BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 217 (Vargas) Hearing Date: April 6,
2011
As Introduced: February 9, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would increase the limits on the compensation
pawnbrokers are allowed to charge for their services.
DESCRIPTION Specifically, this bill would authorize pawnbrokers
to charge borrowers the greater of $3 per month or 2.5% per
month on the unpaid principal balance of loans greater than 90
days old, and below $2,500.
EXISTING LAW
1. 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).
2. Provides for the licensing of pawnbrokers by a chief of police,
sheriff, or police commission (Section 21300).
3. Generally specifies a loan length of four months, and caps the
compensation that may be charged by pawnbrokers on loans of up
to $2,500, as follows:
a. During the first 90 days of the loan, pawnbrokers may
charge borrowers between $1 and $140, depending on the dollar
amount of the loan (Sections 21200.5 and 21201.4);
b. From the 91st day forward, pawnbrokers may charge the
greater of $3 per month or 2.5% per month on the unpaid loan
balance up to $225; 2% per month on the unpaid balance
between $225.01 and $900; 1.5% per month on the unpaid
balance between $901 and $1,650; and 1% per month on the
unpaid balance in excess of $1,650; one month's interest may
SB 217 (Vargas), Page 2
be charged for any part of the month in which pawned property
is redeemed (Sections 21200 and 21201.4). It is this
stair-step rate structure that would be changed by this bill
and replaced with a single maximum rate of 2.5% per month, or
$3 per month, whichever is greater.
c. Pawnbrokers may charge a loan setup fee not to exceed
the greater of $5 or 2% of the loan amount, capped at $10
(Section 21200.1).
d. Pawnbrokers may also charge a handling and storage fee
for larger items that is charged upon property redemption,
not to exceed $5 for any article larger than one cubic foot,
$10 for any article larger than three cubic feet, $20 for any
article larger than six cubic feet, and an additional $1 for
each cubic foot in addition to one cubic foot (Section
21200.6).
e. A processing charge of $4 may be charged for each
firearm pawned (Section 21200.8).
f. If the borrower fails to redeem a pawned item during the
loan period, a charge of up to $3 for services and costs
relating to providing required notices of loan expiration to
the borrower may also be imposed (Section 21201.2).
4. Provides that the limits on rates and charges listed above do
not apply to any loan of a bona fide principal amount of $2,500
or more (Section 21051); there is no interest rate cap on pawn
loans of greater than $2,500.
5. 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);
6. 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).
COMMENTS
SB 217 (Vargas), Page 3
1. Background and Discussion: California's pawn lending rates
and fees are set by statute, and have periodically been
increased over the years to keep up with the cost of doing
business. In 2007, the Collateral Loan and Secondhand
Dealers Association of California (CLSDA; the trade
association which recently changed its name to the
California Pawnbrokers Association) sponsored AB 264
(Mendoza), to increase pawnbroker compensation from the
levels to which they had last been raised in 2001. At
present, California's pawnbrokers rank between 47th and 50th
nationally in monetary return, relative to other state's
pawnbrokers (different rankings apply to different loan
amounts).
AB 264 contained three provisions - 1) an increase in the
allowable loan set-up fee from $3 to $5; 2) an increase in
the minimum monthly charge from $1 to $3; and 3) a change in
the rate structure that would have collapsed the stair-step
rate schedule described above in Existing Law Number 3b and
replaced it with a flat rate of 2.5% on the unpaid principal
balance of loans greater than 90 days in length.
AB 264 passed the Senate Banking, Finance & Insurance Committee
on consent, but was held by the Senate Judiciary Committee.
The first two provisions of AB 264 were later amended into
SB 580 (Calderon), and signed into law in 2008. CLSDA
sponsored AB 1357 in 2009, in hopes of enacting the third
provision previously contained in AB 264. AB 1357 passed
the Legislature, but was vetoed by Governor Schwarzenegger.
The California Pawnbrokers Association (formerly CLSDA) is
sponsoring SB 217, in hopes of convincing the current
Legislature and the new Governor to enact the third, still
unaddressed provision of AB 264.
According to the California Pawnbrokers Association,
approximately 85-88% of pawned property is redeemed. Thus,
most pawn transactions are short-term loans of 120 days or
less. Pawn loans can be a safe way to securely store
valuable jewelry, musical instruments, and other valuable
items, and have the items insured, at the pawnbroker's
expense. Because pawn loans are not reported to major
credit bureaus, some borrowers choose pawn loans to avoid
impacting their credit scores. Other borrowers seek out
pawn loans, because they cannot obtain similar sized loans
and similar loan lengths from depository institutions.
SB 217 (Vargas), Page 4
The California Pawnbrokers Association has historically provided
the Legislature with statistics, demonstrating that the
average cost of a pawn transaction is lower than the cost
associated with other forms of short-term credit, such as
payday loans, refund anticipation loans, and credit card
advances. Pawn transactions are also less expensive than
merchant bounced check fees, bank insufficient funds fees,
credit card late fees, and utility reconnection fees. Pawn
transactions are somewhat more expensive than cash advances
obtained from depository institutions.
2. Summary of Arguments in Support: The California Pawnbrokers
Association is sponsoring SB 217, to help ensure the
continued existence of pawnbrokers in California. According
to the trade association, the number of pawnbrokers
operating in California has declined over time, as
pawnbroker operating costs have increased, while the charges
they are allowed to impose have remained flat. Among the
operating costs cited by the Pawnbrokers Association:
workers' compensation costs that are among the highest in
the state, the cost of training employees to accurately
value collateral, the need to upgrade security to ensure the
safety of pawned items, antiquated and burdensome reporting
requirements, and the costs of licenses and permits.
The California Pawnbrokers Association is concerned that,
without an increase in its compensation structure, the
number of pawnbrokers in the state will continue to decline,
which will result in many potential pawn customers utilizing
other, more costly forms of short-term credit.
3. Summary of Arguments in Opposition: None received.
4. Prior and Related Legislation:
a. AB 424 (Eng), 2011-12 Legislative Session: Would
make technical changes intended to help pawnbrokers
accurately calculate interest payments on loans of
greater than 90 days. Pending in the Assembly Banking &
Finance Committee.
b. SB 212 (DeLeon), 2011-12 Legislative Session: Would
clarify the circumstances under which replacement loans
can be taken out by borrowers who are unable to undertake
these transactions in person. Two-year bill pending in
the Senate Banking & Financial Institutions Committee.
SB 217 (Vargas), Page 5
c. AB 580 (Calderon), Chapter 340, Statutes of 2008):
Enacted the minimum interest charge and loan set-up fee
changes in the Mendoza bill, described immediately below.
d. AB 264 (Mendoza), 2007-08 Legislative Session:
Would have replaced the current stair-step interest rates
applied to pawn loans of over 90 days with a single
monthly interest rate of 2.5%, increased the minimum
interest charge per month from $1 to $3; and changed the
cap on loan set-up fees to the greater of $5 or 2%,
capped at $10 (up from $3 on loans of $50 and below and
$5 on loans above $50). Held in the Senate Judiciary
Committee.
e. 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.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Pawnbrokers Association (sponsor)
American Federation of State, County and Municipal Employees
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102