New Tech, Old Problem: The Rise of Virtual Rent-to-Own Agreements

This Article explores how fintech has disrupted the traditional rent-to-own (RTO) industry, giving rise to new, virtual RTO agreements (VirTOs). These VirTOs have enabled the RTO industry to expand into the service industry and to markets for products not traditionally associated with rentals, such as vehicle repairs, pet ownership, and medical devices. This Article analyzes this development.

RTO agreements purport to rent products to a consumer until the conclusion of a set number of renewable rental payments, at which point ownership transfers. The fundamental characteristic of these agreements—and the reason why they are not regulated as loans—is that the consumer is able to terminate the rental agreement without penalty at any time by returning the merchandise to the rental company. RTO agreements are an extremely high-cost form of financing that were traditionally offered through brick-and-mortar stores, like Aaron’s or Rent-A-Center, to low-income, subprime consumers who could not obtain traditional credit. The introduction of fintech, however, has shifted the RTO business model from traditional one-stop-shop, brick-and-mortar stores to partnerships between VirTO companies and retailers. As this Article explains, these new VirTOs have different attributes from traditional RTO agreements. In a VirTO, a third-party VirTO provider purchases the desired product from a brick-and-mortar retailer and then rents the product back to the consumer. The entire transaction between the retailer and VirTO company occurs online and unbeknownst to the consumer. This business model has allowed VirTOs to emerge in a variety of specialized markets and services. Not only are these agreements a high-cost method to ownership, but consumers often do not understand the agreements.

Although VirTOs purport to be rentals, it is nearly impossible for a consumer to return a rental financed with a VirTO. Because the items rented with VirTOs are not practical to return, this Article argues that VirTOs are not, in fact, RTO agreements. Instead, VirTOs are a sophisticated form of disguised credit. This Article demonstrates that the VirTO industry is a legal fiction designed to avoid consumer protection statutes governing credit. Accordingly, courts should treat VirTOs as credit subject to state usury and federal consumer protection laws. This Article also proposes a series of policy recommendations to regulate VirTOs and to ban such agreements for services and nonsensical products, like vehicle repairs and pets. The policy solutions proposed in this Article provide a model for potential strategies to protect low-income and subprime consumers from the most extreme abuses as fringe financing industries grapple with the introduction of fintech.