Wall Street's short-selling community is pointing to the rent-to-own industry -- companies that rent products to consumers with an option to buy -- as a candidate for scrutiny by the Consumer Financial Protection Bureau.
However, the bureau's director, Richard Cordray, may have a political imperative from President Obama to first target other industries, such as subprime mortgages, private student loans, payday loans, money transfers, debt collectors, credit bureaus and prepaid debit cards.
Investors' behind-the-scenes efforts to persuade the new agency to challenge the RTO industry pit hedge funds' sharpened public-policy instincts against the reality of the CFPB's resource constraints. And the new agency must choose its initial fights carefully, partly because Cordray was given a recess appointment, and critics will be watching closely for signs of overreach. The CFPB has to be sure it can win any lawsuits that might test its authority.
As lawyers for the RTO industry point out, the Dodd-Frank Act seemed deliberately written to exclude rent-to-own transactions from the key definition of a "lease." Nevertheless, the CFPB has rulemaking authority over leasing disclosure forms. And the law carries a broader definition of "credit" than the one contained in the Truth in Lending Act, allowing it to include under the law any other consumer financial products or services, "as may be defined by the Bureau, by regulation."
In other words, say critics, the CFPB, if it wants, could probably target the rent-to-own industry as the new "subprime finance" for the lower-end customer. However, this would divert the agency from the much clearer election-year story lines of mortgages, student loans and payday loans.
As sources point out, RTO is already being litigated at the state level, and it has already been regulated as a financial services product in several jurisdictions. Meanwhile, industry defenders would argue that federal legislation had been proposed long before Dodd-Frank, yet failed to make its way into law.
I strongly doubt that any such legislation (restrictively defining price and allowable contract terms) could gain traction in Washington today. But at least some of its provisions, backed by consumer groups, could inform or provide a template for the CFPB, should it opt to target the industry for review and rulemaking.
Savvy investors raised eyebrows when Rent-A-Center (RCII), the largest publicly traded company in the RTO space, announced a deal whereby it would finance transactions via kiosks at Best Buy (BBY), and then abruptly terminated the arrangement last week.
Critics of the industry note that as many as 80% of RTO transactions via kiosk-based financing go to term, and they scoff at the notion that the contracts reflect anything less than "disguised installment sales" that escape state usury ceilings. One critic says that the companies have done "a masterful job evading the regulatory/legislative headwinds by positioning themselves as retailers versus finance companies." But the move to kiosk-based sales could substantially raise these RTO companies' profile and eventually beget consumer complaints and regulatory scrutiny.
Perhaps just as US Bancorp (USB) and JP Morgan Chase (JPM) recently announced pullbacks from offering private student loans (which are set to be highlighted negatively by the CFPB in July), the retail industry -- which needs to save its precious political capital to fight other battles -- is becoming wary of getting caught in a Washington crossfire.