COVERING IMPORTANT INDUSTRY ISSUES
Beginning in January 2006, Jeff Ingram of
Galese and Ingram will publish a newsletter
on important issues affecting our industry. Jeff has been the Council's attorney since we began in 2000
and his firm has extensive
experience with our industry which dates back to the beginning of title loans.
Jeff's firm is also
the attorney for the Alabama
Independent Automobile Dealers Association. So in short, he knows
the law from all aspects of our industry. As a service to our
members Jeff is available for limited consultations at no fee (you must
be a current member to take advantage of this service). Jeff may
be reached by telephone at 205-870-0663 or email at
SEPTEMBER 2006 NEWSLETTER -
As of today (October 10th) the US Congress has passed and sent to
the President the “John Warner National Defense Authorization
Act” We fully expect this bill to become the law of the land.
It will stop all lending to military members.
NEWSLETTER -- SEPTEMBER
Warner National Defense Authorization Act” (“the Act”) will
have a significant impact on the title pawn and deferred
presentment industry. It explicitly prohibits any extension
of “consumer credit” to a covered member of the armed forces
or their dependants where “the creditor uses...the title to
a vehicle as security for the obligation.” It also prohibits
an extension of consumer credit where “the creditor uses a
check or other method or access to a deposit, savings or
other financial account maintained by the borrower .
as security for the obligation.” A service member is a
covered member if they are on active duty under order of
more than thirty days. This includes active National Guard
or Reserve duty. The term “dependant” is defined as a
member’s spouse, child, or anyone for whom the member has
provided one-half of their support for the past 180 days.
The term “child” includes children under 18 and children
under age 23 who are enrolled in an educational institution.
Stepchildren are included in the definition of child.
The Act will
take effect on October 1, 2007 unless the Secretary of
Defense chooses an earlier effective date. A knowing
violation of any provision of the Act is a misdemeanor with
potential fine and imprisonment of up to one year. It is
possible that a violation of the Act could also create a
cause of action by the customer against the pawn shop.
result of this legislation is that it will be a federal
crime to enter into a title pawn or deferred presentment
transaction with any active member of the armed forces or
reserves or the spouse or child (under age 23 if in school)
of any such member. Although the Act is not specific, it is
likely that a renewal of such an agreement would also be
prohibited after the Act’s effective date.
The Act does
not specify whether the lender has an obligation to inquire
about a customer’s military status. Criminal liability only
attaches for a knowing violation of the statute, so
ignorance could provide some defense. However, the Act
provides that any contract or extension of credit in
violation of the Act is “void from the inception.”
Therefore, even if the lender could avoid criminal liability
through ignorance, the contract will be unenforceable.
The Act could
also have an impact on existing agreements. The Act provides
that arbitration agreements are unenforceable against anyone
who was a member of the armed forces or a dependant at the
time the agreement was made. The Act does not specify
whether this provision only applies to new arbitration
agreements or to already existing agreements.
MARCH 2006 NEWSLETTER -
This is perhaps the riskiest part of our business. If you
don't do it right, you could lose in a very big way!
NEWSLETTER -- MARCH 2006
Title pawn operators are unfortunately often faced with the issue of
repossessing a customer’s vehicle. The question often arises as to
when a repossession can occur. The short answer is that a pledged
motor vehicle can be repossessed after a customer defaults.
The obvious question is when does a default occur. A default occurs
whenever the pledgor breaches its agreement with you. Normally, this
is by failing to make a payment when due. Because of this, you
generally can repossess a vehicle when the debtor fails to satisfy
or renew the pawn within thirty days. Unless your agreement with
your customer states otherwise, you are not legally required to wait
till the end of the grace period to execute a repossession. If you
do repossess the vehicle before the grace period ends, you must then
maintain possession of the vehicle until the end of the grace
Alabama Code §
5-1 9A-5 (c) provides that automobiles, trucks and similar
vehicles must be maintained on your premises for twenty-one days.
The preceding sentence in that section states that other goods
“purchased” by a pawnbroker must be maintained on premises for
fifteen days. In the way that this section is written, the
twenty-one day requirement seems to apply only if the vehicle is
“purchased” by you. It does not seem to apply to pawn transactions
where there is a default.
There are a couple of important side notes in dealing with
repossessions. If the vehicle is located outside of Alabama, you
must consult the law of the state where the vehicle is located
before repossessing the vehicle. Different states have different
laws. What is legal here may not be legal there. Also, if you
repossess the vehicle after your customer files a bankruptcy
petition, you normally will have to allow the customer to retake
possession of the vehicle, repossessing a customer’s vehicle is the
most legally risky action in your business. Be careful and be sure
that your repossession agents know and follow the law.
JANUARY 2006 NEWSLETTER - Annual
Percentage Rate (APR).
Truth In Lending compliance requirements are very specific about the APR
(Annual Percentage Rate) you disclose. Non-compliance can be quite expensive in a court of law.
Some members have had very unpleasant experiences with this issue as a
result of lawsuits. In Alabama, compliance can be ambiguous.
Read Jeff's article below.
NEWSLETTER -- JANUARY
Pawn transactions in
Alabama are governed by Alabama’s Pawnshop Act and the Federal Truth in
Lending Act among other statutes. Pawnshop operators must be sure to
comply with both statutes. The Pawnshop Act requires that a pawn ticket
disclose, among other items, the monthly rate. The federal Truth in
Lending Act requires lenders to disclose the annual percentage rate. It
would seem to be a simple matter to correctly disclose both rates.
Appearances can be deceiving.
The Federal Trade
Commission has issued detailed regulations for calculating the annual
percentage rate in a transaction. For monthly transactions, the annual
percentage rate is twelve times the monthly rate. It would seem
therefore that the annual percentage rate for a pawn transaction is
twelve times the monthly rate, i.e. a 25% monthly rate would be a 300%
annual percentage rate. The Alabama Bureau of Loans says this is the
correct method to determine the annual percentage rate.
The question though is
whether or not a pawn transaction is a monthly transaction. If it is,
the maturity date will be the same day of the month as the transaction
date. For example, a pawn made on February 2, 2006, would be due on
March 2, 2006. There is support for this in the Pawnshop Statute
because several provision speak in terms of a “monthly” transaction.
However, the Act is clear that a maturity date cannot be less than
thirty days after the transaction date. This means, for example, that a
pawn entered into on February 2, 2006, cannot be due before March 4,
2006. Such a transaction is arguably not a monthly transaction. If the
transaction is considered to be a thirty day transaction, the annual
percentage rate is calculated by multiplying the thirty day rate by
thirty and then dividing by 365. A 25% thirty day rate would be a
304.17% annual percentage rate. There are federal cases from other
states adopting this position.
What do you do? Disclose
a 300% annual percentage rate and you have satisfied the Bureau of Loans
but have opened yourself to suits from customers for a violation of the
Truth in Lending Act. Disclose a 304.17% annual percentage rate to
avoid customer lawsuits and the Bureau of Loans may cite you for a
violation for not following its interpretation. An annual percentage
rate of 304.17% seems to be easier to defend. Unfortunately, at this
point, you have little choice but to pick your poison.