BILL ANALYSIS                                                                                                                                                                                                    Ó






                  SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
                             Senator Juan Vargas, Chair


          SB 217 (Vargas)                         Hearing Date:  April 6, 
          2011  

          As Introduced: February 9, 2011
          Fiscal:             Yes
          Urgency:       No
          

           SUMMARY    Would increase the limits on the compensation 
          pawnbrokers are allowed to charge for their services.  
          
           DESCRIPTION   Specifically, this bill 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 90 
          days old, and below $2,500.
           
          EXISTING LAW
           
           1.  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).

           2.  Provides for the licensing of pawnbrokers by a chief of police, 
              sheriff, or police commission (Section 21300).

           3.  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:

               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 




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                 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).

           4.  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.

           5.  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); 

           6.  Allows a borrower to request, and a pawnbroker to consent to a 
              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





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          1.  Background and Discussion:    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 
              levels to which they 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).  

          AB 264 contained three provisions - 1) an increase in the 
              allowable loan set-up fee from $3 to $5; 2) an increase in 
              the minimum monthly charge from $1 to $3; and 3) a change in 
              the rate structure that would have collapsed the stair-step 
              rate schedule described above in Existing Law Number 3b and 
              replaced it with a flat rate of 2.5% on the unpaid principal 
              balance of loans greater than 90 days in length.  

          AB 264 passed the Senate Banking, Finance & Insurance Committee 
              on consent, but was held by the Senate Judiciary Committee.  
              The first two provisions of AB 264 were later amended into 
              SB 580 (Calderon), and signed into law in 2008.  CLSDA 
              sponsored AB 1357 in 2009, in hopes of enacting the third 
              provision previously contained in AB 264.  AB 1357 passed 
              the Legislature, but was vetoed by Governor Schwarzenegger.  
              The California Pawnbrokers Association (formerly CLSDA) is 
              sponsoring SB 217, in hopes of convincing the current 
              Legislature and the new Governor to enact the third, still 
              unaddressed provision of AB 264. 

          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 similar sized loans 
              and similar loan lengths from depository institutions.





                                                SB 217 (Vargas), Page 4




          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. 

           2.  Summary of Arguments in Support:  The California Pawnbrokers 
              Association is sponsoring SB 217, to help ensure the 
              continued existence of pawnbrokers in California.  According 
              to the trade association, the number of pawnbrokers 
              operating in California has declined over time, as 
              pawnbroker operating costs have increased, while the charges 
              they are allowed to impose have remained flat.  Among the 
              operating costs cited by the Pawnbrokers Association:  
              workers' compensation costs that are among the highest in 
              the state, the cost of training employees to accurately 
              value collateral, the need to upgrade security to ensure the 
              safety of pawned items, antiquated and burdensome reporting 
              requirements, and the costs of licenses and permits.  

          The California Pawnbrokers Association is concerned that, 
              without an increase in its compensation structure, the 
              number of pawnbrokers in the state will continue to decline, 
              which will result in many potential pawn customers utilizing 
              other, more costly forms of short-term credit.

           3.  Summary of Arguments in Opposition:    None received.
        
          4.  Prior and Related Legislation:   

               a.     AB 424 (Eng), 2011-12 Legislative Session:  Would 
                 make technical changes intended to help pawnbrokers 
                 accurately calculate interest payments on loans of 
                 greater than 90 days.  Pending in the Assembly Banking & 
                 Finance Committee.

               b.     SB 212 (DeLeon), 2011-12 Legislative Session:  Would 
                 clarify the circumstances under which replacement loans 
                 can be taken out by borrowers who are unable to undertake 
                 these transactions in person.  Two-year bill pending in 
                 the Senate Banking & Financial Institutions Committee.




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               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)
          American Federation of State, County and Municipal Employees
           
          Opposition
               
          None received

          Consultant: Eileen Newhall  (916) 651-4102