WHAT IS A PAWN SHOP?

Pawnshop is an individual or business that offers secured loans to people, with

items of personal property used as collateral. The items having been pawned to the
broker are themselves called pledges or pawns, or simply the collateral. While many
items can be pawned, pawnshops typically accept jewelry, musical instruments,
home audio equipment, computers, video game systems, televisions, cameras,
power tools and other relatively valuable items as collateral.

If an item is pawned for a loan (colloquially, "hocked"), within a certain contractual

period of time the pawner may redeem it for the amount of the loan plus some
agreed-upon amount for interest. The amount of time, and rate of interest, is
governed by law or by the pawnshop's policies. If the loan is not paid (or extended,
if applicable) within the time period, the pawned item will be offered for sale to
other customers by the pawnshop. Unlike other lenders, the pawnshop does not
report the defaulted loan on the customer's credit report, since the pawnshop has
physical possession of the item and may recoup the loan value through outright sale
of the item. The pawnshop also sells items that have been sold outright to them by
customers.

DEFINITION OF TERMS
Pawnshop shall refer to a person or entity engaged in the business of lending
money on personal property that is physically delivered to the pawnshop premises
as loan collateral. The term shall be synonymous and may be used interchangeably,
with pawnbroker or pawnbrokerage.
Pawner shall refer to the borrower of a pawnshop.
Pawnee shall refer to the pawnshop or pawnbroker.
Pawn is the personal property delivered by the pawner to the pawnee as security
for a loan
Pawn ticket is the pawnbrokers receipt for a pawn and shall not be considered as
an official receipt for amounts collected.
Property shall include only such personal property which can be physically
delivered to the control and possession of the pawnee.
Voting stock is that portion of the authorized capital which is subscribed and
entitled to vote.

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Vital records shall consist of the Loans Extended/ Paid Registers, General
Ledger/Journal, that may be in electronic form, covering the current and at least the
preceding five (5) years of operation, unused accountable forms and permanent
records, e.g., articles of 5 incorporation/co-partnership, by-laws, stock certificates,
etc.
Bulky pawns shall refer to household appliances, office machines and the like,
which occupy considerable amount of space i.e., measuring at least 1.5 x 1.5 x 0.5
feet.
Premises shall refer to the area where the pawnshop conducts its business and
maintains office. It includes office or storage spaces maintained and/or used by the
pawnshop which are adjacent to the pawnshops location.

GOVERNING LAWS
P.D. No. 114, known as the Pawnshop Regulation Act, regulates the establishment
and operation of pawnshops.

BUSINESS MODEL
Assessment of Items
The pawning process begins when a customer brings an item into a pawn
shop.Common items pawned (or, in some instances, sold outright) by customers
include jewelry, electronics, collectibles, musical instruments, tools, and (depending
on local regulations) firearms. Gold, silver, and platinum are popular itemswhich
are often purchased, even if in the form of broken jewelry of little value. Metal can
still be sold in bulk to a bullion dealer or smelter for the value by weight of the
component metals. Similarly, jewelry that contains genuine gemstones, even if
broken or missing pieces, have value.

The pawnbroker assumes the risk that an item might have been stolen. However,
laws in many jurisdictions protect both the community and broker from unknowingly
handling stolen goods (also known as fencing). These laws often require that the
pawnbroker establish positive identification of the seller through photo identification
(such as a driver's license or government-issued identity document), as well as a
holding period placed on an item purchased by a pawnbroker (to allow time for local
law enforcement authorities to track stolen items). In some jurisdictions, pawnshops
must give a list of all newly pawned items and any associated serial number to
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police, so the police can determine if any of the items have been reported stolen.
Many police departments advise burglary or robbery victims to visit local
pawnshops to see if they can locate stolen items. Some pawnshops set up their own
screening criteria to avoid buying stolen property.

The pawnbroker assesses an item for its condition and marketability by testing the
item and examining it for flaws, scratches or other damage. Another aspect that
affects marketability is the supply and demand for the item in the community or
region. In some markets, the used goods market is so flooded with used stereos and
car stereos, for example, that pawnshops will only accept the higher-quality brand
names. Alternatively, a customer may offer to pawn an item that is difficult to sell,
such as a surfboard in an inland region, or a pair of snowshoes in warm-winter
regions. The pawnshop owner either turns down hard-to-sell items, or offers a low
price. While some items never get outdated, such as hammers and hand saws,
electronics and computer items quickly become obsolete and unsaleable. Pawnshop
owners must learn about different makes and models of computers, software, and
other electronic equipment, so they can value objects accurately.

To assess value of different items, pawnbrokers use guidebooks ("blue books"),

catalogs, Internet search engines, and their own experience. Some pawnbrokers
have trained in identification of gems, or employ a specialist to assess jewelry. One
of the risks of accepting secondhand goods is that the item may be counterfeit. If
the item is counterfeit, such as a fake Rolex watch, it may have only a fraction of
the value of the genuine item. Once the pawnbroker determines the item is genuine
and not likely stolen, and that it is marketable, the pawnbroker offers the customer
an amount for it. The customer can either sell the item outright if (as in most cases)
the pawnbroker is also a licensed secondhand dealer, or offer the item as collateral
on a loan. Most pawnshops are willing to negotiate the amount of the loan with the
client.

Determining Amount of Loan

To determine the amount of the loan, the pawnshop owner needs to take into
account several factors. A key factor is the predicted resale value of the item. This is
often thought of in terms of a range, with the low point being the wholesale value of
the used good, in the case that the pawnshop is unable to sell it to pawnshop
customers, and they decide to sell it to a wholesale merchant of used goods. The
higher point in the range is the retail sale price in the pawnshop. For example, a
five-year-old laptop may have been bought by the customer for $1000. However, as
a used item in a pawnshop, it might only fetch $250 as a purchase price in the
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pawnshop, because the customers will be wary that it might be a "lemon" that the
seller is getting rid of because it has some hard-to-detect problem, and because
pawnshops do not typically offer a warranty with goods sold. Used electronics
wholesalers will buy the laptop from the pawnshop owner for $100 to $150. The
wholesaler pays a lower price than the retail value because they have the added
cost of hiring electronics technicians who overhaul and repair the items so that they
can be sold in used electronics stores.

The pawnshop owner also takes into account their knowledge of supply and demand
for the item in question to determine if they think that they will end up selling the
laptop for $100 to a wholesaler or $250 to a pawnshop customer. If the pawnshop
owner believes that the local market for used laptops is saturated (overloaded with
used laptops), they may fear that they will only get $100 for the laptop if they have
to unload it to a wholesaler. With that figure in mind as the expected revenue, the
pawnshop owner has to factor in the overhead costs of the store (rent, heat,
electricity, phone connection, yellow pages advertisement, website costs, staff
costs, insurance, alarm system, items lost when they are confiscated by police,
etc.), and a profit for the business. As such, the customer who comes in with this
laptop that they paid $1000 for when it was new may be offered as little as $50 by
the pawnshop owner, who is taking into account all of the risk and cost factors.

In determining the amount of the loan, the pawnshop owner also assesses the
likelihood that the customer will pay the interest for several weeks or months and
then return to repay the loan and reclaim the item. Since the key to the pawnshop
business model is making interest off the loaned money, pawnshop owners want to
accept items that the customer is likely to want to recover, after having paid
interest for a period on the loan. If, in an extreme case, a pawnshop only accepted
items that customers had no interest in ever reclaiming, it would not make any
money from interest, and the store would in effect become a second hand dealer.
Determining if the customer is likely to return to reclaim an item is a subjective
decision, and the pawnshop owner may take many factors into account. For
example, if a young able-bodied man comes into the pawnshop to pawn an electric
wheelchair (perhaps claiming it to be the possession of his late grandparent), the
pawnshop owner may doubt that the item will be redeemed. On the other hand, if a
middle aged man pawns a top quality set of golf clubs, the pawnshop owner may
assess it as more credible that he will return for the items. Some customers may
attempt to persuade the pawnshop owner that the item in question is important to
them ("that necklace belonged to my grandmother, so I will certainly return for it")
as a means of obtaining a loan. Other customers return to the same store,
repeatedly pawn the same item(s) as a way of borrowing money, and return to pay

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the interest and recover the item(s) before the end of the loan period; thus, the
pawnbroker knows that redemption is likely and will therefore make the loan.

The saleability of the item and the amount that the customer wants for it are also
factored into the pawnbroker's assessment; if a customer offers a very salable item
at a low price, the pawnbroker may accept it even if it is unlikely that the customer
will return, because the pawnshop can turn around a quick profit on the item.
However, if a customer offers an extremely low price the pawnbroker may turn
down the offer, because this suggests that the item may either be counterfeit or
stolen.

In some countries e.g. Sweden there is legislation to prevent the pawn broker from
making unfair profits (usury due to financial distress or ignorance of the customer)
at the expense of the customer by low evaluation on their collaterals. It is stated
that the pawn broker may not keep the collateral but must sell them at public
auction. Any excess after paying the loan, the interest and auction costs must be
paid to the customer. If the item does not fetch a price that will cover these
expenses the pawn broker may keep the item and sell it through other channels.
Despite this protection. the cost for the customer to borrow money this way will be
high, and if he cannot redeem the collateral it would in many cases be better to sell
the goods directly.

Inventory Management
Pawnshops have to be careful to manage how many new items they accept as
pawns: either too little inventory or too much is bad. A pawnshop might have too
little inventory if, for example, it mostly buys jewels and gold that it resells or
smeltsor perhaps the pawnshop owner quickly sells most items through specialty
shops (e.g., musical instruments to music stores, stereos to used hi-fi audio stores,
etc.). In this case, the pawnshop is less interesting to customers, because it is
mostly empty.

On the other extreme, a pawnshop with a huge inventory has several

disadvantages. If the store is crammed with used athletic gear, old stereos, and old
tools, the store owner must spend time and money shelving and sorting items,
displaying them on different stands or in glass cases, and monitoring customers to
prevent shoplifting. If there are too many low-value, poor quality items, such as old
toasters, scratched-up 20-year-old TVs, and worn-out sports gear piled into
cardboard boxes, the store may begin to look more like a rummage sale or flea
market. Small, high-value items such as iPod players or cell phones must be in
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locked glass display cases, which means the owner may need additional staff to
unlock the cabinets for items customers want to examine. As a store fills with items,
an owner must protect inventory theft by hiring staff to supervise the different areas
or install security cameras and alarms. Too much unsold inventory means that the
store has not been able to realize value from these items to provide cash to lend.

The better option lies in the middle: a store with a moderate amount of good
quality, brand-name items arranged neatly in the display windows attracts
passersby, who are more likely to enter and shop. If items are attractively laid out in
display cases and shelves, the pawnshop looks more professional and reputable.
Once passersby start shopping in the store, they may be more inclined to pawn or
sell their own items to the pawnshop. Some pawnshop owners prevent cluttered
look by storing overstocked items, or less attractive items such as snow tires, in a
back room or basement. Some pawnshop companies operate a chain of stores in a
state or province. This way, they can balance inventory between stores. For
example, they can move some of a rural store's surfeit of fishing gear to an urban
store.

Some stores also slim down inventory by selling items to specialty retailers. A
pawnshop in a low-income neighborhood that pays a customer $300 for a power
amplifier with a used value of $2000 may find the unit hard to sell alongside much
less expensive merchandise. They may sell the amplifier to a used audio equipment
store whose customers expect higher end equipment. Some pawnshops sell
specialty items online, on eBay or other websites. A specialty item such as a highend model railroad set may not sell in the store for its "blue book" value. On an
online auction, it stands a good chance of bringing a good price.

FORMS OF BUSINESS ORGANIZATION

Only Filipino citizens may establish and own a pawnshop organized as a single
proprietorship

. A pawnshop established as a single proprietorship by non-Filipino owner prior to

January 29, 1973 may continue as such during the lifetime of the registered owner.
If a pawnshop is organized as a partnership, at least seventy percent (70%) of its
capital shall be owned by Filipino citizens.

Pawnshops established as partnerships prior to January 29, 1973, with non-Filipino

partners whose aggregate holdings amount to more than thirty percent (30%) of the
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capital may retain the percentage of their aggregate holdings as of January 29,
1973, and said percentage shall not be increased, but may be reduced, and once
reduced shall not be increased thereafter beyond thirty percent (30%) of the capital
stock of such pawnshop.

In the case of a pawnshop organized as a corporation, at least seventy percent

(70%) of the voting stock therein shall be owned by citizens of the Philippines, or if
there be no capital stock, at least seventy percent (70%) of the members entitled to
vote shall be citizens of the Philippines.

Pawnshops registered as corporations with foreign equity participation in excess of

thirty percent (30%) of the voting stock, or members entitled to vote, of the
pawnshop may retain the percentage of foreign equity as of January 29, 1973, and
said 2 percentage shall not be increased, but may be reduced and once reduced,
shall not be increased thereafter beyond thirty percent (30%) of the voting stock, or
number of members entitled to vote, of such pawnshop.

The percentage of foreign-owned voting stock in a pawnshop corporation shall be

determined by the citizenship of its individual stockholders. If the voting stock in a
pawnshop corporation is held by another corporation, the percentage of foreign
ownership in that pawnshop shall be computed on the basis of the foreign
citizenship of the individuals owning voting stock in, or members entitled to vote of,
the stockholder corporation.

REGISTRATION AND LICENSING

Any person or entity desiring to engage in the pawnshop business shall
a. Register with the Department of Trade and Industry (DTI), in the case of a
single proprietorship; or with the Securities and Exchange Commission (SEC),
in the case of a partnership/corporation. Pawnshops with foreign equity
participation shall also register with the Board of Investments.
b. Secure a license from the appropriate city or municipality where the
pawnshop is to be established and operated, in accordance with the
requirements of the pertinent ordinance in that city or municipality.
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REQUIREMENT
BANK

OF

REGISTRATION

WITH

THE

CENTRAL

Pursuant to Section 6 of P.D. 114, which requires pawnbrokers to register with the
BSP before commencing actual business operations, every pawnshop shall submit to
the BSP an Information Sheet on the entity (using BSP-prescribed form) duly
accomplished by the proprietor/managing partner/president under oath that shall be
the basis for the issuance by the BSP of an Acknowledgement of Registration (AOR).
The Information Sheet shall be accompanied by the following documents:
a. A Certificate of Registration (COR) of business name from the DTI, in case of a
sole proprietorship;
b. Articles of Partnership/Incorporation and by-laws duly registered with the SEC,
in the case of a partnership or a corporation which Articles shall indicate that
the primary purpose of the partnership/ corporation is to engage in the
business of a pawnshop or a pawnbroker;
c. City/municipal license/business license/ mayors permit for 3 the current
period;
d. Personal data sheet (using BSP-prescribed form for pawnshops) with passport
size picture duly accomplished by the proprietor or partners or directors,
president and manager or officer-in-charge of the head office; and
e. Such other documents that may be required by the BSP that are enumerated
in a list attached to the Information Sheet.

No application for registration shall be accepted from a person or entity other than
the proprietor, partner, or incorporator of a pawnshop unless the person or entity
applying on behalf of the proprietor, partner or incorporator submits a duly
executed and notarized special power of attorney authorizing the person or entity to
act on behalf of the proprietor, partner, or incorporator. In the case of a corporate
applicant, a certified true copy of the board resolution authorizing the person or
entity shall likewise be submitted.

A pawnshop shall commence actual operations within six (6) months from the date
of issuance of the AOR. Failure to commence actual operations within the
aforementioned six (6) months period shall render the BSP AOR as automatically
cancelled.

The pawnshop shall notify the BSP in writing of the start of operations within five (5)
business days from the actual start of operations.
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Any pawnshop that is found operating that does not have a current business permit
issued by the city or municipality where it is located and an AOR issued by the BSP
is considered operating illegally. Such pawnshop shall be reported to the Office of
the Mayor of the concerned city or municipality, for appropriate action, without
prejudice to whatever legal action the BSP may pursue under Section 18 of PD No.
114 and other applicable laws against the pawnshop, its proprietor, partners,
incorporators, stockholders, directors, president and officers of the pawnshop.

REGULATORY POWERS OF THE BSP

a. To issue rules and regulations to implement the provisions contained herein:
b. To require from pawnshops reports of condition and such other reports
necessary to
c. Determine compliance with the provisions of this decree:
d. To exercise visitatorial powers whenever deemed necessary; and
e. To impose such administrative sanctions including the imposition of fines for
violationsof this decree and regulations issued by the central bank in
pursuance thereto.

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