) (decision of the New Mexico Supreme Court discussing substantive and

procedural unconscionability).

James P. Nehf, Effective Regulation of Rent-to-Own Contracts, 52 OHIO ST. L.J. 751, 755

(1991).

Truth-in-Lending Act (TILA), 15 U.S.C. §§ 1601–1667f (2018).

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1450 LEWIS & CLARK LAW REVIEW [Vol. 24.4

FDCPA,

and numerous other federal and state laws applicable to the extension of

credit.

Some of the products in the marketplace that currently claim to not be credit

include rent-to-own contracts,

bail bonds,

employer loans,

buy-now-pay-later

services like Afterpay and education finance ISAs. These last two are modern cut-

ting-edge examples of the expansion of shadow credit.

Afterpay works with retailers to provide financing for relatively small purchases,

by breaking up the purchase price into four equal installments.

In the same breath,

Afterpay claims that “[u]nlike some typical finance businesses, Afterpay relies on

and only benefits from customers not going into default, paying off their orders in

full and on time,” but also that “[a]fterpay charges a flat $10 late fee per payment

and a further late fee of $7 if the payment is not made within 7 days.”

On a small

purchase, these fees represent thousands of percentage points per annum if stated as

interest rates. The first YouTube video to pop up to help consumers understand

Afterpay calls this service interest-free, which is scary.

The capacity to use essen-

tially unregulated services like this to overspend is breathtaking, especially for

younger consumers.

Likewise, with education finance ISAs, lenders advance funds to the consumer

Id. § 1692a.

Hawkins, supra note 12, at 2051.

California felt the need to clarify that bail bonds are indeed credit after the industry

claimed they were not and thus claimed they did not need to state an APR in their contracts. S.

318, 2019-20 Leg., Reg. Sess. (Cal. 2019).

Jim Hawkins, Earned Wage Access and the End of Payday Lending, B.U. L. REV.

(forthcoming 2020) (manuscript at 36–41), https://ssrn.com/abstract=3514856.

Afterpay Fact Sheet, AFTERPAY, https://www.afterpay.com/attachment/44/show (last

visited Dec. 21, 2020).

Id.

Destinyc06, What is afterpay??? Afterpay pros and cons!! How to use afterpay., YOUTUBE

(Mar. 23, 2019), https://www.youtube.com/watch?v=GFw1-klb7-s.

As Levitin explains in his blog:

This finance charge or four-installments provision is key for buy-now-pay-later products like

Afterpay. Afterpay allows the consumer to purchase goods now and pay over 4 equal install-

ment payments. So it’s within the 4-installment part of the “creditor” definition. And After-

pay does not have a charge if you pay on time. It only has a late fee. Late fees are excluded

from the finance charge if it is for “actual, unanticipated late payment.” So if borrowers are

anticipated to pay off the Afterpay advance within the four installments, no problem—no

finance charge, and not a “creditor” for TILA, and therefore not subject to TILA disclosure

rules, TILA error resolution rules, or TILA unauthorized transaction liability limitation

rules. Of course, if most consumers are paying late, then Afterpay’s late fee would be a finance

charge, so it would be a creditor, extending credit and subject to TILA. (I have no reason to

believe that this is the case).

Levitin, supra note 3. Note, however, that even though Afterpay is not subject to TILA, it is still

subject to ECOA, FCRA, FDCPA, and CFPA.

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for tuition/living expenses in exchange for the consumer’s promise to pay a percent-

age of his or her future income, over and above a minimum amount, to the lender.

While the total number of payments, payment time, and/or amount of payment

may be capped, generally speaking, “the more you earn, the more you pay.”

While these ISAs are clearly used to finance an education, they claim to be “not

credit.”

Similar to buy-now-pay-later arrangements like Afterpay, and like

Paycheck advances, the financiers claim that they do not issue credit.

Like the

rent-to-own industry, ISA providers claim that only unconditional promises to re-

pay constitute credit,

belying the existence of non-recourse credit. Indeed, in one

law firm’s analysis of ISAs, the firm explains in detail, law by law, why all of the

usual consumer protection laws do not apply to ISAs.

We can see that many cred-

itors would indeed want “more of that please.” Below we describe some of the laws

these entities seek to avoid.

Levitin, supra note 3.

Id.; see also Robert Farrington, Be Careful with Income Sharing Agreement (ISAs) to Pay for

College, F

ORBES (Apr. 12, 2019), https://www.forbes.com/sites/robertfarrington/2019/04/

12/income-sharing-agreements-to-pay-for-college/#70fc4d1052e0.

Levitin describes them as more like “participating preferred shares, in that if there’s

enough to pay the common equity (the consumer) a dividend, then the preferred shares must be

paid a dividend. While we often call preferred shares equity, they’re really a hybrid of equity and

debt features.” Levitin, supra note 3.

Regulatory Treatment of Educational ISAs Under Federal and Select State Consumer Credit

Statutes, M

ORRISON & FOERSTER LLP (Mar. 2019), https://media2.mofo.com/documents/

190408-regulatory-educational-consumer-credit-statutes.pdf.

Id. at 1–2. As Levitin explains in his blog:

Whether ISAs are credit is critical to their viability. ISAs are priced differently depending on

school and/or major. A computer science major is likely to have to pay a lower percentage

than an anthropology major. One might imagine a pricing differential between students at

an HBCU or minority-serving institution and at other schools. If ISAs are credit for ECOA

purposes, there’s likely, therefore, to be major disparate impact issues.

. . .

For CFPA purposes, there are two possible ways [ISAs could be credit]. First, for ISAs pro-

vided by the school itself (such as Perdue University), the answer is clearly yes. “Credit” is

“the right granted by a person to a consumer to . . . purchase . . . services [education] and

defer payment for such purchase.” If a school is the ISA provider, it’s definitely credit for the

CFPA, which means UDAAP prohibitions apply. I think the answer is also the same if the

provider is affiliated with the school, as the CFPA has an anti-evasion provision in its defi-

nition of “financial product or service”.

Second, for ISAs provided by third-parties, the question is whether the ISA is a “right granted

by a person to a consumer to defer payment of a debt” or to “incur debt and defer its pay-

ment.” (To be sure, the language about “purchase property or services and defer payment for

such purchase” does not necessarily refer to a purchase from the person . . .).

Levitin, supra note 3.

MORRISON & FOERSTER LLP, supra note 72, at 2, 6–21.

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1452 LEWIS & CLARK LAW REVIEW [Vol. 24.4

1. The Truth in Lending Act

The granddaddy of all consumer protection laws is TILA,

passed by Congress

in 1968.

TILA requires all credit providers to disclose all fees and charges in one

number, an annual percentage rate (APR) comprised of the sum of the amount fi-

nanced and the finance charge, as well as the number, amount, and due dates of all

scheduled payments and the amount of any late payment charge.

Congress’ pur-

pose in enacting TILA was to allow consumers to more readily compare the various

credit terms available, to avoid the uninformed use of credit, and to protect the

consumer against “inaccurate and unfair credit . . . practices.”

As explained by

Elizabeth Renuart and Diane Thompson:

The drafters of TILA understood that without uniform disclosure, interest

calculations are forbiddingly complex. The APR is meant to be a simplifying

heuristic that allows borrowers to decide between options that are otherwise

overwhelmingly complex. Many consumers stumble when confronted with

even basic computational problems. Lenders can compound those missteps

through marketing that distracts consumers from the salient points.

Congress designed the APR to be the single number for consumers to focus on

when shopping for credit, and thus the APR has become the touchpoint for con-

sumers comparing the cost of credit.

The purpose of TILA is to allow consumers

to compare fees, or the total cost of goods or housing, by comparing the annual

percentage rate on credit costs.

Moreover, TILA has been remarkably effective at

getting consumers to pay attention to interest rates and the cost of credit.

TILA’s

familiar and tidy TILA text box makes easy an otherwise daunting math task.

TILA applies to credit sales, which include “any contract in the form of a bail-

ment or lease in which the bailee or lessee contracts to pay a sum substantially equiv-

alent to or in excess of the aggregate value of the property and services involved and

the bailee or lessee will become, or for no other or a nominal consideration has the

option to become, the owner of the property upon full compliance with his obliga-

tions under the contract.”

Barring industry legislation to the contrary, this lan-

guage certainly covers rent-to-own transactions.

Truth in Lending Act (TILA), Pub. L. No. 90-321, 82 Stat. 146 (1968) (current version

at 15 U.S.C. § 1601 (2018)).

Id. at § 1638(a)(6).

Id. at § 1601(a); see also Martin & Huckins, supra note 54, at 388–89.

Renuart & Thompson, supra note 29, at 190.

Id. at 217.

Id. at 190.

Id. at 189–90.

Id.

Martin & Huckins, supra note 54, at 389; Truth in Lending Act (TILA), 15 U.S.C. §

1602(g) (2018).

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Retail sales stores like Conn’s or Best Buy, who sell items on credit, must com-

ply with TILA, but rent-to-own stores in states with industry-sponsored legislation

do not. Yet there is no doubt that the market substitute for rent-to-own contracts

are installment sales contracts offered through retailers like Conn’s. Conn’s is a na-

tional appliance, furniture, and electronic store which makes most of its sales from

the credit it offers to consumers who have difficulty getting credit elsewhere.

It is

required to include an APR in all its contracts which puts it at a disadvantage com-

pared to rent-to-own companies.

To help consumers compare the cost of their goods and credit services to those

offered by typical rent-to-own companies, Conn’s offers a side-by-side comparison

on their web site.

For an LG 43” television, their cash price is $699.99 and their

financed price over 24 months is $1,173.52. They compare this to a typical rent-to-

own transaction for the same television in which the cash price is $1,046.05 and the

financed price is $2,092.09.

The point of all this is not the exorbitant cost, but the fact that Conn’s and

rent-to-own are not on a level playing field because Conn’s is required to be honest

and transparent in its disclosure of the total costs of its products and services and

rent-to-own is not, despite that these transactions are market substitutes.

Lawrence Meyers, A Case Study in Capital Preservation: Conn’s (Part 1), WYATT INV.

RESEARCH (Sept. 22, 2014), https://www.wyattresearch.com/article/capital-preservation/.

YES MONEY vs. Rent To Own, CONNS HOMEPLUS, https://www.conns.com/yes-money-

financing-vs-rent-to-own-texas, (last visited on Aug. 27, 2020).

Id. This is a saving of $918 over roughly two years. Id. They do the same math for an LG

French door refrigerator, which they sell for $1,699.97 cash or $2,515.12 financed. With rent-to-

own, one would pay $2,500.53 for the same refrigerator in cash or $3,846.96 financed, a $1331

savings. Finally, they offer a sofa set for $1,979.99 in cash or $2,890.96 financed, whereas these

same items would cost roughly $2,080 in cash or $4,160 over time from a rent-to-own

establishment.

A few courts have considered whether rent-to-own companies must disclose an APR and

comply with TILA. Some have found that rent-to-own contracts fall within TILA, given that in

substance they are the same as a credit transaction and that in most cases the customer intends to

buy the item, not merely rent it. See Clark v. Rent-It Corp., 685 F.2d 245, 248 (8th Cir. 1982);

Davis v. Colonial Sec. Corp., 541 F. Supp. 302, 305 (E.D. Pa. 1982); Waldron v. Best T.V. &

Stereo Rentals, Inc., 485 F. Supp. 718, 719 (D. Md. 1979); Murphy v. McNamara, 416 A.2d

170, 177 (Conn. Super. Ct. 1979). Most courts, however, have found that TILA does not apply

to rent-to-own contracts, on the reasoning that in a rent-to-own transaction, the customer does

not promise to pay the full value of the goods he or she is acquiring. See, e.g., Ortiz v. Rental

Mgmt., Inc., 65 F.3d 335, 342 (3d Cir. 1995); In re Hanley, 135 B.R. 311, 314 (C.D. Ill. 1990);

Clark v. Rent-It Corp., 511 F. Supp. 796, 799 (S.D. Iowa 1981); LeMay v. Stroman’s, Inc., 510

F. Supp. 921, 923 (E.D. Ark. 1981); Dodson v. Remco Enters., Inc., 504 F. Supp. 540, 543

(E.D. Va. 1980); Smith v. ABC Rental Sys. of New Orleans, Inc., 491 F. Supp. 127, 397 (E.D.

La. 1978), aff’d, 618 F.2d 397 (5th Cir. 1980); Stewart v. Remco Enters., Inc., 487 F. Supp. 361,

363 (D. Neb. 1980); Remco Enters., Inc. v. Houston, 677 P.2d 567, 573 (Kan. App. 1984).

Moreover, in 1981, the Federal Reserve Board, empowered by Congress to issue implementing

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1454 LEWIS & CLARK LAW REVIEW [Vol. 24.4

Some scholars insist that providing an APR in rent-to-own transactions will

only confuse customers. For example, Michael Anderson claims that APRs do not

help consumers understand rent-to-own transactions and that they “neither convey

sufficient information to enable a consumer to rationally choose the most efficient

alternative nor can they be cited as evidence of exploitation of either [rent-to-own]

or laundromat customers.”

Similarly, Professor Jim Hawkins has argued that

APRs should not be required in rent-to-own transactions, in part because consumers

do not understand APRs and cannot calculate them,

and in part because the in-

dustry has indicated in the strongest possible way that if it has to disclose an APR,

it will leave the marketplace.

On the other hand, consumers need not be able to calculate an APR as long as

they can compare two TILA boxes, which many apparently can do.

APR disclo-

sures are still relevant in contracts shorter than one year in duration. After all, one

need not travel a mile to go a certain number of miles per hour. If rent-to-own

dealers were required to disclose the APR, this interest rate might shock consumers

into reconsidering signing on the dotted line. Then, on the other hand, it may not,

but at least consumers could compare the cost of a rent-to-own transaction to an

installment purchase agreement if they wanted to.

2. The Fair Debt Collection Practices Act

The FDCPA sets limits on the ways in which debt collectors can contact con-

sumers to collect a debt. For example, debt collectors may not call before 8 am or

after 9 pm,

call a consumer at work,

employ any unfair practices in an attempt

to collect a debt,

or conceal his or her identity on the phone.

Moreover, if the

consumer asks to never be contacted again, the debt collector must cease all contact

regulations for the TILA, clarified the scope of the act by amending its Regulation Z to define a

credit sale as including “a bailment or lease (unless terminable without penalty any time by the

consumer).” Martin & Huckins, supra note 54, at 389–90. Rather, he or she has an option to keep

paying and own the item at the end of a certain term. But see Perez v. Rent-a-Ctr., Inc., 892 A.2d

1255, 1257–58 (N.J. 2006).

As Anderson explains:

Requirements that rent-to-own agreements disclose implicit APRs merely cloud the issue for

consumers because they are not simply disguised installment contracts any more than are

layaway plans or the long-term use of coin-operated washing machines and photocopiers.

Anderson & Jackson, supra note 12 , at 304–05.

Hawkins, supra note 12, at 2107.

Id. at 2103–04.

See Renuart & Thomas, supra note 29, at 217–18.

Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692c (a)(1) (2018).

Id. § 1692c (a)(3).

Id. § 1692f.

Id. § 1692d (6).

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with that consumer.

The FDCPA also dictates how a debt collector must act when

communicating with a third party about the consumer being collected upon, and

dictates that debt collectors cannot even share information pertaining to a debt to

anyone but the consumer, a spouse, or a parent if the consumer is underage.

Debt

collectors cannot communicate with consumers by postcard or in any other way that

invades privacy about the debt, nor can they publish any kind of listing of consumers

that have not paid a debt, except to a consumer bureau.

If a consumer hires an attorney and tells the debt collector he or she is repre-

sented, the debt collector can no longer communicate with the consumer directly.

Debt collectors are prohibited from using any form of harassment or abuse while

attempting to collect.

100

They cannot lie or falsely imply that the consumer has

committed a crime.

101

While these rules do not generally apply to companies col-

lecting on their own debts, if the creditor collects under a slightly different name

than the one they otherwise operate under, the FDCPA rules do apply.

102

If the

FDCPA is violated, the consumer can recover statutory and actual damages plus

attorney’s fees, an important remedy when seeking a lawyer.

103

The FDCPA does not apparently apply to rent-to-own transactions, yet fair

debt collection in rent-to-own transactions is a problem. According to the National

Consumer Law Center (NCLC), the rent-to-own industry has used the threat of

arrest and criminal sanctions to obtain payments from customers.

104

In many states,

if a customer misses a single payment and does not promptly return the merchan-

dise, the rent-to-own dealers pursue criminal charges against the customer.

105

The

industry, enabled by state criminal statutes and prosecutors’ offices, has pursed crim-

inal theft charges against renters of property, which the NCLC likens to the resur-

gence of debtor’s prison and the criminalization of poverty.

106

In other consumer

transactions, failure to make a payment would be considered a breach of contract, a

civil matter, but, because in rent-to-own contracts, the dealers retain title to the

property, dealers base their criminal claims on “theft of services” or “theft of rental

Id. § 1692c (c).

Id. §§ 1692c (b), (d).

Id. §§ 1692b (4)–(5), 1692d (d), 1692f (7).

Id. §§ 1692b (6), 1692c (a)(2).

100

Id. § 1692d.

101

Id. §§ 1692e (7)–(8), (10).

102

Id. § 1692a (6).

103

Id. § 1692k (a).

104

Brian Highsmith & Margot Saunders, The Rent-To-Own Racket: Using Criminal Courts

to Coerce Payments from Vulnerable Families, N

AT’L CONSUMER L. CTR. 2 (Feb. 2019),

https://www.nclc.org/images/pdf/criminal-justice/report-rent-to-own-racket.pdf.

105

Id. at 3.

106

Id. at 4. In these situations, dealers use intimidation tactics on customers struggling to

make payments on their rent-to-own contracts. Id. at 3, 9.

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1456 LEWIS & CLARK LAW REVIEW [Vol. 24.4

property.”

107

NCLC attorneys also describe how state agencies such as prosecutors’ offices

and the police are being used by the rent-to-own dealers.

108

State theft laws vary

widely. Some explicitly apply to rent-to-own contracts, while others are silent on

whether they apply to rent-to-own transactions.

109

Some state statutes base the se-

verity of the offense on the value of the property (i.e., misdemeanor versus felony)

and are particularly concerning because of the high mark-up on the property being

rented in these contracts.

110

For example, someone arrested for theft of a TV worth

$200 at retail might be charged with stealing property worth $1200 if that’s what

the inflated “cash price” of the TV is in the rent-to-own agreement.

111

Thus a simple

failure to pay a consumer debt, a civil collection suit, becomes first a criminal mis-

demeanor charge that can then be inflated to a felony conviction which carries all

of the consequences of serious criminal behavior, including inability to vote, obtain

employment, etc.

3. Other Federal Laws

The Consumer Leasing Act, enacted by Congress in 1976, applies to consumer

leases that obligate the consumer for more than four months.

112

The Act requires

lessors to disclose the initial payment, any official fees or other incidental charges,

and the number, amount, total amount, and due dates of the periodic payments,

but does not require the disclosure of a finance charge or an annual percentage rate

107

Id. at 3. Only three states specifically exclude RTO transactions from their theft statutes:

Connecticut, South Carolina, and Virginia. Id. at 12.

108

Id. at 11.

109

Id. at 12.

110

Id. at 13.

111

Advocates suggest that state laws be passed to protect consumers from being targeted by

rent-to-own dealers. Some suggested provisions explicitly excluding rent-to-own contracts from

theft statutes, requiring specific proof that the defendant intended to steal the property,

establishing a civil legal process through which rent-to-own deals and consumers can resolves

disputes, and regulating coercive collection strategies by imposing legal liability for threatening

arrest with no reasonable basis. Id. at 3; see also Shannon Najmabadi & Jay Root, New Texas Law

Protects Rent-to-own Customers Against Criminal Prosecution, T

EXAS TRIBUNE (June 21, 2019, 9:00

AM), https://www.texastribune.org/2019/06/21/new-texas-law-protects-rent-own-customers-

against-criminal-prosecution/ (describing the passage of this kind of state law). There is also the

FCRA, but this act is used by creditors and non-creditors alike. KaydenPhoenix2011, Credit

Advice, CREDIT KARMA (May 19, 2011), https://www.creditkarma.com/question/does-leasing-

furniture-and-other-items-help-boost-a-credit-score/. Rent-to-own establishments send mixed

signals on whether they do or do not report credit, but one thing is clear: if they do not, that does

not help one’s credit, and taking out a regular loan does. Ciaran John, Does Rent to Own Help

Your Credit?, T

HE NEST, https://budgeting.thenest.com/rent-own-credit-23222.html (last visited

Oct. 21, 2020).

112

Truth in Lending Act (TILA), 15 U.S.C. § 1667 (1) (2018).

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because the lessor is not extending credit.

113

These requirements are extremely min-

imal,

114

yet the rent-to-own industry need not even comply with these laws because

rent-to-own contracts do not obligate the consumer beyond the one week or one

month rental.

The ECOA prohibits a creditor from discriminating against an applicant on

the basis of race, color, religion, national origin, sex, marital status, age, or receipt

of public assistance.

115

Since rent-to-own deals are allegedly not credit, rent-to-own

dealers are allowed to discriminate. The FCPA requires those who collect payments

on debts to report on such activity in a fair and accurate manner,

116

but these re-

quirements do not apply of course if rent-to-own transactions do not involve the

extension of credit.

117

4. State Usury Laws

Another set of laws that rent-to-own dealers seek to avoid is usury laws, or laws

that cap the interest rates that a lender can charge on loans.

118

To establish a usury

claim at common law, a plaintiff must ordinarily prove the following: (i) a loan of

money or forbearance of debt, (ii) an agreement that the principal shall be repayable

absolutely, (iii) the exaction of a greater amount of interest than is allowed by law,

and (iv) an intention to evade the law at the inception of the transaction.

119

Sixteen states plus the District of Columbia have usury caps ranging from 12%

113

Id. at § 1667a (9).

114

See Martin & Huckins, supra note 54, at 391 n.42, stating that:

The industry has recognized that because the provisions of the Consumer Leasing Act are so

“benign,” some RTO dealers might attempt to conform their agreements to its requirements.

Ed Winn III, Looking at Leasing, PROGRESSIVE RENTALS, Dec. 1994/Jan. 1995, at 10.

Legal counsel to the Association of Progressive Rental Organizations, a RTO trade group,

advises caution to dealers considering such action for the following reasons: 1) advertising

“no obligation,” a particular attraction of RTO, might subject them to charges of false ad-

vertising; 2) RTO customers are quite likely to return the merchandise during the initial

four-month rental period; if dealers, to avoid expenses, do not take default judgments, they

may be viewed as not really being in the leasing business, but they would no longer be in

compliance with state RTO statutes; 3) the availability of a purchase option becomes an issue

because, if one is offered, it has to be for a price greater then [sic] “nominal” or the transaction

may be characterized as a sale, subjecting the transaction to the TILA and state installment

sales statutes.

Id. at 12–13; FED. DEPOSIT INS. CORP., CONSUMER COMPLIANCE EXAMINATION MANUAL V-7.1

(Sep. 2015), https://www.fdic.gov/regulations/compliance/manual/5/v-7.1.pdf.

115

Equal Credit Opportunity Act (ECOA), 15 U.S.C. § 1691 (2018).

116

Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681(a) (2018).

117

Rent-to-own agencies surely use the credit reporting system to check on customer’s

creditworthiness, so they are using the system and they should also report to it.

118

Miller v. Colortyme, Inc., 518 N.W.2d 544, 549–50 (Minn. 1994).

119

Id. at 549.

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to 36% per annum. Minnesota is one of those states.

120

As a result, in Miller v.

Colortyme, the Minnesota Supreme Court had to decide if a rent-to-own transaction

was a credit transaction because if so, the transaction involved an interest rate well

above the Minnesota interest rate cap.

121

The court ultimately held that rent-to-

own transactions were credit sales and thus subject to general usury laws.

122

Naturally, being able to get out from under usury caps is a tremendous benefit

for a creditor. For example, payday lenders, which charge 300% per annum or more,

cannot operate in states with usury caps.

123

If rent-to-own transactions are not

credit, they need not comply with usury laws and can charge whatever they want.

C. Recourse Versus Non-recourse Debt, Article 9, and the Scope and Legislative

History of Article 9

Secured debt comes in two types: recourse debt, in which the creditor can pur-

sue the debtor for the full amount even if the collateral doesn’t cover it, and non-

recourse debt, where the creditor can only realize on the collateral for the debt, once

the debtor stops paying.

124

Article 9 covers all security interests, whether the debt is

recourse or non-recourse.

125

Several industries that look like they are providing se-

cured credit are claiming that their products are not credit at all but something else.

This Section describes these different types of secured credit and why we care if a

vendor is providing secured credit.

1. Rent-to-Own Debt is Non-recourse Debt, but Debt Nevertheless

The industry’s most consistent and compelling argument for why rent-to-own

is not credit is that customers can end the relationship at any time, surrender the

rented goods, and not be liable for the remaining lease payments. As the New Jersey

Supreme Court noted in Perez v. Rent-A-Center, however, this one fact is not deter-

minative on the issue of whether something is credit or something else.

126

Function-

ally, rent-to-own transactions involve non-recourse debt, a type of debt for which

the creditor does not seek additional payment after default, but relies solely on its

collateral post-default.

120

Payday Loan Consumer Information, CONSUMER FED’N AMERICA, https://

paydayloaninfo.org/state-information (last visited Dec. 21, 2020).

121

Miller, 518 N.W.2d at 546.

122

Id. at 548.

123

Nathalie Martin, Public Opinion and the Limits of State Law: The Case for Federal Usury

Caps, 34 N.

ILL. U. L. REV. 259, 266, 268–71 (2014).

124

Julia Kagan, Defining Limited Recourse Debt, INVESTOPEDIA, https://investopedia.com/

terms/l/limitedrecoursedebt.asp (last visited Dec. 20, 2020).

125

U.C.C. § 1-901(a) (AM. LAW. INST. & UNIF. LAW COMM’N 2019) (“. . . [T]his article

applies to . . . a transaction, regardless of its form, that creates a security interest in personal

property or fixtures by contract . . .”).

126

Perez v. Rent-a-Ctr., Inc., 892 A.2d 1255, 1270 (N.J. 2006).

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Non-recourse or limited recourse debt is debt for which the creditor agrees not

to pursue the borrower for any additional payments once it repossesses its collat-

eral.

127

With recourse debt, the lender has the legal right to collect not just from the

collateral, but also from the debtor’s other assets upon default.

128

Recourse debt can

either be full recourse or limited recourse.

129

Full recourse debt allows the lender to

seize and sell the debtor’s assets, through the state execution and collections pro-

cess.

130

Limited recourse or non-recourse debt contracts forbid the lender from collect-

ing except from limited assets, typically just its collateral.

131

This type of debt “gives

the lender a limited amount of recourse to the borrower’s other assets in the event

of default.”

132

If the borrower defaults on his or her payments, the lender can exer-

cise its rights to repossess its collateral, but that’s it. If the collateral is insufficient to

cover the entire debt, the borrower is not personally liable for the deficiency or

shortfall between the amount of unpaid debt and the amount realized on the collat-

eral.

133

Non-recourse loans are not limited to home loans.

134

Any time the lender relies

solely on the value of its collateral for collection, the debt is non-recourse debt. Rent-

to-own contracts create just that, non-recourse debt. It is not that the transactions

are leases, as both parties prefer that the customer ultimately own the property and

in most cases that is what happens.

135

Rather, rent-to-own transactions create debt

for which the lender intends to rely solely on its collateral for repayment. Rent-to-

own contracts in which the customer can end the relationship at any time by just

returning the goods have all of the attributes of non-recourse debt. Non-recourse

debt is debt, nevertheless.

2. The Side-Step Around Article 9

As we have seen, creditors extending credit on a secured or unsecured basis

benefit in many ways by calling their products something other than “credit.” One

127

Kagan, supra note 124.

128

Id.

129

Id.

130

Id.

131

Id.

132

Id.

133

Id.

134

For example, “[a]uction houses and art specialists, on the other hand, provide non-

recourse loans and their decisions are based solely on the value of the art and its risk. The

borrower’s guarantee is not required in order to approve a non-recourse loan, and the main

criterion is the art itself, not the creditworthiness of the borrower.” William N. Goetzmann &

Milad Nozari, Art as Collateral 5 (Yale ICF, Working Paper No. 2018-01, 2020),

https://ssrn.com/abstract=3099054.

135

Lacko, supra note 9, at ES-2.

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benefit is escaping the purview of Article 9 of the U.C.C., which governs reposses-

sions, forfeiture, and creditor liability. In the first scholarly article on rent-to-own,

Professor James Nehf noted the industry’s particular interest in avoiding Article 9’s

repossession provisions.

136

The scope of Article 9 has always been broad, to keep lenders from disguising

their transactions as leases for the purpose of escaping the protections of the U.C.C.

As one court explained:

[Article 9 was drafted, in part,] [t]o avoid the dismal history under which

legislatures drafted laws to govern security arrangements and clever lawyers

routinely escaped the grasp of such laws by devising ingenious documents that

suited their clients’ needs . . . . [The Code instructs that, with limited excep-

tions, Article 9 applies regardless of] whether title in collateral is in the secured

party or the debtor . . . . The drafters . . . took this step with the intention

“that its provisions should not be circumvented by manipulation of the locus

of title.”

137

Ensuring that Article 9 applies to disguised security interest is critical to, among

other things, avoiding forfeitures of equity similar to that which occurred in the

infamous Walker Furniture case, in which a low-income woman made most of her

installment payments on various household goods, but defaulted at the end and lost

everything.

138

The drafters of Article 9 also sought to avoid unfair collection and

repossession.

139

136

Nehf, supra note 59, at 752.

137

In re Jeff Benfield Nursery, Inc., 565 B.R. 603, 613 (Bankr. W.D.N.C. 2017).

138

Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 447 (D.C. Cir. 1965).

139

As Nehf explains:

If the agreement is deemed to have created a security interest, the state’s version of Article 9

will impose several restraints on the repossessing firm that do not apply to lessors. For in-

stance, after a dealer lawfully repossesses, the consumer has a right under section 9-506 to

cure the default by tendering the amount secured by the obligation. If default is not cured

and the dealer decides to retain the collateral (instead of selling it or re-renting it to another

customer), section 9-505 requires the dealer to give written notice of the proposed retention

to the consumer, and if the consumer does not object, the dealer may keep the collateral in

full satisfaction of the debt and the consumer would not owe any additional amount. Reten-

tion is not permitted, however, where the consumer has paid 60% of the original purchase

price; the dealer must then sell or lease the goods within ninety days unless the consumer

signs a waiver of this right. Most importantly, under section 9-504 if the dealer sells or leases

the repossessed property, it must notify the consumer before the disposition and account to

the consumer for any surplus realized from the sale or lease above the amount owed. Because

the percentage of RTO contracts that result in repossessions is relatively high, the notice and

accounting requirements of Article 9 would impose a substantial administrative burden on

RTO operations. Noncompliance would subject the dealer to a statutory damages formula

which, particularly in a class action alleging a pattern of noncompliance, could be substantial.

Nehf, supra note 59, at 789–90.

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As explained below, the original U.C.C. distinguished between leases and con-

tracts by looking at the economic realities of the transaction. The customer’s option

to get out of the deal before the end of the lease was one factor, but not determina-

tive.

140

Under former section 1-201(37), courts balanced many factors to determine

if a lease was a true lease or a security interest.

141

Under most of these analyses, rent-

to-own transactions were deemed disguised security interests, which were covered

by Article 9 and were thus subject to all of the protections of both the U.C.C. as

well as all other credit-related laws.

142

Courts focused on a variety of objective facts

related to the leasing transaction, such as the terms of the lease and any option, the

140

If a “lease” includes a purchase option for nominal or no consideration, then it is

presumed to be intended as a security agreement and not a lease, unless the option price bears a

resemblance to the fair market value of the property. In re Phoenix Pipe & Tube, L.P., 38 U.C.C.

Rep. Serv. 2d 28, *2 (E.D. Pa. June 8, 1993). A purported lease is actually a secured sales contract

and therefore does not constitute a true lease when the parties apparently intended the lease as

security, as demonstrated by the debtor’s option to purchase the “leased” equipment at the end of

the lease term. Although the lease may not contain explicit language granting a security interest,

the practical effect of the lease is to create a security interest if the lease is intended as security. In

re Village Import Enters., 126 B.R. 307, 308 (Bankr. E.D. Tenn. 1991). The Code recognizes

that a secured sale may be veiled in lease terms. The lease need not contain specific language

granting the security interest. The drafters of the U.C.C. “expected a lease intended as security to

use only lease terms. They did not expect a party to disguise a secured sale as a lease and then give

away the disguise by including words granting the lessor a security interest.” Id. at 308–09; see also

Sutton v. Ryder Truck Rental, Inc., 807 S.W.2d 905, 906–07 (Ark. 1991). An equipment lease

is in reality a secured transaction if the lessee has the right to purchase the equipment for $1.00 at

the end of the lease period. In re McDaniel, 127 B.R. 132, 134 (Bankr. N.D. Tex. 1991).

141

See In re Price, 577 B.R. 643, 653–54 (Bankr. E.D.N.C. 2017) (holding that a purported

lease agreement was a disguised security agreement when the “lessee’s” obligations were not subject

to termination, the “lessee” was obligated for the initial term of the lease, and the option to

purchase the equipment for $1.00 constituted nominal consideration); see also In re Johnson, 571

B.R. 167 (Bankr. E.D.N.C. 2017); In re Ajax Integrated, L.L.C., 554 B.R. 568, 578–79 (Bankr.

N.D.N.Y. 2016); In re Johnson, 86 U.C.C. Rep. Serv. 2d 207, *6–8, *12–13 (S.D. Miss. Mar.

27, 2015); In re Purdy, 763 F.3d 513, 519–21 (6th Cir. 2014); Gib. Fin. Corp. v. Prestige Equip.

Corp., 949 N.E.2d 314, 321 (Ind. 2011); In re Lash, 73 U.C.C. Rep. Serv. 2d 292, *15–16

(Bankr. M.D.N.C. Dec. 9, 2010); In re Bailey, 326 B.R. 156, 161 (Bankr. W.D. Ark. 2005); In

re Super Feeders, Inc., 236 B.R. 267, 269–70 (Bankr. D. Neb. 1999); In re Eagle Enters., 237

B.R. 269, 274–75 (E.D. Pa. 1999).

142

More specifically, former section 1-102(37), which later became section 1-203, provided

that:

Unless a lease or consignment is intended as security, reservation of title thereunder is not a

“security interest.” Whether a lease is intended as security is to be determined by the facts of

each case; however, (a) the inclusion of an option to purchase does not of itself make the

lease one intended for security, and (b) an agreement that upon compliance with the terms

of the lease the lessee shall become or has the option to become the owner of the property

for no additional consideration or for a nominal consideration does make the lease one in-

tended for security.

In re Super Feeders, Inc., 236 B.R. at 269–70.

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1462 LEWIS & CLARK LAW REVIEW [Vol. 24.4

amount of equity, if any, that the lessee was acquiring in the leased property, the

amount of rent under the lease compared to the purchase price for the goods if sold

rather than leased, which party insured the property, whether the lessor had dis-

claimed warranties, the value of the property at the end of the lease, and the nature

of the lessor’s business.

143

One very significant factor was whether the lease agree-

ment required that the transferee pay consideration for the use of the goods for a

term that was equal to their economic life, although this one factor was by no means

determinative.

144

Rent-to-own transactions meet many of these fluid factors.

Later, the lease versus security interest provision in Article 9 was moved to sec-

tion 1-203 and amended to make it absolutely necessary for the customer to be

bound to the entire lease term for the full useful life of the leased goods, in order for

a transaction to be a security interest.

145

This new definition created a sea change in

143

The test focused on whether, at the time the lease was executed, it was reasonably

predictable that the “lessor” will have retained more than a nominal residual interest in the goods.

If it had not, the transaction is in fact a secured transaction because the transferee has received the

full economic ownership, and presumably value, in the goods. A thorough discussion of the

difference between a lease and a security interest can be found in C

OOGAN ET AL., SECURED

TRANSACTIONS UNDER THE UCC § 30.02 (2020). See also In re Pillowtex, Inc., 349 F.3d 711,

717–18 (3d Cir. 2003); In re Our Secret, Ltd., 282 B.R. 697, 701–04 (Bankr. D.N.M. 2002);

Leasing One Corp. v. Caterpillar Fin. Servs. Corp., 776 N.E.2d 408, 407, 409–11 (Ind. Ct. App.

2002); In re Hoskins, 266 B.R. 154, 158–59 (Bankr. W.D. Mo. 2001); Citipostal, Inc. v. Unistar

Leasing, 724 N.Y.S.2d 555, 558 (N.Y. App. Div. 2001); Burkhart v. U.S. Commerce Equip. Fin.

LLC., 2001 WL 984915, at *4 (Tenn. Ct. App. Aug. 28, 2001).

144

Some factors deal with an option exercisable by the transferee to renew the lease or to

purchase the goods. An option to purchase the goods does not convert the lease to a sale and

security interest so long as the transferee must pay more than a nominal consideration. The reason

is that the transferee might not exercise the option and thus the transferor has a residual value. If

the lessee does exercise the option to purchase, at that point its purchase of goods is a separate

transaction from the original lease. On the other hand, if the transferee must pay no consideration

or only nominal consideration, the transferee at the time the lease is executed acquires the total

interest in the goods. Hence, the nominal lease is a disguised security interest. Whether a lease is

a lease or a security interest turns most critically, therefore, on whether the additional

consideration paid by the transferee is nominal. C

OOGAN, supra note 143, at § 30.03[1][c].

145

U.C.C. § 1-203 (AM. LAW. INST. & UNIF. LAW COMM’N 2017). Specifically, section 1-

203 was amended as follows:

§ 1-203. Lease Distinguished from Security Interest.

(a) Whether a transaction in the form of a lease creates a lease or security interest is deter-

mined by the facts of each case.

(b) A transaction in the form of a lease creates a security interest if the consideration that the

lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term

of the lease and is not subject to termination by the lessee, and: (1) the original term of the lease

is equal to or greater than the remaining economic life of the goods; (2) the lessee is bound

to renew the lease for the remaining economic life of the goods or is bound to become the

owner of the goods; (3) the lessee has an option to renew the lease for the remaining eco-

nomic life of the goods for no additional consideration or for nominal additional considera-

tion upon compliance with the lease agreement; or (4) the lessee has an option to become

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the definition by providing that there was no need to balance any factors and no

security interest at all, if the lease was “subject to termination by the lessee.”

146

Be-

fore this, whether the lessee could terminate was just one factor.

147

Suddenly, if the

customer did not have to pay the entire lease, then it was no longer a secured trans-

action, but a lease regardless of the rest of the economics. Prior to the enactment of

this amendment, courts used at least sixteen different factors, but the one factor that

was determinative to many courts was whether the “lease” granted the “lessee an

option to become the owner of the property for no additional or nominal consider-

ation at the end of the lease.”

148

Rent-to-own transactions by definition contain the

very option upon which former Article 9 and these cases relied.

It is remarkable that this little-talked-about sea change turned the existing test

on its face and made the absolute promise to pay the one determining factor, elim-

inating intent entirely, along with the previously used economic realities test. By

focusing solely on the absolute promise to pay rather than the economic realities,

our U.C.C. also moved away from international standards on the lease/sale distinc-

tion, which focus primarily on whether the lessee has the option to become the

owner of the goods upon full compliance with the terms of the contract.

149

In any

case, before this U.C.C. amendment, the rent-to-own industry got busy passing the

industry-friendly legislation described in the next Part, perhaps just in case the

U.C.C. changed again.

the owner of the goods for no additional consideration or for nominal additional considera-

tion upon compliance with the lease agreement.

Id. (emphasis added).

146

Id.

147

See, e.g., In re Village Import Enters., 126 B.R. at 308.

148

See Nehf, supra note 59, at 793. As Nehf explains, where the lessee can automatically

become the absolute owner of the property at the end of the lease, “periodic lease payments are

indistinguishable from payments under an installment sales contract, and the lessee has in fact

been purchasing the goods over the contract term.” Id. Some courts disagreed, however. “Relying

on the first sentence of section 1-201(37), which provides that a security interest ‘secures payment

or performance of an obligation,’ several courts have held that, despite the possible transfer of

ownership for no additional consideration at the end of the lease, an RTO contract does not create

a security interest because the consumer undertakes no obligation to repay a debt.” Id. at 793–94.

149

See, e.g., Conditional Sales Act, R.S.N.S. 1989, c 84, § 2(1)(b); Mitsui & Co. (Canada)

Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187 (Can.) (in which the Supreme Court of Canada

confirmed that this wording did not limit the scope of the registration provisions of the Nova

Scotia Act, first enacted in 1930, to “disguised conditional sales agreements”—i.e., lease-option

agreements—where it is plain that the lease payments in reality are going toward the purchase of

the leased goods).

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1464 LEWIS & CLARK LAW REVIEW [Vol. 24.4

III. THE ANATOMY OF RENT-TO-OWN

This Part describes how rent-to-own works. It helps put these contracts in con-

text by comparing them to pure lease transactions, in which a person rents an item

for a limited period of time with no expectation of ownership. A good example is a

car rented at an airport. The consumer never plans to own the car and is using it for

a short time. “Rent-to-own” or “rental-purchase” transactions are something of a

hybrid.

150

These contracts are typically written as short-term, weekly or monthly,

obligations, but automatically renew for an extended period.

151

Typically, the con-

sumer becomes the owner on completion of payments over that span.

152

Rent-to-own companies fall within the broad category of lenders who provide

“loans” to low-income consumers at high costs.

153

Other lenders in this category

include payday lenders, tax-refund-anticipation loan providers, traditional check

cashers, foreign remittance shops, auto-title pawn stores, and traditional pawn

shops, all of which share certain predatory characteristics.

154

For the most part, these

lenders are clustered in low-income neighborhoods or outside military bases, their

products are poorly regulated, often with triple-digit interest rates, they sometimes

operate under safe-harbor laws drafted by the industry itself, they sometimes use

threatening bullying tactics to collect debts and late payments, and their products

are often designed to keep consumers in perpetual debt.

155

The name “rent-to-own” says it all. Rent-to-own contracts offer the allure of

renting in order to someday own. Indeed, the majority of rent-to-own customers

hope to someday own the item outright.

156

The cost of these transactions is three or

four times the cash price for the item.

157

150

Martin & Huckins, supra note 54, at 385–86 (discussing typical rent-to-own

transactions); David L. Ramp, Renting to Own in the United States, 24 C

LEARINGHOUSE REV. 797,

797 (1990) (discussing rent-to-own contracts).

151

Id. at 797, 809.

152

Id. at 797.

153

Ed Mierzwinski, The Poor Still Pay More: The Small-Loan Industry Preys on Low-Income

Americans Who Often Have No Choice but to Accept Their Outrageous Payment Terms. But This Big

Business May Be Facing Trouble, 44 T

RIAL 40, 42 (2008).

154

Id.

155

Id. (noting that the “mom-and-pop lenders” of the 1960s are now called rent-to-own

stores, and “sell the American dream of ownership of furniture, appliances, computers, jewelry,

automobile wheel sets, and wide-screen TVs. Business Week said rent-to-own businesses have 8%

(about $20 billion) of the $250 billion ‘poverty business.’”).

156

Lacko, supra note 9, at ES-2.

157

Id. at ES-3.

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A. Rent-to-Own Fundamentals

Rent-to-own contracts are highly popular and have been since the 1960s.

158

2016, the Association of Progressive Rental Organizations reported revenue of $8.6

billion in the United States and also reported an estimated customer count of 4

million between brick and mortar stores and e-commerce.

159

Rent-to-own agree-

ments enable a consumer to rent a product for a set time period without a credit

check or substantial down payment.

160

The consumer is then given the option to

purchase that product by either paying a substantially higher purchase price, or by

completing all self-renewing payments for the set time period.

161

The consumer can

also terminate the agreement at any point with no penalty.

162

According to the con-

tract terms, by just stopping the agreed upon payments, the contract ceases and the

vendor will come and pick up the product.

163

Rent-to-own transaction rates are undeniably high.

164

For example, consider a

typical transaction involving a $300 television. The rent-to-own agreement listed a

seemingly reasonable weekly payment of $16 and after 52 payments, the consumer

would own the television for the total cost of $832.

165

This transaction amounts to

an APR of 254%, though APRs are not provided to customers as we discussed above

in connection with the truth-in-lending analysis.

166

For comparison purposes, the

average APR for credit cards in the United States in 2019 was 15.05% for all ac-

counts.

167

B. Unprecedented Self-Regulation

While rent-to-own transactions appear to us to be disguised security inter-

ests,

168

due to enabling statutes lobbied into law by the rent-to-own industry, they

158

Id. at 2.

159

Richard May, The Shape of Rent-to-Own by the Numbers, ASS’N OF PROGRESSIVE RENTAL

ORG. (Aug. 7, 2017), https://www.rtohq.org/2017/08/shape-rent-numbers/.

160

Lacko, supra note 9, at ES-3.

161

Id.

162

Id.

163

Id. at 4.

164

Nehf, supra note 59, at 752.

165

The Consumer Rental Purchase Agreement Act: Hearing on H.R. 1701 Before the Subcomm.

on Fin. Inst. and Consumer Credit of the H. Comm. on Fin. Servs., 107th Cong. 99 (2001)

(statement of Margot Sanders, Managing Attorney, National Consumer Law Center).

166

See supra notes 75–91 and accompanying text.

167

Consumer Credit - G.19, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

(Aug. 7, 2020, 3:00 PM), https://www.federalreserve.gov/releases/g19/current/g19.pdf.

168

A disguised security interest has been defined by the Fifth Circuit as a transaction labeled

as a lease, but where the agreement is not subject to cancellation by the lessee, and the lessee is

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are regulated under their own industry-written laws. Few purveyors of credit services

have organized as relentlessly as the rent-to-own industry. Considering payday lend-

ers, mortgage lenders, debt collectors, rent-to-own landlords, credit-reporting agen-

cies, and every other purveyor of credit, none have sought so hard to pass their own

extensive regulatory framework, on both a state and national level.

In the 1980s, the rent-to-own industry convinced more than forty-five state

legislatures ‘to adopt its preferred safe-harbor legislation—treating week-to-

week contracts as renewable leases, not as purchases over time—thus exempt-

ing the business from state small-loan usury ceilings, retail installment sales

acts, and other credit sale laws.’

169

According to many, the industry regulation is toothless and, essentially, non-

regulation.

170

According to James Nehf, the industry sprang up once federal disclosure laws,

like TILA, made it more expensive to lend to low-income individuals.

171

By arguing

that this service was not credit at all, but rather merely renting an item one might

ultimately own, companies could avoid all the new (at the time) federal regula-

tion.

172

They could also avoid Article 9.

173

Avoiding these two regulatory schemes

seemed to be the primary goal of the legislation.

174

As we explained in Part II.B.2 above, the current Article 9 does not cover the

transactions in any case, so the rush to legislate out of it is mysterious. Perhaps the

industry feared that the law would change back, and they would then be subject to

Article 9 as they were under prior U.C.C. law. The primary obligations of Article 9

are to provide notice of default before repossession, to not breach the peace when

bound to become the owner of the goods. In re Pioneer Health Servs., Inc., 759 F. App’x. 240,

243–44 (5th Cir. 2018).

169

Mierzwinski, supra note 153, at 42.

170

See H.R. REP. NO. 107-590, pt. 1, at 37 (2002) (testimony of Hon. Maxine Waters),

stating that:

[t]he Consumer Rental Purchase Agreement Act is special interest legislation at its very worst.

The bill is falsely presented by its industry proponents as pro-consumer and as not pre-emp-

tive of state law. Neither is true. The bill has one purpose and one purpose only: to circum-

vent stronger consumer protections in the Federal Truth-in-Lending Act and in the statutes

of a handful of States that the rent-to-own industry has not been able to overturn.

Id.; see also The Consumer Rental Purchase Agreement Act: Hearing on H.R. 1701 Before the

Subcomm. on Fin. Inst. and Consumer Credit of the H. Comm. on Fin. Servs., 107th Cong. 38

(2001) (statement of Hon. Julia Carson); Consumer Credit Protection Act: Hearing on S. 1152

Before the Subcomm. on Consumer Affairs of the S. Comm. on Banking, Housing, and Urban Affairs,

98th Cong. 1 (1983) (statement of Sen. Paula Hawkins, Chairman, Subcomm. on Consumer

Affairs).

171

Nehf, supra note 59, at 754–55.

172

Id.

173

Id.

174

Id. at 821–22.

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repossessing, to provide notice of sale of the collateral, to return any surplus back to

the borrower after the sale, if there is one, and to allow the borrower to reclaim the

goods before a sale.

175

One goal of Article 9 is to avoid a forfeiture if there is value

in a repossessed item, and rent-to-own transactions necessarily permit such a forfei-

ture.

176

Since the companies also can re-rent the same repossessed items to other

customers, forfeiture can be more nefarious. Forfeiture of equity deprives customers

of their right to the benefit from the companies’ normal, contractual mitigation of

damages.

177

The industry is also deeply opposed to compliance with TILA, the law that

requires lenders to state the APR on a loan so that customers can compare the cost

of various forms of credit and the credit offered by various providers.

178

In his em-

pirical study of rent-to-own companies, Professor Jim Hawkins found that rent-to-

own companies uniformly reported that, if they had to comply with the obligations

to state an APR for their products, they would leave that market or stop operating

in that state.

179

This extreme desire to not disclose the cost of credit is also mysteri-

ous.

The desire to avoid all forms of consumer credit regulation has been articulated

often. According to Martin and Huckins:

The industry is very concerned with maintaining its unique position in the

marketplace, neither sale nor lease, in order to keep its favorable legal treat-

ment. For example, APRO has counseled its members to avoid marketing

techniques that bring it too close to retail sales. . . . Under a flex-term plan,

for example, the store offers to rent an item for, perhaps, $40 a month, in

which case the customer would become the owner in two years, or for $70 a

month, in which case it would take only one year to own. APRO legal counsel

explains that such a plan makes the term “fair rental value” meaningless and

suggests that the customer is doing something other than merely renting the

item for a month. If the customer merely rents for one month on the $70

plan, he has not gotten anything for his extra $30 a month, creating an unfair,

deceptive transaction.

180

The industry wants to have it both ways. Both they and their customers intend

for the transaction to be an outright sale, and hope that it will be, but they want to

175

Id. at 789–90.

176

Id. at 790–91.

177

See id. at 789–90.

178

The rent-to-own industry likes to call itself a “service,” as if this will preclude the

transaction from being credit. The fact that this is a service, does not make it not credit. All credit

is a service. See Alexandrov, Grodzicki & Bedre-Defolie, supra note 32, at 2 (describing credit as

a service).

179

Jim Hawkins, supra note 12, at 2103–05.

180

Martin & Huckins, supra note 54, at 412 n.187.

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avoid regulation by being governed by lease, rather than credit laws.

181

C. Rent-to-Own Regulation

All but four U.S. states passed industry-sponsored regulation in some form or

another.

182

This Part briefly reviews some of the primary provisions of most of these

laws, typically called Rental Purchase Agreement Acts (“Acts”).

183

The key provi-

sions are that rent-to-own transactions are not “credit transactions” and that rent-

to-own transactions are not covered by either Article 9 or Article 2 of the U.C.C.

184

Given that the transactions are deemed not to be “credit transactions” under these

statutes, they are regulated to a far lesser degree,

185

to the detriment of their typically

disadvantaged customers. The regulations mandate minimum disclosures but few

“substantive limits on the transaction in areas consumer representatives deem most

abusive.”

186

1. The Substance (or Lack Thereof) of Rental Purchase Agreement Acts

To fall within these Acts, the contract must be an agreement for the “use of

goods by an individual for personal, family or household purposes, for an initial

period of four months or less, that is automatically renewable with each payment

after the initial period, that does not obligate or require the consumer to continue

renting or using the goods beyond the initial period and that permits the consumer

to become the owner of the goods.”

187

The first key is to make sure the transactions

are four months long or less, even though they can be renewed as long as it takes to

purchase the item.

188

The meat of the Acts are the disclosures. The primary disclosures require a

description of the goods and whether they are new or used;

189

a statement of the

cash price of the goods, which is illusory;

190

disclosure of periodic payments and

due dates and a total of these payments due in order to own the item; along with an

explanation of how to purchase items at the end of the “lease” or in an early purchase

option. There also must be a disclosure about who must maintain the items; whether

181

Anderson & Jackson, supra note 12, at 304.

182

Id.

183

See, e.g., Rental-Purchase Agreement Act, N.M. Stat. Ann. § 57-26-1 (1995).

184

Anderson & Jackson, supra note 12, at 304.

185

Id.

186

Nehf, supra note 59, at 815.

187

N.M. Stat. Ann. § 57-26-2G (1995).

188

See id. The statute also exempts mobile homes and a few other transactions like safety

deposit boxes. N.M.

STAT. ANN. §§ 57-26-A (3), (5) (1995).

189

N.M. STAT. ANN. § 57-26-5A(4) (1995).

190

Disclosure of the cash price is meaningless, though, because no one goes into a rent-to

own establishment to buy outright and stores can set the cash price at any level they want. Nehf,

supra note 59, at 822–23.

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the consumer is liable for loss or damage to the goods and who must insure the

goods;

191

a statement that the consumer will not own the goods until the consumer

has paid the total amount necessary to acquire ownership,

192

and a statement that

the consumer may terminate the rental-purchase agreement without penalty by vol-

untarily surrendering the goods “in good repair, reasonable wear and tear excepted,

along with any past due rental payments upon expiration of any rental period.”

193

While lessee rent-to-own companies are provided with explicit damages under

the Act, there is no section providing damages for lessor consumers. One could read

the Act as providing no right to sue by a consumer lessor, but the Act also says that

“[t]his subsection does not bar a consumer then in default on an obligation from

asserting a violation of the Rental-Purchase Agreement Act as an original action or

as a defense or counterclaim to an action brought by a lessor against the con-

sumer.”

194

As for lessee damages,

195

lessees can recover the greater of actual damages

for breach or 25% of the total payments required to owns the item, but only be-

tween $100 and $1,000.

196

Consumers are also liable for costs and attorneys’ fees,

197

and cannot offset their own damages.

198

Regarding the statute of limitations, all

suits must be filed within one year of the last rental payment or within one year of

the rental-agreement violation.

199

Given that a consumer is not likely to know he

or she must sue within a year, this is incredibly short, especially for a contract. Con-

tracts statute of limitations are usually four years.

200

Lessees also have a few defenses,

none particularly generous.

201

This disclosure-based Act falls far short of the protections one gets with other

credit products, such as disclosure of interest rates under TILA, recovery of sur-

pluses, and notice of repossession under Article 9.

191

See N.M. STAT. ANN. §§ 57-26-5A(3), (9) (1995).

192

Id. § 57-26-5A(2).

193

Id. § 57-26-5A(10).

194

N.M. STAT. ANN. § 57-26-11B (1995).

195

Id. § 57-26-11A.

196

Id. § 57-26-11A(1).

197

Id. § 57-26-11A(2).

198

“A consumer may not take any action to offset the amount for which a lessor is potentially

liable under subsection A of this section against any amount owed by the consumer unless the

amount of the lessor’s liability has been determined by judgment of a court of competent

jurisdiction in an action in which the lessor was a party.” Id. at § 57-26-11B.

199

Id. § 57-26-11D.

200

U.C.C. § 2-725 (AM. LAW. INST. & UNIF. LAW COMM’N 2017).

201

See Brian Highsmith & Margot Saunders, The Rent-To-Own Racket: Using Criminal

Courts to Coerce Payments from Vulnerable Families, N

AT’L CONSUMER L. CTR. 1, 14–15 (Feb.

2019), https://www.nclc.org/images/pdf/criminal-justice/report-rent-to-own-racket.pdf.

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2. Case Law on Rent-to-Own

In Minnesota, New Jersey, North Carolina, and Wisconsin, the industry-spon-

sored legislation did not pass due to fairness concerns for consumers.

202

Under the

existing consumer credit statutes of these states, rent-to-own contracts are credit

transactions,

203

and therefore, in those states, the transactions are considered credit

transactions.

204

The cases rely on each state’s definition of a consumer credit sale.

205

202

Bruce Speight & Greg Hart, Rent-to-Own Ripoff: Why Wisconsin Shouldn’t Exempt the

Predatory Rent-to-Own Industry from Consumer Protection Laws, W

IS. PUB. INT. RES. GROUP (May

13, 2013), https://wispirg.org/sites/pirg/files/reports/The%20Rent-to-Own%20Ripoff.pdf.

Speight & Hart state that:

While some 46 states have enacted industry-friendly laws with these and other weak provi-

sions, a few states, including New Jersey, Wisconsin, Minnesota and Vermont, enforce tough

consumer protection laws. Unable to win in all state legislatures, the RTO industry has also

asked Congress to preempt, or over-ride, these strong state consumer protection laws and

replace them with a weak industry-friendly federal law; thus far, that effort has failed.

Id.; see also Highsmith & Saunders, supra note 201 (observing, in Appendix: State Laws

Authorizing RTO Transactions and Criminalizing Failure to Rental Property, that all states have

laws authorizing RTO transactions except Minnesota, New Jersey, North Carolina, and

Wisconsin).

203

Minnesota, New Jersey, and Wisconsin both require APR disclosures because judicial

decisions have held that the transactions fall within each state’s respective Consumer Credit Sales

Act. See Miller v. Colortyme, Inc., 518 N.W.2d 544, 548, 549 (Minn. 1994) (concluding that

rent-to-own transactions were credit sales under Minnesota’s Consumer Credit Sales Act); see also

Perez v. Rent-a-Ctr., Inc., 892 A.2d 1255, 1270 (N.J. 2006); Rent-A-Ctr., Inc. v. Hall, 510

N.W.2d 789, 795 (Wis. Ct. App. 1993) (holding that Wisconsin’s consumer credit sale act

covered rent-to-own transactions). Also, Vermont requires disclosure but does not call these

“credit.” V

T. STAT. ANN. tit. 9, § 41b(a) (2015); VT. C.P.R. 115.04(b)(4) (1997) (requiring

disclosure on price tag); V

T. C.P.R. 115.04(b)(1) (1997) (requiring disclosure in contract). Nine

other states impose statutory limits on the total costs that rent-to-own firms may charge customers:

Connecticut, Hawaii, Iowa, Maine, Michigan, New York, Ohio, Pennsylvania, and West

Virginia. See Hawkins, supra note 12, at 2108 n.319 (citing Ed Winn III, APRO’s Legal Counsel,

Mem http://www.rtohq.org/rent-to-own/wp-content/uploads/LegUpdate_2006.pdf (last visited

Mar. 29, 2019)).

204

See, e.g., Perez, 892 A.2d at 1270; Miller, 518 N.W.2d at 549.

205

For example, the Wisconsin statute reads:

(9) ”Consumer credit sale” means a sale of goods, services or an interest in land to a customer

on credit where the debt is payable in installments or a finance charge is imposed and in-

cludes any agreement in the form of a bailment of goods or lease of goods or real property if

the bailee or lessee pays or agrees to pay as compensation for use a sum substantially equiva-

lent to or in excess of the aggregate value of the goods or real property involved and it is

agreed that the bailee or lessee will become, or for no other or a nominal consideration has

the option to become, the owner of the goods or real property upon full compliance with

the terms of the agreement.

WIS. STAT. § 421.301 (2020). Minnesota’s statute reads as follows:

Subd. 2. Consumer credit sale. — ”Consumer credit sale” means a sale of goods or services

in which:

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D. The Demographics of the Typical Rent-to-Own Customer

The best available data on rent-to-own usage and demographics, as well as cus-

tomer intentions at the time of contracting, comes from a 2000 FTC study involv-

ing interviews with over 500 randomly selected rent-to-own customers.

206

The rent-

to-own industry insists that a large part of its customer base is comprised of well-

heeled customers that rent-to-own to fill a temporary need, such as a large-screen

TV for the Super Bowl.

207

In reality, most rent-to-own consumers are disadvan-

taged.

208

Compared to households that had never used rent-to-own, rent-to-own

customers were more likely to be African-American, were younger and less educated,

and had lower incomes.

209

Rent-to-own customers are far more likely to come from

(a) credit is granted by a seller who regularly engages as a seller in credit transactions of the

same kind;

(b) the buyer is a natural person; and

and not for commercial, agricultural, or business purpose.

MINN. STAT. § 325G.15 (2019).

206

Lacko, supra note 9, at 1. The major findings of the FTC staff survey included that 2.3%

of United States households had used rent-to-own transactions in the last year, and 4.9% had

done so in the last five years. Id. at 25. This is lower than the usage of payday loans by comparison,

which run 5.5% nationwide. P

EW CHARITABLE TRUSTS, PAYDAY LENDING IN AMERICA: WHO

BORROWS, WHERE THEY BORROW, AND WHY 4 (2012), https://www.pewtrusts.org/-

/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.

207

See APRO, THE RENT-TO-OWN INDUSTRY: AN OVERVIEW, https://www.rtohq.org/wp-

content/uploads/2019/06/APRO-Flipbook-About-Us.pdf (last visited Dec. 20, 2020) (“What all

customers have in common is that they have immediate needs for consumer household goods

. . .”).

208

See Eligio Pimentel, Renting-to-Own: Exploitation or Market Efficiency?, 13 LAW & INEQ.

369, 370 (1995); Lee M. Breslau, A Study of Appliance Rental Practices: Appliance Rentals and

Purchases by Low-Income Consumers, 20 C

LEARINGHOUSE REV. 1515, 1516–17 (1987); see also

Rent-To-Own: Providing Opportunities or Gouging Consumers?: Hearing Before the Comm. on

Banking, Fin. and Urban Affairs, 103rd Cong., 1st Sess. 121–22 (1993) [hereinafter “Hearings”]

(testimony of William Leibovici, Assistant Attorney General of Maryland). In these hearings,

William Leibovici stated that:

Everybody seems to agree that the customers of rent-to-own centers are primarily low-in-

come consumers. . .

. In addition to being low-income, a significant number of rent-to-own

customers are seniors. In 1990, the American Association of Retired Persons (AARP) pro-

duced a Senior Consumer Alert in which it stated ‘Older Persons are prime targets of these

[rent-to-own] come-ons.

Id.

209

Lacko, supra note 9, at 1. The report found that:

Thirty-one percent of rent-to-own customers were African American, 79 percent were 18 to

44 years old, 73 percent had a high school education or less, 59 percent had household in-

comes less than $25,000, 67 percent had children living in the household, 62 percent rented

their residence, 53 percent lived in the South, and 68 percent lived in non-suburban areas.

Id.

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communities of color, as African-Americans and Hispanics appear to be overrepre-

sented in rent-to-own transactions.

210

According to a report written for Rent-A-

Center itself, 38.6% of its rent-to-own customers are African-American and 10.9%

are Hispanic despite that at the time of that report, African-Americans constituted

12.1% of the total population and Hispanics, 9%.

211

These rent-to-own customers

also were more likely to have children at home, rent their homes, and live in the

South.

212

They also were more likely to live in the inner city or the country.

213

Regarding economic condition, most consumers who entered into a rent-to-

own agreement made less money than those who had never entered into a rent-to-

own agreement.

214

They also had less education.

215

Of the customers who returned

their rent-to-own item, 24% did so for financial reasons.

216

Almost half of rent-to-

own customers surveyed reported making late payments.

217

Fifteen percent of late

customers reported poor treatment from the lessee, and 11% reported quasi-abusive

techniques from collections departments.

218

E. What Do Customers Really Want in Rent-to-Own Transactions?

A common claim by industry is that many of their customers are not interested

in buying the item they are renting; rather, most just want to use it for a while.

219

This is largely untrue. Seventy percent of customers buy the item they are renting

and this purchasing rate applies across all demographics.

220

The reason the industry

focuses on customers that do not wish to buy is that it makes the transaction look

more like a true, short-term lease than a lease purchase agreement or a credit trans-

action. Continuing with this charade, the industry claims that, at the moment of

210

Pimentel, supra note 208, at 370–71 n.7 (citing Carl C. Hoffmawn & Robert L. Lovler,

Rent-A-Center Final Report (1994) (prepared for the Board of Directors of Thorn Emi Plc, the

Parent Company of Rent-A-Center)).

211

U.S. DEP’T. OF COMMERCE, 1990 CENSUS OF POPULATION GENERAL POPULATION

CHARACTERISTICS UNITED STATES 3 (1990).

212

Lacko, supra note 9, at 1.

213

Id.

214

Id.

215

Id.

216

Id. at 62.

217

Id. at 74.

218

Id.

219

See Anderson & Jackson, supra note 12, at 302, stating that:

The rental phase of RTO is well suited to consumers who find themselves in personal, fi-

nancial, or employment situations that are seen as temporary or unpredictable. For this con-

sumer group of renters, the embedded put option is highly valued while the option to secure

an installment agreement at a later date increases in value through time.

Id.

220

Lacko, supra note 9, at ES-1.

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entering into the transaction, most customers do not wish to purchase the item.

221

This is also untrue. “Sixty-seven percent of customers intended to purchase the mer-

chandise when they [entered] the . . . transaction, and 87 percent of the customers

intending to purchase actually did [so].”

222

The name of these transactions says it

all: the average person “rents” to “own.”

IV. RENT-TO-OWN HOUSING AND SHADOW CREDIT

A close cousin to the rent-to-own transaction for consumer goods is another

shadow credit transaction, the land sale contract, or contract for deed.

223

These

transactions fall somewhere along the continuum of property rights between owners

and renters and classic home mortgage transactions.

224

Buyers purchase their homes

with installment payments and the seller holds on to title to the land and home until

that last payment is made.

225

These transactions allow people with bad credit or no credit to purchase a

home, at least in theory.

226

In practice, they don’t work as well.

227

In many ways,

these transactions combine the worst aspects of traditional home buying, with the

worst aspects of leasing real estate. The buyers often are responsible for repairs and

also fail to build equity.

228

Due to imbalances of power between buyers and sellers, many of these rent-to-

own home buyers never end up owning the home they pay on for several years.

Rent-to-own homebuyers do not typically become homeowners for several rea-

sons: First, the transactions are often not recorded, so there is no paper trail proving

the buyers have actually purchased anything.

229

Second, even in an honest deal,

221

Id. at 10–11.

222

Id. at ES-2.

223

Genevieve Hébert Fajardo, “Owner Finance! No Banks Needed!” Consumer Protection

Analysis of Seller-Financed Home Sales: A Texas Case Study, 20 G

EO. J. POVERTY L. & POL’Y 429

(2013); cf. Grant S. Nelson, The Contract for Deed as a Mortgage: The Case for the Restatement

Approach, 1998 BYU L. REV. 1111, 1112 (1997); Elizabeth M. Provencio, Moving from Colonias

to Comunidades: A Proposal for New Mexico to Revisit the Installment Land Contract Debate, 3

MICH. J. RACE & L. 283, 293–95 (1997); Grant S. Nelson & Dale A. Whitman, The Installment

Land Contract-A National Viewpoint, 1977 BYU

L. REV. 541, 541–42 (1977).

224

Nelson, supra note 223, at 1112.

225

Nelson & Whitman, supra note 223, at 541.

226

See Eric T. Freyfogle, The Installment Land Contract as Lease: Habitability Protections and

the Low-Income Purchaser, N.Y.U.

L. REV. 293, 304–05 (1987).

227

See Provencio, supra note 223, at 293–95 (describing the debate surrounding installment

land contracts).

228

See Freyfogle, supra note 226, at 295–96 n.12; see also Nelson, supra note 222, at 1113.

229

See Hébert-Fajardo, supra note 223, at 429 (stating that “[t]here are many examples of

families who pay under a contract for deed for years, only to find out that the home has existing

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there is the problem of forfeiture of equity when a buyer fails to complete the trans-

action—a particularly common and significant problem if the buyer has paid for a

long time.

230

Consumers lose their homes and their equity.

231

Third, unlike outright purchases, the properties do not get inspected before the

transaction begins, so they often have serious defects that the buyer does not know

about and must fix.

232

These defects would be remedied by the landlord in a tradi-

tional rental relationship.

233

Buyers typically pay a significant down payment, so

walking away is expensive. Finally, the effective interest rates on these deals can be

breathtakingly high, especially when compared to traditional bank loans. Rates of 9

to 18% are not uncommon,

234

compared to current mortgage rates of 2.5 to 4%.

235

Over 30 years, these interest rate differentials can amount to hundreds of thousands

of dollars.

236

Typical installment land contract buyers resemble typical household goods

rent-to-own customers. Contracts for deed are often referred to, fittingly, as a “poor

man’s mortgage.”

237

Buyers are typically low-income and more often persons of

color.

238

Buyers seldom request or even know about inspections, appraisals, and title

liens or that the seller plans to evict them and start over with new buyers.”). Professor Hébert

Fajardoa, tells this story from one of her clinic cases:

Selling to a second buyer then trying to evict: Ms. Alvarado lives with her family in Eagle

Pass, Texas, on the border with Mexico. She signed a contract for deed, making a down

payment of $1500 and paying $400 per month for at least three years. The seller never rec-

orded the contract for deed. In 2011, Ms. Alvarado received an eviction notice saying she

would need to leave the property at the end of the month. The seller had sold the property

to another buyer using another contract for deed.

Id. at 431 (emphasis omitted).

230

See Provencio, supra note 223, at 285; see also Freyfogle, supra note 226, at 312.

231

Provencio, supra note 223, at 287.

232

Freyfogle, supra note 226, at 296 n.12.

233

Id. at 296.

234

See Hébert Fajardo, supra note 223, at 429; Shelayne Clemmer, Texas’s Attempt to

Mitigate the Risks of Contracts for Deed—Too Much for Sellers—Too Little for Buyers, 38 S

T. MARY

L.J. 755, 799 (2007) (describing rates as high as 18% for contracts for deed, contracts in which

seller provides financing to the buyer for the purchase of real property—similar to rent-to-own).

235

BANKRATE, LLC, https://www.bankrate.com (last visited Oct. 21, 2020).

236

Id.

237

Hébert Fajardo, supra note 223, at 429.

238

See Stacy Purcell, The Current Predatory Nature Of Land Contracts And How To

Implement Reforms, 93 N

OTRE DAME L. REV. 1771, 1774 (2018), stating that:

In the first half of the twentieth century, land contracts were largely used by members of

minority groups who were shut out of the traditional home buying market. Racist lending

practices prevented African Americans from receiving bank-financed mortgages, so they

turned to land contracts. For example, in Chicago an estimated eighty-five percent of Afri-

can-American homeowners purchased their home with a land contract. These sales heavily

favored the sellers and were often unjust. As is still the case, buyers rarely completed the

contract term and obtained legal title. Instead, they fell behind on payments and lost their

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policies.

239

Buyers rarely know to check title records, or to ensure that their deed is

held in escrow until all payments are made.

240

The New York State Department of Financial Services (DFS) claims that rent-

to-own, lease-to-own, or land installment contracts have become new forms of pred-

atory mortgage lending, noting that they are marketed to vulnerable consumers,

promising a path to homeownership, but having them sign agreements that do not

lead to that coveted result.

241

The state of Wisconsin agrees and is suing Vision

Property Management for “misleading and deceiving business practices [that] in-

duce[s] Wisconsin consumers to lease, rent, or purchase uninhabitable proper-

ties.”

242

Wisconsin claims that the company requires tenants to bear the costs of

rehabilitating the property, curing building code violations and paying back taxes,

and if they do not do so, they are evicted in short order.

243

Even more so than rent-

to-own appliance and electronics transactions, an imbalance of power is a defining

feature of rent-to-own real estate contracts.

244

V. RENT-TO OWN HOUSING SHEDS AND NATIVE AMERICAN

PREDATION

As we have explained, the rent-to own industry has successfully created its own

regulation system in most states. This system defines the rent-to-own business as

one that does not provide credit and thus is not bound by the large suite of laws

applicable to consumer credit transactions. As we have also seen, rent-to-own hous-

ing and real estate contracts have the potential to be particularly harmful to con-

homes. The practice “stripped wealth from African-American communities and led to ‘debt

peonage or impoverishment for many black contract buyers, and . . . decay of the commu-

nities in which such sales were concentrated.’”

Id.

239

See Freyfogle, supra note 226, at 305, stating that:

The typical installment contract home buyer has long appeared to courts as a poorly advised,

poorly protected, often lower-income purchaser . . . Because they do not obtain outside fi-

nancing, they do not benefit from the precautions demanded by typical mortgage lenders:

inspections, appraisals, title reports, termite certificates, and other evidence of a property’s

value.

Id.

240

Id.

241

Mortgage Markets: Regulators Look at Rent-to-Own, 51 MORTGAGE & REAL EST. EXECS.

REP. 6 (2018).

242

Ben Lane, Wisconsin Accuses Rent-to-Own Operator Vision Property Management of

Harming Consumers, H

OUSINGWIRE (June 5, 2017), https://www.housingwire.com/articles/

40339-wisconsin-accuses-rent-to-own-operator-vision-property-management-of-harming-consumers.

243

Id.

244

Cf. Provencio, supra note 223, at 305–06.

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1476 LEWIS & CLARK LAW REVIEW [Vol. 24.4

sumers as they capitalize on the strong desire to become homeowners. These trans-

actions frequently result in a forfeiture of equity and all the contract terms are col-

ored by a significant imbalance of power. These same characteristics are present in

a new form of rent-to-own housing that has the potential to be even more predatory

than classic rent-to own contracts or rent-to-own real estate contracts. This Part

describes this new development: rent-to-own shed deals in Native American com-

munities.

A. Native Americans are a Vulnerable Target for Rent-to-Own Shed Deals

Native Americans are particularly vulnerable in terms of financial stability. Less

than 50% of all Native people graduate from high school each year.

245

Conversely,

an average of 93% of non-Native students in the United States obtained a high

school diploma.

246

Poverty and unemployment rates are also higher for Native

Americans than other ethnic groups across the nation.

247

In 2017, only 14.7% of

all Native Americans across the nation had a bachelor’s degree.

248

Over 20% of Na-

tive American families live below the poverty line, which is the highest poverty rate

among all ethnic groups.

249

By comparison, the national poverty level was 11.8%

in 2018.

250

Compounding the problem, many Native people lack understanding of

credit reports and credit scores, which is exacerbated by language barriers and inad-

equate access to technology that could otherwise be used to facilitate financial edu-

cation and consumer research.

251

Many have also taken out high-cost predatory

credit and have compromised credit histories and high rates of loan defaults.

252

245

Education, NAT’L CONGRESS OF AM. INDIANS, http://www.ncai.org/policy-issues/

education-health-human-services/education (last visited Dec. 21, 2020); see also Gaby Galvin,

Tribal Housing Reveals Inequalities in Indian Country, U.S. N

EWS & WORLD REP. (Sept. 23, 2017,

12:00 AM), https://www.usnews.com/news/best-states/articles/2017-09-23/across-the-us-

disparities-in-indian-country-emerge-through-tribal-housing (discussing inequalities between

different Native groups).

246

U.S. DEP’T OF EDUC., NAT’L CTR. FOR EDUC. STAT. ET AL., 2017 STATUS AND TRENDS

IN THE EDUCATION OF RACIAL AND ETHNIC GROUPS 66 (July 2017).

247

Galvin, supra note 245.

248

U.S. CENSUS BUREAU, Table S1501: 2017 ACS 1-year Estimate Subject Tables-

Educational Attainment, https://data.census.gov/cedsci/table?q=s1501&g=

0100000US&y=2017&

tid=ACSST1Y2017.S1501&hidePreview=true (last visited Dec. 21, 2020).

249

U.S. CENSUS BUREAU, Table S1702: Poverty Status in the Past 12 Months of

Families, https://data.census.gov/cedsci/table?q=S1702&tid=ACSST1Y2019.S1702 (last visited

Dec. 21, 2020).

250

Jessica Smega, et al., Income and Poverty in the United States: 2018, U.S. CENSUS BUREAU

(Sept. 10, 2019), https://www.census.gov/library/publications/2019/demo/p60-266.html.

251

Megan Horning, Border Town Bullies: The Bad Auto Deal and Subprime Lending Problem

Among Navajo Nation Car Buyers, 73 N

AT’L LAW. GUILD REV. 193, 205–06 (2016).

252

Valentina Dimitrova-Grajzl, et al., Consumer Credit on American Indian Reservations

(Mar. 26, 2014) (unpublished manuscript at 1–4), https://ssrn.com/abstract=2408747. This may

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Higher than average rates of poverty, limited education, and a lack of financial

literacy make Native Americans more vulnerable to risky sales contracts such as rent-

to-own agreements. While rent-to-own agreements involving goods such as appli-

ances and electronics can be harmful, rent-to-own housing transactions are expo-

nentially worse for consumers, especially in Native communities.

B. Housing Crisis in Indian Country

Lack of housing in Indian country makes tribal members especially vulnerable

to alternative housing options.

253

“‘Housing needs are very extreme on tribal lands,’

says Housing and Urban Development (HUD) spokesperson Ed Cabrera. ‘They

face a lot of challenges with sanitation, structural deficiencies, homelessness and

other things we take for granted. There’s been improvement in the past couple of

decades, but there are still major problems.’”

254

The importance of affordable hous-

ing is crucial to lifting tribal members out of poverty, obtaining employment, and

improving overall quality of life.

255

Tribal nations rely heavily on federal funding to

support housing development.

256

HUD allocates blocks of grants and loan guaran-

tee programs to the tribes that, in turn, are used by tribal authorities to increase,

improve, and maintain housing.

257

Unfortunately, this leaves tribal members at the

mercy of the tribal housing authorities to utilize insufficient funding to provide

housing.

258

be due a general lack of financial literacy that is certainly not confined to the Native American

sector of consumers.

253

This was the case for one Tribal Member in New Mexico who, as an adult, lived in her

childhood, three-bedroom home with her parents, two brothers, and niece. Space was tight,

privacy was non-existent, and she was eager to get out on her own. Tina had a high school

diploma. She worked full time as a cashier but only made minimum wage. There were not many

options in her community for housing and what little she found, she couldn’t afford. A relative

offered to rent her his 16’x 24’ shed for $150 per month. To her, 384 square feet for $150 per

month was heaven, compared to the cramped quarters in her family’s home. The shed was

insulated, but had no electricity. Extension cords were run from the relative’s main home out to

the shed so that Tina could plug a couple lights in at night, a fan in the summer, and a small

heater in the winter. Eventually, they installed a window A/C unit and plugged that into the

extension cord as well. Tina lived there for six years despite having no running water or plumbing.

Tina, a Tribal member in New Mexico whose name has been changed for this Article, describes

the reasons why she chose to live in a shed cabin for 6 years, and the experience of living in a shed

cabin. See personal communication with Tina, Mar. 3, 2019.

254

Galvin, supra note 245.

255

Id.

256

See generally Addressing the Housing Crisis in Indian Country: Leveraging Resources and

Coordinating Efforts: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 112th

Cong. (2012) (discussing federal programs to support housing development in tribal nations).

257

Galvin, supra note 245.

258

See, e.g., id. (describing housing crisis in Navajo Nation).

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The Senate Indian Affairs Committee described the crisis in detail in 2015.

259

An earlier HUD report explained:

Decent housing is not readily available in Indian Country; decent and afford-

able housing is even harder to obtain. Overall, 18.4 percent of homeowners

in Native American areas are cost burdened. This means they are spending

more than 30 percent of their income for housing each month. Affordability

problems are even more common for those who do not own their homes: 31.6

percent of renters on Native American lands are cost burdened.”

260

In the same 2009 evaluation, HUD reported that overcrowding affected 16%

of Native American and Alaska Native households in tribal areas.

261

Seventeen per-

cent of these households had one or more people staying with them solely due to a

lack of housing alternatives.

262

Six percent of the homes in the study had incomplete

plumbing and 7% had incomplete kitchens, compared to less than 2% of all United

States households.

263

The researchers concluded that 68,000 housing units would

be required to eliminate the problem of overcrowding in Native communities.

264

This partly explains why Native communities have been so hard hit by the 2020

Coronavirus pandemic. For example, the largest tribe in the United States, the Nav-

ajo Nation, has a higher infection rate than anywhere else in the nation, including

New York and New Jersey.

265

The difficulty of obtaining a mortgage in Indian Country further compounds

the problem. Land in Indian Country is held in trust by the federal government as

a result of the General Allotment Act of 1887.

266

Tribal trust land may not be en-

cumbered by a lien without overcoming substantial hurdles.

267

While section 184

of the Indian Home Loan Guarantee Program was designed to assist lenders in over-

coming these hurdles and providing mortgages to Tribal members, the barriers are

259

Addressing the Housing Crisis in Indian Country, supra note 256.

260

S. REP. NO. 114-117, at 2 (2015).

261

The Native American Housing Needs Study, U.S. DEP’T OF HOUSING & URBAN

DEVELOPMENT, https://www.huduser.gov/portal/pdredge/pdr-edge-research-022117.html (last

visited Dec. 21, 2020).

262

Id.

263

Id.

264

Id.

265

Alexandra Sternlicht, Navajo Nation Has Most Coronavirus Infections Per Capita In U.S.,

Beating New York, FORBES (May 19, 2020, 4:04 PM), https://www.forbes.com/sites/

alexandrasternlicht/2020/05/19/navajo-nation-has-most-coronavirus-infections-per-capita-in-us-

beating-new-york-new-jersey/#3e78f0908b10.

266

U.S. DEP’T OF HOUSING & URBAN DEVELOPMENT, OFFICE OF POLICY DEVELOPMENT

& RESEARCH, MORTGAGE LENDING ON TRIBAL LAND: A REPORT FROM THE ASSESSMENT OF

AMERICAN INDIAN, ALASKA NATIVE, AND NATIVE HAWAIIAN HOUSING NEEDS 1 (2017).

267

Id. at 19.

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still such that lenders are reluctant to engage in the process.

268

Lending through the

section 184 program typically takes six to eight months to close because of the steps

required to overcome the trust status of the land.

269

Despite section 184 providing

a 100% guarantee on the loan, lenders often lack the knowledge and/or desire nec-

essary to take on the process.

270

With inadequate housing available, limited financial resources, and often, com-

promised credit, tribal members look outside of the reservation for housing possi-

bilities. For example, shed dealers recognize this opportunity. Many have situated

themselves near New Mexico pueblos in order to offer rent-to-own shed deals to

tribal members. Many of the sheds marketed look more like welcoming cabins than

what you might use for tool storage. They can be equipped with electricity once

delivered and insulated to provide a livable space. Most appealing, the rent-to-own

contracts require no credit check, no commitment, and little down payment, mak-

ing them appear to be a viable option for financially strapped tribal members. Un-

fortunately, like many consumer credit products, they sound better than they actu-

ally are.

C. Rent-to-Own Shed Dealers: The New Predator of New Mexico’s Native Americans

Native Americans have historically been targeted by various predatory institu-

tions in search of the poorest, most vulnerable communities. High interest loan

stores physically surround the Navajo Nation, saddling this particular Native Amer-

ican community with more high interest loans than any other community in the

United States.

271

Likewise, the Navajo Nation is also surrounded by car dealerships

notoriously known for upselling vulnerable customers into a vehicle the salesman

knows they cannot afford.

272

After pressuring the consumer into an expensive car,

the salesperson may inflate the consumer’s stated income to qualify the customer for

financing.

273

The FTC investigated these dealers and ultimately sued them for vio-

lations of the FTC Act, TILA, Regulation Z, and the Consumer Leasing Act, among

268

Id.

269

Id. at viii.

270

Id. at 19–20. Lenders also note that the lack of established credit among Tribal members

provides yet another obstacle preventing them from engaging in offering mortgages in Indian

Country. Id. at 24.

271

Endless Debt: Native Americans Plagued by High-Interest Loans, NBC NEWS: IN PLAIN

SIGHT (Oct. 31, 2014), https://www.nbcnews.com/feature/in-plain-sight/endless-debt-native-

americans-plagued-high-interest-loans-n236706.

272

Horning, supra note 251, at 206–08.

273

Id. at 205 (explaining the sales practices of dealerships surrounding the Navajo Nation,

including misrepresenting buyer’s stated income, knowingly selling vehicles to customers unable

to afford the monthly payment, and relying on repossessions as a second stream of revenue for a

single vehicle).

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other laws, for preliminary and permanent injunctive relief, rescission or refor-

mation of contracts, restitution, and damages.

274

In these car deals, after getting Native American customers into their dealer-

ships, dealers keep the customers there for extended periods of time, hide crucial

parts of the contracts, lie about reported income, and fraudulently qualify buyers

for cars the dealership knows they will never be able to afford,

275

because, in the

end, the dealership knows that car will be repossessed and then be resold for a second

stream of revenue.

276

These dealerships also extensively market their most over-

priced and, in some cases, fraudulent deals to Native communities alone. This type

of targeted marketing has been found to be illegal discrimination due to disparate

treatment and disparate impact.

277

We see similar targeted, discriminatory marketing in the rent-to-own shed in-

dustry. For example, one company has 18 shed dealer locations within New Mex-

ico.

278

See Image 1.

274

FTC Charges Auto Dealerships in Arizona and New Mexico with Falsifying Consumers’

Information on Financing Documents, FED. TRADE COMM’N (Aug. 1, 2018),

https://www.ftc.gov/news-events/press-releases/2018/08/ftc-charges-auto-dealerships-arizona-

new-mexico-falsifying; see also Fed. Trade Comm’n v. Tate’s Auto Ctr. of Winslow Inc., 2019

WL 1130006, at *1 (D. Ariz. Mar. 13, 2019).

275

Horning, supra note 251, at 206–08.

276

Id.

277

Creola Johnson, The Magic of Groups Identity: How Predatory Lenders Use Minorities to

Target Communities of Color, 17 G

EO. J. ON POVERTY L. & POL’Y 165, 197–99 (2010); see

LastWeekTonight, Payday Loans: Last Night with Jon Oliver, Y

OUTUBE (Aug. 10, 2014),

https://www.youtube.com/watch?v=PDylgzybWAw.

278

GRACELAND PORTABLE BUILDINGS, Addendum B-New Mexico Map,

https://graceland.worldsecuresystems.com/states/new-mexico.html (last visited Oct. 21, 2020)

(Graceland locations identified by the letter “G” on the map). This dealer has extremely poor

customer reviews. Graceland Portable Buildings Reviews and Complaints, PISSEDCONSUMER,

https

://graceland-portable-buildings.pissedconsumer.com/review.html, (last visited Dec. 20, 2020).

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Image 1.

All but four locations, located primarily in rural southern New Mexico,

279

are

surrounded by tribal lands. At the Mescalero Nation, there are two dealers, one lo-

cated at each entrance to the reservation. Similar to the car dealerships facing charges

by the FTC, this dealer surrounds tribal land with rent-to-own sales locations. Just

as the Navajo Nation depends on transportation to survive day-to-day life in rural

America, Native communities in New Mexico seek affordable housing. Dealers sell

Native consumers on costly rent-to-own shed deals, knowing that many will not be

able to afford the monthly payments.

280

Eventually, the sheds can be repossessed

279

These southern border locations target another highly vulnerable population: recent

immigrants.

280

NATIONAL BARN & STORAGE RENTAL ASSOCIATION, NBSRA, http://www.nbsra.com/

(last visited Dec. 21, 2020).

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and sold for a second stream of revenue.

281

Indeed it is not uncommon in our clin-

ical law program to hear stories of repossession or to actually see sheds being repos-

sessed. It is difficult to get information about the status of a “repossession”

282

or to

even get an accounting. The fee structures are opaque and at times impossible for

even lawyers to understand. Given the complete lack of governmental oversight, the

potential for abuse is limitless.

283

D. An Insider’s View of Rent-to-Own Predation

The website of the National Barn and Storage Rental Association (NBSRA),

the trade association for the shed industry, explains the industry practices.

284

The

organization’s mission is to “[p]rotect the industry’s future against legislation.”

285

The benefits of being a rent-to-own dealer include that “[t]here is no increased risk

to the [dealer] since the rent-to-own company assumes the risk . . . the dealer re-

ceives full retail price for the structure and frees up capital to allocate in other areas

or build more sheds.”

286

Moreover, as for shed repossessions, these are actually good

for business. According to the website:

Returns are not necessarily a financial loss. The returned shed will attract new

customers since there is a segment of shed buyers looking for a bargain. A

rental return brings customers to the sales lot eager to buy, sometimes this

leads to the sale of a new storage shed or barn.

287

While the NBSRA elucidates the benefits of rent-to-own dealerships, some vet-

erans in the industry disagree, going so far as to warn consumers to beware of rent-

to-own shed deals. Sheds Unlimited has dedicated an entire page of its website to

281

Id. For example, John, from a centrally located Pueblo in New Mexico, used to build

sheds for his community. This was his side job and how he supported his family during his off

season from work. Once Graceland came to town however, he had to close that side business.

“Nobody wanted to wait for me to build a shed, when they could buy one, rent-to-own, for a few

hundred dollars a month.” He was happy for his community until he began to see the negative

impact Graceland was having. “I had to buy my brother-in-law’s shed from him when he got

behind on payments. They were about to come take it and would have if I hadn’t paid it off.

Everyone thinks it’s just a couple hundred dollars until they are making that payment month after

month and then they realize they can’t afford it.” When you inundate a sector of consumers who

are financially vulnerable and in desperate need of housing options, your shed sales are going to

increase. Interview with John, Tribal Member in New Mexico (Feb. 10, 2019) (a Tribal Member

in New Mexico, discussing experiences in Native communities with regards to shed deals).

282

Telephonic Interview with Kenneth Bobroff, President, UNM School of Law (June 21,

2019).

283

Id.

284

NBSRA, supra note 280.

285

Id.

286

Why Rent To Own?, NBSRA (Apr. 4, 2018), http://www.nbsra.com/why-rent-to-own.

287

Id.

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educating consumers on the dangers of these transactions.

288

They educate consum-

ers that rent-to-own sheds will cost consumers 25–65% more than buying out-

right.

289

The site goes on to warn consumers that, if at any time they stop making

monthly payments, they will lose the shed, even if they have paid 99% of the con-

tract price.

290

Michael W. Mathis, a shed dealer for over 20 years, is so opposed to rent-to-

own shed sales that he created his own blog on the topic.

291

As he explains:

[w]e have been [i]n the storage shed business for almost 20 years, I have per-

sonally taken the time to investigate the possibility of tapping into this addi-

tional market myself, and have been approached by lenders who are more

than willing to work with me in this endeavor, but I have a problem with

offering this mainly my conscience . . . my real problem with Rent to Own is

that I feel we are taking advantage of people. Let’s face it anyone with any

financial insight can see this for what it is A RIP OFF . . . Rent to Own shed

business preys on people who have made poor choices, don’t know better or

unfortunate circumstance [has] put them in bad financial situations.

292

Some larger players in the industry, such as “Tuff-Shed,” seemingly agree with

this opinion of rent-to-own shed agreements. While “Tuff-Shed” did begin offering

rent-to-own options in 2015, they limited rent-to-own contracts to sheds 10x16

and smaller.

293

Sheds sized at 10x16 or smaller are significantly less likely to be used

as homes, thereby reducing the chance of a consumer losing their home to the rent-

to-own agreement.

Rent-to-own agreements for shed dealers are undoubtedly profitable for the

industry. If they weren’t profitable, no shed dealer would offer these types of agree-

ments. However, when those positioned to receive a large cut of that profit publicly

acknowledge the unethical nature of the transaction and refuse to take part, it sends

a powerful message of extraordinary predation.

288

Why NOT to choose a Rent-A-Shed Option, SHEDS UNLIMITED LLC,

https://shedsunlimited.net/why-not-to-choose-a-rent-a-shed-option (last visited Dec. 21, 2020).

289

Id. Our view of rent-to-own customer contracts show that this is an incredibly

conservative estimate based on contracts on file with authors, scrubbed of identifying data.

290

Id.

291

Michael W. Mathis, Rent to Own Storage Sheds - Why You Should Think Twice,

EZINEARTICLE (Feb. 20, 2010), https://ezinearticles.com/?Rent-to-Own-Storage-Sheds—-Why-

You-Should-Think-Twice&id=3798258.

292

Id.

293

Introducing Rent-To-Own with Tuff Shed, TUFF SHED (Feb. 25, 2016),

https://www.tuffshed.com/introducing-rent-to-own-with-tuff-shed.

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E. Comparing the Cost of Credit in Shed Homes to Rent-to-Own Land Sale Contracts

and Mortgages

Interest rates on housing are lower than interest rates on other types of loans.

For example, a credit card rate might average 18–24%, while a home loan in 2020

averages 2.75–3.125%.

294

A very high-interest land sale contract, or mobile home

loan, can run 18%, though rates of 9–10% are currently more common. The inter-

est rate in a typical rent-to-own shed is roughly 40% per annum, 10 times the aver-

age home mortgage rate.

295

These rates are incredibly high, particularly given that

forfeiture of equity is so likely. Clearly additional regulation is needed to ensure that

those on the low end of the economic scale do not pay so much more than the rest

of us for basic shelter.

VI. THE GREATER IMPLICATIONS OF THE CREDIT-NO CREDIT

DISTINCTION ON THE FUTURE OF CREDIT REGULATION

In this Part, we discuss the greater implications of the credit/no credit dichot-

omy, focusing on large-scale societal implications of sheltering shadow credit prod-

ucts from regulation. In considering the narrowest problems we have raised here,

many solutions are viable. For example, if we focus narrowly on the abuses occurring

in the rent-to-own shed industry, we could regulate the rent-to-own shed industry

in the same way we regulate mobile home rent-to-own transactions. In some states,

for example, rent-to-own mobile home transactions are treated as credit because the

stakes are large and the personal property is being used as a home.

296

If one wanted

to think a bit more broadly, one could similarly regulate rent-to-own real estate to

require all the consumer protections of other consumer credit.

297

We could think even more broadly and regulate the entire rent-to-own house-

hold goods industry right back into the consumer credit scheme, where it once sat

before Article 9 was amended and before the rent-to-own industry passed its own

regulatory scheme. In so doing, we would treat rent-to-own like any other consumer

credit transaction. Rent-to-own dealers would be legally required to comply with

interest rate caps, TILA, and Article 9. Consumers could compare the cost of this

credit to market alternatives like retail installment sales contracts, could be free of

294

BANKRATE, supra note 235.

295

Id.

296

See, e.g., N.M. STAT. ANN. § 57-26-3(A)(5) (1995).

297

See, e.g., Nelson, supra note 223, at 1116. Nelson argues that courts should take the

Restatement Third of Property’s approach which treats contracts for deed as mortgages. See id.

Nelson acknowledges that in states where these types of contracts are regulated by statute, it might

be unfeasible to implement this judicial solution. Id. at 1166–67. By adopting the Restatement’s

approach, however, he argues that both buyers and sellers will have their interests protected under

the broad confines of mortgage law. Id.

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unfair debt collection practices by collection agencies, and could get the repossession

and other protections of Article 9. Lawyers could sue for violations of these laws,

keeping the credit providers honest and the consumers protected. While this may

constrict the availability of rent-to-own transactions, there would likely still be

plenty of players and market alternatives to fill consumer need.

Shadow credit, however, creates concerns broader than just rent-to-own trans-

actions. As one commentator explained as to all of these newer shadow creditor

products, but particularly ISAs in education:

I suspect what is going on is an attempt by the ISA industry to get the camel’s

nose under the tent and become too-big-to-fail. If the ISA industry gets large

enough before facing the regulatory question, the industry will be able to push

back against any regulatory attempts by pointing to potential disruption and

reliance of consumers upon the product. Frankly, this is an issue the CFPB

should be getting out ahead on. The Bureau should be issuing regulatory

guidance on ISAs as part of its regulation of the private student lending mar-

ket. Alternatively, the Bureau could undertake a rule making defining “debt”

under the CFPA.

298

As we have mentioned, payroll advance loans are growing fast, and while they

could be a good market alternative to payday loans,

299

this industry’s claim to be

outside consumer credit regulation is also troubling. The industry’s refusal to com-

ply with usury laws or TILA make the products and their regulation unpredictable

going forward. Indeed, New York State is leading a multi-state investigation into

whether payroll advance companies are, by claiming to be “not credit,” violating

usury laws and other consumer protections.

300

Similarly, bail bonds, buy-now-pay-

later services, and employer payday advances are all credit transactions, though they

claim not to be bound by TILA or other credit laws.

301

The cost of not catching the shadow credit trend before it really takes hold

could be significant. The benefits of non-compliance, charging whatever interest

rates one wants, not disclosing an interest rate, and not complying with repossession

and forfeiture rules are incredibly remunerative. As a result, there is no reason to

believe the growth in shadow credit will not continue to morph, perhaps enough to

deregulate consumer credit.

This issue also has broader implications for the legal system as a whole. There

are endless examples of situations in which form could be elevated over substance,

298

Levitin, supra note 3.

299

Hawkins, supra note 12, at 2112.

300

Suzanne Barly, New York State Regulator Leads Probe into Payroll Advance Industry,

EUTERS (Aug. 6, 2019, 10:47 AM), https://www.reuters.com/article/us-new-york-loans/new-

york-state-regulator-leads-probe-into-payroll-advance-industry-idUSKCN1UW218.

301

Alex Kornya et al., Crimsumerism: Combating Consumer Abuses in the Criminal Legal

System, 54 H

ARV. C.R.-C.L. L. REV. 107, 127, 138 (2019).

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to the detriment of our legal system. In these other areas of the law, we are careful

to elevate substance over form, so we can treat all fact patterns, products, and situa-

tions with authenticity, fairness, and consistency under the law. While formalism

and procedural distinctions have their place, we need to be careful how those rules

affect people in practice, and aware of unintended consequences.

302

The substance-over-form doctrine is a major tenet of tax law.

303

Placing form

over substance creates a distressing tendency to mangle basic economic concepts.

304

In both taxation and employment contexts, courts and the IRS routinely look be-

yond labels to determine the true nature of the legal relationship between employers

and employees/independent contractors.

305

Allowing employers to mislabel an em-

ployee as an independent contractor would lead to all kinds of mischief and under-

mine laws intended to protect employees from wage theft and overreaching.

306

There are many, many more examples from the area of taxation.

307

In the area of tribal payday lending, we see another example of how form can-

not be elevated over substance.

308

A lender cannot simply partner with a tribe on a

very minimal level, and then get the sovereign immunity that tribes receive as gov-

ernments.

309

Similarly, minority-owned businesses get certain benefits when apply-

ing for and bidding on government contracts, but one cannot simply form a loose

partnership with one minority group, who has very little control or ownership, and

302

See Edward J. Schnee, Substance-Over-Form Doctrine: The Past, Present and Recommended

Future, 127

J. TAX’N 82, 82 (2017) (stating that the “Supreme Court has created numerous

doctrines to implement the Internal Revenue Code. These doctrines have been applied many

times. They have also changed over time. One of these major doctrines is the substance-over-form

doctrine.”); see also David Dyzenhaus, Constituting the Rule of Law: Fundamental Values in

Administrative Law, 27 Q

UEEN’S L.J. 445, 450 (2002). Another example of the substance over

form doctrine comes from administrative court decisions:

Formalism is formal in that it requires judges to operate with categories and distinctions that

determine results without the judges having to deploy the substantive arguments that under-

pin the categories and distinctions. Since those categories and distinctions must take on a life

of their own in order to operate in this detached way, they are capable of determining results

that contradict the very arguments for these categories and distinctions.

Id.

303

See generally Bryan Camp, Form Over Substance in Fifth Circuit Tax Cases, 34 TEX. TECH.

L. REV. 733 (2003).

304

Id. at 736.

305

Id. at 745.

306

Id. at 744.

307

Id. at 742.

308

See generally De La Torre v. Cashcall, Inc., 422 P.3d 1004, 1009 (Cal. 2018); Nathalie

Martin & Joshua Schwartz, The Alliance Between Payday Lenders and Tribes: Are Both Tribal

Sovereignty and Consumer Protection at Risk?, 69 WASH. & LEE L. REV. 751, 753 (2012).

309

Id. at 753, 755.

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get those benefits.

310

Finally, in the area of securities regulations, federal and many state statutes reg-

ulate “investment contracts” as well as the traditional categories of securities, like

shares of stock, to avoid gamesmanship in the form of transactions.

311

Under the

analysis of the Supreme Court in Howey, what matters is what the transaction really

is, not what it purports to be.

312

The examples above are all from commercial law, but there are many more

examples of items in which we are careful to elevate substance over form in our legal

system. In the area of environmental law, for example, the Environmental Protec-

tion Agency regulates pesticides under the Federal Insecticide, Fungicide, and Ro-

denticide Act (FIFRA).

313

Under section 18 of FIFRA,

314

all pesticides must be reg-

istered and under FIFRA’s implementing rules.

315

These products include all

products used as a pesticide, even if the manufacturer never advertised the product

for this use or even intended that use when the product was produced.

316

In other

words, throughout our legal system, substance beats form, classification matters, and

meaningful regulatory schemes protect both honest businesses and consumers.

VII. CONCLUSION

As some of the examples above show, classification is not just about money.

The legitimacy of the entire legal system rests on honest classification and charac-

terization, calling a spade a spade. As our Supreme Court has noted numerous times,

“[t]he exaltation of form over substance is to be avoided.”

317

Lawyers specialize in

categorizing fact patterns, transactions, and products. How we do this affects much

more than we may realize. Rent-to-own transactions are but one example of trans-

actions that look, act, and clearly are credit, but have been misclassified by the law

310

Id.; see also id. at 753, 757.

311

What is the Howey Test, FINDLAW, https://consumer.findlaw.com/securities-law/what-is-

the-howey-test.html (last visited Dec. 21, 2020).

312

Securities Exchange Comm’n v. W. J. Howey Co., 328 U.S. 293, 300–01 (1947). Under

the Howey Test, a transaction is an investment contract if: “1. It is an investment of money, 2.

There is an expectation of profits from the investment, 3. The investment of money is in a

common enterprise, and 4. Any profit comes from the efforts of a promoter or third party.

Although the Howey Test uses the term “money,” later cases have expanded this to include

investments of assets other than money.” F

INDLAW, supra note 311.

313

Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. § 136(b) (2018).

314

Id. § 136a(a).

315

40 C.F.R. § 152.15 (2019); see also Why Pesticide Certification?, N.D. ST. UNIV.,

https://www.ag.ndsu.edu/pesticide/WhyPesticideCertification.pdf (last visited Oct. 21, 2020).

316

See, e.g., id. (the substance over form rule causes Avon to need to register Skin So Soft as

a pesticide); see also 40 C.F.R § 152.15 (2019).

317

United States v. DiFrancesco, 449 U.S. 117, 142 (1980).

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to be something else, at the behest of the rent-to-own industry. As we have demon-

strated, as rent-to own has morphed into areas beyond household goods, we can see

the harm that shadow credit can impart on individuals, the consumer credit system,

or perhaps even the credit system as a whole.

318

What happens with one credit prod-

uct can happen with others. More critically, what happens in the credit and financial

world can happen in the rest of the legal system. We can watch the legal system

weaken through false classifications. Alternatively, we can stay vigilant in calling a

spade a spade and regulating credit as credit, for the sake of the entire system.

318

Erik F. Gerding, The Subprime Crisis and the Link between Consumer Financial Protection

and Systemic Risk, 5 FIU

L. REV. 93, 93 (2009) (arguing that consumer financial protection can,

and must, serve a role not only in protecting individuals from excessive risk, but also in protecting

markets from systemic risk and that strong “consumer financial regulations can mitigate these

risks in three, non-exclusive ways: (1) by reducing the level of defaults on consumer loans, (2) by

making defaults more predictable, and (3) by reducing the correlation of defaults.”). Professor

Gerding testified before Congress on this same topic in 2019. Emerging Threats to Stability:

Considering the Systemic Risk of Leveraged Lending: Hearing before the H. Comm. on Fin. Servs.,

Subcomm. on Consumer Protection and Fin. Inst., 116th Cong. 2–15 (2019) (statement of Erik F.

Gerding, Professor of Law and Wolf-Nichol Fellow, University of Colorado Law School).