SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 217 (Vargas)
As Introduced
Hearing Date: May 10, 2011
Fiscal: No
Urgency: No
BCP
SUBJECT
Pawnbrokers
DESCRIPTION
This bill, sponsored by the California Pawnbrokers Association, 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 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 this committee four
(more)
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years ago due to concerns about the amount of the proposed increase. An identical bill,
AB 1357 (Coto, 2009) was vetoed by Governor Schwarzenegger. In vetoing that bill, the
Governor stated:
In the current economic times, I cannot support increasing the interest rate that
pawnbrokers are permitted to charge for loans, given that its impact will be on a
population that is currently least able to afford the increase.
This bill was approved by the Senate Banking and Financial Institutions Committee on
April 6, 2011.
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 receive a flat 2.5 percent fee on the entire unpaid principal
balance.
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COMMENT
1. Stated need for the bill
According to the author:
Since California’s pawn lending rates and fees are set by statute, the industry
must seek legislative action to address the need for an increase. The need for an
increase is clearly demonstrated by the fact that California pawnbrokers rank
from 40th to 49th place (depending on the loan amount) in monetary return in all
revenue categories nationally. . . .
This bill would amend section 21200 of the Financial Code [and collapse] the
current stair step interest charger into a flat 2 ½ percent on loans above $225.00 in
the fourth and subsequent months. This results in a very small increase in the
allowable interest rate pawnbroker’s may charge, but most importantly greatly
simplifies the calculation of charges of pawn loans for pawnbrokers, local law
enforcement, and borrowers.
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.
Loan amount
Current maximum monthly fee
Proposed maximum monthly fee
$100
$2.50
$2.50
$500
$11.13
$12.50
$1000
$20.63
$25.00
$2,000
$33.80
$50.00
The California Pawnbrokers Association (CAPA), sponsor, contends that over 80
percent of pawned property is redeemed, and that most pawn transactions are short-
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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.
CAPA 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 consumers who
rely 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 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
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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: American Federation of State, County and Municipal Employees (AFSCME,
AFL-CIO)
Opposition: None Known
HISTORY
Source: California Pawnbrokers Association
Related Pending Legislation:
AB 424 (Eng), would make technical changes intended to help pawnbrokers accurately
calculate interest payments on loans of greater than 90 days. This bill is in the
Assembly Appropriations Committee.
SB 212 (DeLeon), would clarify the circumstances under which replacement loans can
be taken out by borrowers who are unable to undertake these transactions in person.
This bill is in the Senate Banking & Financial Institutions Committee.
Prior Legislation:
AB 1357 (Coto, 2009), would have enacted an identical increase. This bill was vetoed.
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: Senate Banking & Financial Institutions (Ayes 7, Noes 0)
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