Fisher Law Corporation

PAWN SHOPS AND ELECTRONIC SIGNATURES

I.          Background.

The pawn industry and business model has a longstanding history throughout world history. The industry began over 3,000 years ago in Ancient China as a way to grant short‑term credit to peasants. The business made its way over to ancient Greece and Rome, giving merchants a way to get small shops off the ground. During the Middle Ages, some restrictions were placed on charging interest by the Catholic Church, halting the growth of pawn shops. These rules were relaxed in the 14th and 15th centuries in Europe as short‑term credit became an important way of financing business endeavors and granting temporary aid to the poor and wealthy alike.  England=s King Edward III financed the war against France in 1388 by pawning his jewels. Queen Isabella of Spain similarly pawned her jewelry to finance Christopher Columbus’s first voyage to the New World.

The history of pawnshops and its business also has roots in the United States.  During the era of the Great Depression when banks were failing, pawnshops were some of the only money lending institutions.  Thereafter, the pawn industry grew.  Today, there are over 12,000 pawnshops operating in the United States, and growing. 

The business model of pawn shop is simple, the pawn shop or broker offers a secured loan to a seller or pledger using personal property as collateral. The loan is based on the value of the collateral with varying degrees of loan length and interest rates.  The industry is under strict federal and state or local regulations that set requirements for interest rates, loan amounts, reporting requirements, and zoning ordinances. The pawnshop business model has proven to be successful, an estimated 80 percent of customers are repeat customers, and between 70 to 80 percent of all loans nationwide are repaid.

The appeal of pawnshops is that they offer customers a quick, convenient and confidential way to borrow money. The loan does not require a back account, credit check, and there are no legal consequences if the loan is not repaid. As a result of the recession, there are stricter banking regulations and rules which negatively impacted many Americans.  Traditional or community banks no longer provide small loans, resulting in a gap, which pawn shops inevitably fill.  According to the FDIC 2011 National Survey of Unbanked and Underbanked, approximately 8.2 percent of households did not have a bank account, which translates into about 17.7 million adults without a bank account.  Further, a reported 20 percent of US households are underbanked, meaning that they have a bank account but rely on alternative financial services (AFS).  As the survey points out, households who are either unbanked or underbanked, rely more on AFS, such as pawn shops and payday loans, to meet their financial needs.  The FDIC Survey also notes that 7.4 percent of all U.S. households have used a pawnshop.  Data suggests that certain states, such as Texas and Arizona, frequent pawn shops more often,  resulting in 26 percent and 24 percent of the population, respectively, using a pawn shop in the last five years. (McKernan Prohibitions, Price Caps, and Disclosures Table 1).

II.        Law Enforcement and Pawnbrokers.

As previously noted, the majority of states have strict regulations which the pawn shop must adhere to. Guidelines include strict information gathering about the seller or pledger and reporting mandates to local police. This information is meant to help police identify stolen property.  As a result of pawnshops= own discretion and procedures in place to obtain pawned merchandise, less than half of one percent of all pawned merchandise is identified as stolen goods. (Nationalpawn brokers.org).  In some states or municipalities, in addition to requiring information gathering about the seller, such as their physical description, driver=s license information, and/or social security information, about seven states absolutely require the fingerprint of the seller to do business.  Half a dozen more states have left this issue up to local municipalities in which some require a fingerprint or require a fingerprint where there is no photo identification.  The strict identification and reporting guidelines have the purpose to curb thieves from pawning stolen goods and help police solve property crimes.  There is conflicting reports about the ability of police to productively use this information to solve property crime. For example, in 2007 in Charlotte Mecklenburg County, North Carolina more than a quarter‑million items were sold to pawn shops. In 48 cases, the fingerprint helped to identify a suspect. Reports from Denver, Colorado, states that local police search through 40,000 pawn‑shop slip transactions for stolen items. These pawn‑shop sales slips spawn about 50 investigations. (http://extras.denverpost.com/news/shot1201a.htm).

III.       Pawnbrokers and Expansion into E-Commerce.

Despite various rules and regulations, pawn shops are still frequented by many. Until recently, pawn shops have been a strictly brick and mortar business.  Recently, as with most other brick and mortar industries, the pawn business has expanded into an online business transaction.  In this scenario of an electronic transactions, a seller or Apledger@ contacts an online pawnbroker site by phone or through the internet.  The pledger describes the item(s) he wishes to pawn.  The online pawn site requests photographs of the item(s) and makes a provisional offer.  The pawn site sends a shipping label for the borrower to send them the item(s).  Once received, the pawnshop appraises the item(s).  If the borrower agrees on the loan amount, the pawnshop wires the loan proceeds to the borrower=s bank account or mails a check.  Once the loan is repaid with interest, the pawnshop mails the borrower back the item(s).  If the borrower defaults on the loan, the pawnshop keeps the item(s).

With the advent of the Internet and other advances in technology, agreements are frequently negotiated and finalized by electronic communication methods such as fax, e‑mail, or Internet websites. Agreements formed in this matter are not “written” or “signed” within the traditional meanings of those terms. In recognition of the changes in the way agreements are formed and preserved, both California and the federal government have enacted legislation validating electronic documents and electronic signatures. In California, the governing statute is the Uniform Electronic Transactions Act (UETA) [Civ. Code 1633.1 et seq.]. Nearly all other states also have enacted UETA. The federal counterpart is the Electronic Signatures in Global and National Commerce Act (E‑SIGN) [Pub. L. No. 106‑229, tit. 1, 2 (June 30, 2000); 15 U.S.C. ‘ 7001 et seq.].

In California, UETA applies (with some specified exceptions) to electronic records and electronic signatures relating to a “transaction”; that is, an action or set of actions occurring between two or more persons relating to the conduct of business, commercial, or governmental affairs [Civ. Code  1633.3(a); see Civ. Code 1633.2(o) (definition of “transaction”); see also Civ. Code 1633.2(a)‑(n), 1633.3(b)‑(d), (f) (other definitions; exceptions)]. UETA is to be construed and applied so as to facilitate electronic transactions consistent with other applicable law; to be consistent with reasonable practices concerning electronic transactions and with the continued expansion of those practices; and to effectuate the general purpose to make uniform the law with respect to the subject of UETA among states enacting it [Civ. Code 1633.6]. Numerous specific statutory exclusions from UETA exist [see Civ. Code 1633.3(b), (c)]. The broadest exclusions include the following:

  • * Transactions subject to a law governing the creation and execution of wills, codicils, or testamentary trusts [Civ. Code 1633.3(b)(1)].
  • * Transactions subject to Division 1 of the Commercial Code, except Com. Code 1107 and 1206 [Civ. Code 1633.3(b)(2)].
  • * Transactions subject to Divisions 3 (negotiable instruments), 4 (bank deposits and collections), 5 (letters of credit), 8 (investment securities), 9 (secured transactions), or 11 (funds transfers) of the Commercial Code [Civ. Code 1633.3(b)(3)].
  • * Transactions subject to any law requiring that specifically identifiable text or disclosures in a record or portion of a record be separately signed or initialed [Civ. Code 1633.3(b)(4)]. However, this exclusion does not apply to transactions subject to Civ. Code ‘1677 or 1678, relating to liquidated damages in real property sales contracts, or Code Civ. Proc.  1278, relating to arbitration provisions in real property sales contracts.

Although transactions excluded from UETA are not subject to its provisions, they still may be conducted by electronic means if that can be done under any other applicable law [Civ. Code 1633.3(f)].

Under UETA, a record or signature may not be denied legal effect or enforceability solely because it is in electronic form. A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. If a law requires a record to be in writing, an electronic record satisfies the law. If a law requires a signature, an electronic signature satisfies the law [Civ. Code 1633.7; see Civ. Code 1633.2(a), (d), (e), (g), (h), (m) (definitions of “contract,” “electronic,” and “record”)]. In a case evaluating, under common law, the validity of an e mail sent prior to enactment of the UETA, a federal court held that the e mail, signed with a party’s name, satisfied the statute of frauds, assuming that a binding oral agreement existed and that the e mail included all of the material terms of that agreement [ Lamle v. Mattel, Inc. (Fed. Cir. 2005) 394 F.3d 1355, 1362‑1363] .

The UETA does not require that a record or signature be created, generated, sent, communicated, received, stored, or otherwise processed or used, by electronic means or in electronic form [Civ. Code 1633.5(a)].  Moreover, the UETA applies only to a transaction between parties each of whom has agreed to conduct the transaction by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct. Except for a separate and optional agreement the primary purpose of which is to authorize a transaction to be conducted by electronic means, an agreement to conduct a transaction by electronic means may not be contained in a standard form contract that is not an electronic record. An agreement in such a standard form contract may not be conditioned on an agreement to conduct transactions by electronic means. An agreement to conduct a transaction by electronic means may not be inferred solely from the fact that a party has used electronic means to pay an account or register a purchase or warranty. These statutory rules may not be varied by agreement [Civ. Code 1633.5(b)].

A party that agrees to conduct a transaction by electronic means may refuse to conduct other transactions by electronic means. If a seller sells goods or services by both electronic and nonelectronic means and a buyer purchases the goods or services by conducting the transaction by electronic means, the buyer may refuse to conduct further transactions regarding the goods or services by electronic means. These statutory rules may not be varied by agreement [Civ. Code 1633.5(c)].

Except as otherwise provided in UETA, the effect of any of its provisions may be varied by agreement. The presence in certain provisions of UETA of the words “unless otherwise agreed,” or words of similar import, does not imply that the effect of other provisions may not be varied by agreement [Civ. Code 1633.5(d)].

An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to whom the electronic record or electronic signature was attributable [Civ. Code 1633.9(a)]. The effect of an electronic record or electronic signature attributed to a person under the foregoing rules is determined from the context and surrounding circumstances at the time of its creation, execution, or adoption, including the parties’ agreement, if any, and otherwise as provided by law [Civ. Code 1633.9(b)].

The federal E‑SIGN Act applies to any transaction in or affecting interstate or foreign commerce [see 15 U.S.C. 7001(a)]. Under E‑SIGN, notwithstanding any statute, regulation, or other rule of law, a signature, contract, or other record relating to a transaction affecting interstate or foreign commerce may not be denied legal effect, validity, or enforceability solely because it is in electronic form, and a contract relating to such a transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation [15 U.S.C.  7001(a); see 15 U.S.C. 7006 (definitions)]. The term “transaction” means an action, or a set of actions, relating to the conduct of business, consumer, or commercial affairs between two or more persons, including any of the following types of conduct [15 U.S.C. 7006(13)]:

  • The sale, lease, exchange, licensing, or other disposition of personal property (including goods and intangibles) or services (or any combination of these actions).
  • The sale, lease, exchange, or other disposition (or any combination of these actions) of any interest in real property.

The E‑SIGN requirements do not limit, alter, or otherwise affect any requirement imposed by a statute, regulation, or rule of law, other than a requirement that contracts or other records be written, signed, or in nonelectronic form [15 U.S.C. 7001(b)(1)].

State law, regulation, or other rule of law may modify, limit, or supersede the provisions of 15 U.S.C. 7001, but California UETA is preempted by the federal statute to the extent that anything is inconsistent with the regulatory provisions of E‑SIGN. In other words, UETA controls in states that have enacted it, but individual state modifications of UETA that are inconsistent with E‑SIGN are preempted.

As of mid‑2007, UETA has been enacted in all but four states, and those four have equivalent laws [see 15 U.S.C. 7002(a)(2)]. UETA has also been enacted in the District of Columbia and the U.S. Virgin Islands.

The requirement to give effect to an electronic signature or record also does not apply to court documents (such as orders, notices, briefs and pleadings); notices of cancellation or termination of utility services; specified notices in connection with default, acceleration, repossession, foreclosure, eviction, or right to cure under a credit agreement secured by, or a rental agreement for, an individual’s primary residence; cancellation of health or life insurance benefits; product recall notices [15 U.S.C. 7003(b)(2)]; and any document required to accompany any transportation or handling of toxic or dangerous materials [15 U.S.C. 7003(b)(3)].

Several states allow electronic pawn transactions including: Colorado, Florida, Texas, New York, Georgia, New Hampshire, Hawaii, and Arizona.  Online or electronic pawn transactions is changing the perception and face of this industry. Online pawn shops such as Borro, Pawntique, Pawngo, and Ultrapawn, each have a maximum transaction borrowing limits of $1 million, and will let you borrow on collateral of items such as an luxury vehicles, a $450,000 wine collection, or even an Oscar Statute.
(http://www.forbes.com/sites/ashleaebeling/2012/07/09/short‑on‑cash‑luxury‑pawn‑shop‑borro‑loans‑10000‑to‑1‑million/)

Electronic pawn transactions have a greater appeal than traditional brick and mortar stores. In today’s time, more and more people are making purchases online, banking online, and are otherwise constantly plugged into technology.  Electronic pawn transactions specifically cater to this type of person.  Electronic transactions offer convenience, confidentiality, and privacy for many higher end consumers who many not be comfortable visiting a local pawn shop.  Further, online pawn shops offer lower rates of interest, larger loan amounts, and often higher valuations.

IV.         Pawnbrokers, Title Risks, and Fingerprints.

       The main difference between a typical loan from a pawnbroker and one from a commercial financial institution (such as a bank) concerns the requirements for the provision of identification. In the case of a bank loan, rigorous identification checks are required to assess the credit risk of the borrower. Conversely, a pawnbroker only requires identification of the borrower so that the title of the goods pledged as security can be accepted and potential loss from retrieval of pledged goods by the rightful owner avoided. (Pawnbrokers regard this as possibly the most serious risk they face). Apart from this, identity of the borrower is essentially irrelevant. Similarly, whereas formal legal contracts are required for bank borrowing, minimal legal documentation is involved in pawnbroking. The only documentation legally required to be produced by the pawnbroker, is that of a pledge ticket which consists of basic information about the borrower, the goods, the principal of the loan, the interest rate charged, and the amounts and dates when payments are to be made. 

As a result of the minimal contractual and identification obligations, a loan may be completed in about ten minutes. Pawnbrokers perform a variety of economic functions for a variety of customers. The most common interpretation of the pawnbrokers’ role is that they provide short‑term secured loans. In addition to providing consumer credit, pawnbrokers offer sellers of goods a means of selling goods (either by outright buys or by pledging goods and not subsequently redeeming them). When pawnbrokers resells goods from buys or goods not redeemed, they offer consumers an alternative to purchasing new goods. Yet another interpretation of the pawnbroking role, and that least complimentary to the pawnbroker, is the common perception that it facilitates the disposal of stolen goods. Because of the minimal identification requirements, possessors of stolen goods can obtain cash for those goods by pledging them, but with no intention of redeeming. The extent to which pawnbroking facilitates the disposal of stolen goods depends upon the extent to which pawnbrokers insist on verifying title to goods offered, which in turn depends, inter alia, upon the probability and extent of loss if goods accepted are stolen and subsequently reclaimed by the rightful owners. Regulatory requirements and their enforcement are relevant here, as is the extent to which, for different types of goods, title can be readily established. For example, serial numbers on electronic equipment may enable police and rightful owners to identify such goods easily, whereas rightful ownership of common design jewelry is not so readily established.

It is often thought that because of the nature of their business, pawnbrokers provide a conduit for trade in stolen property. While stolen goods may be offered as collateral, the pawnbroker faces the risk that, if the pledged item does not belong to the individual, a claim by the rightful owner will lead to return of the pledged good and loss of the loaned  funds. Such a risk may be referred to as title risk, and is regarded by pawnbrokers as a major source of risk, particularly since goods may be pawned by family or friends of the rightful owner and criminal charges of theft never made.  Anecdotal evidence of customers purchasing goods using stolen credit cards and identity documents from a department store and providing the receipt and using the same documents when pawning the good, or of one person pawning a good and an accomplice subsequently appearing to assert ownership of stolen goods, are not uncommon. The police have trouble prosecuting such cases, in which the pawnbroker often becomes the victim.   This risk is comparable to a financial institution’s credit risk and, just as those institutions attempt to assess the credibility of the promise to repay, pawnbrokers should exercise great effort to assess the credibility of the borrower’s claim to title.

California law governing pawn transactions within the state require pledgers to provided photo identification along with a fingerprint. The requirement of a finger print for pawn transactions is a hardship and California pawnbrokers face and are being prevented from expanding into electronic transactions.  Requiring a fingerprint in an electronic transaction is causing California to lose revenue and  pawnbrokers to lose clientele to online brokers residing in other states that penetrate the California marketplace.  And, there are no empirical studies or other data available to establishes any correlation between criminal conviction rates and fingerprints obtained from the JUS-123 forms. Indeed, while it may be law enforcement’s general feeling that fingerprinting a borrower may act as a deterrent to fencing stolen property, there is no data available to support that supposition.  While one can make the argument that criminals whose fingerprints are already in State or Federal law enforcement databases may think twice about giving a fingerprint to a pawnshop (hence, the deterrent factor), the majority of borrowers who have no prior experience with law enforcement will not be deterred from giving a fingerprint in connection with pawning property.  And, separate and apart from the deterrent factor is the apprehension element. Again, there is no data or studies available to establish any nexus between convictions based on fingerprints on a pawnbroker’s JUS 123 forms.

California and its pawnbrokers are losing and will continue to lose revenue and income unless the existing law is changed to permit electronic transactions without the need for fingerprints. As other online pawn brokers have seen, there is has been a transformation in clientele who turn to pawnbrokers for loans.  This new face of pledgers turn to electronic transactions for the convenience and privacy that this service offers. The clientele who uses expensive luxury goods as collateral would think twice about providing a fingerprint, especially if the pledger can find the same service elsewhere which does not require a fingerprint. California is already losing revenue and income because the law has not caught up, as residents are sending collateral elsewhere than going to local pawnshops.  Robert T., self described as an upper class resident of California sent a Rolex to Pawntique, which gave him a loan for $4,200. (http://www.pawntique.com/news/pawntique‑chicago‑tribune/)  Ramon C., a Citrus Heights, California resident, was offered $400 more from internet company PawnGo than the local pawnshop for his collection of gold coins.  Vernita J., a Sacramento resident, also used the services of PawnGo, which offered her $45.00 compared to her local pawnshop offer of $20.  California’s residents have a lot of luxury good and assets. PawnGo, based out of Colorado, is seeing many transactions from California residents. In fact, according to CEO Todd Hill,  California is one of PawnGo’s top three states in terms of transactions with the average loan by California residents of $5,000. (http://www.sacbee.com/2012/03/15/v‑wireless/4338961/online‑pawnshops‑start‑to‑click.html) California is clearly on the losing side of this business.  Stan L., vice president of Capital City Loan & Jewelry, a chain of nine Sacramento‑area pawnshops, states that “online stores are in direct competition with California pawnbrokers.”

Current pawnbrokers that conduct electronic transactions are not required to obtain a fingerprint from a pledger, even in states that require a fingerprint during a face to face transaction.  For instance, pawnbrokers in Colorado are not mandated by state law to provide fingerprints of pledgers, rather the local municipalities govern. The municipalities of Centennial and Littleton, Colorado require fingerprints from sellers during in person pawn transaction. Ordinances passed by both municipalities waive this requirement for online transactions and instead allow for digital signatures and electronic‑identification verification to supplant the photo ID and fingerprint.  Other internet-based pawnshops require a driver’s license or other form of government issued ID and proof of residence, such as a utility bill, for identification. A fingerprint during electronic transactions is not necessary; identifying a pledger through two sources of identification is sufficient.  The identification of the pledger and description of each collateral item will still be transmitted to local authorities.

 UPDATE:  SB-300, enacted in 2015, now permits electronic pawn transactions. 

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