On February 6, Professor Jeff Sovern published a blog post in which he seems to be urging the CFPB to regulate rent-to-own (“RTO”) companies.  He quoted an article in the Huffington Post which, in turn quoted a CFPB spokeswoman as saying that the CFPB is reviewing the RTO industry and has not yet decided what action, if any, would be appropriate.  I don’t understand why the CFPB is equivocating since there’s no doubt that a customary RTO transaction is outside the scope of permissible regulation by the CFPB.

An “RTO” transaction involves the short-term lease (generally a week) to a consumer of tangible personal property, such as furniture, consumer electronics and home appliances, with the option for the consumer to extend the term for additional one-week periods and to purchase the property after a certain number of extensions.  It’s not a loan since the consumer pays a weekly rental payment in advance and can return the item and owe nothing further after the one-week rental period or at the end of any extended rental period.  Just as it decided not to put car rental agencies under the CFPB’s jurisdiction, Congress also decided not to put RTO companies under the CFPB’s jurisdiction. 

The CFPB’s jurisdiction encompasses companies who extend “credit” as defined in Title X of Dodd-Frank. Section 1002(7) of  Dodd-Frank 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.”  An RTO transaction doesn’t fit within this definition since the customer is paying in advance to lease property for a one-week period of time.

Section 1002(15) of Dodd-Frank also subjects to CFPB jurisdiction a non-operating lease of personal property only if it is the “functional equivalent of a purchase finance transaction” and has an initial term of at least 90 days.  An RTO transaction fails both of these tests and is therefore not subject to the CFPB’s jurisdiction.

The fact that the CFPB can’t regulate RTO transactions does not mean, however, that the RTO industry is subject to no regulation, as Professor Sovern suggests.  Indeed, state RTO statutes tightly regulate the industry already.  See, e.g., Cal. Civ. Code § 1812.620 et seq.; N.Y. Pers. Prop. Law § 500 et seq.; Ohio Rev. Code Ann. § 1351.01 et seq.; 42 Pa. Cons. Stat. § 6901 et seq.  Furthermore, the FTC has the right to initiate an enforcement action against an RTO company that it believes is engaged in an unfair or deceptive act or practice.