An Overview of Pawn Shops
The term "pawn shop" is synonymous with the idea of a place that will offer you money for your second-hand or unwanted items. The core concept of this establishment is that they will hand over a quick lump sum in exchange for your items of value with the promise that they will return the items to you if you present them with the money you agreed upon or sell it to them if you don’t return in time or are unable to pay for the items back.
Pawn shops usually work on the principle of offering a fixed amount of money in exchange for an item, and then charging you a fee to retain ownership of it or purchase the item back from them. The length of time for you to return for the items is usually one month, but the fee percentage applied is monthly. Another option is selling items to the shop for the best price , which is regularly beaten down quite considerably from the original purchase value. Items are also bought by the pawn shop to re-sell so you can go in and attempt to purchase your own belongings back if the shop decides it wants to do so. Some are not as flexible, so you may even find that your item has been disposed of altogether. Whatever the situation, it is important to remember not to allow your resentment step in and consider your own decision as the one that has caused you to not possess the item you originally took in.
Generally speaking, a pawn shop will expect you to present a form of government-issued identification before carrying out a transaction with you, so check your local laws to be fully aware of all that may be required on your part.
Major Federal Laws
Pawn shops in the United States are subject to several federal laws that help to ensure consumer protection during transactions. The Truth in Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA) are two key federal laws that affect pawn shops throughout the nation. TILA creates regulations for credit such as advertising, billing and interest rates for open-end accounts. For example, section 163 of TILA deals with the ability of pawn shops to charge fees. "The general rule is that a pawn shop can charge a pawn service fee if the fee is expressed in words or coding linking the payment to the services being offered."
Under TILA, pawn shops, like most businesses that extend credit to customers, are also subject to required disclosures under the terms of a credit contract. The Federal Trade Commission has a factsheet for businesses regarding disclosures which states, "For advertisements and solicitations in writing, on radio, and on television, TILA requires credit card issuers to make clear and conspicuous disclosures of certain fees, periodic rate, and the other terms of their open-end credit offers. (Open-end credit plan means a plan, like a credit card, under which the creditor may permit a debtor to make repeated withdrawals and under which the creditor may impose a finance charge from time to time on an outstanding unpaid balance.)"
Similarly TILA applies to closed-end credit, which is any loan that cannot be reused after the terms of the agreement change. Closed end credit includes loans commonly offered by pawn shops for a short period of time or one time credit payment.
The Equal Credit Opportunity Act (ECOA) also impacts pawn shops. The ECOA prohibits financial and credit institutions from discrimination against applicants based on race, color, religion, national origin, sex, marital status, age, or income. The Federal Reserve Board issues rules regarding ECOA for financial institutions. The ECOA is enforced by the Federal Trade Commission (FTC) with respect to violations of TILA.
ECOA is applicable to transactions between individuals and a creditor incurred primarily for personal purposes and secured by a lien on a dwelling. The FTC has a compliance guide relating to the ECOA.
State Pawn Shop Statutes
Even though pawn shops are frequently regulated on a national basis, the laws that directly affect their day-to-day operations and business practices vary considerably from state to state. As such, it is essential that consumers and pawn shop operators familiarize themselves with the rules in their jurisdictions. One of the key variations among states is in the way they regulate the interest rates charged by pawn brokers. Some states do not impose any limit on the interest and/or service charges associated with loans. Other states allow for non-federal banks, such as state chartered banks or savings and loan associations that do not conduct business in more than one state, to charge the same interest as commercial banks.
In some states, such as Texas, Mississippi, and Arkansas, there is no interest rate limit. There may be reporting requirements, but loans are usually limited by the loan term rather than interest rate. Accordingly, these states often have expensive interest rates, which can adversely affect consumers. In Alabama, all interest accrues at 96% per year. Michigan regulates the interest, allowing only those loan terms for 30 days; however, substantial 3% monthly fees can add up.
While non-bank lenders vary in rate, the terms of loans are sometimes influenced by Interest Rate Caps. For example, in New York State, there is a maximum of 2.33% interest rate every month (28.99% annual) for loans of $25,000 or less. Also, loans are limited to $15,000 or less, and the terms must not exceed thirty days. Notably, some states like Ohio and Illinois also limit the length of time for loans to say 30 to 60 days.
It is important to note that federal law allows armed forces members and their families to acquire loans for thirty-six percent (36%) or less, which will replace state regulations. In some states, there is a time requirement on the length of the state-mandated grace period before brokers can auction items. Mississippi requires a grace period of four hours, as opposed to the two-day requirement in many other states. This rule is often used to alleviate loss in the event that the customer fails to reclaim the paw.
Interest rates and other terms vary greatly across state lines, not only from one state to the next but also among the regions in a state. For instance, Oklahoma has several border states with varying regulations that impact lenders and customers. Oklahoma regulates the interest rate charged on cash loans and allows lenders to charge 25% monthly on amounts under $1,000, but other states just across the border will max out on a lower dollar amount or in a shorter time frame. While these seemingly thin differences may not seem significant, they can have a large impact on both the customer and broker side of the transactions.
A customer in Oklahoma City looking to take out a loan on a luxury watch may find a lower interest rate just across the Texas border. Of course, the borders of states can be tenuous to navigate, and in these situations, online pawnbrokers are often called upon to help customers in states with higher rates or fewer options for pawn shops to obtain personal funds when they need them.
Licensing and Regulatory Compliance
The initial licensing of a pawn shop is the beginning of its relationship with the local municipality or county. Most municipalities and some counties have adopted detailed requirements for license applications for "money lenders," which include pawn shops. The number of municipal jurisdictions that have adopted this approach is significant, as is its cost in terms of time and money spent by pawn shop owners.
Licensing commissioners typically seek to limit licensure to those individuals or entities that have suitable experience, competence and integrity to be "money lenders." Certain individuals such as registered pawn brokers, are more likely to receive favorable ruling on a license application. Even the experience requirements are not uniform – some jurisdictions require as little as one year’s duration in the operations of a pawn shop in other jurisdictions may consider one month as sufficient experience. As with many licensing systems, the provision of incomplete or missing information on a license application can create significant delays for a pawnbroker.
Once licensed, compliance with reporting requirements and on-site inspections by law enforcement or municipal staff is often required. For example, most licensing authorities have a real-time reporting requirement with respect to pawned items, whether through an online service or regularly scheduled downloads of information. Municipal staff or law enforcement officers may also conduct quarterly or monthly on-site visits to the pawn shop are also common compliance measures. These regressions can be quite substantial requiring significant time and money to complete.
Interest Rate and Loan Repayment Requirements
Interest rates on a collateralized debt are different than the traditional unsecured loans that many people may be used to. Specifically, pawn shops use the valuation of the collateral to determine an appropriate value. This can mean higher risk and expense to the pawnbroker, and the interest rates will be higher as a result. Also, while some pawn shops offer weekly, biweekly, and monthly terms, most will offer 30-day terms, particularly in New York.
Some people think that pawnbrokers make loans at unreasonable interest rates, or businesses that charge much higher rates of interest than typical lenders. Pawn shop interest rates can be as little as 2.33% per month , and are typically no more than 25%, depending on the state. In comparison, short-term personal loans can range anywhere from 14% to 56%, depending on credit score. Collateralized loans are also typically less expensive than payday loans, which can charge 300% or more per year.
All states have enacted usury laws and predatory lending statutes to protect the average individual against being taken advantage of by lenders. Some pawn shop owners have abused their consumer loans, and these laws are in place to ensure that individuals in need of cash cannot be financially taken advantage of by pawnbrokers.
Pawn Shop Lending and Consumer Protections
Consumers have certain rights when dealing with pawn shops. First, pawn shops are required to be transparent about the amounts that will be offered for each piece of property and the fees associated with the transactions. The pawnbroker should be able to provide you with any information related to the piece of collateral and provide their terms in writing. The right to this information is also applicable to the return policy, and return policies must be explained fully. For example, if the pawn shop issues refunds only on cash transactions, this must be disclosed upfront to the consumer.
Pawn shop transactions are subject to many legal protections designed to prevent the pawnbroker from exploitation. The following is a list of some of the legal protections available to consumers: Not all pawn transaction will be protected by each of these laws, so it is important to consult with an experienced attorney for specific advice.
Receiving Stolen Goods
In cases where the local police or sheriff believes that the property being pawned is stolen, that agency may ask the local pawn shop dealer to hold off on taking possession of the pawn item. Section 6470(b). Thus, the first circumstance that can result in the confiscation of collateral held in a pawn transaction is the request of law enforcement, coupled with the default of the pawner.
If the pawner does not return to redeem the collateral and is presumed to have defaulted, the pawn shop dealer is required by law to advise the appropriate law enforcement agency that a request to hold the collateral was made and that the pawner has defaulted. Section 6486. Thus, if a local city or county asks a pawn shop dealer to hold property suspected to be stolen, that dealer must hold the collateral for the time period that the request to hold was made, and then advise the law enforcement agency that the pawner has defaulted.
The second circumstance that can result in the confiscation of collateral at the direction of law enforcement is exampled by the following scenario. Assume that you, the pawnee, conduct a mandatory background check on the pawner and find that the person has been convicted of robbery with a firearm in what would be a felony in your jurisdiction. You are required by law to refuse the pawner’s request to pawn if the local law would consider the crime to be a felony. Under Section 6473(d) of the Pawn Broker Ordinance for Los Angeles County, a pawn broker engaged in a pawning business must report to the Sheriff’s Department if the broker knows or should know (i) either from the facts of the transaction itself or from experience under circumstances such as the transaction is similar to other transactions where the dealer has reason to know or suspect that the property the pawner is parting with is lost or stolen; or (ii) if the property the pawner is parting with is of a type which the dealer knows or should know (under the circumstances) has been frequently reported as lost or stolen or if such property is "generally known to be stolen". In such cases, the sheriff may issue a search warrant.
Vehicles and firearms are treated specially under Cal. Pen. Code ยง 12026.3 and are also subject to confiscation if they are being pawned and then not returned to the ultimate owner within 180 days, or if they are not restricted property.
Effects of Regulatory Revisions on Pawn Shops
The impact of new regulations on pawn shops can be significant, as compliance requires an understanding of a complex matrix of federal and local laws governing their operations. Many small, independently owned pawn shops lack the resources to meet compliance obligations without pass-through costs to consumers.
A rush of new regulations including the CFPB’s Payday Rule, the OCC’s ‘True Lender’ Rule, and Title III and IV of the Consumer Financial Protection Act place pawn shops in the crosshairs of increased regulatory scrutiny. The CFPB issued the Payday Rule on October 5, 2017, but not without controversy. No sooner was the CFPB’s Payday Rule issued than it was challenged in a lawsuit filed by industry groups and payday lenders. The opponents contend that the payday rule exceeds the agency’s statutory authority under the CFPA and that the CFPB ignored evidence demonstrating the rules would have the unintended consequence of harming more consumers than they helped. In its own separate suit, the CFPB contends that the payday rule will prevent consumers from accessing affordable credit. Meanwhile, in the absence of the rule, consumers pay more than $32 billion annually in payday loan fees alone. It is estimated that the CFPB’s Payday Rule will reduce payday loan revenue collected by the industry by 50 percent.
The OCC’s ‘True Lender’ Rule was effective August 19, 2019, yet community banks and credit unions will continue to rely on third-party partnerships to compete in the consumer finance lending space. Recently, several state attorneys general filed suit against the Office of the Comptroller of the Currency ("OCC") to invalidate the OCC’s "True Lender" rule . The state attorneys general assert that the OCC is trying to craft loopholes that will allow predatory lenders to, effectively, make loans in states with strict usury caps without fear of criminal liability or civil penalties. In an effort to preclude such litigation, the OCC issued the ‘True Lender’ rule, which determined that if a bank enters into a loan agreement, the bank is the ‘True Lender’ even if it sells the loan to a third-party in which the bank holds only a small equity interest and does not participate in the loan’s management. Alternatively, if a bank sells a loan to a third-party (where the bank holds a 100% ownership interest), the bank may not claim it is the ‘True Lender’ if it fails to fund the loan with its own capital and perform loan servicing activities. Thus, although significant legal challenges lie ahead, the OCC continues to issue guidance on mid-size institution banking.
Finally, Title III and IV of the Consumer Financial Protection Act could adversely impact pawn shop owners subject to supervisory authority. Title III empowers states to regulate any person "to offer or provide a consumer financial product or service." Similarly, Title VI authorizes states to regulate any person that offers or provides services for residential mortgage loans. Increasing regulatory oversight could result in additional burdens, including lengthy compliance periods for rule-writing and frequent examination cycles.
In light of all the recent changes to regulations, what does the future hold for financial institutions, especially pawn shop owners? While many states are looking for creative solutions to developing regulation-such as state-chartered banks, for example-some predict an exodus from states with stricter regulations to migrate to states with more lenient regulatory enforcement.