BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 424 (Eng)
As Amended June 6, 2011
Hearing Date: July 5, 2011
Fiscal: Yes
Urgency: No
BCP
SUBJECT
Pawnbrokers
DESCRIPTION
This bill, sponsored by the California Pawnbrokers Association,
would increase the maximum fee a pawnbroker may charge or
receive on the entire unpaid principal balance of loans over 90
days to 2.5 percent per month, thus, increasing the current
allowable fees from:
2 to 2.5 percent on the portion of the balance between $226
and $900;
1.5 to 2.5 percent on the portion of the balance between $901
and $1650; and
1 to 2.5 percent on the portion of the balance above $1650.
This bill would replace references to "30 days" with "month,"
define a month as 30 days, and make related conforming changes.
BACKGROUND
Pawnbrokers generally function by offering loans to individuals
in exchange for items of value. Those individuals may, within a
certain period of time, purchase the items back for the amount
of the loan plus a certain specified fee. If the time elapses
without that payment, the pawnbroker may then sell the items to
recoup the amount of the loan, usually only a fraction of its
market value. Pawnbrokers may also choose to purchase the item
outright.
Current law limits the amount of compensation pawnbrokers may
charge or receive for providing their services. Under Financial
(more)
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Code Sections 21200.5 and 21201.4, a pawnbroker is allowed to
charge a specified amount for the first 90 days of a loan, while
charges after the first 90 days are computed in accordance with
Section 21200. That Section allows a pawnbroker to receive
compensation pursuant to a graduated interest rate schedule.
This bill would collapse that interest rate scale to a flat 2.5
percent per month, thus increasing the fee that may be charged
consumers who have an unpaid balance after the first 90 days of
the loan. The proposed collapsing of interest rates is
identical to a provision in SB 217 (Vargas, 2011), which was
approved unanimously by this Committee on May 10, 2011. This
bill would also replace reference to "month" with "30 days,"
define a month as 30 days, and make other technical, conforming
changes.
This bill was approved by the Senate Banking and Financial
Institutions Committee on June 29, 2011.
CHANGES TO EXISTING LAW
Existing law defines "pawnbroker" as every person engaged in the
business of receiving goods, including motor vehicles, in pledge
as security for a loan. (Fin. Code Sec. 21000.)
Existing law requires every loan made by a pawnbroker to be
evidenced by a written contract that provides for a four-month
loan period, as specified. If a pledged article is not redeemed
during the four-month period, and there is not a written
agreement to extend the loan period, the pawnbroker must notify
the borrower within 30 days after expiration of the loan period
and provide a 10 day extension, as specified. Existing law
provides that if the pawnbroker fails to notify the borrower
within 30 days after the expiration of the loan period, the
pawnbroker shall not charge interest from the day after the
expiration of the one month period. (Fin. Code Sec. 21201.)
Existing law permits a pawnbroker to charge fees pursuant to a
set schedule of charges that are based upon the amount of the
loan, including a charge not exceeding one dollar in any loan
for not more than 30 days which does not exceed $14.99. (Fin.
Code Sec. 21200.5.) Existing law provides that charges for the
first 90 days of a loan shall be determined by that schedule of
charges. Charges for any period of time following the first 90
days of the loan shall be determined by application of the
schedule of maximum compensation. (Fin. Code Sec. 21201.4.)
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Existing law , the schedule of maximum compensation, prevents a
pawnbroker from charging or receiving fees in excess of the sum
of the following:
2.5 percent per month on the portion of unpaid principal
balance up to $225;
2 percent per month on the portion of unpaid principal balance
in excess of $225 up to, and including $900;
1.5 percent per month on the portion of unpaid principal
balance in excess of $900 up to, and including $1,650; and
1 percent per month on any remainder of such unpaid principal
balance in excess of $1,650. (Fin. Code Sec. 21200.)
Existing law permits a fee not exceeding $3 a month to be
charged on any loan when the monthly charge permitted by
Financial Code Section 21200 after the first 90 days would
otherwise be less than that minimum charge. (Fin. Code Secs.
21200(a)(5); 21201.4.)
This bill would revise the above schedule of maximum
compensation to, instead, allow a pawnbroker to charge or
receive a flat 2.5 percent fee on the entire unpaid principal
balance.
This bill , for purposes of the above provisions, would define
"month" as meaning a period of time consisting of 30 consecutive
calendar days, and make various conforming changes.
This bill would clarify that, after the first three months, a
charge not exceeding three dollars a month may be charged in any
month where the sum of the interest rates would otherwise be
less.
This bill would further clarify that, pursuant to the schedule
of charges, a charge not exceeding one dollar per month for the
first three months may be made on any loan which does not exceed
$14.99.
This bill would make other technical, clarifying changes.
COMMENT
1. Stated need for the bill
According to the author, this bill "is part of a larger effort
to (over several sessions) sweep the B&P and Financial codes and
simplify and make uniform sections relevant to pawnbrokers."
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2. Effects of collapsing the interest rate
For the first 90 days of a loan a pawnbroker may charge
according to the "schedule of charges," which must be posted in
a place clearly visible to the public. After that 90-day
period, a pawnbroker may charge according to a "schedule of
maximum compensation" that permits the pawnbroker to be
compensated based upon a sliding interest rate scale. The
amount of interest that may be charged under that scale is
dependent on the loan amount - 2.5 percent per month on the
portion of an unpaid balance up to $225, 2 percent on the
portion in excess of $225 up to, and including $900, 1.5 percent
on the portion in excess of $900 up to, and including $1,650,
and 1 percent on any remainder in excess of $1,650. (Loans in
excess of $2,500 are not subject to the above limitations on
compensation.) (Fin. Code Sec. 21051.)
As a result, the flat 2.5 percent a month cap proposed by this
bill would affect those with unpaid principal loan balances
greater than $225, and leave those with balances in excess of
$1,650 to bear the burden of a 150 percent fee increase for that
portion of the balance. (The sponsor notes that although exact
statistics are not currently available, the average loan was
estimated to be between $150 and $185 in 2006.) The following
chart illustrates the effects of the proposed increase.
------------------------------------------------------------------
| Loan amount |$100 |$500 |$1000 |$2,000 |
|------------------------------+--------+--------+---------+-------|
|Current maximum monthly fee |$2.50 |$11.13 |$20.63 |$33.80 |
|------------------------------+--------+--------+---------+-------|
|Proposed maximum monthly fee |$2.50 |$12.50 |$25.00 |$50.00 |
------------------------------------------------------------------
The California Pawnbrokers Association (CAPA), sponsor, contends
that over 80 percent of pawned property is redeemed, and that
most pawn transactions are short-term loans of 90 days or less.
If, in fact, most items are redeemed before the Section 21200
(the interest rate provision) applies, the effect of this bill
would be to increase the fees for those with insufficient funds
to redeem, or reduce their balance below $225, in the first 90
days.
CAPA further contends that California's pawnbrokers rank between
40th and 49th nationally in monetary return, and that pawn
transactions compare favorably with other forms of short-term
credit, such as payday loans and credit card advances.
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3. Other considerations in collapsing the interest rate
Pawnbrokers represent a valuable source of short-term credit to
those who may not be able to, or do not desire to, seek a costly
credit-card advance or payday loan. The policy question
presented by this bill is whether fees should be increased on
consumers who rely upon pawnbrokers as a source of credit: those
individuals may not otherwise have credit, savings, or money to
pay for day-to-day expenses.
Regarding the reported recent increase in pawn lending, the
Contra Costa Times' July 23, 2008 article entitled Pawn shops
brimming with business noted:
Amid the brewing cloud of recession and bitterly high gas
prices . . . Ý, the] bustle at pawn shops, jewelry and coin
buyers suggests many East Bay residents are foraging deep
into drawers and attics for keepsakes, family heirlooms,
even gold teeth, to hawk or pawn for a short-term loan to
stretch the miles or make rent. . . .
When the economy flags, the pawn business rallies. But
something is different this time, said Bob Goldstone of
Danville, a board member with the Collateral Loan &
Secondhand Dealers Association, the industry group for
pawnbrokers in California. "I've never seen anything like
this before. This is above and beyond," said Goldstone,
retired from an Oakland pawn shop after a 48-year career.
"These brokers are loaning money out continuously all day
long."
Similarly, the Modesto Bee's November 7, 2008 article entitled
Pawn Biz Picks Up; with Credit Tight and the Economy Bad, More
Folks Need the Services Offered reported:
According to the National Pawnbrokers Association, pawn
customers tend to be middle-class consumers who need
short-term credit but are unable to get it from financial
institutions. David Brooks, who opened Brooks Pawn &
Jewelry Co. on Coffee Road 27 years ago, has seen the
casualties of a slumping economy and tight credit. "We see
more people come in when times are tougher," he said. "It's
harder for them to make it from paycheck to paycheck."
Business picked up more than a year ago, the same time
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companies began announcing layoffs, Brooks noted. While
pawn shops make money on interest from loans on pawned
items, times aren't necessarily good for brokers. When
pawns go up, defaults go up, too. And when times are tough,
the retail end of pawn shops feel it too, Newnam said. If
Newnam had his way, he'd turn back the clock to 2006, when
cash flow was steadier and the economy was stronger. That's
better for his business and those who need his services.
It should also be noted that Governor Schwarzenegger vetoed AB
1357 (Coto, 2009) which contained an identical provision
collapsing the interest rates. In vetoing that bill, the
Governor stated:
In the current economic times, I cannot support increasing
the interest rate that pawnbrokers are permitted to charge
for loans, given that its impact will be on a population
that is currently least able to afford the increase.
4. Changing 30 days to a month
In addition to the above collapse of the interest rates, this
bill would replace references to 30 days with "month," 90 days
with "three months," and define "month" as a period of time
consisting of 30 consecutive calendar days. As a result of
those substitutions, there would be no substantive change to the
existing timing requirements. The author maintains that the
proposed changes are "part of a larger effort to (over several
sessions) sweep the B&P and Financial codes and simplify and
make uniform sections relevant to pawnbrokers."
While the proposed substitutions are nonsubstantive, the
proposed language regarding the amount that can be charged
pursuant to the "Schedule of Charges" for loans which do not
exceed $14.99 could potentially be construed to change the loan
period allowed for those small loan amounts. Under existing
law, a charge not exceeding $1 may be made on any loan "for not
more than 30 days" which does not exceed $14.99. That provision
was (arguably erroneously) interpreted by Matthew Bender's
California Forms of Pleading and Practice as allowing a charge
of "$1 or less for a 30-day loan of no more than $14.99." This
bill would strike the language referring to 30 days and,
instead, provide that a charge not exceeding $1 per month for
the first three months may be charged.
The sponsor asserts that the above change, in fact, is not
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substantive and that the loan period for those loans is already
four months. Consistent with that argument, it should be noted
that existing law requires pawn loan contracts to be for a
four-month period, and that charges for the first 90 days be
determined by the Schedule of Charges amended by this bill.
(See Fin. Code Secs. 21201; 21201.4.) The sponsor further
notes:
Put another way, what we are attempting to address is to
clear up the $1.00 charge for that loan category ($14.99 or
under) which could be misunderstood. The minimum charge is
to be charged in each month of the 90 days as it currently
is. We believe current law, and certainly current practice
is to apply the same "per month" (now defined in AB 424 as a
consecutive 30 day period) charge to the $14.99 or under
category that is applied to all of the other loan
categories.
Support : None Known
Opposition : None Known
HISTORY
Source : California Pawnbrokers Association
Related Pending Legislation :
SB 217 (Vargas), contains an identical provision to collapse the
interest rates. This bill is currently in the Assembly Banking
& Finance Committee.
SB 212 (DeLeon), would clarify the circumstances under which
replacement pawn loans can be taken out by individuals who are
unable to undertake these transactions in person. This bill is
in the Senate Banking & Financial Institutions Committee.
Prior Legislation :
AB 1357 (Coto, 2009), would have enacted an identical increase.
This bill was vetoed.
SB 580 (Calderon, Chapter 340, Statutes of 2008), increased the
allowable loan set-up fee from $3 to $5 and increased the
minimum monthly charge from $1 to $3.
AB 264 (Mendoza, 2007), as introduced, would have increased the
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maximum rate that may be charged on loans over 90 days by
instituting a flat 2.5 percent a month interest rate, and
increased the loan setup fee to a maximum of $50, as specified.
The bill was gut and amended after being held in this committee.
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.
Prior Vote :
Senate Banking & Financial Institutions Committee (Ayes 6, Noes
0)
Assembly Floor (Ayes 70, Noes 0)
Assembly Appropriations Committee (Ayes 17, Noes 0)
Assembly Banking and Finance Committee (Ayes 11, Noes 0)
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