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Sale-Leaseback
Lenders Defy Regulation |
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Cashing in on
Sale-Leasebacks
In October1999, a woman walked into a sale-leaseback company in Fort Worth,
Texas and borrowed $200 for a week to pay household bills during her husband's
temporary unemployment. She entered into a sales-leaseback agreement in which
the company "purchased" her television and VCR for $200 and then "leased"
the items back to the woman for $66 every week. She supplied the serial numbers
of the appliances, signed a few papers, and left a personal check as security.
After the first week, the woman was unable to repay the amount of cash borrowed,
had to extend the loan, and even borrowed an additional $100. This continued
for five weeks until the woman, seeking help, finally contacted the Office of
Consumer Credit Commissioner. She had already paid $563 in "rent"
on the loan and still had not paid anything towards the principal to "repurchase"
her "leased" property.(3)
Although formally a "lease" arrangement, this consumer was caught
in the same trap as so many others since the tide of payday lending swept the
state in the last decade. She could not keep up with the fees, and behind the
fees was a principal balance that never declined no matter how many payments
she made.
Sale-leaseback operators claim their agreements are short-term solutions to
cash-flow problems. But, a study of payday lenders in Indiana showed that 77
percent of customers roll over existing loans, and the average duration of a
loan, including extensions, is between 3 1/2 to 4 1/2 months.(4)
Consumers are often unable to repay the entire amount in two weeks and extend
the loan several times until they have paid more in fees than originally borrowed.
Consumer complaints to the OCCC reveal that consumers are actually engaging
in long-term financial commitments. Lease agreements have an "automatic
renewal option" built into them that allows customers to renew the lease
at the end of the 14-day period for an additional fee.(5)
Some companies allow customers to turn over the title to their car as collateral
to get a larger amount of cash quickly. The lease process is the same as a traditional
sale-leaseback, but the lease payments are large and the burden of a non-declining
debt even greater.
One borrower turned over his truck title to Quick Cash in order to qualify for
a loan of $500. According to the lease agreement, this sale-leaseback lender
charged $125 every two weeks with a four week minimum. After quickly getting
in too deep, his mother wrote to the Better Business Bureau, which forwarded
her letter to the Consumer Credit Commissioner.
"My son borrowed $500 and [as of two months later] he paid four payments
totaling $440. Each payment, only $5 went toward principal...I paid $560 more
to get his title released...these people are robbing people without a gun."(6)
The payday loan rule is designed to ensure that borrowers do not get caught
in a cycle of non-declining debt. Under the rule, a payday loan that is renewed
twice must be turned into a declining balance loan.(7) But
sale-leaseback companies renew their agreements week after week and month after
month and the consumer may never be able to "buy back" those appliances.
Although sale-leaseback companies claim they are not lenders, five of the companies
we called advertise in the phone book under the "loan" section, next
to traditional small loan and pawn companies.(8)
While the companies require customers to bring in the serial numbers, make,
and model of various appliances, the lenders most often do not ask to see the
appliance being purchased and leased. Nor do they appear to require proof that
these items have not been "sold" to someone else.
The Texas State Committee on Economic Development's Subcommittee on Consumer
Credit Laws researched the issue of sale-leaseback loans and issued a report
in September 2000. The Subcommittee found that these companies "embrace
the subterfuge of renaming the loan transaction in order to avoid regulatory
oversight by the Office of Consumer Credit Commissioner." The Subcommittee
report notes that companies do not accept return of the property at the end
of the lease, but only accept cash or lease renewal like any other payday lender.
The Subcommittee recommended that Texas law be amended to define a sale-leaseback
transaction as a loan and require federal Truth in Lending disclosures.(9)
The Sunset Staff Report on the Texas Finance Commission found similar problems
with sale-leaseback transactions. Among recommendations for increasing consumer
protection through stronger regulatory authority, the Report specifically proposed
strengthening the Office of Consumer Credit Commissioner's oversight of sale-leaseback
loans.(10)
Notes:
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3 Complaint to the Office of Consumer Credit Commissioner, 2/14/2000.
4 Sunset Commission. Sunset Staff Report on the Texas Finance Commission Agencies.
p. 67. October 2000.
5 Lease agreements: Cash-2-U Leasing, Dallas; Instant Rental Service, Dallas;
First Capital Leasing, Houston; Hubby Leasing, Dallas.
6 Complaint to the Office of Consumer Credit Commissioner, 9/28/98.
7 Texas Administrative Code, Title 7, Part I, Chapter 1, Subchapter F. Alternate
Charges for Consumer Loans, 7TAC Sec. 605(f)(1).
8 Dallas and El Paso Yellow Pages, 2000, "Loans."
9 Texas Senate, Committee on Economic Development, Subcommittee on Consumer
Credit Laws, Interim Report, 76th Texas Legislature, September 2000.
10 Sunset Commission Staff Report on the Texas Finance Commission, October 2000.
