BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 1357
Assemblymember Coto
As Introduced
Hearing Date: July 14, 2009
Financial Code
BCP:jd
SUBJECT
Pawnbrokers
DESCRIPTION
This bill would increase the maximum fee a pawnbroker may charge
or receive on the entire unpaid principal balance of loans over
90 days to 2.5 percent per month, thus, increasing the current
allowable fees from:
2 to 2.5 percent on the portion of the balance between $226
and $900;
1.5 to 2.5 percent on the portion of the balance between $901
and $1650; and
1 to 2.5 percent on the portion of the balance above $1650.
BACKGROUND
Pawnbrokers generally function by offering loans to individuals
in exchange for items of value. Those individuals may, within a
certain period of time, purchase the items back for the amount
of the loan plus a certain specified fee. If the time elapses
without that payment, the pawnbroker may then sell the items to
recoup the amount of the loan, usually only a fraction of its
market value. Pawnbrokers may also choose to purchase the item
outright.
Current law limits the amount of compensation a pawnbroker may
charge or receive for providing their services. Under Financial
Code Sections 21200.5 and 21201.4, a pawnbroker is allowed to
charge a specified amount for the first 90 days of a loan, while
charges after the first 90 days are computed in accordance with
Section 21200. That section allows a pawnbroker to receive
(more)
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compensation pursuant to a graduated interest rate schedule.
This bill would collapse that interest rate scale to a flat 2.5
percent per month, thus increasing the fee that may be charged
consumers who have an unpaid balance after the first 90 days of
the loan. A related bill that contained the same collapsing of
interest rates, AB 264 (Mendoza, 2007), was held in committee
two years ago due to concerns about the amount of the proposed
increase.
This bill was approved by the Senate Banking, Finance and
Insurance Committee on June 17, 2009.
CHANGES TO EXISTING LAW
Existing law defines "pawnbroker" as every person engaged in the
business of receiving goods, including motor vehicles, in pledge
as security for a loan. (Fin. Code Sec. 21000.)
Existing law permits a pawnbroker to charge fees pursuant to a
set schedule of charges that are based upon the amount of the
loan. (Fin. Code Sec. 21200.5.) Existing law provides that
charges for the first 90 days of a loan shall be determined by
the schedule of charges. Charges for any period of time
following the first 90 days of the loan shall be determined by
application of the schedule of maximum compensation. (Fin. Code
Sec. 21201.4.)
Existing law , the schedule of maximum compensation, prevents a
pawnbroker from charging or receiving fees in excess of the sum
of the following:
2.5 percent per month on the portion of unpaid principal
balance up to $225;
2 percent per month on the portion of unpaid principal balance
in excess of $225 up to, and including $900;
1.5 percent per month on the portion of unpaid principal
balance in excess of $900 up to, and including $1,650; and
1 percent per month on any remainder of such unpaid principal
balance in excess of $1,650. (Fin. Code Sec. 21200.)
Existing law permits a fee not exceeding $3 a month to be
charged on any loan when the monthly charge permitted by
Financial Code Section 21200 after the first 90 days would
otherwise be less than that minimum charge. (Fin. Code Secs.
21200(a)(5); 21201.4.)
This bill would revise the above schedule of maximum
compensation to, instead, allow a pawnbroker to charge or
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receive a flat 2.5 percent fee on the entire unpaid principal
balance.
COMMENT
1. Stated need for the bill
According to the author:
AB 1357 addresses the remaining component of a compromise
between Consumers' Union and the Collateral Loan &
Secondhand Dealers Association-pawnbrokers in 2006. As part
of an overdue compromise, pawnbrokers agreed to leave all
loans under $225 at the level allowed in current law.
Consumers' Union recognizes pawn loans as the consumer's
best bargain in non-conventional lending, and has encouraged
the small increase to be given at higher loan amounts, to
offer an alternative to the high-cost non-conventional
lending available to the unbanked in California.
2. Effects of collapsing the interest rate
For the first 90 days of a loan a pawnbroker may charge
according to the "schedule of charges," which must be posted in
a place clearly visible to the public. After that 90-day
period, a pawnbroker may charge according to a "schedule of
maximum compensation" that permits the pawnbroker to be
compensated based upon a sliding interest rate scale. The
amount of interest that may be charged under that scale is
dependent on the loan amount - 2.5 percent per month on the
portion of an unpaid balance up to $225, 2 percent on the
portion in excess of $225 up to, and including $900, 1.5 percent
on the portion in excess of $900 up to, and including $1,650,
and 1 percent on any remainder in excess of $1,650. (Loans in
excess of $2,500 are not subject to the above limitations on
compensation. (Fin. Code Sec. 21051.)
As a result, the flat 2.5 percent a month cap proposed by this
bill would affect those with unpaid principal loan balances
greater than $225, and leave those with balances in excess of
$1,650 to bear the burden of a 150 percent fee increase for that
portion of the balance. (The sponsor notes that although exact
statistics are not currently available, the average loan was
estimated to be between $150 and $185 in 2006.) The following
chart illustrates the effects of the proposed increase.
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------------------------------------------------------------------
|Loan amount |$100 |$500 |$1000 |$2,000 |
|------------------------------+--------+--------+---------+-------|
|Current maximum monthly fee |$2.50 |$11.13 |$20.63 |$33.80 |
|------------------------------+--------+--------+---------+-------|
|Proposed maximum monthly fee |$2.50 |$12.50 |$25.00 |$50.00 |
------------------------------------------------------------------
The Collateral Loan and Secondhand Dealers Association (CLSDA),
contends that over 80 percent of pawned property is redeemed,
and that most pawn transactions are short-term loans of 90 days
or less. If, in fact, most items are redeemed before the
Section 21200 (the interest rate provision) applies, the effect
of this bill would be to increase the fees for those with
insufficient funds to redeem, or reduce their balance below
$225, in the first 90 days.
CLSDA further contends that California's pawnbrokers rank
between 40th and 49th nationally in monetary return, and that
pawn transactions compare favorably with other forms of
short-term credit, such as payday loans and credit card
advances.
3. Other considerations
Pawnbrokers represent a valuable source of short-term credit to
those who may not be able to, or do not desire to, seek a costly
credit-card advance or payday loan. The policy question
presented by this bill is whether fees should be increased on
the portion of the population that relies upon pawnbrokers as a
source of credit - those individuals may not otherwise have
credit, savings, or money to pay for day-to-day expenses.
Regarding the reported recent increase in pawn lending, the
Contra Costa Times' July 23, 2008 article entitled Pawn shops
brimming with business noted:
Amid the brewing cloud of recession and bitterly high gas
prices . . . [, the] bustle at pawn shops, jewelry and coin
buyers suggests many East Bay residents are foraging deep
into drawers and attics for keepsakes, family heirlooms,
even gold teeth, to hawk or pawn for a short-term loan to
stretch the miles or make rent. ?
When the economy flags, the pawn business rallies. But
something is different this time, said Bob Goldstone of
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Danville, a board member with the Collateral Loan &
Secondhand Dealers Association, the industry group for
pawnbrokers in California. "I've never seen anything like
this before. This is above and beyond," said Goldstone,
retired from an Oakland pawn shop after a 48-year career.
"These brokers are loaning money out continuously all day
long."
Similarly, the Modesto Bee's November 7, 2008 article entitled
Pawn Biz Picks Up; with Credit Tight and the Economy Bad, More
Folks Need the Services Offered reported:
According to the National Pawnbrokers Association, pawn
customers tend to be middle-class consumers who need
short-term credit but are unable to get it from financial
institutions. David Brooks, who opened Brooks Pawn &
Jewelry Co. on Coffee Road 27 years ago, has seen the
casualties of a slumping economy and tight credit. "We see
more people come in when times are tougher," he said. "It's
harder for them to make it from paycheck to paycheck."
Business picked up more than a year ago, the same time
companies began announcing layoffs, Brooks noted. While
pawn shops make money on interest from loans on pawned
items, times aren't necessarily good for brokers. When pawns
go up, defaults go up, too. And when times are tough, the
retail end of pawn shops feel it too, Newnam said. If
Newnam had his way, he'd turn back the clock to 2006, when
cash flow was steadier and the economy was stronger. That's
better for his business and those who need his services.
Support : Two individuals
Opposition : None Known
HISTORY
Source : Collateral Loan and Secondhand Dealers Association of
California
Related Pending Legislation : None Known
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Prior Legislation :
SB 580 (Calderon, Chapter 340, Statutes of 2008), increased the
allowable loan set-up fee from $3 to $5 and increased the
minimum monthly charge from $1 to $3.
AB 264 (Mendoza, 2007), as introduced, would have increased the
maximum rate that may be charged on loans over 90 days by
instituting a flat 2.5 percent a month interest rate, and
increased the loan setup fee to a maximum of $50, as specified.
The bill was gut and amended after being heard in this committee
AB 1297 (Papan, Chapter 505, Statutes of 2001), increased the
maximum loan setup fee on loans of up to $50 from $2 to $3;
increased allowable handling and storage fees from $3, $9, and
$18, to $5, $10, and $20, depending on the size of the object;
and increased the maximum allowable fee for costs relating to
sending a loan expiration notice from $2 to $3.
Prior Vote :
Assembly Banking and Finance Committee (Ayes 11, Noes 0)
Assembly Appropriations Committee (Ayes 16, Noes 0)
Assembly Floor (Ayes 78, Noes 0)
Senate Banking, Finance and Insurance Committee (Ayes 11, Noes
0)
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