BILL ANALYSIS                                                                                                                                                                                                    





                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                            2015 - 2016  Regular  Session


          SB 300 (Mendoza)
          Version: March 26, 2015
          Hearing Date: April 21, 2015  
          Fiscal: Yes
          Urgency: No
          TH   
                    

                                        SUBJECT
                                           
                              Pawnbrokers: Regulations

                                     DESCRIPTION  

          This bill 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.

                                      BACKGROUND  

          Until recently, secondhand goods merchants and pawnbrokers in  
          the United States have been confined to doing business out of  
          fixed storefronts with customers who visit their physical retail  
          locations.  This geographical limitation has historically  
          allowed each state to regulate the activities of secondhand  
          dealers and pawnbrokers doing business within their state as  
          they saw fit.  For secondhand goods merchants and pawnbrokers  
          doing business in California, state law governs many aspects of  
          how these businesses operate.  The Legislature, for example, has  
          enacted various laws to both curtail the dissemination and  
          facilitate the recovery of stolen property, including property  








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          acquired by pawnbrokers and secondhand dealers, knowing that  
          these merchants are often utilized by individuals attempting to  
          sell or pawn stolen or embezzled property.

          Generally, California law requires all secondhand dealers,  
          including pawnbrokers, and coin dealers to report daily to law  
          enforcement every piece of tangible personal property that they  
          purchase, take in trade, take in pawn, accept for sale on  
          consignment, or accept for auctioning, using an electronic  
          reporting system maintained by the California Department of  
          Justice.  Property so acquired by secondhand dealers must be  
          held for at least 30 days and must be produced or surrendered to  
          law enforcement when it is reasonably thought that the property  
          was lost, stolen, or embezzled.  California law also regulates  
          the terms by which pawnbrokers may offer loans secured by  
          tangible property to consumers, including placing caps on loan  
          setup fees, handling and storage fees, and caps on maximum  
          compensation.

          With the advent of the Internet, however, some out-of-state  
          pawnbrokers have begun transacting business with California  
          residents online, using the Internet and express delivery  
          companies to accomplish what used to be done at retail  
          storefronts.  According to a recent article:

            For consumers, it means that instead of plopping a castoff  
            wedding ring, camera or china platter onto the counter of a  
            local pawnshop, you do the entire transaction online and by  
            mail. . . . The appeal: Online pawning is relatively quick,  
            completely private, and there's no stigma of walking into a  
            public place with your personal possessions to hock.  And if  
            you default on your loan, nothing gets reported to a credit  
            bureau.  (Claudia Buck, Pawnshop Has Spread to the Internet  
            (Mar. 19, 2012) The Minneapolis Star Tribune  
             [as of  
            April 11, 2015].)

          Despite its convenience for consumers, the ability of  
          out-of-state pawnbrokers and secondhand goods merchants to  
          remotely offer services to Californians may, in effect, leave  
          California residents unprotected when these merchants transact  
          business in violation of California law.  According to the same  
          article, one California pawnshop owner argues that these online  
          pawn shops are "in direct competition with California  
          pawnbrokers," adding that "it's an uneven matchup, [since]  







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          California law requires walk-in pawnshop customers to provide  
          I.D., fingerprints and a signature.  Local shops also must  
          report each item they receive to law enforcement to thwart  
          stolen goods.  They can't conduct any business online. "  (Id.)

          Accordingly, this bill would allow pawnbrokers to make pawn  
          transactions over the Internet by enacting various changes to  
          California's pawnbroker laws, including authorizing written pawn  
          contracts to be made electronically, removing the requirement to  
          provide a thumbprint, requiring pawn loan proceeds to be  
          deposited in a U.S. depository institution, and allowing certain  
          notices to be provided electronically.

                                CHANGES TO EXISTING LAW
           
           1.Existing law  includes a statement of legislative intent to  
            curtail the dissemination of stolen property, to facilitate  
            the recovery of stolen property and to detect possible sales  
            tax evasion by means of a uniform, statewide,  
            state-administered program of regulation of persons whose  
            principal business is dealing in tangible personal property,  
            as specified.  (Bus. & Prof. Code Sec. 21625.)

             Existing law  includes a statement of legislative intent that  
            reports of transactions in pawned and secondhand property  
            should be correlated with law enforcement reports so as to  
            trace and recover stolen property.  (Bus. & Prof. Code Sec.  
            21625.)

             Existing law  defines a "secondhand dealer" to mean any person  
            or entity whose business includes buying, selling, trading,  
            taking in pawn, accepting for sale on consignment, accepting  
            for auctioning, or auctioning secondhand tangible personal  
            property.  Existing law specifies that a "secondhand dealer"  
            does not include a "coin dealer" or participants at gun shows  
            or events, persons who perform the services of an auctioneer,  
            or persons whose business is limited to the reconditioning and  
            selling of major household appliances, as specified.  (Bus. &  
            Prof. Code Secs. 21626, 21626.5.)

             Existing law  defines "tangible personal property" to mean: (1)  
            all secondhand personal property that has a serial number or  
            personalized markings; (2) all tangible property, new or used,  
            taken by a pawnbroker as security for a loan; and (3) all  
            tangible personal property commonly sold by secondhand dealers  







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            that constitutes a significant class of stolen property.   
            (Bus. & Prof. Code Sec. 21627(a)-(b).)  Existing law provides  
            that tangible personal property does not include coins,  
            monetized bullion, or commercial grade ingots of precious  
            metals.  (Bus. & Prof. Code Sec. 21627(d).)

             Existing law  defines a "pawnbroker" to mean a person engaged  
            in the business of receiving goods in pledge for security for  
            a loan."  (Fin. Code Sec. 21000.)

             Existing law  defines a "coin dealer" to mean any person, firm,  
            partnership, or corporation whose principal business is the  
            buying, selling, and trading of coins, monetized bullion, or  
            commercial grade ingots of gold, or silver, or other precious  
            metals.  (Bus. & Prof. Code Sec. 21626(b).)

             Existing law  requires every loan made by a pawnbroker for  
            which goods are received in pledge as security to be evidenced  
            by a written contract, a copy of which shall be furnished to  
            the borrower.  Existing law states that the loan contract  
            shall provide a four-month loan period, shall set forth the  
            loan period and the date on which the loan is due and payable,  
            and shall clearly inform the borrower of his or her right to  
            redeem the pledge during the loan period.  (Fin. Code Sec.  
            21201.)

             This bill  would provide that the requirement for a written  
            contract signed by the pledgor may be met electronically if  
            the contract and transaction comply with the provisions of the  
            California Uniform Electronic Transactions Act, and any  
            required written disclosures to be set forth in a specified  
            minimum type size are conspicuously presented to the pledgor  
            prior to his or her execution of the electronic contract.   
            This bill would also provide that the loan contract shall  
            provide for at least a four-month loan period.
           2.Existing law  requires a pawnbroker to notify a pledgor at his  
            or her last known address of the termination of the loan  
            period, by a means for which verification of mailing or  
            delivery of the notification can be provided by the  
            pawnbroker, and extending the right of redemption, during  
            posted business hours, for a period of 10 days from the date  
            of mailing of that notice.  (Fin. Code Sec. 21201.)

             This bill  would provide that a pawnbroker may also notify the  
            pledgor at his or her last known electronic address of the  







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            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.

           3.Existing law  requires every secondhand dealer and coin dealer  
            to report daily to law enforcement, on forms or through an  
            electronic reporting system approved by the Department of  
            Justice, all secondhand tangible personal property, except for  
            firearms, which he or she has purchased, taken in trade, taken  
            in pawn, accepted for sale on consignment, or accepted for  
            auctioning as specified.  Existing law specifies that such  
            reports shall include, among other things, a complete and  
            reasonably accurate description of the property acquired, 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, and a legible fingerprint  
            taken from the intended seller or pledger, as specified.   
            (Bus. & Prof. Code Sec. 21628.)

             This bill  would 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 make other technical and clarifying changes to  
            existing law pertaining to pawnbroker loans.

                                        COMMENT
           
           1.Stated need for the bill
           
            The author writes:

            10-15 [percent] of pawn transactions in California are  
            conducted via the [I]nternet by out-of-state pawnbrokers.   
            Unfairly, California law precludes California pawnbrokers from  
            competing with these out-of-state [I]nternet pawnbrokers  
            because California based pawnbrokers are required to obtain a  
            fingerprint in order to provide a loan.  Out-of-state  
            [I]nternet-based pawnbrokers are exempt from the fingerprint  
            requirement, essentially shutting local California pawnbrokers  
            out of the [I]nternet pawn business because there is no  







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            technology available that allows for the electronic  
            transmission of fingerprints.
            California pawnbrokers are highly regulated in order to  
            protect consumers and to prevent the sale of stolen property.   
            However, the [I]nternet transactions by out-of-state  
            pawnbrokers are not subject to California's 30-day hold  
            requirement and the California Department of Justice does not  
            receive a report on the items being pawned.

            SB 300 removes the thumbprint requirement for secondhand  
            dealers only when acting as pawnbrokers and only when  
            conducting electronic transactions over the [I]nternet,  
            requires that any money issued by the pawnbroker be sent to a  
            bank account verified to be in the name of the pledger of  
            property to the pawnbroker, reduces the fees incurred by  
            pledgers of property by allowing them to renew loans prior to  
            the expiration date of an existing loan and gives pledgers of  
            property via the [I]nternet access to the lower interest rates  
            offered by California pawnbrokers.

           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.   
          Existing law also protects consumers whose tangible property is  
          stolen by requiring pawnbrokers to retain possession of newly  
          acquired goods for 30 days and to report such acquisitions to  
          the California Department of Justice.  Together, these two  







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          requirements enable law enforcement to identify and recover  
          stolen property that might otherwise rapidly pass from a thief  
          into private possession.  Similarly, the requirement that  
          pawnbrokers obtain a fingerprint from the seller of goods helps  
          law enforcement disrupt the market in California for stolen  
          goods and identify those who attempt to sell stolen goods.

          Out-of-state pawnbrokers doing business in California via the  
          Internet might not comply with California's requirements for  
          pawnbrokers and secondhand goods dealers.  The activities of  
          these out-of-state Internet pawn operators may divert pawn loans  
          from California pawnshops to other states, which might not  
          require that property acquisition reports be sent to law  
          enforcement, and which might allow pawnbrokers to charge higher  
          interest rates and fees to consumers.  This bill would, among  
          other things, authorize California pawnbrokers to execute  
          written pawn loans using electronic contracts consistent with  
          the California Uniform Electronic Transactions Act.  This bill  
          would also eliminate the requirement that a pawnbroker collect  
          and report the fingerprint of a pawn pledgor when executing a  
          pawn loan via the Internet.  Instead, it would require the  
          pawnbroker to electronically deposit the loan proceeds into a  
          deposit account held in the pledgor's name at a U.S. depository  
          institution.  Together, these changes to California's pawnbroker  
          and secondhand dealer laws are likely to facilitate the  
          development of Internet pawn services by California licensed  
          pawnbrokers.  According to the sponsor, the California  
          Pawnbroker's Association, these changes "will allow California  
          pawnbrokers to compete on a level playing field with pawnbrokers  
          in other states."

           3.Verification of Identity
           
          Existing law requires every secondhand dealer, including pawn  
          brokers, to report daily to law enforcement all secondhand  
          personal property which he or she has purchased, taken in trade,  
          taken in pawn, accepted for sale on consignment, or accepted for  
          auctioning.  These daily reports must include, among other  
          things, a complete and reasonably accurate description of the  
          property acquired, 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, and a  
          legible fingerprint taken from the intended seller or pledger.   
          (Bus. & Prof. Code Sec. 21628.)  This bill would require a  
          pawnbroker who has issued a loan electronically, instead of  







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          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.

          Staff notes that Section 326 of the Uniting and Strengthening  
          America by Providing Appropriate Tools Required to Intercept and  
          Obstruct Terrorism Act of 2001 (USA PATRIOT Act, Pub. L.  
          107-56), requires all financial institutions to obtain, verify,  
          and record information that identifies each person who opens an  
          account in order to help the government fight money laundering  
          activities and the funding of terrorism.  While this bill would  
          remove the requirement that a pawnbroker collect the fingerprint  
          of a pawn pledger who enters into an internet-based pawn loan,  
          the substitute requirement that loan proceeds be deposited into  
          a deposit account held in the pledgor's name at a U.S.  
          depository institution would provide an alternate method of  
          verifying the identity of individuals who pawn personal property  
          in California.

          It is important to note, however, that two problems may arise  
          under this substitute identity verification process that are not  
          present under existing law.  First, since a pawnbroker entering  
          into a pawn loan over the Internet might never personally  
          interact with a pledgor, it is possible that the pledgor could  
          conceal his or her true identity from the pawnbroker and from  
          law enforcement by fraudulently providing the financial and  
          identity credentials of another person.  This sort of fraud  
          would likely be impossible to conduct under existing law, which  
          requires the "in-person" collection of a fingerprint from the  
          pledgor.  Second, it is not clear whether this bill would  
          require a pawnbroker to transmit a record of the financial  
          information gathered from the pledgor used to facilitate the  
          depositing of pawn loan proceeds to law enforcement.  Without  
          either the pledgor's fingerprint required under existing law or  
          a record of the financial information used to facilitate payment  
          under this bill, law enforcement may lack sufficient information  
          to effectively combat the trafficking of stolen property.

           4.Notification by Electronic Mail
           
          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  







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          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 help ensure that pledgors will receive electronic notices of  
          termination from pawnbrokers, the author offers the following  
          amendment:



             Author's Amendment  :








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            On page 4, line 2, following the period, insert:  Electronic  
            notice of the termination of the loan period shall be valid if  
            the pledgor has previously responded within the last 120 days  
            to an electronic communication sent by the pawnbroker to the  
            pledgor's electronic address.


           Support  :  None Known

           Opposition  :  None Known

                                        HISTORY
           
           Source  :  California Pawnbroker's Association

           Related Pending Legislation  :

          SB 285 (Block, 2015) would consolidate from 21 loan brackets  
          into 6 the existing schedule of maximum charges a pawnbroker may  
          charge for the first 3 months of any loan, and would set new  
          maximum charges within those loan brackets.  This bill would  
          increase the charge limit a pawnbroker may charge for the fourth  
          and subsequent months of a loan from 2.5% per month on the  
          unpaid balance to 3% per month, would increase the charge limit  
          that may be assessed as loan setup fees, and would increase the  
          amount that may be charged for the handling and storage of  
          pawned articles.  This bill would also authorize pawnbrokers to  
          provide notice to a borrower of the termination of the loan  
          period by electronic mailing at the sole option of the borrower.  
           This bill is pending in the Senate Judiciary Committee.

           Prior Legislation  :
    
          ACR 101 (Jones-Sawyer, Res. Ch. 154, Stats. 2014) requested the  
          California Department of Justice to convene meetings with  
          representatives from law enforcement, prosecutors, and the  
          secondhand dealer and pawnbroker industries to recommend changes  
          to existing law pertaining to Internet pawnbroking.

          SB 762 (Hill, Ch. 318, Stats. 2013) clarified the rights and  
          interests of licensed pawnbrokers and secondhand dealers in  
          property seized from a pawnbroker where a criminal investigation  
          or case involving the property has been resolved or terminated.   
          This bill also modified procedures for a law enforcement agency  
          to seize lost, stolen, or embezzled property from a pawnbroker  







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          or secondhand dealer, including authorizing a law enforcement  
          officer to seize property, with or without a warrant, if the  
          pawnbroker or secondhand dealer in possession of the property  
          refuses to place a hold on the property.

          AB 391 (Pan, Ch. 172, Stats. 2012) requires secondhand dealers  
          and coin dealers to report specified transactions involving  
          tangible personal property using an electronic reporting system  
          administered by the California Department of Justice, and  
          requires the Department of Justice to charge specified licensure  
          and renewal fees for the purpose of funding the electronic  
          reporting system.

          AB 1796 (Galgiani, 2012) would have included in the definition  
          of criminal profiteering activity the unlicensed sale of  
          tangible personal property or other secondhand goods, including  
          gold and other precious metals.  AB 1796 failed passage in the  
          Assembly Committee on Public Safety.

          AB 704 (Ma, 2011) would have required a person conducting  
          business as a secondhand dealer to provide a valid secondhand  
          dealer's license to any peace officer upon demand and would have  
          authorized a peace officer to impound all tangible personal  
          property found in the possession or control of the person if a  
          secondhand dealer's license is not provided, as specified.  This  
          bill also would have authorized the imposition of storage  
          charges for impounded personal property and would have  
          authorized a nonprofit association composed of 50 or more  
          licensed secondhand dealers to bring an action to enjoin a  
          person from conducting business as a secondhand dealer without  
          being licensed.  This bill died in the Assembly Committee on  
          Judiciary.

          SCR 63 (Yee, Ch. 16, Stats. 2010) urged the Department of  
          Justice to ensure compliance with a requirement that the  
          department develop a standard format to be used statewide for  
          the purpose of reporting secondhand dealer transactions.

          SB 1893 (Burton, 2004) would have required all secondhand  
          tangible personal property acquired by a secondhand dealer, coin  
          dealer, business machine dealer, and pawnbroker to be reported  
          electronically in an electronic data reporting system to be  
          developed by the California Department of Justice, and would  
          have extended existing licensure requirements to include coin  
          dealers and business machine dealers.  This bill died in the  







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          Assembly Committee on Business and Professions.

          SB 1520 (Schiff, Ch. 994, Stats. 2000) required the California  
          Department of Justice to develop an electronic reporting system  
          for reporting all tangible personal property purchased, taken in  
          trade or pawn, or accepted for sale on consignment or for  
          auctioning, by secondhand dealers and coin dealers.  This bill  
          exempted from the electronic reporting requirement a coin dealer  
          who engages in less than 10 transactions each week each  
          consisting of not more than one item.

           Prior Vote  :  Senate Banking and Financial Institutions Committee  
          (Ayes 7, Noes 0)

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