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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