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 SB 217 (Vargas), Page 2 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 SB 217 (Vargas), Page 3 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. SB 217 (Vargas), 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) American Federation of State, County and Municipal Employees Opposition None received Consultant: Eileen Newhall (916) 651-4102