End Furniture Poverty has a long-term interest in the area of availability of credit for low income families in need of essential household items.
It was with great interest, then, that we observed FRC Group’s short-lived initiative to bring responsible lending and fair interest rates to the high street rent-to-own market – Our House.
In 2015 with the financial support of Esmée Fairbairn, Oldham Council, Calico Housing, Trident Housing and WHG and in-kind support from Lloyds Banking Group – FRC Group launched Our House, a socially responsible competitor to the established rent-to-own (RTO) stores that blight high streets up-and-down the country.
The group’s belief at the outset was that the high interest rates charged by the prevailing rent-to-own operators was the most damaging aspect of the existing model. However, they found that irresponsible lending – by way of extending loans that customers cannot afford to repay – are a greater issue.
With the support of lending partner Five Lamps, Our House was able to extend credit at an affordable APR. By matching the product range of its competitors while offering lower APR rates, it was believed that they would tackle Furniture Poverty head on while launching a sustainable social business that could ultimately be scaled up to help low-income families across the UK.
Like other RTO operators, Our House had a physical presence on the high street showcasing a range of products very similar – if not identical – to those marketed by other RTO stores. The plan was that Our House would be able to ‘poach’ the customers who would otherwise have gone to an established RTO store, attracted by the reduced weekly repayments offered by Our House.
However, it quickly became clear that building a sustainable customer base from the low-income families and vulnerable people who traditionally make up the clientele of RTO stores was challenging – if not impossible - as granting loans to most applicants was neither in the best interest of Our House or the would be customer!.
Even with their established experience in extending loans to families with low incomes, the store’s lending partners were shocked by the levels of indebtedness exhibited by those applying to Our House for credit.
The simple application of responsible lending practices designed to protect against extending loans that borrowers simply could not afford to repay, whilst continuing to function at a very basic level, led to about 70% of applicants being rejected for loans.
This high decline rate was not a result of over caution on the part of Our House and Five Lamps. Nor was it simply because of a disproportionate number of ‘chancers’ that Our House had been warned would ‘try it on’ in the early weeks.
The decline rate was simply the result of the application of the very same responsible lending rules that Five Lamps apply to all loan applications. If the loan would result in the applicant not having enough money left to pay rent, buy food, clothe children and put the heating on, then a loan was rightly declined. However, this is an approach not universally adopted by other RTO operators.
There were many instances of applicants refused loans by Our House angrily announcing that they would go to one of the established RTO stores, confident they would be given credit. A handful even made a point of returning to the store with a credit agreement from another RTO operator for the item that Our House had turned them down for.
The fact that Our House were declining markedly more loan applications than their competitors – on whose acceptance rates the business plan was modelled – meant that the business was unable to achieve a sustainable level of turnover.
In short, it was impossible for Our House to operate a sustainable rent-to-own business while abiding by responsible lending guidelines.
In order for Our House to become viable, the store would have had to extend credit to customers in the full knowledge that they could not afford to pay for the item whilst living any sort of decent life.
Paradoxically, the extension of credit to people who are unable to afford the item and maintain a basic standard of living is not a substantial credit risk for lenders because customers are known to prioritise the payment of RTO loans for household goods over things such as rent.
Initial presumptions that high APR was the main problem with the existing RTO model were dispelled as it soon became clear that the provision of credit to very low-income, heavily indebted families is a much bigger problem. Many of these borrowers cannot afford to repay the money loaned – let alone interest – and were becoming trapped in an ever-deepening spiral of debt.
Our House’s failed experiment did raise questions about how other RTO operators were able to attract a much more creditworthy customer base, while still adhering to the FCA’s responsible lending guidelines.
A statement released by the FCA detailing discussions between themselves and the UK’s largest rent to own company Bright House, may shed some light on this.
In the FCA’s press release of 24th October 2017 they state that ‘Bright House has been working closely with the FCA since late 2014 as we identified that the firm’s lending application affordability assessment processes and collections processes did not always deliver good outcomes for customers particularly those who were at a higher risk of falling into financial difficulty.’
Suspicions that some staff working in RTO stores may not have been applying the FCA’s responsible lending criteria as rigorously as they ought to have, appear to have been well-founded. The extent to which this has been happening and the extent to which this has contributed to the success of businesses like Bright House is yet to be seen.
However, it has been reported that in the wake of the application of responsible lending principles, Bright House’s earnings had crashed by 79 per cent.
The traditional rent-to-own market appears to be in a state of turmoil that no level of interest can compensate for. A large proportion of would-be customers will now be declined credit due to responsible lending criteria being properly applied.
Now the FCA has clamped down on RTO operators flouting responsible lending rules, it will be interesting to see whether this model can be sustainable moving forward. End Furniture Poverty certainly hopes that this will herald the start of a new age of responsible, affordable support to help lift people out of Furniture Poverty.