BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Joseph L. Dunn, Chair
2005-2006 Regular Session
AB 594 A
Assembly Member Karnette B
As Amended June 13, 2006
Hearing Date: June 20, 2006 5
Civil Code 9
ADM 4
SUBJECT
Personal Property: Rental-Purchase Agreements
DESCRIPTION
This bill would revise and recast a number of provisions
relating to personal property rental-purchase agreements
under the Karnette Rental-Purchase Act.
This bill would redefine "cash price" for purposes of
rental-purchase agreements, and would establish definitions
of "lessor's cost," and "total payments," among others.
This bill would provide that the consumer has the right, as
specified, to acquire ownership of the property within
three months of the date the consumer executed the
rental-purchase agreement by paying the cash price.
This bill would limit the maximum cash prices, pursuant to
certain specified formulas, that a lessor would be
permitted to charge on a first rental of personal property,
and on a second and subsequent rentals, and would limit the
maximum total of payments in relation to the maximum cash
price limits.
This bill would provide that, if a lessor willfully
discloses a cash price or a total of payments that exceeds
the amount permitted by the bill's provisions, the
agreement is void, the consumer shall retain the property
without any obligation, and the lessor shall refund to the
consumer all amounts paid.
(more)
AB 594 (Karnette)
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This bill would provide that, on or after June 1, 2005 to
December 31, 2005, inclusive, a lessor may comply with
current law as amended by this bill in lieu of complying
with current law as in effect before the effective date of
this bill without incurring any liability for doing so.
BACKGROUND
In 1994, AB 722 (Karnette, Chapter 1026) enacted the
Karnette Rental-Purchase Act (Act). The Act requires every
rental-purchase agreement to be in writing and to contain
specified information, including a description of the
personal property and the total number and total amount of
periodic payments necessary to acquire the property. The
Act prohibits the inclusion of certain provisions in these
agreements. The Act specifies the parameters of the
consumer's liability for loss of, or damage to, the
property and those of permissible security deposits. The
Act regulates the advertisement of rental-purchase
agreements, including the sending of solicitation or other
promotional materials. The Act provides that any waiver or
modification of its provisions is void and unenforceable as
contrary to public policy.
Since its enactment, the Attorney General (AG) and others
have encountered some problems with the Act's provisions,
and enforcement of the Act. This bill, a collaborative
effort between the AG and the rental-purchase industry,
seeks to address the problems with the Act that have been
encountered in practice.
CHANGES TO EXISTING LAW
Existing law , the Karnette Rental-Purchase Act, makes
various findings and declarations with respect to
rental-purchase contracts, including that such contracts do
not actually disclose the actual terms and cost of the
transaction or the consumer's liability for certain unfair
provisions. [Civil Code (CC) Sections 1812.620, 1812.621.]
Existing law provides that it is the Legislature's intent
to ensure that consumers are protected from
misrepresentations and unfair dealings by ensuring that all
AB 594 (Karnette)
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relevant terms, including the cash price, periodic
payments, total purchase price, and other applicable
charges or fees, are disclosed before they enter into
rental-purchase agreements. [Id.]
Existing law further provides that it is the Legislature's
intent to: (a) prohibit unfair and unconscionable conduct
toward consumers in connection with rental-purchase
transactions; (b) prohibit unfair contract terms, including
unreasonable charges; (c) prevent the forfeiture of
contract rights by consumers; (d) provide a right of
reinstatement and a reasonable formula for the exercise of
purchase option rights under a rental-purchase contract;
(e) provide reasonable requirements for the servicing,
repair, and replacement of improperly functioning rental
property; and (f) cover rental-purchase transactions under
existing laws, including laws governing debt collection,
cosigners, home solicitation contracts, and warranties; and
this title shall be liberally construed to achieve its
remedial objectives. [Id.]
Existing law defines, among other things, "cash price" as
the price at which retail sellers are selling and retail
buyers are buying the same or similar property for cash in
the same trade area in which the lessor's place of business
is located, and cash price may be evidenced as specified.
[CC Section 1812.622.]
Existing law provides that evidence of the cash price of
new rental property may include the following:
Published prices or advertisements by retailers of
similar products selling in the same trade area in which
the lessor's business is located, if the prices were
published or disseminated within the 90-day period
preceding the date of the rental-purchase agreement.
An amount equal to twice the documented actual cost,
including freight charges, of the rental property to the
lessor from a wholesaler, distributor, or manufacturer.
The manufacturer's suggested retail price (MSRP) for a
home appliance or home electronic product, as defined.
The MSRP may not be used as evidence of the cash price of
any other type of rental property. [CC Section
1812.644.]
Existing law provides that every rental-purchase agreement
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must be contained in a single document which sets forth all
of the agreements of the lessor and the consumer with
respect to the rights and obligations of each party; must
be written in the same language as principally used in any
oral sales presentation or negotiations leading to the
execution of the agreement; and must clearly and
conspicuously make a number of specified disclosures,
including the cash price of the property, and the total
number and total amount of periodic payments necessary to
acquire ownership of the property. [CC Section 1812.623.]
Existing law provides that no rental-purchase agreement may
contain certain specified provisions with respect to such
things as fees, repossession, waivers, security interest,
consumer liability for loss or damage, and civil actions.
Any prohibited provision in a rental-purchase agreement is
void and unenforceable, and any agreement containing a
prohibited provision is voidable by the consumer. [CC
Section 1812.624.]
Existing law provides, as specified, that the consumer has
the right to acquire ownership of the property at any time
after the initial payment by making all past due payments
and fees and an amount equal to the cash price stated in
the rental-purchase agreement multiplied by a fraction that
has as its numerator the number of periodic payments
remaining and that has as its denominator the total number
of periodic payments. [CC Section 1812.632.]
This bill would define "cash price" as the price of the
personal property described in the rental-purchase
agreement that the consumer may pay in cash to the lessor
at the inception of the rental-purchase agreement to
acquire ownership of that personal property.
This bill would define "appliance" as including any
refrigerator, freezer, range including any cooktop or oven,
microwave oven, washer, dryer, dishwasher, room air
conditioner, or air purifier.
This bill would define "electronic set" as including any
television, radio, camera, video game, or any type of
devise for the recording, storage, copying, printing,
transmission, display, or playback of any sound or image,
but would not include any item that is part of a computer
system.
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This bill would define "computer system" as a computer
processor and a video monitor, printer, and peripheral
items primarily designed for use with a computer. Audio
and video devices, which are commonly used for
entertainment and into which data may be downloaded from a
computer, would not be part of a computer system.
This bill would define "lessor's cost" as the documented
actual cost, including freight charges, of the rental
property to the lessor from a wholesaler, distributor,
supplier, or manufacturer and net of any discounts,
rebates, and incentives.
This bill would define "total payments" to mean the total
amount of periodic payments necessary to acquire ownership
of the property that is the subject of the rental-purchase
agreement if the consumer makes all regularly scheduled
payments.
This bill would provide that the consumer has the right to
acquire ownership of the property within three months of
the date the consumer executed the rental-purchase
agreement by paying the lessor an amount equal to the cash
price and any past dues fees less all periodic payments the
consumer has paid. This bill would also provide that,
within 10 days after the consumer executes the agreement,
the lessor must personally deliver or send by first-class
mail the consumer a notice informing the consumer of the
three-month purchase rights.
This bill would provide that a lessor must maintain records
that establish the lessor's cost, as defined, for each item
of personal property that is the subject of a
rental-purchase agreement.
This bill would provide that the maximum cash price for the
lessor's first rental of property subject to a
rental-purchase agreement may not exceed 1.65 times the
lessor's cost for computer systems and appliances; 1.7
times the lessor's cost for electronic sets, 1.9 times the
lessor's cost for furniture; and 1.65 times the lessor's
cost for all other items.
This bill would provide that the maximum total of payments
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may not exceed 2.25 times the maximum cash price that could
have been charged for the first rental of the property, as
specified.
This bill would provide that the maximum total of payments
for the lessor's second and subsequent rental of the
property may not exceed the maximum total of payments
permitted for the first rental of the property less: (1)
for appliances and electronic sets, one-third the amount of
all rental payments paid to the lessor by consumers who
previously rented that property; or (2) for furniture,
computer systems, and all other items, one-half the amount
of all rental payments paid to the lessor by consumers who
previously rented the property.
This bill would provide that the maximum cash price for
property on its second or subsequent rental may not exceed
the maximum total of payments for the property under the
bill's provisions divided by 2.25.
This bill would provide that, if a lessor willfully
discloses a cash price or a total of payments that exceeds
the amount permitted by the bill's provisions, the
agreement is void, the consumer shall retain the property
without any obligation, and the lessor shall refund to the
consumer all amounts paid.
This bill would provide that, on or after June 1, 2005 to
December 31, 2005, inclusive, a lessor may comply with
Sections 1812.622, 1812.623, 1812.624, 1812.632, and
1812.644 as amended by this bill in lieu of complying with
those sections as they were in effect before the effective
date of this bill without incurring any liability for doing
so.
COMMENT
1. This bill is the product of lengthy and numerous
negotiations
Over the past two years, the AG's office has engaged in
lengthy and numerous discussions and negotiations with
the rent-to-own industry to address problems encountered
with the Act's provisions; problems with enforcement of
the Act; issues related to a 2003 Legislative Counsel
Opinion letter discussed below; and issues raised by the
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Griego case (unpublished decision). The AG and the
industry state that this bill is a result of those
discussions and negotiations. CAOC (Consumer Attorneys
of California), however, has some concerns. [See Comment
7.]
2. Stated need for the bill
The AG writes, in support:
This measure makes important changes to the Karnette
Rental Purchase Act which comprehensively governs the
sale, rental, and purchase of consumer items under
rent to own transactions. The rent-to-own (RTO)
business serves a significant niche market that
straddles the rental and retail sales markets.
Although some customers are only interested in renting
various items, the vast majority of renters intend to
acquire ownership and would be shopping at retail
establishments and discount stores if they had the
credit or cash to do so.
These consumers obtain substantial advantages through
RTO transactions. An RTO transaction does not require
a credit check, is based on weekly payments, entails
no obligation to continue making payments (the
consumer can stop at any time and return the goods
without further obligation, debt collector pressure,
or adverse credit reporting), obligates the rental
company to maintain the rented items in good working
order, allows the consumer who turns back rented goods
to reinstate the rental at a later date within one
year by getting an equivalent rental item and resuming
payments, and permits a consumer to acquire ownership
either by exercising an early purchase option
predicated on a percentage of the cash price stated in
the contract or by making all regularly scheduled
rental payments.
RTO transactions, however, can be very expensive and
current law does not regulate the maximum prices that
may be charged. Under current law, a rental company
has to disclose the cash price of the rented item in
the contract. The "cash price" is defined as the
price at which willing buyers are paying willing
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sellers for the item in the relevant trade area. This
calculation has not worked well because the
determination of cash price requires a regular survey
of the market which imposes an administrative burden
on rental companies and a burden on law enforcement to
determine what the real cash price is.
AB 594 addresses the problem by creating reasonable
bright-line pricing caps for the cash price and total
of payments. The bill would ensure that consumers are
not taken advantage of by unconscionable pricing and
at the same time would provide sufficient margin for
RTO companies to function profitably. In addition,
this measure will help law enforcement by making it
easier to obtain documentation supporting the cash
price and payments disclosed in the contract.
Finally, AB 594 will provide a means of setting the
cash price for used items, and add a "3-months same as
cash" provision that would enable customers to buy
items at the cash price within the first three months
and get a credit for all prior payments. This will
provide significant benefits to consumers who are able
to acquire ownership.
The sponsor, Rent A Center, writes:
AB 594 will correct a major ambiguity [in the law]
relating to product price caps. Specifically, a
recent court decision in the case of Griego, et al. v.
Rent-A-Center, Inc., et al., Case No. JPPC 4244,
interpreted the Act to require a court to factually
determine whether a retailer is in compliance with the
Act's definition of "cash price." Under the court's
interpretation, a consumer, enforcement agency, or the
retailer would not know whether prices are in
compliance until there is a court decision made on the
specific facts of the case. This creates significant
disadvantage to all parties. A consumer or
enforcement authority would have to sue in court just
to know whether a retailer had overcharged a consumer.
Similarly, a retailer would not know whether they
have set their prices in compliance with the Act until
they are sued and a court renders a decision. This
creates a difficult situation for all parties to make
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sure that the appropriate prices are being charged and
that the Act is being followed. To highlight the
ambiguity in the law, a [2003] Legislative Counsel
Opinion took a position contrary to the Griego court
stating that the definition of "cash price" can be met
without a court ruling if the retailer follows the
objective standards specified in the Act. This
ambiguity must be corrected to provide clear direction
for consumers, enforcement agencies, and retailers to
comply with this important segment of the Act.
3. Bill proposes new parameters for cash price caps on
rent-to-own products
This bill would provide that the maximum cash price for
the lessor's first rental of personal property may not
exceed 1.65 times the lessor's cost for computer systems
and appliances; 1.7 times the lessor's cost for
electronic sets, 1.9 times the lessor's cost for
furniture; and 1.65 times the lessor's cost for all other
items. The bill would further provide that the maximum
total of payments may not exceed 2.25 times the maximum
cash price that could have been charged for the first
rental of the property.
This bill would also provide that the maximum total of
payments for the lessor's second and subsequent rental of
the property may not exceed the maximum total of payments
permitted for the first rental of the property less: (1)
for appliances and electronic sets, one-third the amount
of all rental payments paid to the lessor by consumers
who previously rented that property; or (2) for
furniture, computer systems, and all other items,
one-half the amount of all rental payments paid to the
lessor by consumers who previously rented the property.
And, the bill would provide that the maximum cash price
for property on its second or subsequent rental may not
exceed the maximum total of payments for the property
under the bill's provisions divided by 2.25.
The AG asserts that these parameters for price caps will
bring certainty to what "cash price" means in the
rent-to-own market, and provide consumers greater
protection from price gouging or overreaching by RTOs
than is available under current law.
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4. Do the definition sections for "appliances" and
"electronic set" need to be expanded?
The bill's provisions would define "applicance" and
"electronic set" to include certain specified items.
Should the definition of "appliance" be expanded to
include such things as convection ovens, toaster ovens,
and vacuums?
Should the definition of "electronic set" be expanded to
make sure such things as speakers are covered by the
bill?
5. Legislative Counsel's 2003 opinion, and the Griego
court decision
In 2003, Legislative Counsel issued an opinion regarding
the Act that found that "cash price" of new personal
property, as disclosed by the lessor in rental-purchase
agreements may be an amount that is equal to or less than
twice the documented actual cost, including freight
charges, of the rental property to the lessor from a
wholesaler, distributor, or manufacturer. The AG
disagrees with this opinion, noting that the current law
provides that "twice the documented actual cost" may be
evidence of "cash price" and ignores the current
statutory definition of "cash price." (See Changes to
Existing Law.)
In contradiction to Legislative Counsel's opinion, the
sponsor writes that the Griego court decision
[unpublished and settled in 2005] held that the Act
requires a court to factually determine on a case-by-case
basis whether an RTO has complied with the Act's
definition of "cash price." Both the RTO industry and
the AG assert that this contradiction is best rectified
by this bill, which would provide greater certainty as to
what "cash price" means for purposes of rental-purchase
agreements.
6. Is the retroactivity provision in the bill
problematic?
This bill would provide that, on or after June 1, 2005 to
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December 31, 2005, inclusive, a lessor may comply with
Sections 1812.622, 1812.623, 1812.624, 1812.632, and
1812.644 as amended by this bill in lieu of complying
with those sections as they were in effect before the
effective date of this bill without incurring any
liability for doing so.
The AG asserts that this provision does not raise
retroactivity concerns for several reasons. First, the
AG states that its investigation into the RTO industry
has revealed substantial noncompliance with current law
cash price requirements, and the AG believes that
allowing optional compliance with the bill's provisions
would facilitate the settlement or resolution of cases,
and would provide better protection to the public until
January 1, 2007, which would be the effective date of
this bill.
Second, the AG asserts that, in general, retroactive
legislation violates due process rights only if the legal
consequences of past activity is changed to the detriment
of the person who engaged in the activity, such as a loss
of property rights, or addition liability. Here, the AG
argues, that RTO companies would have the option of
continuing to comply with current law, or be relieved of
liability for noncompliance with current law if they
comply with the far more rigorous requirements of this
bill.
Finally, the AG posits that there is nothing per se
unconstitutional about retroactive legislative
provisions.
TO CLARIFY THE APPLICATION OF THIS PROVISION, SHOULD THE
DATES BE AMENDED TO JUNE 1, 2005 TO DECEMBER 31, 2006?
7. Consumer Attorneys of CA's (CAOC) concerns with the
bill's provisions
CAOC has submitted a letter of concern. The primary
concern CAOC raises is that the use of the manufacturer's
suggested retail price (MSRP), with respect to the cash
price of home appliances and home electronics, would be
eliminated under the bill's provisions. CAOC writes:
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[U]tilizing market pricing and MSRP to evidence cash
price is a vital reference. An overwhelming majority
of manufacturers provide MSRP information for their
electronic and furniture goods they sell to RTOs.
MSRP information is readily available to RTOs and
others at the time they purchase the goods from the
manufacturer. Obtaining this information is not
cumbersome, nor would it require a "regular survey" of
the market. CAOC is concerned that striking the
reference to the MSRP to establish the "cash price"
eliminates the single-most consistent, and reasonably
attainable piece of evidence that can demonstrate what
the true market cash price is. Without reference to
the MSRP, we are concerned that the RTOs will be able
to utilize the new cash formulas to set their pricing
of goods at values that may range between 8% to 50%
above the MSRP.
The AG disagrees with these concerns and counters with
the following points:
The MSRP is at most the sale price which a
manufacturer would like to see charged retail
consumers in a conventional retail sale. An RTO is
not a conventional sale, in that substantially higher
overhead costs are involved, including delivery,
pick-up, restocking, product maintenance,
reinstatement, and administration of weekly payments.
In addition, higher costs may be involved in dealing
with individuals who often have no or poor credit
histories.
MSRP is not a benchmark used in the retail industry
to establish retail price. Retailers base price on
product cost, overhead, and most importantly, market
demand. Retailers are much more concerned with what
competitors are charging for a product than what the
manufacturer's MSRP is.
MSRP does not have the force of law, and requiring
it might actually undermine antitrust law disfavoring
resale price maintenance.
Current law allows MSRP to be considered as
evidence of the market price for home appliances and
electronics. Current law also allows an RTO to use an
amount equal to twice its wholesale cost plus freight
as evidence of cash price. Nothing in current law
makes either of these forms of evidence superior to
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the other, and neither is conclusive of cash price.
Current law provides that cash price is the price
at which retail sellers are selling and retail buyers
are buying a product in the trade area where the RTO
is located. This means that, under current law, a
determination of cash price involves a fact intensive
inquiry, and is not a matter of resorting to MSRP.
Under current law, MSRP may only be used for
appliances and electronics, and therefore provides no
guidance for furniture which represents a substantial
share of RTO transactions, approximately 40% for large
RTOs.
SHOULD THE BILL BE AMENDED TO PROVIDE THAT, FOR HOME
APPLIANCES AND ELECTRONICS, RTO ENTITIES WOULD BE
REQUIRED TO DISCLOSE THE MSRP PRIOR TO EXECUTING A
RENTAL-PURCHASE AGREEMENT?
8. Technical and recommended amendments
On page 4, line 15, after "including," insert: "actual"
On page 4, line 18, after "Total," insert: "of"
On page 5, line 8, after "total," insert: "of"
On page 6, delete lines 24 through 40, and on page 7,
delete lines 1 through 7, and insert a box as follows:
On page 9, delete line 5, and insert: "other than the
county in which"
On page 9, line 27, delete "of" and insert: "or"
Support: Office of the Attorney General
Opposition: None Known
HISTORY
Source: Rent A Center, Inc.
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Related Pending Legislation: None Known
Prior Legislation: AB 722 (Karnette, Chapter 1026,
Statutes of 1994) enacted the Karnette
Rental-Purchase Act. The Act requires every
rental-purchase agreement to be in writing
and to contain specified information,
including a description of the property and
the total number and total amount of periodic
payments necessary to acquire the property.
The Act also prohibits the inclusion of
certain provisions in these agreements. The
Act also specifies the parameters of the
consumer's liability for loss of, or damage
to, the property and those of permissible
security deposits. The Act also regulates
the advertisement of rental-purchase
agreements, including the sending of
solicitation or other promotional materials.
The Act also provides that any waiver or
modification of its provisions is void and
unenforceable as contrary to public policy.
Prior Vote: Assembly Business and Professions Committee
(Ayes 10, Noes 0)
Assembly Appropriations Committee (Ayes 18, Noes
0)
Assembly Floor (Ayes 73, Noes 0)
(The Senate Judiciary Committee staff notes that
the bill has been significantly amended since
these votes.)
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