Pawnshop institutions sign loan and collateral agreements, applicable to relevant laws on private lending | Entry case

When signing a loan mortgage contract with a pawn organization, should the upper limit calculation of comprehensive fees and interest be governed by the pawn contract or relevant regulations on private lending? This article provides a detailed analysis based on a case study. This case is included in the “People’s Court Case Database” (Entry No. 2024-08-2-126-001).

Keywords

Civil Law, Pawn, Loan Contract, Private Lending

Comprehensive Fee, Financial Institution, Interest Rate Cap

Pawn Management Measures

Case Number

(2022) Hu 02 Min Zhong 6090

Panel

Presiding Judge: Li Feiyi

(Adjudicating Judge)

Judge: Yang Yiming

Judge: Chen Xianwei

Clerk: Du Ziqiang

Basic Facts

Plaintiff Shanghai Pawn Co., Ltd. claims: On August 30, 2021, Shanghai Pawn signed a “Mortgage Loan Contract” (hereinafter referred to as the “Mortgage Loan Contract”) with Hong Honghong, mainly agreeing that Hong Honghong would borrow from Shanghai Pawn, with comprehensive fees calculated at 2.7% per month, and interest at 0.3% per month; Hong Honghong used two of his properties as collateral for the loan. Subsequently, Shanghai Pawn lent 2.5 million RMB to Hong Honghong, and both parties completed real estate mortgage procedures. Due to Hong Honghong’s failure to repay, Shanghai Pawn filed a lawsuit. The plaintiff requests: 1. Hong Honghong to return the 2.5 million RMB loan; 2. Hong Honghong to pay comprehensive fees (from the loan date to actual payment, at 2.7% per month) and interest (from the loan date to actual payment, at 0.3% per month); 3. Shanghai Pawn has the right to exercise its mortgage rights on the mortgaged property.

The defendant Hong Honghong argues: The loan relationship is merely a private lending relationship, not a pawn contract, and should not support high comprehensive fees and interest based on pawn relations. Since the interest and comprehensive fees on the 500,000 RMB overdue amount exceed legal limits, adjustments are necessary.

The court’s investigation found: In August 2021, Shanghai Pawn (Party A, lender) and Hong Honghong (Party B, borrower, mortgagor) signed a “Mortgage Loan Contract,” agreeing that Party B would mortgage his own property to Party A for a loan due from August 26, 2021, to November 25, 2021; Party B would pay comprehensive fees and interest, with a monthly comprehensive fee rate of 2.7% and a monthly interest rate of 0.3%; the collateral consisted of two properties; the contract also included provisions on dispute resolution and breach of contract. On August 31, 2021, Shanghai Pawn and Hong Honghong completed real estate mortgage procedures, with Shanghai Pawn becoming the mortgagee. On August 30, 2021, Shanghai Pawn lent 2.5 million RMB to Hong Honghong, who has yet to repay the loan or pay the comprehensive fees and interest.

The first-instance court ruled: 1. Hong Honghong to pay Shanghai Pawn 2.5 million RMB; 2. Hong Honghong to pay Shanghai Pawn comprehensive fees (based on 2.5 million RMB, from September 1, 2021, until the effective date of the judgment, at a monthly rate of 2.7%); 3. Hong Honghong to pay interest (based on 2.5 million RMB, from September 1, 2021, until the effective date, at a monthly rate of 0.3%). If Hong Honghong fails to perform these obligations upon maturity, Shanghai Pawn may exercise its mortgage rights.

After the first-instance judgment, Hong Honghong appealed.

The Second Intermediate Court of Shanghai upheld the first and third rulings; revoked the second ruling; modified the second ruling to require Hong Honghong to pay comprehensive fees at an annual rate of 11.8% (based on 2.5 million RMB, from September 1, 2021, until the effective date); and dismissed other claims by Shanghai Pawn.

Legal Reasoning

The core dispute in this case is: whether the upper limit for calculating comprehensive fees and interest should be based on the pawn contract or relevant regulations on private lending.

The comprehensive fee and interest rate for pawn are stipulated in the “Pawn Management Measures” issued by the Ministry of Commerce and the Ministry of Public Security, which aim to regulate pawn activities. Pawn business or pawn contracts should adhere to these measures. However, the “Mortgage Loan Contract” involved in this case, apart from one party being Shanghai Pawn, a pawn business operator, contains only general mortgage loan terms. It does not include pawn-specific clauses such as collateral, promissory notes, absolute pawn, or pawn period. Therefore, it should not be classified as a pawn contract. Although Shanghai Pawn has attributes of a financial or quasi-financial institution, the loan in this case does not constitute a pawn operation; it is a typical private lending activity. The comprehensive fees and interest rates involved should be governed by the “Several Issues Concerning the Application of Law in the Trial of Private Lending Cases” (Legal Interpretation [2015] No. 18, revised in 2020), specifically Article 25, which caps the interest rate at four times the one-year loan market quotation rate published by the National Interbank Funding Center, i.e., 15.4% annually. Deducting the interest calculated at 0.3% per month (annual rate 3.6%), the comprehensive fee should be calculated at an annual rate of 11.8%. Any excess is not supported.

Legal Summary

Contracts signed by pawn operators and borrowers that do not involve typical pawn clauses should be substantively examined by the court. Based on the specific contract content, such agreements should be recognized as general loan or mortgage loan contracts, not pawn contracts. These contracts are subject to the interest rate cap in the “Several Issues Concerning the Application of Law in the Trial of Private Lending Cases,” and pawn operators cannot claim excessive comprehensive fees based solely on the “Pawn Management Measures.”