Customer Reserve Accounts: A Solution to the “Down Payment” Problem
Rent-to-own agreements provide a great value for customers by allowing them the flexibility of a monthly contract, which can be terminated at any time by returning the rental property. The entry into a rental agreement is typically fairly low, with no credit checks being a common practice, and low monthly payments.
As rent-to-own gained popularity in the shed industry, customers began asking if they could put some money down to lower their payments and/or purchase the shed sooner. Initially, this was frowned upon, as accepting a down payment gives the customer equity in the transaction and is most likely a disguised credit sale.
Some rent-to-own companies were accepting “down payments,” choosing to operate outside of the legal bounds of rent-to-own regulation and rolling the dice on the odds.
About five years ago, a group of RTO providers, along with NBSRA guidance, began to work with attorneys on a way to bring a solution to this growing problem. NBSRA was very concerned about their members doing business correctly and wanted to provide a solution, if at all possible. Amos Bieler was very instrumental in working with the NBSRA board and Edward L. Winn, III of Martinec, Winn & Vickers, P.C., in crafting what is known today as CRAs, or customer reserve accounts.
A CRA is a one-time, large rental payment that is held until the customer exercises their ownership options, at which time it is applied to their contract. In exchange for this onetime, large rental payment, a rent-to-own company chooses to lower the customer’s monthly rental payments in equal percentage in relation of the CRA to the cash price.
For example, if a shed is $3,000 and the customer deposits $1,000 into their CRA account, that is one-third of the cash price, and monthly payments are lowered by a third. The customer is
renting the unit, and they are not purchasing a portion of the shed when they choose to deposit money into their customer reserve account.
This type of arrangement has been referred to as a “purchase reserve” in the past; however, this is a term that should not be used in relation to a rental agreement, as it could incorrectly lead a customer to believe that they are purchasing the rental item.
There are several things to be aware of when you offer CRAs. You cannot require a customer to deposit money into their CRA, or it will appear like a down payment and run the risk of being a
disguised credit sale.
Do not confuse CRAs with security deposits. In most states, a security deposit may be required, in accordance with state rental statutes.
Indiana changed their rental statutes in 2015 prohibiting CRAs due to frustration the department faced with inadequate bookkeeping records during audits of companies that were accepting
CRAs. If you are in another state besides Indiana, while it is still possible, do your bookkeeping properly.
If the rental property is returned, either voluntarily or involuntarily, you must return the monies in the customer’s CRA account, less any past due amounts. You cannot subtract “pick-up” charges or create extended “wait” times before the property is actually picked up. If this is a voluntary pickup, in many cases the customer’s financial obligation ends when they inform you to pick up the unit, not when you actually get around to it.