Audio Report (5:28) (RealAudio 14.4)

Second in a Series

((Sound... typing, ambience))

For a growing number of people with low incomes and bad credit, pawnshops like this one in downtown St. Paul are a substitute for a bank or a credit card - a place to get ready money... backed by collateral such as a VCR, tool set... or wedding ring. Pawn your personal property, and you can buy it back a month later for the amount of the loan... plus interest and fees. If you don't come back, the pawnshop can put your property up for sale.

Last year, the Minnesota legislature passed a set of regulations designed to protect pawnshop customers. The bill's senate sponsor, DFLer Leonard Price of Woodbury, says interest rates charged by pawnshops were a focal point of the legislative hearings.

((Price: "And when people heard 300-percent, 270-percent, there was a lot of disdain toward that kind of charge. And again, it isn't that only poor people or low-income people use pawnbrokers, because as I learned, there are a lot of folks out there that use pawn to finance particular things that they want or need. But nobody should have to pay that kind of interest rate."))

Price's bill, which went into effect last August, capped pawn interest rates at 3-percent a month or 36-percent annually -- 'plus a reasonable fee for storage and services.' Price says the 'reasonable fee' language was meant to give pawnbrokers some 'wiggle room.' Now, pawnbrokers admit they're using that wiggle room to charge the same rates as they did before the law was passed.

((Pawnshop clerk: "How much you trying to borrow?" MPR: "I'd like to get fifty anyway, if I could." Pawnshop clerk: "Probably get you in the area of half that, around 30 bucks ..."))

A Minnesota Public Radio news editor pawned a television at a pawn shop in downtown St. Paul.

((Clerk: "It's 12.5-percent every fifteen days, so on thirty, it's ... 3.75 and there's a dollar fee on pickup, that's for the St. Paul police department to check out the item."))

The one-dollar charge for the police check pushed the cost of the 30-dollar loan to four dollars and 75 cents for 15 days... a 380-percent annual interest rate. That figure is off the charts nationally. Of states that limit total pawn interest rates, the nation's highest is Georgia... at 300-percent. The head of the Minnesota Pawnbrokers Association, Duluth pawnbroker David Gilberg, says it's no secret that the state's pawnshops have not really lowered their rates to 36-percent. He says most charge interest and fees totaling an annual equivalent of 240-percent... or 20-percent a month.

((Gilberg: "Yeah, it's entirely possible some shops are going up to 25-percent. I'm not aware of any shops right now that are encroaching into that 30-percent range. It may be, I'm just saying I'm not aware of it."))

((Price: "That's real interesting information, because we did think it would be 3-percent a month, which would I translate into 36-percent annual."))

Senator Price says pawnbrokers charging the equivalent of 200- to 300-percent interest are violating the intent of the legislature.

((Price: "If there are consumers out there that are unhappy with that, and I would expect we'd hear from them as we have more experience, that they would file a complaint with their county attorney, and then we would have some discussions about that in the legal system."))

Price acknowledges that in a legal challenge, a judge or jury would have to decide whether pawnshop charges are violating the 'reasonable fee' language in the law. Gilberg of the Pawnbrokers Association says he tells members to charge only fees that they 'logically defend' as necessary to cover their costs and make a decent profit. He says if pawnshops could only charge 36-percent interest, they couldn't survive.

((Gilberg: "Three-percent a month sounds like an awful lot of money when you're dealing on something such as an automobile loan or anything like that. But when you're talking loans as an average of under 50 dollars,/ at only 3-percent a month you have to write an astronomical amount of loans to receive enough financial charges to make a living."))

There's some evidence to support that claim. John Caskey, an economist at Swarthmore and author of a book on pawnshops... says northeastern states that limit total pawn interest rates to 36-percent do drive many shops out of business.

((Caskey: "It's quite common in the northeast to find very few pawnshops. The ones that exist are in large urban areas where they can do high volume, and often they'll only, say, accept as collateral jewelry, small, high-value items where they can make a profit while charging only 3-percent a month."))

So, Caskey says New York, which limits pawn interest rates to 36-percent, has only about 70 pawnshops statewide... half the number in Minnesota. The Pawnbrokers Association says the number of pawnshops in the state has grown from about 90 five years ago to 140 today. That mirrors growth in the industry nationwide; the number of pawnshops in the country has doubled in the last ten years.

Richard Fuller, a Minneapolis attorney who helped negotiate the state pawn regulations, says pawnshop customers are entitled to credit at reasonable rates... just like everybody else. He says he wouldn't mind pushing some pawnshops out of business by lowering their interest rate cap.

((Fuller: "There may not be a pawnshop on every corner. There will be enough pawnshops to fill the need."))

Senator Price says, after gathering more information on the practice of Minnesota's pawnshops, he may consider rewriting the law if that's what it takes to bring pawn interest rates down. I'm John Biewen, Minnesota Public Radio News.

High Cost of Poverty Series - Fringe Banking - Rent-To-Own - Low-Income Housing