BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015 - 2016 Regular Session
SB 285 (Block)
Version: February 19, 2015
Hearing Date: April 28, 2015
Fiscal: Yes
Urgency: No
TH
SUBJECT
Pawnbrokers: Compensation: Loans
DESCRIPTION
Existing law regulates pawnbrokers and sets the maximum
compensation that may be charged or received for loans to their
customers. This bill would increase the maximum compensation
levels authorized under current law. Specifically, this bill
would:
increase certain amounts that may be charged during the first
three months of any loan less than $2,500 by consolidating the
existing 21 loan brackets into 6 and setting new maximum
charges within those brackets;
increase from 2.5 percent to 3 percent the maximum monthly
rate of compensation that may be charged for the fourth and
subsequent months on the unpaid principal balance of any loan;
increase from 2 percent to 3 percent the allowable loan setup
fee for each loan, and increase from $10 to $30 the maximum
allowable loan setup fee; and
increase the amount that may be charged for the handling and
storage of pawned articles.
This bill would also authorize a pawnbroker to deliver, at the
sole option of the pledgor, specified notices via electronic
mail.
BACKGROUND
Pawnbrokers generally function by offering loans to individuals
in exchange for items of value. Those individuals may, within a
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certain period of time, purchase the items back for the amount
of the loan plus interest and certain specified fees. If the
time elapses without that payment, the pawnbroker receives title
to the item and may then sell it to recoup the amount of the
loan, which is usually only a fraction of the item's 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
Code Section 21200.5, a pawnbroker is allowed to charge a
specified amount for the first 90 days of a loan depending on
the principal balance, while charges after the first 90 days are
allowed to reach up to 2.5 percent per month on the unpaid loan
balance, in accordance with Section 21200. Existing law also
sets the maximum amount that may be charged as a loan setup fee
and for the handling and storage of pawned items.
This bill would consolidate from 21 to 6 the existing brackets
that set the maximum charge a pawnbroker can receive during the
first three months of a loan. This bill would also increase the
amounts that may be charged for the fourth and subsequent months
on the unpaid principal balance of any loan, as a loan setup
fee, and for the handling and storage of pawned articles. This
bill would also authorize a pawnbroker to deliver, at the sole
option of the pledgor, a notice indicating the termination of a
loan period via electronic mail.
This bill was approved by the Senate Banking and Financial
Institutions Committee on April 15, 2015.
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 at his or her last known address within 30 days
after expiration of the loan period and provide a 10 day
extension to redeem the pledged property, as specified.
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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 per month for
any loan that 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 not exceed the lesser of $3 per month or 2.5 percent of
the unpaid principal balance. (Fin. Code Secs. 21200, 21201.4.)
Existing law provides that a loan setup fee not to exceed $5 or
2 percent, whichever is greater, may be charged for each loan.
However, the maximum loan setup fee shall not exceed $10. (Fin.
Code Sec. 21200.1)
Existing law provides that, in addition to other allowed
charges, at the time property is redeemed a pawnbroker may
collect a handling and storage charge for pawned articles
pursuant to a set schedule of charges based on the volume of the
pawned item, including a charge of $5 for any article that
cannot be contained within one cubic foot. Existing law
prohibits the collection of a storage charge for any article
that can be contained within one cubic foot. (Fin. Code Sec.
21200.6)
This bill would consolidate from 21 loan brackets into 6 the
existing schedule of maximum charges a pawnbroker may charge for
the first 90 days of a loan, and would set new maximum charges
within those loan brackets.
This bill would increase from 2.5 percent to 3 percent the
maximum monthly rate of compensation that may be charged for the
fourth and subsequent months on the unpaid principal balance of
any loan.
This bill would increase from 2 percent to 3 percent the
allowable loan setup fee for each loan, and increase from $10 to
$30 the maximum allowable loan setup fee.
This bill would permit the collection of a $1 handling and
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storage charge for any article that can be contained within one
cubic foot, and would authorize the collection of handling and
storage charges at the time a loan is issued instead of when the
property is redeemed.
This bill would provide that a pawnbroker may notify the pledgor
at his or her last known electronic address of the termination
of the loan period at the sole option of the pledgor by a means
for which verification of electronic transmission of the
notification can be provided by the pawnbroker.
This bill would make other technical and clarifying changes.
COMMENT
1.Stated need for the bill
The author writes:
SB 285 would increase the rates and fees that California
pawnbrokers may charge their customers, helping sustain the
long-term viability of the pawn industry in California.
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. The last increase occurred
in 2011 (AB 424, Eng, Chapter 318, Statutes of 2011).
According to [the California Pawnbroker's Association,] CAPA,
California's interest rate and fee caps on pawn loans of up to
$2,500 are among the lowest in the country. California
currently ranks 48th out of 51, when our allowable pawnbroker
compensation is compared to the other states and the District
of Columbia. Many of California's pawnbrokers - particularly
our smallest ones - are struggling to remain in business in a
state whose cost of living and cost of doing business is among
the highest in the country.
CAPA, sponsor of this bill, counts approximately half of
California's licensed pawnbrokers among its membership. In
2014 alone, thirteen of CAPA's members shut their doors,
unable to make ends meet. Without an increase in allowable
compensation, CAPA asserts that California's pawn industry
will not survive.
According to national figures provided by CAPA, about 80
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[percent] of pawn customers are repeat customers. Repayment
rates nationally are in the 70 [percent] to 80 [percent]
range, with California trending toward the upper level of that
range.
2.Consumer Protection
The Legislature has long considered consumer protection to be a
matter of high importance. State law is replete with statutes
aimed at protecting California consumers from unfair, dishonest,
or harmful market practices. For example, the Consumers Legal
Remedies Act was enacted "to protect the statute's beneficiaries
from deceptive and unfair business practices," and to provide
aggrieved consumers with "strong remedial provisions for
violations of the statute." (Am. Online, Inc. v. Superior Court
(2001) 90 Cal.App.4th 1, 11.) Similarly, for over 70 years,
California's Unfair Practices Act (Bus. & Prof. Code Sec. 17000
et seq.) has protected California consumers from "unlawful,
unfair or fraudulent business act[s] or practice[s]." (Bus. &
Prof. Code Sec. 17200.)
Consumer protection in the pawnbroking industry is no less a
matter of fundamental public policy. California law protects
consumers from unscrupulous business practices by, among other
things, limiting the maximum compensation a pawnbroker can
charge for a loan secured by a borrower's tangible property. In
the past, this Committee has viewed an annualized interest rate
cap of 36 percent on small dollar loan products as an
appropriate consumer safeguard. The benchmark 36 percent rate
cap for small dollar lending emerged in the first half of the
twentieth century as a mechanism to control the then-extant
"black market for illegal usurious small loans[] run by loan
sharks." (Saunders, Why 36 [Percent]?: The History, Use, and
Purpose of the 36 [Percent] Interest Rate Cap (April 2013)
[as of
April 19, 2015].) As of 2013, "over 35 jurisdictions - 70
[percent] of states - still provide for annual interest rate
caps at the 36 [percent] benchmark or less within their
statutory schemes governing small-dollar installment loans by
nonbank lenders." (Id.) The 36 percent rate cap has endured
because it "works on a practical level." A 36 percent interest
rate cap results in payments that "borrowers are more likely to
be able to make while actually paying off the loan," and also
"forces lenders to offer longer term loans with a more
affordable structure and to more carefully consider ability to
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pay to avoid write offs" prior to lending. (Id.)
The rate increases proposed in this bill would, at their
maximum, increase the interest rate due on pawnbroker loans to
36 percent. However, when combined with other allowable fees
and charges, such as loan setup fees and storage fees, the
effective annual percentage rate of pawn loans would likely
exceed 36 percent.
3.Economic Justification for Increases
In its support letter, the California Pawnbroker's Association
(CAPA) states that the pawnbroking industry "is losing ground in
the battle to keep pace with rising costs" and that the rate and
fee increases proposed in this bill "will help in that effort."
They state that, based on California industry averages, a number
of business costs borne by pawnbrokers have gone up since 2011,
the last time the Legislature authorized increases. The figures
they cite include a 24 percent increase in payroll costs, a 97
percent increase in storage costs, and a 143 percent increase in
automobile and fuel costs. CAPA also points out that, based on
its findings, California currently ranks 48th out of the 50
states and the District of Columbia in terms of allowable
pawnbroker compensation, and that 13 of its member businesses
closed in 2014.
Importantly, CAPA does not provide any information regarding the
profitability of pawnbroking in California under the current
regulatory scheme, nor does it offer any data specific to the
pawnbroking industry showing that it has become unprofitable due
to increases in the general cost of doing business in
California. CAPA does not indicate whether changes in lending
activity have offset any of these costs, or how these costs
impact the pawnbroker industry specifically. Also missing is
any data showing that the businesses that closed in 2014
represent an increase over prior years, or that these closures
were offset by the startup of new businesses.
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. Given the fact that the rate
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increases proposed in this bill would likely fall on California
residents who are among the least financially able to absorb
them, the Committee may wish to investigate more thoroughly
whether the increases proposed in this bill are economically
warranted.
4.Rate Increases in Detail
This bill proposes to increase the allowable fees and costs
pawnbrokers may charge in four broad areas. First, the bill
would increase from 2.5 percent to 3 percent the maximum monthly
rate of compensation that may be charged for the fourth and
subsequent months on the unpaid principal balance of any loan.
Expressed as a yearly rate, this provision would increase from
30 percent to 36 percent the maximum annual percentage rate
(APR) authorized for pawn loans beyond the first 90 days.
Second, this bill would increase from 2 percent to 3 percent the
allowable loan setup fee for each pawn loan, and increase from
$10 to $30 the maximum allowable loan setup fee. This maximum
$30 charge would be in addition to all other charges and fees
due on a pawn loan.
Third, this bill would authorize pawnbrokers to collect a $1
handling and storage charge for any article that can be
contained within one cubic foot. Under current law, articles
less than one cubic foot in volume may not be assessed a storage
charge. Additionally, this bill would authorize the collection
of storage charges at the time a loan is issued instead of when
the property is redeemed, resulting in both lower loan
disbursements to pawn customers as well as extending these
charges for the first time to customers who choose not to redeem
pawned articles.
Finally, this bill would modify the existing schedule of 21 loan
brackets that set the maximum charges a pawnbroker may charge
for the first 90 days of a loan. Under existing law, loans fall
within a loan bracket based on their principal amount. For
example, a loan not exceeding $19.99 may only incur a $3 charge
for the first three months, and a loan not exceeding $99.99 may
only incur a $10 charge for the first three months. This bill
would consolidate the existing schedule of 21 loan brackets into
6 and would set new maximum allowable charges within these loan
brackets. The first five new loan brackets - covering loans
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less than $175 - would largely follow the existing schedule,
authorizing a charge equivalent to between 8.5 and 15 percent of
the loan balance. The last loan bracket - covering loans in
excess of $175 but less than $2,500 - would increase the
allowable charge from between 5.6 and 6.7 percent of the loan to
a flat rate of 9 percent. Expressed as a yearly rate, this
would authorize an increase in APR from between 16.8 and 20
percent during the first 90 days to 36 percent.
To lessen the financial impact these increases might have on
pledgors, the Committee may want to consider the following
amendments that would reduce the fee increases proposed in this
bill and move the point at which storage fees may be collected
back to the time a pledged item is redeemed. These changes
would, among other things, ensure that the annual percentage
rate authorized for pawn loans beyond the first 90 days remains
below 36 percent.
Suggested Amendments :
On page 2, line 6, strike "three percent" and insert "two and
three quarters percent"
On page 4, between lines 3 and 4, insert: "A charge not
exceeding twenty dollars ($20) may be made on any loan for not
more than three months of one hundred seventy five dollars
($175) or more, but not exceeding two hundred ninety-nine
dollars and ninety-nine cents ($299.99)."
On page 4, line 5, strike "9 percent" and insert "7.75
percent"
On page 4, lines 6 and 7, strike "one hundred seventy-five
dollars ($175)" and insert "three hundred dollars ($300)"
On page 6, lines 1 through 5, strike "In addition to other
allowed charges, when a pawnbroker issues a loan or any
subsequent loan as permitted by Section 21201.5, the
pawnbroker may include a handling and storage charge for
pawned articles." and insert "In addition to other allowed
charges, at the time property is redeemed a pawnbroker may
collect a handling and storage charge for pawned articles."
5.Electronic Notification
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Under existing law, if a pledged article is not redeemed during
the set pawn loan period and the pledgor and pawnbroker do not
mutually agree to extend the loan period, the pawnbroker must
notify the pledgor at his or her last known address of the
termination of the loan period. The mailing of this notice by
the pawnbroker begins a ten-day period within which the pledgor
has the right to redeem his or her pledged property. (See Fin.
Code Sec. 21201.) This bill would authorize a pawnbroker to
instead provide the required notification using either the
pledgor's last known mailing address or, at the pledgor's
option, an electronic address, provided the pawnbroker has a
means for verifying the electronic transmission of the
notification.
Staff notes that the Legislature has previously authorized
consumers to receive certain notices by electronic mail,
including under the Davis-Stirling Common Interest Development
Act, which allows homeowners to receive documents from a
homeowners association by electronic delivery if the recipient
has consented, in writing, to that method of delivery. (See
Civ. Code Sec. 4040.) Like that provision, this bill requires
the express consent of the pledgor before a pawnbroker may
deliver notices by electronic mail. Unlike postal mail,
electronic mail allows a pledgor and pawnbroker to communicate
almost instantaneously about critical issues such as the
redemption of pledged property. By not having to wait for
postal delivery of a notice indicating the termination of a loan
period, this provision arguably helps consumers react to and
address problems with pledged property more quickly than would
be possible using postal mail, and eliminates the possibility
that consumers will be harmed by adverse events that could have
been avoided had the consumer received notice more promptly.
However, unlike postal mail, consumers may not be effectively
alerted to the receipt of electronic notices since they are not
physically delivered to the recipient, but instead require a
recipient to access their electronic mail system. Further, some
consumers may not be aware that they have received a time
sensitive notice from a pawnbroker if the message is
automatically filtered into a less-often accessed part of the
electronic mail system, such as a "spam" folder.
To better ensure that pledgors receive notices of termination by
electronic delivery, the Committee may want to consider the
following amendment.
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Suggested Amendment:
On page 7, line 35, following "notice." insert: "Electronic
notice of the termination of the loan period shall be valid if
the pledgor has previously responded to an electronic
communication sent by the pawnbroker to the pledgor's last
known electronic address provided by the pledgor. Upon the
initiation of each new or replacement loan, the pledgor shall
affirm that the current electronic address on file with the
pawnbroker is valid.
Support : A L & L Inc.; All Pawn; Clyde's Auction Service
Opposition : None Known
HISTORY
Source : California Pawnbroker's Association
Related Pending Legislation : SB 300 (Mendoza) would authorize a
pawnbroker to execute a written contract for a loan for which
goods are received in pledge as security if the contract and
transaction comply with the provisions of the Uniform Electronic
Transactions Act. This bill would also require a pawnbroker who
has issued a loan electronically, instead of obtaining and
reporting the customer's fingerprint, to electronically deposit
the loan proceeds into a deposit account held in the name of the
pledgor at a depository institution located in the United
States. This bill would additionally authorize a pawnbroker to
deliver, at the sole option of the pledgor, specified notices
via electronic mail. This bill is set for hearing in the Senate
Judiciary Committee.
Prior Legislation :
AB 424 (Eng, Ch. 318, Stats. 2011) authorized pawnbrokers to
charge borrowers the greater of three dollars per month or 2.5
percent per month on the unpaid principal balance of loans below
$2,500 that are greater than three months old. This bill also
defined a month for purposes of the laws governing pawnbrokers
as a period of time consisting of 30 consecutive days.
SB 217 (Vargas, 2011) would have authorized pawnbrokers to
charge borrowers the greater of three dollars per month or 2.5
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percent per month on the unpaid principal balance of loans below
$2,500 that are greater than three months old. This bill was
gutted and amended to address a different subject.
SB 212 (DeLeon, 2011) would have clarified the circumstances
under which replacement pawn loans could be taken out by
individuals who are unable to undertake these transactions in
person. This bill died in the Senate Banking & Financial
Institutions Committee.
AB 1357 (Coto, 2009) would have increased 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. This
bill was vetoed by Governor Schwarzenegger.
SB 580 (Calderon, Ch. 340, Stats. 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
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 gutted and amended after being held in the Senate
Judiciary Committee.
AB 1297 (Papan, Ch. 505, Stats. 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 and Financial Institutions Committee
(Ayes 7, Noes 0)
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