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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 jeff@galese-ingram.com.

SEPTEMBER 2006 NEWSLETTER - Military Lending. 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.

The “John 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.

The practical 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 - Repossessions. This is perhaps the riskiest part of our business. If you don't do it right, you could lose in a very big way!

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 period.

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.

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.


	NEWSLETTER TOPICS: Military Lending SEPTEMBER 06 Repossessions MARCH 06 APR JAN 06	Galese & Ingram Newsletter *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 jeff@galese-ingram.com. SEPTEMBER 2006 NEWSLETTER - Military Lending. 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 2006 The “John 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. The practical 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 - Repossessions. 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 period. 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 2006 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.
	Title Pawn Council Of Alabama PO Box 361782 Birmingham, AL 35236 tpca@mindspring.com This Site Courtesy of: The Genesis Group, Inc. Birmingham, AL Payday & Title Loan Software 205-733-9926