I have written several times about Indirect Lending, whereby the Finance Company takes assignment of a retail installment sales contract. See Back to Basics, Continued - What is the Difference Between Direct Lending and Indirect Lending?, Back to Basics, Continued - Master Dealer Agreements for the Purchase and Sale of Installment Sales Contracts and Back to Basics, Continued - Let’s Talk About Purchasing and Taking Assignment of Retail Installment Sales Contracts. Recall that in indirect lending, the creditor that is responsible for making the Truth-in-Lending Act (TILA) disclosures is the credit seller. The Finance Company, as assignee, must still be concerned that the consumer credit transaction is consummated properly, but in the event of problems, the finance company as assignee has somewhat less potential liability for missteps. 

Today, I want to introduce you to a different twist.

Many sellers of consumer goods are transitioning to the “rent-to-own” model. Under this type of transaction, the consumer is not obligated to continue to rent the consumer goods beyond an initial short-term period such as three months. There is no stated “finance charge.” The transaction is not a true credit sale. And, since the initial term does not exceed four months, the transaction is not subject to TILA or the Truth-in-Leasing Act. Do note, however, that most states have rent-to-own statutes that govern such transactions.

Retailers have moved in this direction for several reasons.

• The down payment required is often less—something attractive to consumers.
• The pricing of the goods allows for recapturing costs more quickly.
• Consumers enjoy the flexibility of not being tied to a long-term credit obligation.
• If, as and when rentals are returned, the goods can be refurbished and relet.
• And, the return of the goods is accomplished without the stigma of “repossession.”

So, what are the consequences to finance companies of taking assignment of such rent-to-own contracts? Unless the retailer conducts a hybrid business—including rent-to-own, credit sales and cash/card sales—the consequences for the finance company of funding the initial transactions are not materially different no matter which model the retailer utilizes.

So, why the caveat about conducting a hybrid business? Well, if the retailer operates all three models—cash/card sales, rent-to-own and credit selling—and if there is a price difference in the goods sold for cash as opposed to rented or sold on an installment basis, that differential may be a hidden finance charge. That’s not a good thing.

The other consequence for the finance company is making sure that there is a clear agreement between the merchant and the finance company as to how to address the return of the goods. See Back to Basics, Continued - Master Dealer Agreements for the Purchase and Sale of Installment Sales Contracts for a blog treating the subject of the Master Agreement.

Please Note: This is the one hundred ninety-eighth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking Dentons - Consumer Finance Report.