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3. Contemporary Fringe Banking
- Russell Sage Foundation
- Chapter
- Additional Information
3 Contemporary Fringe Banking From 1930 through the mid-1970s, the pawnbroking industry contracted . Over this same period, the check-cashing industry grew, but remained largely confined to Chicago, New York City, and a small number of other urban areas. Beginning in the mid-1970s, however, these fringe banking industries grew explosively. In absolute numbers, or measured on a per capita basis, there are more pawnshops today than at any time in the history of the United States. Florida and Texas each have more than 1,000 pawnshops, which combined make more than an estimated ten million loans annually. Over the 1980s, check-cashing outlets opened in cities all across the country. In just the past 5 years, the number of CCOs throughout the country doubled, rising from about 2,000 outlets to almost 5,000. Such rapid growth is initially puzzling, considering that fringe banking services are far more costly than the comparable services of mainstream financial institutions. In many states, for example, pawnshop interest rates are over 200 percent a year. Similarly, the cost of obtaining basic payment services through a ceo is commonly four to ten times higher than similar bank services. The following chapters attempt to resolve this puzzle. Before 36 Contemporary Fringe Banking 37 doing so, however, it is important to understand how contemporary pawnshops and CCOs operate, the fees they levy for their services, and the regulations governing their behavior. This chapter addresses these topics, documents the 1980s boom in fringe banking, and discusses the rise of national fringe-banking chains. CONTEMPORARY PAWNBROKING As pawnbrokers have done for centuries, the contemporary pawnbroker makes fixed term loans to customers based on the value of the collateral they leave in the possession of the broker. A customer might, for example, bring in a watch with a $100 retail value and leave it as collateral for a $50 loan due to be repaid in two months. Pawnshop customers, however, have no legal obligation to repay the loans. If they do not, the pawnbroker becomes the owner of the collateral and the debt is extinguished. Alternatively, the customers can redeem the pledged collateral at any time within the term of the loan and stipulated grace period. To do so, they repay the principal and pay the interest and any other required fees on the loan. In this sense, a pawnshop loan is equivalent to an options market transaction, where the broker purchases the collateral but the customer retains the option to repurchase the item within a specified time period at an agreedupon price. Because the majority of customers redeem their pledges, the main function of pawnshops is to provide small, secured, short-term consumer loans. Contemporary U.S. pawnshops are regulated by state and, sometimes, by local governments. These regulations vary, but there is a general pattern: when someone pawns a good, the terms of the loan contract must be specified on a pawn ticket; the ticket states the customer's name and address, a description of the pledged good, the amount lent, the maturity date, and the amount that must be paid to redeem the good. The broker keeps a copy of the pawn ticket, the customer receives a copy, and a copy must be filed with the local police. When the customer is ready to redeem the item, he or she presents the ticket along with the amount owed, and the broker returns the collateral. In response to the popular belief that pawnshops serve as fences for burglars, all brokers that I interviewed adamantly in- [54.146.97.79] Project MUSE (2024-03-29 16:40 GMT) 38 Fringe Banking sisted that they do not knowingly accept stolen goods as collateral. Although one would expect even dishonest brokers to make such a claim, I found the brokers' explanation generally convincing. They argued that it is not in their interest to make loans on stolen goods because the police can seize the goods, and the broker would lose the collateral and the money loaned. Given the police report requirement, they also said that it would not be in the interest of a thief to pawn stolen goods, and many charged that stolen goods are far more commonly channelled through unregulated flea markets. Although many items, especially jewelry, do not have serial numbers and would be difficult to identify from police reports, available data support the brokers' claims. For example , Oklahoma state officials report that in 1991 the police seized less than 0.1 percent of pawned goods...