BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 424 (Eng) Hearing Date: June 29, 2011
As Amended: June 6, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would increase the limits on the compensation
pawnbrokers are allowed to charge for their services, would
standardize time references in the pawnbroker statutes to refer
to months rather than days, and would define a month in the
pawnbroker statutes as a period of time consisting of 30
consecutive days.
DESCRIPTION
1. Would authorize pawnbrokers to charge borrowers the greater
of $3 per month or 2.5% per month on the unpaid principal
balance of loans greater than three months old, and below
$2,500.
2. Would define a month for purposes of the laws governing
pawnbrokers as a period of time consisting of 30 consecutive
days, and would make conforming changes.
EXISTING LAW
3. Defines a pawnbroker as any person engaged in the business of
receiving goods, including motor vehicles, in pledge as security
for a loan, and defines pledged property as property held as
security for a loan, the title to which remains with the pledgor
and not the pawnbroker (Financial Code Sections 21000 and
21002).
4. Provides for the licensing of pawnbrokers by a chief of police,
sheriff, or police commission (Section 21300).
5. Generally specifies a loan length of four months, and caps the
compensation that may be charged by pawnbrokers on loans of up
to $2,500, as follows:
AB 424 (Eng), Page 2
a. During the first 90 days of the loan, pawnbrokers may
charge borrowers between $1 and $140, depending on the dollar
amount of the loan (Sections 21200.5 and 21201.4).
b. From the 91st day forward, pawnbrokers may charge the
greater of $3 per month or 2.5% per month on the unpaid loan
balance up to $225; 2% per month on the unpaid balance
between $225.01 and $900; 1.5% per month on the unpaid
balance between $901 and $1,650; and 1% per month on the
unpaid balance in excess of $1,650; one month's interest may
be charged for any part of the month in which pawned property
is redeemed (Sections 21200 and 21201.4). It is this
stair-step rate structure that would be changed by this bill
and replaced with a single maximum rate of 2.5% per month, or
$3 per month, whichever is greater.
c. Pawnbrokers may charge a loan setup fee not to exceed
the greater of $5 or 2% of the loan amount, capped at $10
(Section 21200.1).
d. Pawnbrokers may also charge a handling and storage fee
for larger items that is charged upon property redemption,
not to exceed $5 for any article larger than one cubic foot,
$10 for any article larger than three cubic feet, $20 for any
article larger than six cubic feet, and an additional $1 for
each cubic foot in addition to one cubic foot (Section
21200.6).
e. A processing charge of $4 may be charged for each
firearm pawned (Section 21200.8).
f. If the borrower fails to redeem a pawned item during the
loan period, a charge of up to $3 for services and costs
relating to providing required notices of loan expiration to
the borrower may also be imposed (Section 21201.2).
6. Provides that the limits on rates and charges listed above do
not apply to any loan of a bona fide principal amount of $2,500
or more (Section 21051); there is no interest rate cap on pawn
loans of greater than $2,500.
7. Requires all licensed pawnbrokers to post their fees and
charges in a place clearly visible to the general public
(Sections 21200.5 and 21200.7).
8. Allows a borrower to request, and a pawnbroker to consent to a
AB 424 (Eng), Page 3
replacement loan, to take effect before title to the pawned
property passes to the pawnbroker. To obtain a replacement
loan, the borrower must pay all charges and interest due under
the original loan. The principal amount of the replacement loan
may be lower than, the same as, or higher than the loan being
replaced (Section 21201.5).
COMMENTS
1. Background and Discussion: This bill is sponsored by the
California Pawnbrokers Association. It contains provisions
previously contained in SB 217 (Vargas), a measure heard and
passed unanimously by this Committee on April 6, 2011. It
also contains provisions contained in the as introduced
version of AB 424.
a. Provisions contained in the as-introduced version of
AB 424 (define the term "month" as 30 consecutive days;
strike references to 30 days and 90 days in the
pawnbroker statutes and replace them with references to
one month and three months, respectively): This change
is intended to ensure consistency in the time references
within the statutes governing pawnbrokers.
b. Provisions contained in the version of SB 217 passed
by this Committee: California's pawn lending rates and
fees are set by statute, and have periodically been
increased over the years to keep up with the cost of
doing business. In 2007, the Collateral Loan and
Secondhand Dealers Association of California (CLSDA; the
trade association which recently changed its name to the
California Pawnbrokers Association) sponsored AB 264
(Mendoza), to increase pawnbroker compensation from the
level to which it had last been raised in 2001. At
present, California's pawnbrokers rank between 47th and
50th nationally in monetary return, relative to other
state's pawnbrokers (different rankings apply to
different loan amounts).
Two of the three provisions in AB 264 were enacted in 2008,
but the final provision was never signed into law by the
Governor. The California Pawnbrokers Association is
sponsoring SB 217, in hopes of enacting the third, as yet
un-enacted provision of AB 264. The Pawnbrokers
Association believes that this final change is necessary
to help its industry remain viable.
AB 424 (Eng), Page 4
2. The Pawnbroker Business Model: According to the California
Pawnbrokers Association, approximately 85-88% of pawned
property is redeemed. Thus, most pawn transactions are
short-term loans of 120 days or less. Pawn loans can be a
safe way to securely store valuable jewelry, musical
instruments, and other valuable items, and have the items
insured, at the pawnbroker's expense. Because pawn loans
are not reported to major credit bureaus, some borrowers
choose pawn loans to avoid impacting their credit scores.
Other borrowers seek out pawn loans, because they cannot
obtain loans of similar sizes and lengths from depository
institutions.
The California Pawnbrokers Association has historically provided
the Legislature with statistics, demonstrating that the
average cost of a pawn transaction is lower than the cost
associated with other forms of short-term credit, such as
payday loans, refund anticipation loans, and credit card
advances. Pawn transactions are also less expensive than
merchant bounced check fees, bank insufficient funds fees,
credit card late fees, and utility reconnection fees. Pawn
transactions are somewhat more expensive than cash advances
obtained from depository institutions.
3. Summary of Arguments in Support: The California Pawnbrokers
Association is sponsoring this bill for the reasons stated
above.
4. Summary of Arguments in Opposition: None received.
5. Prior and Related Legislation:
a. SB 217 (Vargas), 2011-12 Legislative Session: Would
authorize pawnbrokers to charge borrowers the greater of
$3 per month or 2.5% per month on the unpaid principal
balance of loans greater than three months old, and below
$2,500. Passed the Senate. Provisions amended out of SB
217 and into AB 424.
b. SB 212 (DeLeon), 2011-12 Legislative Session: Would
clarify the circumstances under which replacement loans
can be taken out remotely by borrowers who are unable to
undertake these transactions in person. Two-year bill
pending in the Senate Banking & Financial Institutions
Committee.
AB 424 (Eng), Page 5
c. AB 580 (Calderon), Chapter 340, Statutes of 2008):
Enacted the minimum interest charge and loan set-up fee
changes in the Mendoza bill, described immediately below.
d. AB 264 (Mendoza), 2007-08 Legislative Session:
Would have replaced the current stair-step interest rates
applied to pawn loans of over 90 days with a single
monthly interest rate of 2.5%, increased the minimum
interest charge per month from $1 to $3; and changed the
cap on loan set-up fees to the greater of $5 or 2%,
capped at $10 (up from $3 on loans of $50 and below and
$5 on loans above $50). Held in the Senate Judiciary
Committee.
e. AB 1297 (Papan, Chapter 505, Statutes of 2001):
Increased the maximum loan setup fee on loans of up to
$50 from $2 to $3; increased allowable handling and
storage fees from $3, $9, and $18, to $5, $10, and $20,
depending on the size of the object; and increased the
maximum allowable fee for costs relating to sending a
loan expiration notice from $2 to $3.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Pawnbrokers Association (sponsor)
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102