BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON
                         BANKING AND FINANCIAL INSTITUTIONS
                             Senator Marty Block, Chair
                                2015 - 2016  Regular 

          Bill No:             SB 300         Hearing Date:    April 15,  
          2015
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          |Author:    |Mendoza                                              |
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          |Version:   |March 26, 2015                                       |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Eileen Newhall                                       |
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                         Subject:  Pawnbrokers: regulations.

           SUMMARY       Authorizes electronic pawn transactions, clarifies the  
          effective date of and rules surrounding the issuance of  
          replacement pawn loans, and allows pawnbrokers to provide  
          electronic notifications to pawn borrowers regarding the  
          expiration of the borrower's pawn loan period, as specified.  
          
           DESCRIPTION
             
            1.  Provides that the requirement for a written pawn contract  
              signed by a pledgor (borrower) can be met electronically, if  
              all of the following conditions are met:

               a.     The contract and transaction comply with the  
                 provisions of the Uniform Electronic Transactions Act  
                 (Civil Code Section 1633.1 et seq.);

               b.     Any written disclosures required to be set forth in  
                 a specified minimum type size are conspicuously presented  
                 to the borrower prior to his or her execution of the  
                 electronic contract;

               c.     The pawnbroker discloses the rates and fees  
                 applicable to the loan before the borrower executes the  
                 electronic contract; and

               d.     The pawnbroker electronically deposits the loan  
                 proceeds into a deposit account held in the name of the  







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                 borrower at a depository institution located in the  
                 United States. 

           2.  Clarifies the effective date of a replacement pawn loan, as  
              follows:

               a.     During the contractual loan period of a pawn loan  
                 and any extension of that loan period, and prior to the  
                 start of the ten-day grace period authorized in state  
                 law, a borrower may request, and a pawnbroker may consent  
                 to, a replacement loan, to take effect upon the  
                 expiration of the loan period stated in the active loan  
                 contract.

               b.     In the alternative, during the ten-day grace period,  
                 a borrower may request, and a pawnbroker may consent to,  
                 a replacement loan, to take effect immediately on the  
                 date it is issued.  

           3.  Applies all of the following apply to a replacement loan  
              contract: 

               a.     The loan must be processed as and deemed to be a new  
                 loan subject to the fees and charges permitted on new  
                 loans under the pawnbroker law.

               b.     The unpaid balance of the prior loan must be debited  
                 to the replacement loan when the same article or articles  
                 are pledged.

               c.     The borrower's consent to the terms of a replacement  
                 loan is deemed given, as follows:

                     i.          When the borrower requests the  
                      replacement loan in person or electronically, his or  
                      her consent to the terms of the replacement loan are  
                      deemed given when he or she signs the written  
                      replacement loan contract in person or  
                      electronically in conformance with the rules for  
                      electronic pawn loans.

                     ii.         When the borrower requests the  
                      replacement loan by mail or through a personal  
                      representative, the borrower's consent to the terms  








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                      of the replacement loan are deemed given when all  
                      required charges from the prior loan then due are  
                      paid in a form acceptable to the pawnbroker.  

               d.     The principal amount of a replacement loan is not  
                 constrained, if the replacement loan is requested in  
                 person or electronically.  The principal amount of a  
                 replacement loan must be equal to or less than the  
                 principal amount of the prior loan, if the replacement  
                 loan is requested by mail or through a personal  
                 representative.

               e.     The terms of the replacement loan must be consistent  
                 with the laws governing pawnbrokers as of the date the  
                 replacement loan is issued (thus, if an original loan  
                 contract is consummated prior to a law change, and a  
                 replacement loan contract is consummated after a law  
                 change, the replacement loan contract is governed by the  
                 modified law).

               f.     The pawnbroker must mail or otherwise transmit a  
                 copy of the written replacement loan contract to the  
                 borrower within five business days of receiving payment  
                 in connection with the prior loan contract, via a means  
                 for which the pawnbroker can document mailing or  
                 transmittal.

           EXISTING LAW
           
           PAWNBROKER REQUIREMENTS IN THE FINANCIAL CODE:
           
           4.  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).

           5.  Requires every pawn loan to be evidenced by a written contract,  
              a copy of which must be furnished to the borrower (Section  
              21201).  

           6.  Generally specifies a loan length of four months, and caps the  
              compensation that may be charged by pawnbrokers on loans of up  








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              to $2,500 (Sections 21200, 21200.1, 21200.5, 21200.8, and  
              21201.4).

           7.  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).

           8.  Requires a pawnbroker to notify a pledgor (i.e., a borrower) in  
              writing, at his or her last known address, regarding the  
              termination of the borrower's loan period, by a means for which  
              verification of mailing can be provided by the pawnbroker.  This  
              notification must inform the borrower that they are entitled to  
              an extra ten days in which to redeem their pawned item,  
              beginning on the date the notice is mailed, and must clarify  
              that if the tenth day falls on a day that the pawn shop is  
              closed, the time period is extended to the next day the pawn  
              shop is open (Section 21201).

           9.  Does not cap the rates and fees that may be charged on pawn  
              loans of $2,500 or more (Section 21051).

           10. 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).

           11. Requires pawnbrokers to comply with the rules applicable to  
              secondhand dealers, which are found in the Business and  
              Professions Code Section 21625 et seq.).

           PAWNBROKER REQUIREMENTS IN THE BUSINESS AND PROFESSIONS CODE:
           
           12. Pursuant to the rules for secondhand dealers, every pawnbroker  
              is required to report daily or on the first working day after  
              receipt or purchase of secondhand tangible personal property, on  
              forms or through an electronic reporting system approved by the  
              Department of Justice (DOJ), all tangible personal property,  
              except for firearms, which he or she has purchased or taken in  
              pawn, to the chief of police or sheriff in their jurisdiction.   
              The report must be legible, prepared in English, and must  
              include the following information:  the name and current address  








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              of the seller or pledger of the property, the identification of  
              the seller or pledger, a complete and reasonably accurate  
              description of the property (including serial numbers and  
              identifying marks, if any), a certification by the intended  
              seller or pledger that he or she is the owner of the property or  
              has the authority of the owner to sell or pledge the property,  
              certification by the intended seller or pledger that the  
              information provided is true and complete, and a legible  
              fingerprint taken from the intended seller or pledger, as  
              prescribed by DOJ. Law enforcement agencies that receive these  
              reports must submit them on a daily basis to DOJ (Business and  
              Professions Code Section 21628 and 21634).

           13. Pursuant to the rules for secondhand dealers, every pawnbroker  
              is required to retain in his or her possession, for a period of  
              30 days, all tangible personal property reported to local law  
              enforcement.  The 30-day holding period begins on the date the  
              report of property acquisition is made to the chief of police or  
              to the sheriff.  During this 30-day holding period, pawnbrokers  
              are required to produce any tangible personal property reported  
              to a chief of police or sheriff for inspection by any peace  
              officer or employee designated by the chief of police or sheriff  
              or the Department of Justice (Business and Professions Code  
              Section 21636)

          RELEVANT REQUIREMENTS IN THE UNIFORM ELECTRONIC TRANSACTIONS ACT:


           14. Pursuant to the Uniform Electronic Transaction Act, an  
              electronic record or electronic signature is attributable to  
              a person if it was the act of the person. The act of the  
              person may be shown in any manner, including a showing of  
              the validity of any security procedure applied to determine  
              the person to which the electronic record or electronic  
              signature was attributable.  Attribution must be determined  
              from the context and surrounding circumstances at the time  
              of the signature's creation, execution, or adoption (Civil  
              Code Section 1633.9).

           COMMENTS
         
          1.  Purpose:   This bill is sponsored by the California  
              Pawnbrokers Association (CAPA) to authorize electronic pawn  
              transactions in California and, in doing so, allow  








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              California pawnbrokers to compete with out-of-state  
              pawnbrokers that are currently offering electronic pawn  
              loans.

           2.  Background and Discussion:   According to this bill's  
              sponsor, eight states currently offer electronic pawn  
              transactions, including Colorado, Florida, Texas, New York,  
              Georgia, New Hampshire, Hawaii, and Arizona.  In these  
              states, a potential pledgor contacts the pawnbroker to  
              express interest in obtaining a pawn loan and to describe  
              and/or submit photographs of the item(s) he or she wishes to  
              pawn.  The pawnbroker mails the potential pledgor a mailing  
              label and/or an envelope, box, or other container in which  
              the item(s) to be pawned can be sent by the potential  
              pledgor to the pawnbroker.  Upon receipt of the item(s), the  
              pawnbroker appraises the item(s) and informs the potential  
              pledgor of the amount of money the pawnbroker is willing to  
              lend the potential pledgor.  If this amount is acceptable,  
              the pledgor and pawnbroker enter into an agreement that is  
              signed electronically by both parties, and the agreed-upon  
              sum of money is either wired to the pledgor or  
              electronically deposited in an account at a depository  
              institution of the pledgor's choosing.  The pledgor is then  
              required to pay the pawn loan back according to its terms.   
              Ten to fifteen percent of pawn transactions conducted by  
              Californians are currently being conducted electronically,  
              using out-of-state pawnbrokers that lend over the Internet.   


          As described above (see Existing Law Number 9), California law  
              requires pawnbrokers to obtain a borrower's fingerprint at  
              loan origination.  According to CAPA, California is one of  
              only seven states that still require a fingerprint - a  
              requirement that was originally intended to link a specific  
              pledgor to an item of tangible personal property, but one  
              which, according to CAPA, has never been used in a criminal  
              proceeding in California.  Six other states defer to local  
              municipalities on whether to require fingerprints, and some  
              states only require a fingerprint when the pledgor lacks  
              photo identification.  

              California's fingerprint requirement is problematic in the  
              context of electronic pawn transactions, due to the  
              challenge of verifying that the fingerprint provided belongs  








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              to the pawn borrower.  According to CAPA, all of the states  
              which authorize electronic pawn transactions allow these  
              transactions to be conducted without requiring a  
              fingerprint; instead, they require alternate means of  
              identification, such as digital signatures, photo  
              identification, and/or proof of residency.

              As an alternative to the fingerprint requirement, this bill  
              would require loan proceeds generated through an electronic  
              pawn transaction to be deposited into an account at a  
              depository institution in the United States.  The logic:   
              depository institutions obtain fingerprint data from persons  
              who seek to open accounts; thus a requirement that the  
              person pawning an item receive the proceeds of his or her  
              loan into an account that bears their name will ensure that  
              a fingerprint of that person exists.  Presumably, law  
              enforcement could subpoena such fingerprint records, if they  
              were needed as part of a criminal investigation involving a  
              pawned item.

           3.  Verifying the Legitimacy of Electronic Signatures   This bill  
              requires electronic pawn transactions to be conducted in  
              conformance with the Uniform Electronic Transactions Act  
              (UETA; Civil Code Section 1633.1 et seq.).  UETA is intended  
              to ensure that electronic transactions accompanied by  
              electronic signatures are as enforceable as transactions  
              memorialized on paper with wet signatures; the law applies  
              whenever all parties to a transaction have agreed to conduct  
              the transaction by electronic means.  UETA does not define  
              what constitutes an acceptable digital signature, nor does  
              it require a specific type of security procedure to verify  
              that signature.  Instead, it allows the veracity of a  
              signature to "be shown in any manner, including a showing of  
              the efficacy of any security procedure applied to determine  
              the person to which the electronic record or electronic  
              signature was attributable."  

          Federal anti-money laundering statutes also require pawnbrokers  
              to verify the identities of their customers.  In a  
              memorandum prepared for Committee staff regarding this  
              issue, CAPA explains that pawnbrokers are defined as  
              financial institutions in federal law (31 USC Section  
              5312(a)(2)(O)), and, as such, are required by federal  
              anti-money laundering statutes and regulations to exercise  








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              due diligence in verifying the identities of their  
              customers.  This requirement transcends the form of any  
              given transaction; it applies regardless of whether the  
              transaction occurs in person or electronically.   
           
           4.  Different Rules For Different Types Pawn Loan Extensions:    
              As described above, this bill applies different rules to  
              pawn loan extensions requested in different ways.  When a  
              replacement pawn loan is requested in person or  
              electronically, the borrower's signature (either wet or  
              electronic) is required on the replacement loan contract,  
              and the principal amount of the replacement loan is not  
              limited.  When a replacement pawn loan is requested by mail  
              or through a personal representative, the borrower's  
              signature is not required; instead, the borrower's consent  
              to the replacement loan is deemed given when the prior loan  
              is fully paid off in a manner acceptable to the pawnbroker.   
              In these cases, the principal amount of the replacement loan  
              is capped, and cannot exceed the principal amount of the  
              prior loan.  

          CAPA is proposing these two different sets of rules as a means  
              to protect borrowers by minimizing the potential for fraud  
              involving replacement loan amounts.  If a borrower appears  
              before the pawnbroker in person or requests a replacement  
              loan electronically, that person's identity can more readily  
              be verified, and their wishes regarding the amount of their  
              replacement loan confirmed.  In contrast, when a borrower  
              mails his or her payment in to a pawnbroker or sends a third  
              party to make payment on their behalf, the wishes of the  
              original borrower regarding the size of a replacement loan  
              can be harder to discern.  When a borrower's signature  
              cannot reasonably be obtained or verified (as is the case If  
              an individual sends a personal representative), CAPA is  
              proposing to cap the size of the replacement loan at an  
              amount no greater than the amount of the prior loan.  

           5.  Summary of Arguments in Support:   CAPA is sponsoring this  
              bill to help California pawnbrokers compete with pawnbrokers  
              in other states that transact pawn loans over the Internet.   
              If enacted, this bill will not only allow California  
              pawnbrokers to compete with pawnbrokers in other states, it  
              may allow California's pawnbrokers to dominate the internet  
              pawn market.  California's pawn loan interest rates and fees  








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              are among the lowest in the United States (currently 48th  
              out of 51 states and the District of Columbia; 47th out of  
              51, if SB 285 is enacted).  Borrowers seeking to pawn items  
              are likely to be attracted to these relatively low charges.

          CAPA also believes that California law enforcement will benefit,  
              if this bill is enacted.  At present, Californians seeking  
              to pawn items over the Internet are using pawnbrokers in  
              other states - thus depriving California law enforcement of  
              the information it receives and of the 30-day period in  
              which to inspect pawned property when items are pawned in  
              California.  If this bill is enacted, that trend should  
              reverse.  California law enforcement will not only receive  
              property reports and be able to inspect items pawned over  
              the Internet by California residents, but will receive these  
              reports and be able to inspect items pawned over the  
              Internet by borrowers located in other states.  

           6.  Summary of Arguments in Opposition:    None received.

           7.  Amendments:   Although no amendments are recommended at this  
              time, amendments will eventually be necessary to avoid  
              chaptering problems, if both SB 285 and SB 300 advance to  
              the Governor.  

           8.  Prior and Related Legislation:   

               a.     ACR 101 (Jones-Sawyer), Resolution Chapter 154,  
                 Statutes of 2011:  Requested the California Department of  
                 Justice to convene meetings with representatives from law  
                 enforcement, prosecutors, the secondhand dealer and  
                 pawnbroker industry, and interested members of the public  
                 to determine the changes to existing law that would allow  
                 California pawnbrokers and secondhand dealers to fairly  
                 compete with out-of-state internet pawnbrokers, keep  
                 available to law enforcement merchandise pawned over the  
                 Internet that would otherwise go out-of-state and not be  
                 reported or held for inspection, and protect California  
                 consumers transacting pawn loans over the Internet from  
                 higher interest rates and fees than those permitted in  
                 California.

               b.     SB 212 (De Leon):  Would have authorized replacement  
                 pawn loans to be taken out electronically.  Never taken  








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                 up in the Senate Banking and Financial Institutions  
                 Committee.  

           
          LIST OF REGISTERED SUPPORT/OPPOSITION
            
          Support
           
          California Pawnbrokers Association (sponsor)
           
          Opposition
               
          None received


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