BILL ANALYSIS Ó
SB 300
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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