As many of you are well aware, I am no fan of RTO or LTO as I believe there are serious legal issues at both state and federal levels involving the concept of both of these being a form of a disguised credit transaction and that further individuals or organizations so engaged also fail to comply with other state and federal laws they are subject to.
That said, you should know the following:
Wisconsin DOJ was successful the other day in stopping Vision Property Management, one of the nation’s largest operators of rent-to-own residential schemes from operating in Wisconsin. The court order also allows Wisconsin residents that are VPM tenants to terminate their leases with VPM without penalty, and seek financial damages against VPM that resulted from the company’s “prohibited acts and practices. “
The lawsuit is far from over so VPM is going to face far more than just their own customers. The State of Wisconsin is out for blood, over what they consider “a deceptive business model”.
People already engage in these models in other states should be aware that other A.G.s in other states have been made aware of Wisconsin’s actions. They should also be aware that a new report from Kroll Bond Rating Agency throws a wet blanket onto these practices. KBRA cites a primary concern of rent-to-own is the number of legal questions that surround deals of this type, specifically whether rent-to-own deals could be viewed as predatory lending.
“A primary concern was that the legality of purchase options associated with rent-to-own properties are largely untested and there is a possibility that these purchase options could subsequently be found to violate consumer protection and/or predatory lending laws,” KBRA said in its report.
This presents multiple, serious problems for any investors who buy into a securitization backed by rent-to-own or lease to own properties, KBRA said. In one example provided by KBRA, if it was determined that the purchase option attached to a property violated consumer protection laws, tenants would then stop making rental payments, which could cause significant shortages in the funds available to the note holder to make payments to the servicer.
And if that happens, the funds that ultimately flow to the bondholder could dry up as well.
KBRA does caution that rent-to-own and lease to own securitizations are in their extreme infancy, and said that it expects to see “significant diligence and disclosure” surrounding the deals’ inherent risks. There is also considerable concern that these transactions could be reclassified as loans which would mean the transactions themselves would be violations of both civil and criminal law.
So, does anyone still think that lease to own, or rent to own, or rent credit schemes are a good idea?