BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:  July 7, 2015


                ASSEMBLY COMMITTEE ON PRIVACY AND CONSUMER PROTECTION


                                  Mike Gatto, Chair


          SB  
          300 (Mendoza) - As Amended July 2, 2015


          SENATE VOTE:  39-0


          SUBJECT:  Pawnbrokers: regulations.



          SUMMARY:  Modifies the requirements for a pawn loan contract to  
          enable pawnbrokers to use internet-based methods to create,  
          extend, and service pawn loan contracts.  Specifically, this  
          bill:



          1)Modifies the written contract requirement for pawn loan  
            extensions to be satisfied by electronic signature if the  
            contract makes disclosures regarding the maximum compensation  
            the pawnbroker may earn on the loan, and meets the  
            requirements of the Uniform Electronic Transactions Act, as  
            specified.



          2)Modifies the written contract requirement for new pawn loans  
            to be satisfied by electronic signature if the contract makes  
            disclosures regarding the maximum compensation the pawnbroker  








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            may earn on the loan, and meets the requirements of the  
            Uniform Electronic Transactions Act, as specified, starting  
            January 1, 2017.



          3)Removes the requirement to collect and report the pledgor's  
            thumbprint when the loan is issued electronically.



          4)Requires the loan proceeds of electronic pawn transactions to  
            be deposited in accounts at depository institutions located  
            within the United States.



          5)Requires that pawnbrokers make available upon request by a  
            peace officer, the account information used to deposit loan  
            proceeds of electronic pawn transactions.



          6)Authorizes pawnbrokers, at the pledgor's election, to make  
            required notices and communications through electronic  
            communication.



          7)Clarifies that a valid electronic notice has been made if the  
            pledgor has previously responded to an electronic  
            communication to the address. 



          8)Requires that the pledgor, at the initiation of each new or  
            replacement loan, affirm that the electronic address provided  
            to, or on file with, the pawnbroker is valid.









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          9)Clarifies that the four-month duration requirement is a  
            minimum that is negotiable by the pledgor and pawnbroker for a  
            longer period.


          10)Makes other technical or non-substantive changes.


          11)States that it is the intent of the Legislature to enable  
            California citizens to engage in pawn or collateral loan  
            transactions regardless of location, and that such  
            transactions should be made in conformity with the Uniform  
            Electronic Transactions Act. 
          EXISTING LAW:   



          1)Provides for the licensing and regulation of pawnbrokers in  
            California.  (Financial Code (FC) Sections 21000-21307)


          2)Requires written contracts with the signature of the pledgor  
            to originate a loan with a pawnbroker.  (FC 21201


          3)Specifies that written disclosures must be made regarding the  
            procedures for redeeming pledged property.  (FC 21201)


          4)Requires the public posting of the maximum compensation  
            pawnbrokers may charge for loan services.  (FC 21200.7)


          5)Requires the pawnbroker to notify the pledgor by mail of the  
            termination of the loan period, and the 10-day extended  
            redemption period, by mailing or delivery for which  
            verification can be provided.  (FC 2120)








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          6)Requires pawnbrokers to keep an inventory of all items  
            purchased or taken in pawn.  (FC 21202)


          7)Requires pawnbrokers to report to the local law enforcement  
            inventory and pledgor information, as specified.  (FC 21208)


          8)Requires pawn reports to include: the name of the pledgor, a  
            form of government identification of the pledgor, a complete  
            and accurate description of the property, a certification that  
            the pledgor has the authority to pawn the property, a  
            certification that the pledgor believes the information  
            provided to be correct, and a legible fingerprint of the  
            pledgor.  (Business and Professions Code (BPC) Section 21628)


          9)Requires reports to be completed by electronic submission to  
            the Department of Justice's online database created for this  
            purpose.  (BPC 21628(j)(2)(B))

          FISCAL EFFECT:  The Senate Appropriations Committee found  
          pursuant to Senate Rule 28.8 that any additional state costs are  
          not significant, and do not and will not require the  
          appropriation of additional state funds, and that the bill will  
          cause no significant reduction in revenues.


          COMMENTS:  



           1)Purpose of this bill  .  This bill is intended to allow  
            California pawnbrokers to enter the growing marketplace of  
            internet-based pawn loans, which has heretofore been dominated  
            by pawn businesses in other states.  SB 300 is sponsored by  
            the California Pawnbrokers Association. 








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           2)Author's statement  . According to the author's office, "Under  
            current California law, a California-based pawnbroker  
            providing a loan must obtain and submit to law enforcement the  
            thumbprint of the person pledging property as collateral for  
            the loan.  Out-of-state pawnbrokers conducting business inside  
            of California via the internet are exempt from this, and  
            other, requirements."

            "Because out-of-state pawnbrokers are exempt from the  
            fingerprint requirement because they are not regulated by  
            California, California based pawnbrokers are shut out of the  
            rapidly expanding internet pawn industry.  This segment of the  
            industry is currently estimated to be 10-15% of all pawn  
            transactions conducted in the state."

            "California pawnbrokers are highly regulated in order to  
            protect consumers and to prevent the sale of stolen property.   
            However, the internet 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.  The result is a reduction in the  
            ability of the California Department of Justice to protect  
            California consumers."

           3)The business of pawn and out-of-state brokers  .  A pawnbroker  
            is one who offers a secured loan to an individual using  
            personal property as collateral.  When an item is pawned for a  
            loan, the pledgor may redeem the item for the amount of the  
            loan, plus an additional amount for interest.  If the loan is  
            not paid or extended, then the pawned item becomes the  
            property of the pawnbroker and is offered for sale to the  
            public.  

          California's regulatory authority is limited to pawn brokers  
            located within the state's borders.  California has taken a  
            comprehensive approach like many other states to regulate the  
            pawn industry by limiting who may provide pawn services, the  
            financial rates and terms of those services, and their duties  








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            to cooperate with law enforcement to combat the trafficking of  
            stolen goods.  While licensing of pawnbrokers is completed by  
            local law enforcement, policy governing pawn transactions is  
            set at the state level.

            As the author notes, internet-based pawn is a fast growing  
            area, but there is no state known that explicitly authorizes  
            internet-based pawn in statute.  The few states that are  
            currently home to internet-based pawn companies, such as  
            Colorado and New York, have usually delegated most regulation  
            of pawn brokers to local governments, which have in turn  
            enacted ordinances allowing for the practice.  For example,  
            Centennial, Colorado, which is the home of one internet-based  
            pawn broker PawnGo, has promulgated extensive regulations and  
            licensing requirements focusing on the specific practice of  
            internet based pawn. 

           4)California Pawn & Secondhand Dealer System (CAPSS)  .  CAPPS is  
            a statewide, uniform electronic reporting system administered  
            by the California Department of Justice for pawnbrokers to  
            report inventory and pledgor information, including the  
            pledgor's name, government identification information, and  
            fingerprint.  The CAPSS system was implemented in December of  
            2014 pursuant to AB 391 (Pan), Chapter 172, Statutes of 2012.  
            It replaced the previous system of pawnbrokers reporting  
            inventories and pledgor information on paper directly to their  
            local police chief or county sheriff.  Currently, only  
            California law enforcement agencies have access to the CAPSS  
            database to search for stolen items and suspects in their  
            theft.  
           
           5)California's pawn fingerprint requirement  .  Current law  
            requires pawnbrokers to collect and report a fingerprint of  
            pledgors when making a pawn transaction.  The fingerprint is  
            reported to the CAPSS system and made available for comparison  
            by law enforcement agencies against their own databases,  
            suspects in custody, and evidence from other crimes.  
             This bill would waive the thumbprint requirement for  
            internet-based pawn loans, on the theory that it is not  








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            technically feasible for a verifiable thumbprint of the  
            pledgor to be collected and submitted over the internet to the  
            pawn broker.  Furthermore, the sponsor contends in a study  
            provided to staff that "there is no data or studies available  
            to establish any nexus between convictions based on  
            thumbprints on a pawnbroker's [forms]" and that "because there  
            is no standard associated with the thumbprint, it cannot be  
            used as evidence in a court proceeding".  However, there are  
            numerous California Court of Appeal cases that have upheld  
            convictions that included in their evidence a pledgor's  
            thumbprint on a pawn slip that was collected and reported in  
            compliance with state law. People v. Harden, 110 Cal. App. 4th  
            848 (Cal. App. 4th 2003); People v. Bowles, 198 Cal. App. 4th  
            318 (Cal. App. 4th 2011); People v. Lewis, 2002 WL 598935  
            (Cal. App. 2d 2002) (thumbprint matched defendant who had used  
            fake identification and alias to pawn item).

            It should be noted that this bill's waiver of the fingerprint  
            requirement is triggered solely by the use of electronic  
            signature in completing a pawn loan.  It is therefore possible  
            that someone who wishes to avoid submitting a fingerprint  
            could take advantage of this waiver by forgoing an in-person  
            transaction and simply using a laptop or other electronic  
            device in-store to complete the transaction.

            It is also worth noting that the handful of states identified  
            by the sponsor as allowing internet-based pawn appear to  
            retain fingerprint reporting requirements in their statutes  
            with no exemption for internet-based loans, raising the  
            question of whether or not internet-based pawn brokers in  
            other states are fully complying with the laws of their own  
            states.  (Arizona A.R.S. 44-1625, Florida FL ST.  
            539.001(8)(b)(3).

           6)Financial Account Information  .  In conjunction with the  
            deletion of the fingerprint requirement for internet-based  
            pawn loans, the author has inserted the requirement that  
            pawnbrokers only deposit the proceeds of those internet pawn  
            loans into accounts at depository institutions in the United  








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            States that are in the name of the pledgors.  By using only  
            U.S.-based depository institutions, the bill relies on federal  
            law and regulations that require almost every U.S. financial  
            institution to verify the identity of its account holders when  
            opening an account by checking multiple forms of  
            government-issued identification.  While this requirement will  
            verify the identity of the vast majority of pledgors, it is  
            still susceptible to fraud.  According to the federal  
            Department of Justice's Bureau of Justice Statistics, over the  
            course of 2012 more than 1 million fraudulent bank accounts  
            were opened as a result of identity theft in the United  
            States.  This introduces a new element of risk to pawn  
            transactions that was previously not possible with the  
            fingerprint requirement.  
           
            The bill also requires the pawnbrokers to make available to  
            any peace officer, upon request, the account information used  
            to deposit loan proceeds.  While almost all of the information  
            pawnbrokers are required to provide law enforcement is now  
            electronically transmitted to DOJ's CAPSS database, it is more  
            risky to automatically transfer financial account information  
            in the same manner as fingerprints.  According to DOJ, the  
            CAPSS system would have to be modified to support reporting  
            this new information and its security protocols would likely  
            have to be upgraded to adequately protect this more sensitive  
            information.  By requiring pawnbrokers to provide account  
            information upon request by any peace officer, access to that  
            specific information should be available for investigatory  
            purposes without a warrant. 

           7)Outstanding issues for brick-and-mortar brokers  .  If this bill  
            were enacted to authorize internet-based pawn broking by only  
            modifying the requirements to complete loan contracts and what  
            information needs to be reported, there still may need to be  
            changes to statute  to accommodate the shift from a  
            traditional physical storefront model to internet-based pawn  
            broking.

            There are a number of outstanding questions related to how  








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            internet-based pawn might conflict with the current statutory  
            scheme:

                   a)        Licensure and location.   Current law requires  
                    pawnbrokers to be licensed by the local police chief,  
                    county sheriff, or police commissioner for the  
                    appropriate jurisdiction in which their pawn broking  
                    place of business will be located.  The statute also  
                    specifies that the pawn broking business can only be  
                    conducted at that specific address.

                    However, if a pawn broker decides to only provide pawn  
                    services over the internet, and has different physical  
                    locations to operate electronically, receive pledged  
                    property, and store pledged property, it is unclear  
                    which location will be used for purposes of the  
                    licensing authority.

                    Pawnbroker licenses are also subject to forfeiture if  
                    licensees violate certain conditions, including the  
                    requirement that their business only "carry on" at the  
                    address stated on the license.  With internet-based  
                    pawn, a pawn broker could "carry-on" business in  
                    virtually any location where their mobile device has  
                    internet access, leaving them theoretically vulnerable  
                    to revocation of their license if the licensor  
                    believed that by reading or sending an offer via  
                    e-mail to a potential pledgor while not physically in  
                    their place of business, they had violated the terms  
                    of the license. 

                   b)        Restrictions on fees  .  There are also very  
                    strict limits on the maximum compensation pawn brokers  
                    may receive from loans, including specific allowances  
                    for charges and fees for particular services,  
                    including sending notices. However, without a specific  
                    change in the code there is no provision explicitly  
                    allowing pawn brokers to charge for the return  
                    shipping of the pledged property, or any other costs  








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                    associated with internet-based pawn.  
                     
                   c)        Return requirements  .  Existing law is drafted  
                    in favor of in-person transactions, and assumes, for  
                    example, that the return of items should be  
                    near-immediate upon presentation of the pawn ticket.   
                    Current law requires language in pawn contracts,  
                    pursuant to Section 21201.3, notifying pledgors that  
                    if their property was stored offsite that the pawn  
                    broker had two days to retrieve and present the  
                    property when redeemed.  With internet-based pawn the  
                    realities of long-distance shipping will require  
                    longer periods between redemption via pawn ticket and  
                    full payment and receipt of the pledged property.   
                    Without a change to the allowed time for transit, pawn  
                    brokers may be found in violation if the shipping of  
                    redeemed property takes longer than two days.   
           
          1)Potential effects on the interstate flow of stolen goods  .  The  
            sponsor of the bill, the California Pawnbrokers Association,  
            argues that when Californians use out-of-state online pawn  
            brokers to pawn stolen items, they slip by the tracking and  
            reporting system that California has created, and escape the  
            reach of California law enforcement.  They argue that by  
            keeping more transactions in-state through authorization of  
            internet-based pawn brokers, this bill will allow California's  
            tracking and reporting system to be more effective. 

            However, a new concern could arise: by opening California to  
            an internet-based pawn broker system, a similar problem may be  
            created for out-of-state law enforcement.  Without the  
            fingerprint requirement, California could become the potential  
            recipient of more stolen items from around the country.  And  
            while these out-of-state items will be reported to CAPSS,  
            out-of-state law enforcement would not have access to the  
            database to search, and California law enforcement agencies do  
            not necessarily have the out-of-state crime reports or the  
            time to identify incoming stolen goods from throughout the  
            United States.








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           2)Arguments in support.   According to the California  
            Pawnbroker's Association:  "The California Pawnbroker's  
            Association is proud to sponsor SB 300 (Mendoza) a much  
            needed, and transformational piece of Legislation that will  
            allow California pawnbrokers to compete on level playing field  
            with pawnbrokers in other states."

            According to the National Federation of Independent Business:   
            "SB 300 simply allows California pawnbrokers to compete more  
            with other states that have that advantage due to their more  
            modernized, electronic transaction processes.  This  
            legislation give small employers more hope and opportunity to  
            have a stake in the marketplace, create jobs and contribute to  
            our economy"

           3)Arguments in opposition.   According to Vacaville Chief of  
            Police John Carli, writing on behalf of the California Police  
            Chiefs Association:  "California has benefited from strong  
            pawn laws over the years as a result of clear understanding of  
            the importance of protecting citizens from fraudulent  
            activities due to pawn transactions.  While I appreciate the  
            economical intent of this bill, I cannot support or endorse  
            any legislation that removes the requirement of providing a  
            legible fingerprint of a seller to a pawn or secondhand dealer  
            during a transaction.  How can law enforcement positively  
            verify the identity of the seller during an online pawn  
            transaction?  Possession of a state issued ID that cannot be  
            authenticated is not sufficient, not to mention jurisdiction  
            issues since these crimes would cross state lines."

            "? California police agencies do not have jurisdiction to  
            prosecute cases from other states. The notion that this  
            benefits California is a very weak position since the real  
            problem is about suspect identity, not the business model  
            proposed.

            "Financial information would be far less helpful than a  
            fingerprint.  The presence of a financial account bears no  








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            proof on who conducted the pawn transaction?Regardless,  
            financial account information has become one of the most  
            vulnerable areas of savvy thieves and would not provide an  
            investigator with any assurance that it would be authentic.   
            Another concern is the likelihood that thieves could exploit  
            victims using their identity, causing innocent victims to  
            become the focus of a criminal investigation."

           4)Related Legislation  .  SB 285 (Block) of 2015, would modify how  
            loans are categorized by amount for purposes of applying the  
            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.  The bill would increase the fee  
            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.  SB 285 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.  The  
            bill is pending in the Assembly Appropriations Committee.

           5)Previous Legislation.   ACR 101 (Jones-Sawyer), Chapter 154,  
            Statutes of 2014, requested the California Department of  
            Justice to convene meetings with representative from law  
            enforcement, prosecutors, and the secondhand dealer and  
                                                                 pawnbroker industries to recommend changes to the existing law  
            pertaining to Internet pawnbroking.

           6)Double-referral  . This bill was double-referred to the Assembly  
            Banking and Finance Committee, where it was heard on June 22,  
            2015, and passed on a 12-0 vote. 
          


          REGISTERED SUPPORT / OPPOSITION:










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          Support


          California Pawnbrokers Association (Sponsor)


          National Federation of Independent Business




          Opposition


          California Police Chiefs Association 




          Analysis Prepared by:Brandon Bjerke and Hank Dempsey / P. & C.P.  
          / (916) 319-2200