Existing law regulates the activities of pawnbrokers and makes a violation of these provisions a misdemeanor, as specified. Existing law authorizes the district attorney or the Attorney General, in the name of the people of the State of California, to bring an action to enjoin the violation or the threatened violation of a regulation made pertaining to certain provisions regulating pawnbrokers. Existing law authorizes a pawnbroker to collect a handling and storage charge for pawned articles at the time property is redeemed or a replacement loan is issued. Existing law establishes the maximum amount that may be charged based on the size of pawned articles, as specified.

This bill would additionally authorize a pawnbroker to collect a security charge and would increase the permitted handling, storage, and security charges depending on the size of the pawned articles, as specified. The bill would authorize a pawnbroker, in addition to other allowed charges, to collect a remote transaction fee, as specified.

Existing law permits a pawnbroker to charge a fee in the amount of up to $5 for services and costs pertaining to preparation of a 10-day notice when a pledged item is not redeemed during the loan period.

This bill would expand the services and costs for which the above-described noticing fee may be charged to include the mailing or electronic transmission of the notice, and would increase the maximum amount of the fee to $7.

Existing law regulates the activities of pawnbrokers and makes a violation of these provisions a misdemeanor, as specified. Existing law authorizes the district attorney or the Attorney General, in the name of the people of the State of California, to bring an action to enjoin the violation or the threatened violation of a regulation made pertaining to certain provisions regulating pawnbrokers. Existing law authorizes a pawnbroker to collect a handling and storage charge for pawned articles at the time property is redeemed or a replacement loan is issued. Existing law establishes the maximum amount that may be charged based on the size of pawned articles, as specified.

This bill would additionally authorize a pawnbroker to collect a security charge and would increase the permitted handling, storage, and security charges depending on the size of the pawned articles, as specified. The bill would authorize a pawnbroker, in addition to other allowed charges, to collect a remote transaction fee, as specified.

Existing law permits a pawnbroker to charge a fee in the amount of up to $5 for services and costs pertaining to preparation of a 10-day notice when a pledged item is not redeemed during the loan period.

This bill would expand the services and costs for which the above-described noticing fee may be charged to include the mailing or electronic transmission of the notice, and would increase the maximum amount of the fee to $7.

Existing law regulates the activities of pawnbrokers and makes a violation of these provisions a misdemeanor, as specified. Existing law authorizes the district attorney or the Attorney General, in the name of the people of the State of California, to bring an action to enjoin the violation or the threatened violation of a regulation made pertaining to certain provisions regulating pawnbrokers. Existing law authorizes a pawnbroker to collect a handling and storage charge for pawned articles at the time property is redeemed or a replacement loan is issued. Existing law establishes the maximum amount that may be charged based on the size of pawned articles, as specified.

This bill would additionally authorize a pawnbroker to collect a security charge and would increase the permitted handling, storage, and security charges depending on the size of the pawned articles, as specified. The bill would authorize a pawnbroker, in addition to other allowed charges, to collect a remote transaction fee, as specified.

Existing law requires a loan made by a pawnbroker for which goods are received in pledge as security to be evidenced by a written contract, as specified, and requires the contract to, among other things, provide a loan period that is a minimum of 4 months. Existing law permits a pawnbroker to charge a fee in the amount of up to $5 for services and costs pertaining to preparation of a 10-day notice when a pledged item is not redeemed during the loan period.

This bill would decrease the minimum loan period to 3 months and make a conforming change to a related notice provision. By further restricting the loan period in that requirement, the violation of which is a crime, the bill would impose a state-mandated local program. The bill would expand the services and costs for which the above-described noticing fee may be charged to include the mailing or electronic transmission of the notice, and would increase the maximum amount of the fee to $7.

Existing law regulates the activities of pawnbrokers and makes a violation of these provisions a misdemeanor, as specified. Existing law authorizes a pawnbroker to collect a handling and storage charge for pawned articles at the time property is redeemed or a replacement loan is issued. Existing law establishes the maximum amount that may be charged based on the size of pawned articles, as specified.

This bill would additionally authorize a pawnbroker to collect a security charge and would increase the permitted handling, storage, and security charges depending on the size of the pawned articles, as specified. The bill would authorize a pawnbroker, in addition to other allowed charges, to collect a remote transaction fee, as specified.

Existing law requires a loan made by a pawnbroker for which goods are received in pledge as security to be evidenced by a written contract, as specified, and requires the contract to, among other things, provide a loan period that is a minimum of 4 months. Existing law permits a pawnbroker to charge a fee in the amount of up to $5 for services and costs pertaining to preparation of a 10-day notice when a pledged item is not redeemed during the loan period.

This bill would decrease the minimum loan period to 3 months and make a conforming change to a related notice provision. By further restricting the loan period in that requirement, the violation of which is a crime, the bill would impose a state-mandated local program. The bill would expand the services and costs for which the above-described noticing fee may be charged to include the mailing or electronic transmission of the notice, and would increase the maximum amount of the fee to $7.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Date of Hearing: July 2, 2024

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

SBPCA Bill Id:SB 1198

Author:(Roth) – As Amended Ver:April 8, 2024

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill increases the limit on certain fees collected by a pawnbroker and allows a pawnbroker to collect a new remote transaction fee.

Specifically, this bill:

1. Provides the handling and storage fee a pawnbroker may charge for pawned articles also covers security costs and increases the maximum fee for such purposes, which existing law sets at different amounts based on the size of the pawned article, by a specified dollar amount or 2.5% of the loan amount, whichever is greater.
2. Authorizes a pawnbroker, if the pledger requests or redeems certain electronic loan options, to collect a remote transaction fee of up to 3% of the transaction amount to cover recurring costs associated with software applications.
3. Increases, from $5 to $7, the maximum fee a pawnbroker may charge for services and costs to prepare a 10-day notice when an item is not redeemed during the loan period, and clarifies the noticing fee may cover related mailing or electronic transmission services and costs.

FISCAL EFFECT:

Negligible costs to the Department of Justice, which helps oversee the pawnbroker industry in partnership with local law enforcement.

COMMENTS:

1. Purpose. According to the author:

Every five years, the California Pawnbrokers come before the Legislature to request approval to adjust maximum fees that can be charged on a pawn loan to keep pace with rising operational costs. We are at that five-year mark. SB 1198 ensures the financial viability of the pawn industry by increasing handling and storage fees to account for increased security costs, allowing for a new remote transaction fee, and increasing the fee to prepare a loan expiration notice.

This bill is sponsored by the California Pawnbrokers Association.

1. Pawnbroker Fees. Existing law limits the amount a pawnbroker may charge a borrower for a pawn loan. The statutory fee caps do not adjust automatically with economic conditions, so allowable fees can become more restrictive for pawnbrokers over time due to inflation or increased operational costs. In addition to interest and fees on the loan amount, a pawnbroker may also charge certain fee amounts for handling and storing the pawned item and a $5 fee to prepare a loan expiration notice. This bill increases and clarifies the scope of the maximum allowable handling and noticing fees and authorizes a pawnbroker to charge a remote transaction fee.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: June 17, 2024

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Timothy Grayson, Chair

SBPCA Bill Id:SB 1198

Author:(Roth) – As Amended Ver:April 8, 2024

SENATE VOTE: 38-0

SUBJECT: Pawnbrokers: fees and charges

SUMMARY: Increases the caps on certain fees collected by pawnbrokers and authorizes a remote transaction fee.

Specifically, this bill:

1. Establishes the following updated fee schedule for a pawnbroker’s storage, handling, and security-related activities:
2. $5 (increased from $3) or 2.5 percent of the loan amount for any item that can be contained within one cubic foot;
3. $10 (increased from $6) or 2.5 percent of the loan amount for any item that can be contained within three cubic feet;
4. $20 (increased from $12) or 2.5 percent of the loan amount for any item that can be contained within six cubic feet; and
5. $30 (increased from $24) or 2.5 percent of the loan amount for any item that cannot be contained within six cubic feet, plus $5 (increased from $3) for each additional cubic foot in excess of six cubic feet.
6. Authorizes a pawnbroker to collect a remote transaction fee, if the pledgor elects to request a replacement loan or to redeem a loan through electronic means, of up to 3.0 percent of the transaction amount to cover the recurring costs associated with software applications.
7. Increases the allowed fee from $5 to $7 that a pawnbroker may charge a borrower, who fails to redeem a pawned item during the loan period, for mailing or electronically transmitting the 10-day notice of the borrower’s right of redemption.

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 (i.e., the borrower) 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 (Financial Code Section 21300).

FISCAL EFFECT: Unknown. This bill is keyed Fiscal by Legislative Counsel.

COMMENTS:

1. Purpose

According to the author:

Every five years, the California Pawnbrokers come before the Legislature to request approval to adjust maximum fees that can be charged on a pawn loan to keep pace with rising operational costs. We are at that five-year mark. SB 1198 ensures the financial viability of the pawn industry by increasing handling and storage fees to account for increased security costs, allowing for a new remote transaction fee, and increasing the fee to prepare a loan expiration notice. Pawnshops throughout the state serve as a reliable source of short-term loans, allowing someone to access much-needed cash without the hassle often associated with traditional lending institutions. Whether it's covering medical bills, car repairs, or other urgent expenses, pawnshops offer an instant and accessible solution for those in need. Current law limits the amount of compensation pawnbrokers may charge or receive for providing their services. Without these fee increases, lending businesses will continue to close throughout the state; having an immediate and dramatic impact on the low-income communities they serve.

1. Background on pawn loans.
2. How do pawn loans work?

Pawn loans allow individuals to obtain immediate cash by offering collateral to a pawn shop. Typically, the loan amount is determined as a percentage of the item's value, assessed by the pawnbroker. Pawn loans commonly amount to approximately 50% of the item's resale value, though this percentage may vary depending on the type of item.

Every pawn loan for which goods are received as security must be evidenced by a written contract, with a copy provided to the customer. Legally, the loan agreement must specify a minimum loan period of four months. Pawnbrokers are obligated to keep every pledged item throughout the designated loan period as outlined in the contract.

State law establishes the timeline for when, and the process by which, a pledged article can be sold. If any pledged article is not redeemed during the loan period and the customer and pawnbroker do not mutually agree in writing to extend that period, the pawnbroker must notify the customer within one month after the loan period expires. This notice works to extend the right of redemption for 10 days from the date of mailing or electronic transmission of that notice.

If any pledged article is not redeemed within the 10-day notice period, the pawnbroker becomes automatically vested with title to the pledged article. The pawnbroker may then sell or dispose of the property as he or she wishes.

1. Who uses pawn loans?

When consumers face difficulty qualifying for credit from traditional sources such as banks and credit unions, they often resort to alternative financial services (AFS) providers like payday lenders or auto title lenders. These borrowers pose higher risks for lenders, leading many AFS providers to offer credit at significantly higher costs compared to mainstream credit products. A pawnbroker is another type of AFS provider that offers a financial solution to consumers who may have few options.

Surveys conducted by the Consumer Financial Protection Bureau (CFPB) and the Federal Deposit Insurance Corporation (FDIC) indicate that pawn loan borrowers are more likely to be unbanked, often unable to qualify for more economical credit alternatives, and likely grappling with significant income or expense shocks.

In 2021, the CFPB analyzed consumer behavior in their use of three AFS products: auto title loans, payday loans, and pawn loans. Based on the survey results, CFPB concluded that those who rely on these products valued the speed, discretion, and the lack of a credit check as key reasons for deciding on their choice, and 77% of the consumers using these AFS products had experienced a financial shock and had difficulty paying a bill. Moreover, while just a small share of consumers use these products, those who do use them tend to use them repeatedly.

Pawn loans are also more likely to be used by those without traditional bank accounts. According to the FDIC, 5.6% of unbanked households used a pawnshop loan in 2019 compared to 1.1% of banked households.^[1]

1. How are pawn shops regulated?

Under state law, California's Department of Justice (DOJ) regulates pawnbrokers and enforces California's Financial Code provisions governing the industry. However, in practice, the bulk of pawnbroker oversight occurs at the local level, with the chief of police, sheriff, or police commissioner running the licensing process and administering and enforcing state law. Under this model, the DOJ provides pertinent information to local licensing agencies, such as background check results and a license number. Moreover, the DOJ has implemented a statewide uniform electronic reporting system called the California Automated Pawn and Secondhand Dealer System, for pawnbrokers to use to submit transaction information to DOJ.

1. How much do pawn loans cost?

State law limits what pawnbrokers can charge borrowers for a pawn loan. Because these fee caps do not adjust automatically according to economic conditions, the allowable fees can become more restrictive for pawnbrokers over time due to inflation or increased operational costs.

Under existing state law, a pawnbroker may only charge a specified amount based on the size of the loan for the first three months of the four-month loan. For example, a pawnbroker may charge up to $3 a month for a loan not more than $19.99, compared to no more than 9% on a loan between $175 and $2,499. Beginning on the fourth month, the pawnbroker may then charge 3% per month on the unpaid principal balance.

In addition to the interest and fees on the loan amount, there are set charges for storing, securing, and handling the pawned items. Even with these fees, pawn loans are generally more affordable than other types of consumer loans offered by AFS providers. A $300 pawn loan with a four-month term has an annual percentage rate (APR) of approximately 50%, while a payday loan with a two-week term carries an APR of more than 450%.

1. What does SB 1198 do?

SB 1198 increases the allowable fees a pawnbroker can charge. Specifically, this bill increases the cap on storage fees and authorizes an additional “remote transaction fee” for when the pledger redeems the loan electronically. This fee is meant to cover the costs associated with new software procurement.

The below table summarizes the new proposed fee structure for two hypothetical pawn loans. These loans are assumed to be for an item that can be contained within six cubic feet.

The California Pawnbrokers Association (CAPA), the sponsor of this bill, argues this bill necessary for pawnbrokers to remain competitive. High inflation and increased costs have put additional financial pressures on the industry, and CAPA argues that roughly one-third of pawn shops have closed in the past five years.

1. Prior Legislation
   1. AB 1186 (Medina, Chapter 189, Statutes of 2019) increased the loan setup fee to $7.50 or 3.5% of the loan amount, whichever is greater, not to exceed $90 (up from $5 or 3% of the loan amount, not to exceed $30); increased maximum allowed storage and handling fees; increased the firearms processing charge to $20 per firearm (up from $4 per firearm); and increased the charge that may be imposed to prepare a loan expiration notice to $5 (up from $3).
   2. SB 285 (Block, Chapter 245, Statutes of 2015) increased the maximum monthly interest rate to 3%; increased the loan setup fee to $5 or 3%, not to exceed $30; collapsed the prior 21-tier fee schedule to the current 6-tier fee schedule; added a new storage charge for small items (those that can be contained within one cubic foot), and required representatives of the pawnbroker industry to poll their members annually to gather data relating to the current financial condition of the California pawn industry.
   3. SB 300 (Mendoza, Chapter 417, Statutes of 2015) allowed pawnbrokers to conduct business transactions electronically, as specified, except when establishing an original loan.
      
   4. AB 424 (Eng, Chapter 318, Statutes of 2011) defined a month for purposes of the Pawnbroker Law as a period of thirty consecutive days, and replaced a tiered interest rate model that had previously applied to loans older than three months with a uniform charge equal to the greater of $3 per month or 2.5% per month on the unpaid principal balance of the loan.
   5. SB 580 (Calderon, Chapter 340, Statutes of 2008) increased the minimum monthly interest charge from $1 to $3 on loans older than 90 days 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).
2. Arguments in support

CAPA writes the following:

For Californians seeking to obtain a relatively small dollar loan, pawnbrokers provide short-term credit without a credit check so that everyone who seeks a pawn loan can borrow money. The ability for a borrower to secure a small dollar loan through personal property allows the consumer to manage the risk of default and limit the financial damage, should a default occur. Most pawn loans are relatively small, and the vast majority of pawned items are redeemed. An industry survey conducted in the last 6 months, revealed that 91% of all pawn transactions were for loan sizes of less than $400.

In order for the industry to continue to provide financial services, a revenue increase is needed to keep up with the technological, labor, real estate, and governmental compliance costs. Without this fee increase, lending businesses will continue to close.

REGISTERED SUPPORT / OPPOSITION:

Support

California Pawnbrokers Association (CAPA)

Opposition

None on file.

Analysis Prepared by: Luke Reidenbach / B. & F. / (916) 319-3081

1. https://www.fdic.gov/analysis/household-survey/index.html ↑

 CONSENT  

Bill No: SB 1198

Author: Roth (D)

Amended: 4/8/24

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 7-0, 4/3/24

AYES: Limón, Niello, Bradford, Caballero, Menjivar, Nguyen, Portantino

SENATE JUDICIARY COMMITTEE: 11-0, 4/16/24

AYES: Umberg, Wilk, Allen, Ashby, Caballero, Durazo, Laird, Min, Niello, Stern, Wahab

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SUBJECT: Pawnbrokers: fees and charges

SOURCE: California Pawnbrokers Association

DIGEST:

This bill increases specified fees that pawnbrokers may charge for pawn loans.

ANALYSIS:

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 (i.e., the borrower) 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. (Financial Code 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:
   
   1. During the first three months of the loan, pawnbrokers may charge borrowers between $3 and $225, depending on the dollar amount of the loan. (Financial Code Sections 21200.5 and 21201.4)
      

• 1. During the fourth and subsequent months, pawnbrokers may charge a maximum of 3% per month, or $3 per month, whichever is greater. (Financial Code Sections 21200 and 21201.4)
     
  2. Pawnbrokers may charge a loan setup fee not to exceed the greater of $7.50 or 3.5% of the loan amount, capped at $90. (Financial Code Section 21200.1)
     
  3. Pawnbrokers may also charge a handling and storage fee upon property redemption or the issuance of a replacement loan. This storage fee equals $3 for articles that can be contained within one cubic foot, $6 for items greater than one cubic foot and up to three cubic feet, $12 for items greater than three cubic feet and up to six cubic feet, and $24 for items greater than six cubic feet, plus one additional dollar for each additional cubic foot in excess of 6 cubic feet. (Financial Code Section 21200.6)
     
  4. Pawnbrokers may charge a processing fee of $20 for each firearm pawned. (Financial Code Section 21200.8)
     

1. Provides that the limits on rates and charges described in a) and b) of 3), above, do not apply to any loan of a bona fide principal amount of $2,500 or more. (Financial Code Section 21051)
   
2. Requires a pawnbroker to notify a pledgor (i.e., a borrower) in writing, at his or her last known mailing or electronic address, regarding the termination of the borrower’s loan period, as specified. This notification must inform the borrower that they are entitled to an extra ten days in which to redeem their pawned item, beginning on the date the notice is mailed or electronically transmitted, and must clarify that if the tenth day falls on a day that the pawn shop is closed, the time period is extended to the next day the pawn shop is open. Allows a pawnbroker to charge a fee of up to $5 to prepare this notice. (Financial Code Sections 21201 and 21201.2)
   
3. 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. (Financial Code Section 21201.5)

This bill:

1. Allows a pawnbroker to collect a handling, storage, and security charge for pawned articles, increasing the maximum fees allowed by current law by the following specified amounts:

1. Allows a pawnbroker to collect a remote transaction fee, if the pledger elects to request a replacement loan or to redeem a loan through electronic means, of up to 3% of the transaction amount to cover the recurring costs associated with software applications.
2. Allows a pawnbroker to charge a fee of up to $7 for services and costs pertaining to the preparation and mailing or electronic transmission of the notice described in 5) of the Existing Law section.

Background

Pawnbrokers provide loans that are secured by personal property that the borrower leaves with the pawnbroker. Common items that serve as collateral for pawn loans are jewelry, firearms, electronics, collectibles, tools, and musical instruments. Pawnbrokers assess the value of personal property that a customer intends to pawn and offers a loan based on the assessed value. If a borrower does not pay back their loan, the pawnbroker can take possession of the property. Pawnbrokers lend the borrower only a fraction of the assessed value of the property, often less than 70%, to protect the pawnbroker from losing money on the loan if the borrower does not repay and the pawnbroker sells the property.

Pawnbrokers in California are required to be licensed by local law enforcement agencies who share licensure application information with the California Department of Justice. Pawnbrokers are subject to lending regulations under the Financial Code, as well as secondhand dealer laws found in the Business and Professions Code.

This bill focuses on permissive activities related to pawn loans. The Financial Code provides maximum amounts of various fees that a pawnbroker may charge for a pawn loan. As the costs of doing business increase, pawnbrokers may have difficulty remaining profitable without increases in allowable fees. The California Pawnbrokers Association (CAPA) made a deal with Consumer Reports years ago to seek increases in allowable fees no more than once every four to five years. The last increase to pawnbroker fees was enacted in 2019, and the CAPA is seeking new fee increases with this bill.

Comments

1. Purpose. This bill is sponsored by the CAPA. According to the author:

Current law limits the amount of compensation pawnbrokers may charge or receive for providing their services. Unlike most businesses in California, pawnbrokers must come before the Legislature in order to adjust what they can charge to meet increases in the cost of doing business. The last time the pawnbroker industry requested adjustments to their fees was in 2019 (AB 1189, Medina).

SB 1198 proposes to increase handling and storage fees to account for increased security costs, allow for a new remote transaction fee, and increase the fee to prepare a loan expiration notice.

1. Comparing fees in existing law and this bill. The table below compares the costs of three example loan amounts under existing law and under the fees proposed by this bill. For the sake of understanding the full potential effect of this bill, the table assumes the loans in the columns labeled “This bill” include a remote transaction fee; however, this fee will only be assessed to those borrowers who choose to either renew (or, rarely, redeem) their loan remotely without coming into the pawn shop. The examples in the table also assume that the borrower allows the loan to go to its full 4-month term, though the borrower has the option of redeeming the loan before the end of the third month, which would avoid the interest charge for the fourth month.

Accounting for the fee increases proposed by this bill, pawn loans remain significantly lower cost than payday loans. To borrow $300 over four months, a payday loan borrower would need to borrow, repay, and re-borrow 7.5 times based on the 16-day average term of a payday loan. Over that four month period, the borrower would pay $397 in fees to the payday lender, far exceeding the $54 in fees for the pawn loan (assuming the borrower avoids the remote transaction fee by redeeming the loan in-person). To be fair, a pawn loan does require the borrower to have an asset that they are willing to pawn, but the dollar cost of financing the pawn loan is inarguably and significantly lower than a payday loan.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 5/1/24)

California Pawnbrokers Association (source)

OPPOSITION: (Verified 5/1/24)

None received

ARGUMENTS IN SUPPORT: The California Pawnbrokers Association (CAPA), sponsor of this bill, argues that an adjustment in allowable fees is necessary to stem the tide of pawnshop closures, noting that one-third of licensed pawnshops have closed in the past five years. CAPA asserts that increased costs of doing business in the state and high inflation rates have negatively affected pawnbrokers. To continue making small dollar loans that are comparatively cheaper than alternatives, like a bounced check or credit card late fee, CAPA requests the proposed fee increases.

Prepared by: Michael Burdick / B. & F.I. /

5/1/24 10:58:23

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Thomas Umberg, Chair

2023-2024 Regular Session

Bill No: SB 1198 (Author:Roth)

Version: April 8, 2024

Hearing Date: April 16, 2024

Fiscal: Yes

Urgency: No

Consultant: ID

SUBJECT

Pawnbrokers: fees and charges

DIGEST

This bill increases various fees that pawnbrokers can charge borrowers for a pawn loan, and creates a new remote transaction fee.

EXECUTIVE SUMMARY

Pawnbrokers provide small, short-term loans to individuals who often cannot qualify for other types of credit or need money quickly. Every pawnbroker must be registered and licensed with the state, state and law proscribes the minimum length of time of a pawn loan and the fees and rates a pawnbroker may charge for their loans. The last time the fees were raised by the Legislature was 2019. This bill proposes to increase by specified amounts the handling and storage charge a pawnbroker may charge, and proposes to rename the fee as a handling, storage, and security charge. This bill also proposes to increase the fee a pawnbroker may charge when they issue a borrower a notice of the expiration of the loan period from $5 to $7, and proposes a new remote transaction fee that a pawnbroker can charge when a borrower elects to extend or redeem a loan by electronic means. This charge as proposed may be up to three percent of the transaction amount.

SB 1198 is sponsored by the California Pawnbrokers Association, and the Committee has received no timely opposition to this bill. The California Pawnbrokers Association cites increased technological, labor, real estate, and governmental compliance costs to support SB 1198’s increases. This bill passed out of the Senate Banking and Financial Institutions Committee on a vote of 7 to 0.

PROPOSED CHANGES TO THE LAW

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. (Fin. Code § 21000.)
2. Defines pledged property as property held as security for a loan, the title to which remains with the pledgor (i.e., the borrower) and not the pawnbroker. (Fin. Code § 21002.)
3. Provides for the licensing of pawnbrokers by a chief of police, sheriff, or police commission. (Fin. Code § 21300.)
4. Requires that every loan made by a pawnbroker in which goods are received as security for the loan be evidenced by a written contract, a copy of which must be provided to the borrower, containing specified information. (Fin. Code § 21201.)
5. Specifies a minimum loan length of four months, and caps the compensation that may be charged by pawnbrokers on loans of up to $2,499, as provided. (Fin. Code §§ 21200 et. seq.)
   1. During the first three months of the loan, pawnbrokers may charge borrowers between $3 and $225, depending on the dollar amount of the loan. A charge of $3 is allowed on a loan of up to $19.99, $6 for a loan of between $20 and $49.99, $9 for a loan between $50 and $74.99, $12 for a loan between $75 and $99.99, $15 for a loan between $100 and $174.99, and a charge not exceeding nine percent of the loan amount for any loan between $175 and $2,499. (Fin. Code § 21200.5.)
   2. During the fourth and subsequent months, pawnbrokers may charge a maximum of three percent or $3 per month, whichever is greater. (Fin. Code §§ 21200 and 21201.4.)
   3. Authorizes a loan setup fee for each loan not to exceed $7.5 or 3.5 percent, whichever is greater; however, the maximum loan setup fee cannot exceed $90. (Fin. Code § 21200.1.)
   4. Authorizes a handling and storage fee upon redemption or issuance of a replacement loan as follows:
      1. $3 for any article that can be contained within one cubic foot;
      2. $6 for any article that cannot be contained within one cubic foot, but can be contained within three cubic feet;
      3. $12 for any article that cannot be contained within three cubic feet, but can be contained within six cubic feet; and
      4. $24 for any article that cannot be contained within six cubic feet, and $3 for each additional cubic foot in excess of six cubic feet. (Fin. Code § 21200.6(a)(1)-(4).)
   5. Authorizes a processing charge of $20 for each firearm pawned. (Fin. Code § 21200.8.)
6. 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. (Fin. Code § 21051.)
7. Requires all licensed pawnbrokers to post their fees and charges in a place clearly visible to the general public. (Fin. Code §§ 21200.5(h) and 21200.7.)
8. Requires a pawnbroker to notify a borrower in writing, at the borrower’s last known mailing or electronic address, regarding the termination of the borrower’s loan period, as specified. (Fin. Code § 21201.)
   1. This notification must inform the borrower that they are entitled to an extra 10 days in which to redeem their pawned item, beginning on the date the notice is mailed or electronically transmitted, and must clarify that if the tenth day falls on a day that the pawn shop is closed, the time period is extended to the next day the pawn shop is open. (Fin. Code § 21201.)
   2. Authorizes a pawnbroker to charge a fee of up to $5 to prepare this notice. (Fin. Code § 21201.2.)
9. Specifies that a borrower has a right to redeem their item at any time during the loan period, upon payment of the loan amount and any fees. (Fin. Code § 21201.)
10. Authorizes 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. (Fin. Code § 21201.5.)
11. Permits a pawnbroker to charge a borrower, or their assignee, who loses a pawn ticket for the item, a fee of $10 for services of verifying the identity of the claimant, fingerprinting the claimant, and having the claimant execute a declaration under penalty of perjury. (Fin. Code § 21201.1.)

This bill:

1. Changes the name of the allowable handling and storage charge to a handling, storage, and security charge.
2. Increases the allowable handling, storage, and security charge for pawned items to the following schedule:
   1. $5 or 2.5 percent of the loan amount for any item that can be contained within one cubic foot;
   2. $10 or 2.5 percent of the loan amount for any item that can be contained within three cubic feet;
   3. $20 or 2.5 percent of the loan amount for any item that can be contained within six cubic feet; and
   4. $30 or 2.5 percent of the loan amount for any item that cannot be contained within six cubic feet, plus five dollars for each additional cubic foot in excess of six cubic feet.
3. Creates a remote transaction fee that a pawnbroker may collect from a borrower that elects to request a replacement loan or redeem a loan through electronic means, allowed to be up to three percent of the transaction amount to cover the recurring costs associated with software applications.
4. Increases the allowed fee from $5 to $7 that a pawnbroker may charge a borrower, who fails to redeem a pawned item during the loan period, for mailing or electronically transmitting the 10-day notice of the borrower’s right of redemption.

COMMENTS

1. Author’s statement

According to the author:

Every five years, the California Pawnbrokers come before the Legislature to request legislative approval to adjust their maximum fees to offset the increased costs of operation. The pawn industry holds significant importance in California as a crucial financial safety net for individuals lacking access to traditional credit such as short-term loans, credit cards or pay-day loans. Individuals engage in pawning possessions when seeking a brief loan to navigate challenging periods. In order for the industry to continue to provide financial services to its under-served clientele, they need a revenue increase that will keep up with the security, technological, labor, real estate, and governmental compliance costs they confront, or we will continue to see closures among retail lending businesses.

1. The history and regulation of pawnbrokers

For many cash-strapped Californians in need of a short-term loan, options may be limited. Traditional loans typically require an application, assets to guarantee the loan, and good credit in order to be approved. If an individual cannot be approved for a traditional loan, their alternatives are often payday loans or loans from pawnbrokers.

Pawnbrokers provide short-term loans outside the traditional loan process, giving a loan in exchange for a valuable item that the borrower gives to the pawnbroker as security for the loan. In order to obtain their item back from the pawnbroker at the end of the loan period, the borrower must pay back the loan and the pawnbroker’s fees and interest. Because the loan is secured through an item of value, if a borrower does not repay the loan, the loan is not recouped through collections and the default does not affect the borrower’s credit score. Instead, if the borrower does not repay the loan at the end of the loan period and does not extend the loan period with the pawnbroker, the title to the item will transfer to the pawnbroker, and the pawnbroker can sell the item to recoup the value of the loan. Thus, the loan is guaranteed for the pawnbroker in the borrower’s pawned item. One analogy to this arrangement is the context of an automotive loan, in which the loan company can repossess the vehicle if the borrower fails to pay the loan; however, with a pawnbroker loan, the pawnbroker holds onto the item until repayment takes place, and can assume title and sell the item automatically if the borrower does not repay by the specified time. Historically, the fees and interest charged by pawnbrokers can be relatively high, and loan amounts are typically only a fraction of the value of the item provided as security. If the borrower does not pay the loan and the pawnbroker sells the item for an excess of the value of the loan, the borrower does not get the excess amount. While typical loan amounts nationally average 150 dollars, loans amount can be as large as tens of thousands of dollars.^[1] Pawned items often include purses, watches, jewelry, musical instruments, firearms, and even cars.

Data regarding consumers who use pawnbrokers for loans reveals that many cannot access traditional types of credit, and tend to be unbanked or underbanked consumers. Roughly 60 percent of borrowers of a pawn, payday, or auto title loan were declined entirely or partially for traditional credit options.^[2] Over 60 percent of users of pawn, payday, and auto title loans have either poor or very poor credit scores.^[3] Additionally, while pawn loans tend to be short-term, the same study found that 72.7 percent of borrowers still owed money on a pawn loan if they had taken one out in the previous six months, suggesting that many consumers of pawn loans extend these loans or rollover the loans into a new loan. The use of alternative financial services like pawn loans continues to be more prevalent among households that are unbanked, meaning no one in the household has a credit or savings account at a bank or credit union.^[4] Thus, many who utilize pawn loans do not have access to other forms of credit and do so out of necessity.

In order to protect such consumers from unscrupulous business practices and curtail the sale of stolen property, California regulates the pawnbroker industry and the permissible fees that pawnbrokers can charge borrowers. California law requires every pawnbroker to be registered and licensed with local law enforcement agencies, and that pawn brokers share with the Department of Justice information relating to every personal property transaction at the pawn shop.^[5] California law also requires that every loan made by a pawnbroker in exchange for goods be made by a written contract containing specified information and notices to the borrower, including the loan period and the date on which the loan is due, and that the borrower has a right to redeem their property during the loan period. (Fin. Code § 21201.) If a borrower does not repay the loan by the date the loan is due, California law requires the pawnbroker to notify the borrower within one month of the expiration of the loan, and provide the borrower ten days from the notice to redeem their property. (Fin. Code § 21201(d).) Only after the expiration of that ten-day period will title to the item vest with the pawnbroker. California law also requires pawnbrokers to keep records of every transaction, and display various notices on the premises of their shop regarding the maximum charge of compensation allowed by law, whether the shop insures pawned items, and the right of a borrower to have their items returned to them within two days if stored off-site. (Fin. Code §§ 21202, 21201.3.) An individual who knows or should know that they are violating the provisions relating to pawnbrokers is guilty of a misdemeanor. (Fin. Code § 21209.)

1. The permissible fees that a pawnbroker may charge

California law also tightly proscribes the interest and fees that pawnbrokers are allowed to charge borrowers. For the first three months of the loan, pawnbrokers may only charge specified fees based on the size of the loan, from $3 for loans not more than $19.99, to no more than nine percent on loans between $175 and $2,499. (Fin. Code § 21200.5.) For the fourth month and months thereafter, a pawnbroker may charge three percent per month on the unpaid principal balance, or $3 per month if a three percent charge would be less than $3. (Fin. Code § 21200.) These limitations on monthly charges for the first three months and any months thereafter do not apply to pawn loans of $2,500 or more. (Fin. Code § 21051.)

In addition to these charges, pawnbrokers are allowed to charge a variety of fees. They are permitted to charge a loan setup fee of $7.50 or 3.5 percent, whichever is greater, up to a maximum setup fee of $90. (Fin. Code § 21200.1.) They can also charge a storage and handling charge for the item being kept as security by the pawnbroker. This fee is defined by the size of the item: $3 may be charged for any item that can fit within one cubic foot; $6 for any item that can be contained within three cubic feet; $12 for any item that can be contained within six cubic feet; and $24 for any item that cannot be contained within six cubic feet, with $3 allowed for each additional cubic foot. (Fin. Code § 21200.6.)

While a loan setup fee and storage and handling fees may apply to every loan, California law also allows for certain fees in specific circumstances. A pawnbroker may charge a $10 fee when a borrower loses the pawn ticket corresponding to their item, to cover the services of verifying the identity of the borrower. (Fin. Code § 21201.1.) If a borrower fails to redeem their item and repay the loan by the date the loan is due, the pawnbroker may charge the borrower an extra $5 for the costs of preparing the required 10-day notice of a borrower’s right of redemption. (Fin. Code § 21201.2.) If the item being pawned is a firearm, the pawnbroker may charge an additional $20 processing fee for each firearm pawned. (Fin. Code § 21200.8.)

1. This bill increases the fees a pawnbroker is able to charge, and adds new fees for remote transactions

SB 1198 proposes to increase the allowable fees that a pawnbroker may charge a borrower, and proposes a new fee for remote transactions. First, the bill proposes increasing the handling and storage charge, and renaming the charge a storage, handling, and security charge, from: $3 per item that fits within a cubic foot to $5 or 2.5 percent of the loan amount; $6 to $10 or 2.5 percent of the loan amount for items within three cubic feet; $12 to $20 or 2.5 percent of the loan amount for items within six cubic feet; and $24 plus $3 per extra cubic foot to $30 or 2.5 percent of the loan amount and $5 per extra cubic foot for items that fit in an a space beyond six cubic feet.

SB 1198 also proposes to increase the fee a pawnbroker may charge for the preparing of a 10-day notice from $5 to $7, and specifies that this fee is for the preparation and mailing or electronic transmission of the notice.

Lastly, SB 1198 proposes a new fee that a pawnbroker may charge. This new fee would be called a “remote transaction fee,” that would be chargeable by the pawnbroker when a borrower elects to request a replacement loan or to redeem the loan electronically. The fee allowed would be three percent of the transaction amount.

The sponsor asserts that these increases are necessary to offset increased costs for pawnbrokers related to security, technology, labor, real estate, and governmental compliance. While newer data is not yet available, the sponsors provide data relating to the pawnbroker industry from the period from 2015 to 2017. According to the sponsors, the survey a 144 California pawn shops reported increases in expenses related to employee parking (73 percent increase), security (71 percent increase), employee medical insurance (45 percent increase), storage (39 percent increase), payroll (35 percent increase), lease and rent payments (35 percent increase), and local business license fees (35 percent increase), during the two-year period. The sponsors note that this data does not include costs for continuing education of employees related to the evolution of the items accepted as collateral, ID changes, computer system upgrades and enhancements, and other miscellaneous costs.

The proposed changes to pawnbrokers’ allowable fees are summarized in the table below. It presents the fees currently allowable and what would be allowed under SB 1198 for a loan of various amounts for a four-month loan. However, it should be noted that an additional monthly fee would apply for every month beyond four months, if the period is greater than four months. Additional fees, as previously described, would apply in certain circumstances.

1. Arguments in support

The California Pawnbrokers Association, the sponsors of SB 1198, write:

SB 1198 seeks to ensure the financial viability of the pawn industry in California by doing the following:

• Increasing handling and storage fees to account for increased security costs;
• Allow for a new remote transaction fee, and;
• Increase the fee to prepare a loan expiration notice.

Current law limits the amount of compensation pawnbrokers may charge or receive for providing their services. Unlike most businesses in California, pawnbrokers must come before the Legislature in order to adjust what they can charge to meet increases in the cost of doing business. The last time the pawnbroker industry requested adjustments to their fees was in 2019 (AB 1189, Medina).

A Pawnbroker may charge a fixed interest rate for the first 3 months based upon how much is borrowed. For example, a loan not exceeding $19.99 may only incur a $3 interest charge for the first three months, and a loan not exceeding $99.99 may only incur a $10 interest charge for the first three months. If a client cannot repay the loan within 3 months, 3% is the maximum monthly interest rate that can be charged thereafter.

By comparison, the costs associated with a loan from a pawnbroker are lower than a bounced check or credit card late fee. For example, the cost to borrow $150 from a pawn shop is $20.25. The fee for a bounced check is $20 to $40 from the merchant, plus a $27 to $35 Non-Sufficient Funds Fee from the Bank. Similarly, the late fee for a credit card could run between $25 to $39.

For Californians seeking to obtain a relatively small dollar loan, pawnbrokers provide short-term credit without a credit check so that everyone who seeks a pawn loan can borrow money. The ability for a borrower to secure a small dollar loan through personal property allows the consumer to manage the risk of default and limit the financial damage, should a default occur. Most pawn loans are relatively small, and the vast majority of pawned items are redeemed. An industry survey conducted in the last 6 months, revealed that 91% of all pawn transactions were for loan sizes of less than $400.

In order for the industry to continue to provide financial services, a revenue increase is needed to keep up with the technological, labor, real estate, and governmental compliance costs. Without this fee increase, lending businesses will continue to close. Accordingly, CAPA respectfully asks for your support of SB 1198 (Roth).

SUPPORT

California Pawnbrokers Association (sponsor)

OPPOSITION

None received

RELATED LEGISLATION

Pending Legislation: AB 2231 (Gipson, 2024) establishes the California Pawnbroker Education Council and requires the council to develop and establish a standard course and curriculum in pawnbroker transactions, as specified, to be completed by an applicant for licensure as a condition precedent to being issued or renewing a pawnbroker’s license. AB 2231 is currently in the Assembly Business and Professions Committee.

Prior Legislation:

AB 296 (Gipson, Ch. 164, Stats. 2021) extended the exclusion from state sales and use taxes to the transfer of vested property from a pawnbroker to the person who pledged the property to the pawnbroker as security for a loan from January 1, 2022 to January 1, 2027, among other changes.

AB 1186 (Medina, Ch. 189, Stats. 2019) adjusted the loan setup fee allowed to be charged by a pawnbrokers from $5 or three percent of the loan amount, not to exceed $30 to $7.50, or 3.5 percent of the loan amount, not to exceed $90. AB 1186 also increased the permitted handling and storage charge, processing charge, and the fee for preparing a 10-day notice when an item is not redeemed that a pawnbroker may charge.

AB 1978 (Gipson, 2019) would have extended the exclusion from state sales and use taxes to the transfer of vested property from a pawnbroker to the person who pledged the property to the pawnbroker as security for a loan from January 1, 2022 to January 1, 2027. AB 1978 died in the Assembly Revenue and Tax Committee.

AB 327 (Gipson, 2017) would have provided an exclusion from state sales and use taxes to the transfer of vested property from a pawnbroker to the person who pledged the property to the pawnbroker as security for a loan, until January 1, 2022. AB 327 was subsequently amended to relate to a different subject.

SB 300 (Mendoza, Ch. 417, Stats. 2015) allowed pawnbrokers to conduct business transactions electronically, as specified, except when establishing an original loan.

SB 285 (Block, Ch. 245, Stats. 2015) increased the maximum monthly interest rate for a pawn loan to 3 percent; increased the loan setup fee to $5 or 3 percent, not to exceed $30; collapsed the prior 21-tier fee schedule to the current 6-tier fee schedule; added a new storage charge for small items that can be contained within one cubic foot, and required representatives of the pawnbroker industry to poll their members annually to gather data relating to the current financial condition of the California pawn industry.

AB 1751 (Low, Ch. 793, Stats. 2015) created the California Pawn and Secondhand Dealer System (“CAPSS”) as a single, statewide electronic reporting system operated by the Department of Justice for the submission of specified information about pawnbroker transactions and property to the Department of Justice.

PRIOR VOTES:

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

**************

1. Pawn Industry Statistics, National Pawnbrokers Association, available at https://www.nationalpawnbrokers.org/. ↑

2. Scott Fulford & Cortnie Shupe, Making Ends Meet series: Consumer use of payday, auto title, and pawn loans, Consumer Financial Protection Bureau, Office of Research, Brief No. 2021-1 (May 5, 2021), p. 17, available at https://www.consumerfinance.gov/about-us/blog/making-ends-meet-series-consumer-use-payday-auto-title-pawn-loans/. ↑

3. Id., at 15. ↑

4. 2021 FDIC National Survey of Unbanked and Underbanked Households, Federal Deposit Insurance Corporation (Jul. 24, 2023), available at https://www.fdic.gov/analysis/household-survey/index.html. ↑

5. Fin. Code § 21300; Bus. & Prof. Code § 21626. See also, Secondhand Dealer and Pawnbroker Unit, California Office of the Attorney General (accessed April 6, 2024) available at https://oag.ca.gov/secondhand. ↑

6. Storage and handling fee numbers present two scenarios, the first based on an item that can be contained within one cubic foot, and the second on an item that can be contained within six cubic feet. ↑

7. The proposed remote transaction fee is based on the amount of the specific remote transaction. For the purposes of this table, the transaction amount is assumed to be the full amount of the loan. The remote transaction fee may not always be applicable, as it is only available for remote transactions when a borrower requests a replacement loan or to redeem the loan. ↑

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Monique Limón, Chair

2023 - 2024 Regular

Bill No: SB 1198 Hearing Date: April 3, 2024

Subject: Pawnbrokers: fees and charges

SUMMARY

This bill increases specified fees that pawnbrokers may charge and reduces the minimum loan term from four months to three months.

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 (i.e., the borrower) 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. (Financial Code 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:
   
   1. During the first three months of the loan, pawnbrokers may charge borrowers between $3 and $225, depending on the dollar amount of the loan (Financial Code Sections 21200.5 and 21201.4).
      

• 1. During the fourth and subsequent months, pawnbrokers may charge a maximum of 3% per month, or $3 per month, whichever is greater. (Financial Code Sections 21200 and 21201.4)
     
  2. Pawnbrokers may charge a loan setup fee not to exceed the greater of $7.50 or 3.5% of the loan amount, capped at $90. (Financial Code Section 21200.1)
     
  3. Pawnbrokers may also charge a handling and storage fee upon property redemption or the issuance of a replacement loan. This storage fee equals $3 for articles that can be contained within one cubic foot, $6 for items greater than one cubic foot and up to three cubic feet, $12 for items greater than three cubic feet and up to six cubic feet, and $24 for items greater than six cubic feet, plus one additional dollar for each additional cubic foot in excess of 6 cubic feet. (Financial Code Section 21200.6)
     
  4. Pawnbrokers may charge a processing fee of $20 for each firearm pawned. (Financial Code Section 21200.8)
     

1. Provides that the limits on rates and charges described in a) and b) of 3), above, do not apply to any loan of a bona fide principal amount of $2,500 or more. (Financial Code Section 21051)
   
2. Requires a pawnbroker to notify a pledgor (i.e., a borrower) in writing, at his or her last known mailing or electronic address, regarding the termination of the borrower’s loan period, as specified. This notification must inform the borrower that they are entitled to an extra ten days in which to redeem their pawned item, beginning on the date the notice is mailed or electronically transmitted, and must clarify that if the tenth day falls on a day that the pawn shop is closed, the time period is extended to the next day the pawn shop is open. Allows a pawnbroker to charge a fee of up to $5 to prepare this notice. (Financial Code Sections 21201 and 21201.2)
   
3. 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. (Financial Code Section 21201.5)

THIS BILL

1. Allows a pawnbroker to collect a handling, storage, and security charge for pawned articles, increasing the maximum fees allowed by current law by the following specified amounts:

1. Allows a pawnbroker to collect a remote transaction fee, if the pledger elects to request a replacement loan or to redeem a loan through electronic means, of up to 3% of the transaction amount to cover the recurring costs associated with software applications.
2. Reduces the minimum loan term from four months to three months.
3. Allows a pawnbroker to charge a fee of up to $7 for services and costs pertaining to the preparation and mailing or electronic transmission of the notice described in 5) of the Existing Law section.

COMMENTS

1. PURPOSE

This bill is sponsored by the California Pawnbrokers Association. According to the author:

Current law limits the amount of compensation pawnbrokers may charge or receive for providing their services. Unlike most businesses in California, pawnbrokers must come before the Legislature in order to adjust what they can charge to meet increases in the cost of doing business. The last time the pawnbroker industry requested adjustments to their fees was in 2019 (AB 1189, Medina).

SB 1198 proposes to increase handling and storage fees to account for increased security costs, allow for a new remote transaction fee, and increase the fee to prepare a loan expiration notice. This bill also allows pawnbrokers to shorten the minimum loan period from three to four months.

1. BACKGROUND

Pawnbrokers provide loans that are secured by personal property that the borrower leaves with the pawnbroker. Common items that serve as collateral for pawn loans are jewelry, firearms, electronics, collectibles, tools, and musical instruments. Pawnbrokers assess the value of personal property that a customer intends to pawn and offers a loan based on the assessed value. If a borrower does not pay back their loan, the pawnbroker can take possession of the property. Pawnbrokers lend the borrower only a fraction of the assessed value of the property, often less than 70%, to protect the pawnbroker from losing money on the loan if the borrower does not repay and the pawnbroker sells the property.

Pawnbrokers in California are required to be licensed by local law enforcement agencies who share licensure application information with the California Department of Justice. Pawnbrokers are subject to lending regulations under the Financial Code, as well as secondhand dealer laws found in the Business and Professions Code.

This bill focuses on permissive activities related to pawn loans. The Financial Code provides maximum amounts of various fees that a pawnbroker may charge for a pawn loan. As the costs of doing business increase, pawnbrokers may have difficulty remaining profitable without increases in allowable fees. The California Pawnbrokers Association (CAPA) made a deal with Consumer Reports years ago to seek increases in allowable fees no more than once every four to five years. The last increase to pawnbroker fees was enacted in 2019, and the CAPA is seeking new fee increases with this bill.

1. COMPARING FEES IN EXISTING LAW AND THIS BILL

The table below compares the costs of three example loan amounts under existing law and under the fees proposed by this bill. For the sake of understanding the full potential effect of this bill, the table assumes the loans in the columns labeled “This bill” include a remote transaction fee; however, this fee will only be assessed to those borrowers who choose to either renew (or, rarely, redeem) their loan remotely without coming into the pawn shop. The examples in the table also assume that the borrower allows the loan to go to its full 4-month term, though the borrower has the option of redeeming the loan before the end of the third month, which would avoid the interest charge for the fourth month.

Accounting for the fee increases proposed by this bill, pawn loans remain significantly lower cost than payday loans. To borrow $300 over four months, a payday loan borrower would need to borrow, repay, and re-borrow 7.5 times based on the 16-day average term of a payday loan. Over that four month period, the borrower would pay $397 in fees to the payday lender, far exceeding the $54 in fees for the pawn loan (assuming the borrower avoids the remote transaction fee by redeeming the loan in-person). To be fair, a pawn loan does require the borrower to have an asset that they are willing to pawn, but the dollar cost of financing the pawn loan is inarguably and significantly lower than a payday loan.

1. REDUCING LOAN TERM MAY HARM CONSUMERS

On its face, the proposed reduction of the minimum loan term from four months to three months may appear benign, but consumers who roll over their loan may be disadvantaged by this change. A loan rollover, renewal, or replacement occurs when a borrower rolls any unpaid principal of a loan into a new loan. Under the laws regulating pawn loans, the pawnbroker is allowed to charge a new loan-set-up fee, a new security and storage fee, and, pursuant to this bill, a remote transaction fee if the renewal is conducted remotely (collectively referred to as “fixed fees” of the loan). For a borrower who either intends to rollover their loan or, by circumstance of their finances, feels compelled to rollover their loan, shortening the minimum loan term will lead to a higher frequency of the borrower paying these fixed fees.

For example, take a borrower who effectively has a pawn loan outstanding for one year by taking out an initial 4-month loan and renewing it two consecutive times at the end of the loan term. In this case, the borrower would pay the fixed fees allowed for pawn loans three times over the course of the year. If the minimum loan term were three months as proposed by this bill, the same borrower would pay the fixed fees four times over the course of the year (12 months divided by 3 month term equals 4 loans). The borrower does not receive any additional benefit by reducing the minimum term to three months. Under existing law, the borrower already has the right to redeem a 4-month loan before the start of the fourth month and avoid the interest payment required for the fourth month. Thus, reducing the term may only lead to higher costs for repeat borrowers.

1. ARGUMENTS IN SUPPORT

The California Pawnbrokers Association (CAPA), sponsor of this bill, argues that an adjustment in allowable fees is necessary to stem the tide of pawnshop closures, noting that one-third of licensed pawnshops have closed in the past five years. CAPA asserts that increased costs of doing business in the state and high inflation rates have negatively affected pawnbrokers. To continue making small dollar loans that are comparatively cheaper than alternatives, like a bounced check or credit card late fee, CAPA requests the proposed fee increases.

1. ARGUMENTS IN OPPOSITION

None received

1. AMENDMENTS

Committee staff recommends deleting the proposed change of the minimum loan term from four months to three months. As discussed in Comment 4), above, the proposed change may cause harm to consumers who typically roll over their pawn loan. While pawnbrokers may need additional sources of revenue to stay in business, the other fee increases proposed by this bill are more transparent and easy for the consumer to understand, while the change in the loan term may be less straightforward.

1. DOUBLE-REFERRAL

This bill is double-referred to the Committee on Judiciary.

1. PRIOR AND RELATED LEGISLATION
   1. AB 2231 (Gipson) of this legislative session establishes the California Pawnbroker Education Council charged with developing and establishing a standard course and curriculum in pawnbroker transactions, as specified. The bill provides a certification process for people who satisfy the educational requirements established by the council, but the bill does not require any person to have the certification in order to do business as a pawnbroker. The bill is currently in the Assembly Banking and Finance Committee.
   2. AB 1186 (Medina, Chapter 189, Statutes of 2019) increased the loan setup fee to $7.50 or 3.5% of the loan amount, whichever is greater, not to exceed $90 (up from $5 or 3% of the loan amount, not to exceed $30); increased maximum allowed storage and handling fees; increased the firearms processing charge to $20 per firearm (up from $4 per firearm); and increased the charge that may be imposed to prepare a loan expiration notice to $5 (up from $3).
   3. SB 285 (Block, Chapter 245, Statutes of 2015) increased the maximum monthly interest rate to 3%; increased the loan setup fee to $5 or 3%, not to exceed $30; collapsed the prior 21-tier fee schedule to the current 6-tier fee schedule; added a new storage charge for small items (those that can be contained within one cubic foot), and required representatives of the pawnbroker industry to poll their members annually to gather data relating to the current financial condition of the California pawn industry.
   4. SB 300 (Mendoza, Chapter 417, Statutes of 2015) allowed pawnbrokers to conduct business transactions electronically, as specified, except when establishing an original loan.
      
   5. AB 424 (Eng, Chapter 318, Statutes of 2011) defined a month for purposes of the Pawnbroker Law as a period of thirty consecutive days, and replaced a tiered interest rate model that had previously applied to loans older than three months with a uniform charge equal to the greater of $3 per month or 2.5% per month on the unpaid principal balance of the loan.
   6. SB 580 (Calderon, Chapter 340, Statutes of 2008) increased the minimum monthly interest charge from $1 to $3 on loans older than 90 days 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).

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

California Pawnbrokers Association (sponsor)

Opposition

None received

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