On August 2, 2022, California Attorney General Rob Bonta (Bonta) announced a $15.5 million settlement against Rent-A-Center (RAC) for alleged violations of California consumer protection laws relating to personal property lease-to-own transactions. RAC agreed that $13.5 million will be paid in restitution to California consumers, and $2 million will be paid as a civil penalty. While the thrust of the case centered on an apparent practice by RAC of increasing the “cash price” of items above the standard retail price if the item was to be included in a rental-purchase transaction, RAC agreed to alter its practices and ensure legal compliance in numerous ways. The complaint and agreed judgment provide a laundry list of practices that lease-to-own companies—including virtual and brick-and-mortar based entities—should focus on to ensure compliance.

The Full Story:

RAC is the nation’s largest rent-to-own company, operating over 2,000 stores. Approximately ten years ago, RAC created a product called “Preferred Lease,” for which RAC set up kiosks inside third-party retail stores. These kiosks offer Preferred Lease as a rent-to-own option to customers shopping in these retail locations. If a customer signs up for Preferred Lease, RAC purchases the item from the retailer and delivers it to the customer. This format of transaction, i.e., where a lessor purchases property from the retailer and simultaneously leases the property to a customer pursuant to a rental-purchase agreement, has become a popular form of obtaining products among certain segments of the economy.

Bonta allegedly concluded that, since 2014, RAC executed over 100,000 Preferred Lease agreements with California consumers that violated California’s rent-to-own law, the Karnette Rental-Purchase Act, Civil Code section 1812.620 et seq (the Karnette Act). Specifically, Bonta found that RAC violated the Karnette Act by (1) listing a cash price in the Preferred Lease contract that was 15% higher than what the retailer would charge for the same merchandise; (2) failing to send consumers statutorily required notices about their rights to purchase the merchandise; (3) misleading customers about fundamental aspects of their rent-to-own agreement by using credit-oriented language in their marketing, such as “get approved” and “enjoy your purchase,” and by misrepresenting to customers that they could not return their merchandise; and (4) violating California’s automatic renewal law (Bus. & Prof. Code, § 17600 et seq.) by failing to acquire affirmative consent from customers to the terms of RAC’s Benefits Plus program (which offered subscribers discounts and benefits on unrelated goods such as groceries and hotels) and by failing to provide clear information about how to cancel that subscription.

The Settlement Terms:

RAC agreed to pay a total of $15.5 million in restitution and civil penalties in connection with these findings. In addition, RAC agreed to numerous injunctive terms and prohibitions. Specifically, RAC agreed to ensure legal compliance relating to the following practices:

  • charging or listing an inflated cash price;
  • charging or listing a processing fee that is not reasonable and an actual cost incurred;
  • charging or listing a down payment as described in the Karnette Act;
  • failing to provide an exemplar rental-purchase agreement when a consumer identifies proposed merchandise;
  • failing to provide early purchase option reminder notices;
  • failing to process rent reductions described in Cal. Civ. Code 1812.632(d)(1) (relating to disruptions in income or job loss, disability, illness, pregnancy established through evidence from the consumer);
  • offering any service contract prohibited by Cal. Civ. Code 1812.635 (relating to service contracts covering item while the rental agreement is in place);
  • preventing or limiting a consumer’s right to terminate without penalty;
  • failing to make clear and conspicuous disclosures (including in-store and all marketing) that the transaction is a rental-purchase transaction;
  • representing that there is a limitation or penalty associated with a return;
  • representing to consumers that any portion of a consumer’s payment will be treated as a “down payment” or using the term “money down”;
  • representing that the three-month same as cash buyout option is an “amendment” or “limited time promotion”;
  • making representations that violate Cal. Civ. Code 1812.632(d).

In addition, RAC agreed to provide a “Know Your Rights” disclosure to consumers that will describe the following:

  • the right to terminate at any time without penalty but that RAC retains all applicable rights;
  • the right to cancel if the consumer has not taken possession;
  • the right to reinstatement;
  • the right to acquire ownership during the contract period;
  • the right to rent reduction amounts if income disruptions occur per Cal. Civ. Code 1812.632(d);
  • the amount of any processing fee with a disclosure that the fee is not credited toward the price of the merchandise.

Next, with regard to RAC’s Club Membership Program, RAC agreed to:

  • comply with California’s Subscriptions Law and auto-renewal requirements;
  • not solicit the Program before the rental-purchase agreement is signed;
  • provide full, detailed disclosures about the Program and terms of the Program;
  • apply payments received first to the rental-purchase agreement amounts due and then to the Program amounts due;
  • provide a receipt of each payment made under the Program.

RAC also agreed to train its California employees (and any employee who might be involved in a California transaction) regarding the injunctive terms, and inform all third-party retailers about the Karnette Act’s legal requirements, including that they may not describe the program as “financing” or display the program on a financing page or waterfall portal unless the services are clearly and conspicuously described as “lease-to-own services.”

Finally, RAC is required to provide compliance reporting once a year for three years, and provide the judgment to its employees involved with California transactions and obtain a written acknowledgement from the employees.

Key Takeaways:

Companies operating in the rent-to-own space should take a fresh look at their practices to ensure compliance with the myriad requirements set forth in the applicable rent-to-own laws, including those in the Karnette Act. The RAC/California AG matter sends a message to rent-to-own companies that failing to strictly comply with the Karnette Act creates significant legal risk. Likewise, companies should work through the applicable statutes, in California and elsewhere, to ensure the practices are updated to follow the issues addressed in the AG’s settlement with RAC, such as regarding how to set the cash price and whether and when to send notices of early purchase options, among other issues.