A pawnshop is a business in which a person can get a loan of cash in exchange for handing over personal property of value, such as jewelry, to the pawn shop owner. The item of property is technically a kind of security for the loan. In reality, some borrowers never return to repay the loan and reclaim their property. In this case the pawnshop becomes the owner and offers the property for sale to the public. On occasion, a customer simply sells their item of personal property outright to the pawnbroker for a one-time cash payment.
Or, sometimes, the property owner will choose not to redeem their property by paying off the loan plus interest within the time specified by their contract with the pawnbroker. In this case also, the pawnbroker becomes the owner outright of the property and can sell it.
However, if an owner of pawned property returns within the proper period of time and is ready to repay the loan plus the specified interest, the owner should get their property back from the pawnbroker.
A pawn broker usually does not perform credit checks on the borrower and there are no consequences to the borrower if they never return to pay back the loan and redeem their property. This means that the transaction does not affect their credit rating. Rather, the pawnbroker has made a quick evaluation of the property and if the borrower never returns, the pawnbroker believes they will get their money back from the sale of the item.
One issue that plagues pawnbrokers is the risk that the property pawned in their shops is stolen. Generally, the pawnbroker assumes this risk when they take possession of the property. However, in many states, the law protects both the public and the broker from unknowingly dealing with stolen goods.
State law may require that the pawnbroker establish positive identification of the seller of property through photo identification, such as a driver’s license. State law may also require that the broker enforce a holding period on items purchased to allow time for local law enforcement authorities to track and identify items that may have been stolen.
Many states require pawnbrokers to report all items pawned to the local police daily so they can check it against reports of burglaries and robberies. These procedures mean that very little stolen property can be found in pawn shops. If a pawnbroker should be in possession of stolen property and the rightful owner from whom it was stolen shows up to claim it, the pawnbroker must return it to the owner.
In some states, pawn shops must give a list of all items that have been pawned recently and any serial numbers that may be found on the items to the local police, so the police can determine if the items have been reported stolen.
Some police departments even advise the victims of burglaries or robberies to visit local pawn shops to possibly locate items that were stolen from them. Some pawn shops set up their own screening procedures to avoid buying stolen property.
Of course, pawning property that has been stolen is a crime that may be charged as a felony in some states. In Florida, conviction of the crime of selling stolen property is punishable by up to 15 years in prison and a maximum fine of $10,000 upon conviction.
Pawn shops are highly regulated by all of the same federal laws that apply to entities designed as financial institutions. The federal laws that regulate pawn shops are:
- The Patriot Act;
- The Truth in Lending Act;
- The Equal Credit Opportunity Act;
- The Data Privacy and Safeguard rules from the Federal Trade Commission (FTC).
The Bureau of Alcohol, Tobacco, Firearms and Explosive (ATF) regulated pawn shops that deal in firearms. A pawn shop may also hold a Federal Firearms License. States also regulate the pawn industry. Of course, most pawnbrokers have a business license at least and may even be regulated by local authorities as mentioned above.
