Background: Pawnbroking is one of the oldest businesses in the world. There are records of pawn shops in China as far back as 3,000 years ago. The story that Queen Isabella pawned the crown jewels to finance Columbus’ first voyage to the New World is probably a myth, but it underscores the importance of pawnbroking in the Middle Ages.

Pawnbrokers lend money on items of value, including jewelry, televisions, musical instruments, and bicycles. The loans are based entirely on the value of the collateral. According to the National Pawnbrokers Association, the typical loan is small, averaging less than $100. The average loan period is 30 days. Although the collateral may be foreclosed if the loan is not repaid within the specified time, usually 3-4 months, 70-80 percent of the loans are repaid. Because pawn contracts are secured, no-recourse loans, the customer decides whether he or she will redeem the item pawned.

Pawnbrokers are generally small businesses. It is estimated that there may be as many as 14,000 pawnbrokers in the United States. In recent years the pawn business has changed by the entry of large companies. There are now publicly traded pawn companies. The largest, Cash America, operates 474 pawn shops in 17 states and 2 foreign countries.

Pawnbrokers are regulated by local units of government. The first pawnbroking ordinance in the United States was enacted in New York City in 1912. Michigan’s law on this subject goes back at least to 1889. Currently, there are two basic laws relating to pawnbrokers in Michigan. Public Act 273 of 1917 requires licensing by the local unit of government. Public Act 231 of 1945 imposes a fingerprinting requirement and stipulates the obligations of pawnbrokers and the State Police with respect to that requirement.

Description of Bill: The bill amends Sections 9 and 11 of Public Act 273 of 1917 to permit a pawnbroker to charge a monthly usage fee for property pawned and used by the pawner during the term of the pawn or pledge. The pawnbroker is permitted to agree in writing to allow the pawner to maintain possession and continue to use pledged or pawned property.

The Senate substitute makes four changes in the bill.

•  There is clarifying language that precious metal and gem dealers and second hand and junk dealers are not exempt from obtaining a license under the pawn broker’s act.
•  There is clarifying language that the $1 usage fee allowed in the bill is not considered interest.
•  There is language allowing the pawnbroker to take possession of pledged or pawned property pursuant to Article 9 of the Uniform Commercial Code.
•  A pawnbroker is prohibited from accepting any article or thing that customarily bears a manufacturer’s serial number or other identifying insignia unless the number or insignia is plainly visible.

Summary of Arguments

Pro: Pawn shops traditionally would not have accepted the types of collateral envisioned in the bill, because they typically prefer small items that are more easily stored. By allowing the pawnbroker to agree to allow the pawner to maintain possession and continue to use the property, the pawnbroker isn’t deterred from making the loan by the difficulty of storing the property and the pawner has a source of capital that otherwise would not exist.

Con: It is difficult to see how this concept can work in practice. The pawn business works well, because the pawn shop has possession of the pawned item. If the customer wants it back, he or she must come to the shop and redeem it. If the customer maintains possession, it may be more difficult for the pawn shop to recover the loan.

This bill eliminates the central premise of the pawn transaction (that the broker retains possession) and thereby transforms it into what is essentially conduct properly falling under the Regulatory Loan Act. Because the Pawnbrokers Act has specific provisions for interest and fees above and beyond what is provided in the Usury Act, these higher limits would control, thereby possibly creating an unlevel playing field for RLA licensees who would be able to collect a lesser amount of interest for essentially the same conduct. This disparity could perhaps create future pressure for RLA licensees to seek parity (higher interest rate authority).

Fiscal/Economic Impact

(a) Department

Budgetary: The bill will have no budgetary impact on the department.

Revenue: The bill will have no revenue impact on the department.

Comments:

(b)State of Michigan

Budgetary: The bill will have no budgetary impact on the state.

Revenue: The bill will have no revenue impact on the state.

Comments:

(c)Local Government

Comments: The bill does not increase the responsibilities of local government.

Other State Departments:
State Police may have an interest in this bill.

Any Other Pertinent Information:
The inspiration for this bill reportedly came when the sponsor’s son was working in the landscaping business. As a young person operating a new business without established credit, bank financing was a challenge. If he had been able to pawn the equipment used in his business but retain the rights for continued use, it would have been helpful.

Administrative Rules Impact:
There is no rulemaking authority associated with this act.