SB 1198 introduces new Pawn “Remote Transaction Fee”

On August 19, 2024, the Governor signed into law SB 1198, Pawnbrokers: Fees and Charges, CAPA’s revenue Bill, which updates and increases certain pawnbroker storage fees and charges, as well as, adds a new “Remote Transaction Fee.”

What Is the New Law?  SB 1198 amends Cal. Financial Code §21200.9 introducing a new “Remote Transaction Fee” as an optional fee for customers wishing to redeem or replace a loan without going into the pawnshop.

Cal. Financial Code § 21200.9 is added to the Financial Code, to read:

• “In addition to other allowed charges, a pawnbroker may 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.” (emphasis added).”

The new fee is called a “Remote Transaction Fee.” I have underlined, bolded and italicized certain key provisions of the law above, to draw your attention to the purpose and function of those provisions in the new law. As set forth below, the emphasized provisions and legal terms above have very specific meanings and functions, which help explain how the new law is intended to be used. Keep in mind that the law is brand new, and there is no court interpretation of the law. That being said, we look to the legislative intent (what the legislature understood the law to mean and its purpose when passed) and at the general legal and plain meaning of the text and legislative interpretations principles.

Why Does It Matter If the New Fee is Optional? I have underlined and emphasized the terms may, elects, and through electronic means above, because these terms are important to understanding how the law is intended for use. May and elects signify that the remote transaction fee is optional at the customer’s election. Also, it signifies that the pawnbroker doesn’t have to charge the fee, and the pawnbroker can choose to charge a fee anywhere from no fee at all up to 3% of the transaction amount. So, the fee is entirely optional, and the amount charge can be negotiated up to 3 % of the transaction amount of the redemption or the replacement loan.

Is the New Fee Part of the APR?     No. Because the fee is optional and is outside the pawn transaction, it’s not part of the APR. It’s an elective fee meaning it’s the customer’s choice. The customer can take it or leave it, meaning they can choose to come into the store and redeem or receive a replacement loan without incurring the fee. The “Remote Transaction Fee” is a convenience fee of sorts, for the convenience of paying remotely and avoiding the burden of having to go into the shop. Incurring the fee is the customer’s choice for their convenience of doing a remote transaction through electronic means, meaning NOT in the pawnshop.

What Does It Mean “Through Electronic Means?” “Through electronic means” has purposefully been left broad and open ended, to encompass future possibilities and technology. We don’t know what the future holds for new electronic means to accomplish a remote transaction, so the new law is broad enough to cover future technological advances. So, what does “through electronic means” encompass today? Certainly, the remote transaction fee can be charged when a replacement loan or redemption is done via: 1) a telephone system; 2) online pawn software or a website; and 3) a mobile Pawn Application. All those options are through electronic means.

Why Is It Called A “A Remote Transaction Fee?” This should be obvious, but sometimes it’s necessary to state the obvious. It must be a remote transaction, i.e. NOT IN THE PAWNSHOP. Further, as explained in the paragraph above, it must be via some electronic means, such as a phone system, online pawnshop website, or mobile pawn Application (Think Bravo, Pawnmate, ect…). Many of the existing online pawn platforms, websites, and mobile applications already charge you, the pawnbroker, a fee per transaction (or per contract), now you can pass that along to the customer and get up to 3% of the transaction amount as a fee. This is not meant to be used in the store, hence the term “remote.” Please do not charge customers the “Remote Transaction Fee” while they are in the pawnshop.

What is the 3% Fee for?  The fee is meant to offset the pawnbroker’s costs related to acquiring an electronic remote transaction system, whether software, an app, a phone system, website, or online platform. It’s also meant to capture the cost of each individual transaction, as some vendors charge per transaction. But the fee is meant to do more than pass along the individual transactions fee charged by the vendors. The fee is also meant to cover overall electronic systems sunk costs (i.e. cost of building a website or an application, or purchasing one from a vendor), cyber security, and infrastructure to set up remote electronic pawn to enable such transactions in the first place. Whether you build from scratch, purchase off the shelf from a vendor, or customize an off the shelf system, the fee is meant to help recoup the sunk cost of that new electronic infrastructure for doing remote transactions. This is why the fee can be up to 3% and was not limited to the cost per transaction. The new fee is more than just the one-time transaction fee the vendor charges you, it’s the entire ecosystem (including sunk costs for building a platform, app, and/or website), ongoing maintenance and upgrades of such systems. You do not have to charge the fee, and you don’t have to charge the full 3%, that is negotiable with the customer and/or up to your business judgment as to whether to charge it or not. However, we all know that offering the customer the convenience of a remote electronic option to redeem or secure a replacement contract is costly, so this is an opportunity to recoup some of those costs. Again, one does not have to offer remote electronic transactions at all, the new law is entirely optional.

Practical Concerns in Implementation This is a new fee, so it will need to be incorporated into your contract, into your software, application, website, mobile pawn systems, and their respective terms and conditions. You will need to post the new fee in the shop, so the customer is aware ahead of time when doing the originating pawn loan. The bottom line is, the new fee is allowable by law, but you need to incorporate it into your paperwork, signage, and remote pawn systems to put the customer on notice that the fee exists and is optional. You do not want to be accused of having a surprise fee or hidden fee, even if authorized by law. So full disclosure of the new fee is advisable.

What happens if a customer redeems online? This is uncharted territory. That is for each pawnbroker to decide and clearly indicate in the store signage, contract, and terms and conditions for mobile pawn systems. There is no law on this, so however you set this up, it’s simply a matter of contract with the customer. This would be outside the APR, as it’s up to the pawnbroker to make a policy regarding handling of the item after redeemed. Again, offering remote redemption is strictly optional. You can choose to only offer remote replacement loans, or no remote options at al.

If the customer redeems online, one could imagine via contract after the fact charges for storage if they don’t pick it up within a certain time frame, and/or shipping and handling fees (I would recommend insurance as well) to send it to the customer. Those would all be after the fact transactions, meaning the item is redeemed and no longer in pawn, as to any deals made about storage, shipping, handling, insurance, and what happens if the item is not picked up after a certain date, those matters are to be determined by the pawnbroker and customer. I say after the fact, meaning it’s not in the APR, and it’s about what to do with the item once redeemed. But it’s very important to have the terms of how the item is dealt with decided before the customer redeems online. You don’t want to be stuck storing something forever without a binding written agreement about how to deal with the item once redeemed remotely.

It’s best to have those additional non-pawn fees and terms and conditions laid out ahead of time, posted in the store, in the terms and conditions of any remote system, and/or added to the contract or an addendum signed before the remote redemption takes place. Additional terms, conditions, and fees related to what happens with an item after redeemed remotely should be included in the online and/or mobile app terms and conditions. You don’t want to offer remote redemption, then be stuck sitting on a customer’s item for years with no way to get the item back to the customer and/or take ownership of the item to offset storage costs if it’s not picked up within a certain time frame. Importantly, there is no specific law on this subject, and it’s up to the pawnbroker to define the terms and conditions of a remote redemption. The future hold endless opportunities for remote and online transactions, and you can shape your own terms and conditions to fit your business’ needs.