Thursday, March 4, 2010

A loan is a loan is a loan, even if it it doesn't look like a loan.

In Perez v. Rent-A-Center, Inc, 892 A.2d 1255, 186 N.J. 188 (N.J. 2006), the New Jersey Supreme Court was confronted with the question whether rent-to-own contracts are subject to 30% limit on interest applicable to installment sales set forth in the state's Retail Installment Sales Act ("RISA"), N.J.S.A. 17:16C-1 to -61.

The case arose because the plaintiff had rented from Rent-a-Center a number of items over time that had a total cash price of $9,301.72. Had she paid the weekly rates called for under her rental agreement and the additional option payments called for under that agreement, she would only achieve ownership after having spent $18,613.32. In the court's words, "[t]he difference between the market value of the goods and their ultimate cost was Rent-A-Center's interest charge for the privilege of buying the products over time. By May 2002, the Plaintiff had paid $8,156.72. It was at that point that she stopped paying.

Rent-A-Center thereafter filed a small claims complaint seeking money damages against Perez arising out of her failure to pay for or return the rental items.

One of the first points the court rejected was Rent-a-Center's claim that a rent-to-own agreement should not come under a statute forbidding interest in excess of 30% because the rent-to-own agreement in no way expresses it as a financing agreement:

Historically, the law treated the taking of interest in connection with the sale of goods entirely different from the taking of interest on a loan of money per se. Indeed, in the nineteenth and early twentieth centuries, courts first distinguished between the two kinds of loans and decided that the latter required regulation but the former did not. The rationale behind those cases was the notion that the compulsion facing an individual who owes or needs money is much more compelling than that motivating a person who seeks to buy goods, the latter having the option of foregoing the purchase. See, e.g., General Motors Acceptance Corp. v. Weinrich,218 Mo.App. 68, 262 S.W. 425, 428 (1924)("[A] purchaser is not like the needy borrower, a victim of a rapacious lender, since he can refrain from the purchase if he does not choose to pay the price asked by the seller."). On that basis, courts concluded that although money lenders were subject to the usury laws, those who made loans to sell their merchandise were not.
The idea that the two types of loans were distinct was reflected in the judicial coining of the term "time price differential." Courts used that term to refer to interest incurred in connection with the time sales of goods thus guaranteeing that such sales would escape the usury statutes that by their terms only governed "interest." See Eric A. Posner, Contract Law in the Welfare State: A Defense of the Unconscionability Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract, 24 J. Legal Stud. 283, 303 (1995)("[C]ourts generally upheld retail installment contracts, on the ground that usury laws prohibit excessive interest on money loans, not on loans of goods."). Eventually the term "time price differential" made its way into the statutes.
Legal scholars have challenged the economic basis for drawing a distinction between interest and a time price differential — concluding that the time price differential is nothing more than interest on a loan in the amount of the purchase price extended by a seller to a borrower. Steven W. Bender, Rate Regulation at the Crossroads of Usury and Unconscionability: The Case for Regulating Abusive Commercial and Consumer Interest Rates Under the Unconscionability Standard, 31 Hous. L.Rev. 721, 727 (1994)("[T]he `time price' exemption ... employed the strained judicial fiction that merchants don't receive `interest' when selling their goods on time. Merchants charging more for goods paid over time than goods purchased for cash were thus freed from usury."). Commentators have also debunked the "compulsion" rationale, concluding that the need for the basic necessities of life is no less compelling than the need for money.
However, the view that the time price doctrine insulated retail installment sales from usury continued to have currency in America through the mid-twentieth century. In fact, the charges associated with the credit sale of goods went generally unregulated up until the 1950s. At that point, in response to the drumbeat of scholarly criticism and consumer complaints, some states, including New Jersey, recognized that the credit sale of goods required regulation and began to adopt retail installment sales acts that set interest rate limits on credit sales transactions. Through the incorporation of interest rate caps, those enactments effectively repudiated the historic treatment accorded the credit sale of goods and essentially replaced the usury laws that had been previously declared off-limits.
Like other state initiatives, New Jersey's RISA, which became law in 1960, was "part of a package of laws designed to protect consumers from overreaching by others, to protect consumers from overextending their own resources and also to promote the availability of financing to purchase various goods and services." Among other things, the statute prescribed the general form that retail installment contracts should take, required certain financial disclosures, detailed prohibited practices, and imposed a 10% cap on the time price differential (interest) chargeable in connection with a sale, Penalties for violation were also provided. 
 892 A.2d at 1263-1265 (some citations omitted; emphasis added).