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Suddenly pawnshops are in the spotlight. Thank the Great Recession and the popularity of reality TV.

Turn on TruTV's hit show Hardcore Pawn and you will catch glimpses of the goings-on at Detroit pawnshop American Jewelry & Loan. A middle-aged man wearing a backwards hat ambles into the store, reaches into his mouth and pops out his gold tooth, slapping it on the counter as collateral for a $10 loan. In another episode an amputee pawns his prosthesis for a $50 loan and leaves on crutches.

Scenes like that are the stuff of hit cable-TV shows, but the underlying high-margin business is experiencing a miniboom and creating an opportunity for investors ­seeking stocks that capitalize on lingering economic woes and down-and-out consumers. It's no longer just the unemployed or uneducated who are flocking to pawnbrokers, payday loan firms and ­bargain retailers.

Pawnbrokers are seeing waves of homeowners unable to qualify for credit cards, entrepreneurs looking for seed capital and small-business owners struggling to make payroll. In some cases pawnshops are stepping in where the banks are stepping back.

"We're servicing people that in the past had easy access to credit," says Todd Hills, CEO of Pawngo.com, an online pawn operation that launched in June of this year and specializes in high-value loans. "Ninety percent of our customers are college educated or own a home. They're in the $75,000 to $150,000 range in income. Bank solutions have dried up."

"We've had 30% to 40% earnings growth over the last four or five years," says Eric Fosse, president of North American operations at EZCorp.

If you've never set foot inside a pawnshop, here's how they work. People in need of quick cash come in with things like jewelry or electronics, and brokers make on-the-spot loans based on the collateral presented. No credit check is necessary, though a description of every item is sent to local police.

Bring in a television worth $300 and you might get a 30-day loan of $100 at 20% interest per month. Pay $120 back after the first month and you get your TV back. Or just pay $20 per month in interest until you can pay off the entire loan. If you miss a payment, the pawnbroker sells your TV after a month's grace. Most states cap the monthly interest rate, which ranges from 4% in New York to 25% in Florida.

The big profits, of course, come from lending and not from selling TVs or Barcaloungers in pawnshop showrooms. In fact, loan defaults are surprisingly low. The National Pawnbrokers Association says that 80% of all pawn loans are repaid.

The gold bull has been good for pawnbrokers. Some 60% of all pawn loans are made on jewelry. As gold prices rise, so do loan values, even for unsellable gold jewelry, which can be smelted and sold. "If gold is at $1,650 today, these guys are only lending on the equivalent of $1,000," says David Burtzlaff, analyst at Stephens. "They've built in a cushion so that if gold falls it doesn't just wipe out their business."

By: Carolyn Said, Chronicle Staff Writer

While all eyes were on the budget this Legislative session, Texas passed two bills that may help protect consumers from scams involving payday loan scams.

House Bill 2592 requires lenders to provide certain disclosures to customers, such as fees and interest rates. Some of these fees can add up to an annual interest rate of more than 300 percent. Customers have found themselves owing much more than the initial cost of the loan, the Better Business Bureau said.

House Bill 2594 creates a licensing requirement for car and payday loan providers. The new requirement will allow customers to check a lender out with the state before doing business.

Both bills will be effective Jan. 1, 2012.

To help consumers avoid high fees and scams, the BBB offers the following tips:

■ Beware of online lenders offering quick cash. Such lenders claim they are not bound by state and federal regulations and therefore skirt many of the laws that protect consumers.

■ Pay off the loan quickly. A $15 fee isn't too high if you pay it only once. Extending the loan period means paying multiple fees, making it more difficult to pay down on the original loan amount.

■ Do not pay a fee up front. Lenders asking for a fee before they provide the loan are not legitimate.

■ Be wary of lenders asking for a wire transfer. The Texas Attorney General's Office said scammers will ask for this type of payment rather than allowing you to mail a check to avoid an additional charge of mail fraud.

■ Check the lender's name closely. Scammers will also use a company name similar to that of a reputable lender. The AG's office filed suit against a company calling itself City Mortgage, which had no affiliation with Citibank or CitiMortgage.

■ If it seems too good to be true, it is. Companies claiming to offer a low interest rate regardless of credit are not trustworthy, according to the AG's office. The National Foundation for Credit Counseling or the Consumer Credit Counseling Service in your area can help you consolidate debt or get a loan despite poor credit history.

■ Check the company's rating. Go online to www.BBB.org to check out a company's rating and customer complaints before dealing with a lender. Remember, the threat of identity theft is high since all lenders require personal information. Unscrupulous companies will use that to their advantage.

The Burnsville, MN-based business was issued pawn broker licenses on April 19 to open two stores in Des Moines, but those plans were interrupted by a six-month moratorium on new pawn shops and payday loan stores that was enacted Monday by the City Council.

The signs were still posted this afternoon at 4620 S.E. 14th St. despite requests to have them removed, said Roger Brown, an assistant city attorney.

"It's their plan to be open for business someday -- we don't dispute that plan," Brown said. "I don't see any violation for their sign that's inside the window. Obviously everything changes the minute that door opens for business, but we're going to view it as an irritation but not a legal violation as long as it's just a sign proclaiming something that, at least at this point, is not correct."

As of early this afternoon, city and Pawn America officials had been trading phone messages regarding the request to remove the signs, Brown said.

Michael Green, an attorney from the Brown Winick law firm who's representing Pawn America, referred questions to the company's public affairs representative, who could not immediately be reached for comment.

Businesses who believe the moratorium causes them "unnecessary hardship" can launch an appeal before the council as soon as its June 14 meeting. Officials from Pawn America, who plan to open stores at 3715 Merle Hay Road and 4620 S.E. 14th St., are expected to seek relief from the moratorium.

There aren't any "now open" signs at the Merle Hay Road location, Brown said.

"I don't know what kind of message they're trying to send if they choose to put signs up in the windows, but we will be forced to do something if they actually were to open for business," he said.

The city will "seek relief from the court to order them to close" if the business opens, he added.

City leaders will spend the next 180 days examining long-term zoning changes that could require separation distances between the businesses and cap interest rates for loans made by pawn shops. Language in the Iowa code appears to give municipalities the ability to regulate interest rates on loans given by pawn shops, city officials said.

The moratorium was urged by neighborhood leaders, Iowa Citizens for Community Improvement and several business owners who've voiced concerns about the number of pawn shops and payday lenders in Des Moines.

There is precedence for the restrictions the city is considering for pawn shops and payday loan stores. City zoning already restricts where bars, liquor stores and pornography shops can be located, for instance.

There are an estimated 14 pawn shops and 31 payday lenders in Des Moines, city officials said.

Brad Rixmann, owner of Pawn America, told council members many of the negative perceptions people have about pawn shops are unfounded. The business would make over $2 million in building improvements at the two locations proposed in Des Moines, both of which are former Furniture Row stores, company officials said. There are 23 Pawn America locations in Minnesota, Wisconsin, South Dakota and North Dakota.

City Councilman Brian Meyer said his week he is disappointed the signs are posted in the window of the building at 4620 S.E. 14th St. Meyer said he hopes the company isn't "intentionally thumbing their nose at the city."

Job losses in the U.S. may be in the process of bottoming, but the employment market is surely nowhere near being healthy yet. So, it's not surprising that innumerable people find themselves lacking the cash to make even the most basic purchases or pay their usual monthly bills.

That's why "money stores" that provide short-term loans by using car or jewelry as collateral have become enticing to Americans who need funds to cover necessities -- especially when their credit card limits have been cut, they're unable to get a traditional bank loan or they even lack any bank account at all.

Most people who turn to such short-term credit sources do so to "cover recurring expenses like rent, food or bills . . . and to cover home mortgage payments," according to a survey by the nonprofit Texas Appleseed. And yet, top federal regulators warn that people who use these loans repeatedly can end up in serious financial hardship because the loans come with such high interest rates.

Small Storms Become Big Storms

So, what are people to do? Being in a financial tight spot is fraught with difficulty, but there are a few options to consider. Active initiatives are now available from both governmental and nonprofit groups.

For instance, Joshua Reynolds runs a program at nonprofit organization Family Services of Greater Houston, which makes auto-title loans and offers low-cost alternatives to payday loans (in which a working person's next paycheck serves as the collateral). "A lot of our clients don't have the cushion to weather small storms, but those become big storms when they take out high-cost loans," says Reynolds, a vice president of emerging programs at the nonprofit. His group writes loans with annual rates that average around 8%, compared with effective annual percentage rates of 300% to 500% or more for typical money-store loans.

The group works closely with each borrower to ensure that he or she has the income to make repayments, and it helps the borrower budget a monthly payment schedule. Instead of writing out a short-term loan that most people cannot pay back in a month's time, Family Services of Greater Houston will make a $5,000 car loan, for example, for around a two-year term with a $200-a-month payment. Financial coaching is mandatory for anyone who takes out these loans. "We want to break the cycle and help them build savings for future emergencies."

Reynolds says in his experience, each borrower his group works with wants to repay loans and to improve credit. So far, the group has made just under 2,000 loans, and its experience has been heartening. "Nine out of 10 borrowers successfully complete their loan," he says.

Affordable Loans From Banks

Another network that borrowers can tap into is a pilot Federal Deposit Insurance Corp. small-loan program, which ends in October 2010. The program has 30 participating banks in several states and is intended to identify effective and replicable business practices to help banks incorporate affordable small loans into their mainstream services.

"Banks are well positioned to offer small-dollar loans at greatly reduced costs and help their customers build savings in the process," said FDIC Chair Sheila Bair in a recent speech. In this program, people can get loans up to $1,000 with annual percentage rates below 36% and no prepayment penalties.

Bair has also shone a light on Americans who are "unbanked" or "underbanked." Last year, she released a survey that showed over a quarter, or 25.6%, of all households either have no checking or savings account, or have a bank account but still choose to rely regularly on alternative lenders such as payday loan stores and pawnshops.

"These stores lure people in by making such things as money orders much cheaper than banks," says Anthony Santiago, chief operating officer of Newark Now, a program that aims to improve the industrial city in New Jersey. "Many landlords only accept money orders for rent, and people need the service cheap. It's as simple as that."

"An Opportunity to Get a Second Start"

Since the FDIC released its report, several states and cities have joined a program called "Bank On" to get the unbanked to open accounts. For example, banks that have signed up in the Newark effort offer people one free money order a month, and they're making financial education a key component of the initiative. "It's an opportunity to get a second start, act responsibly and learn to save for unforeseen expenses," says Santiago.

The program has different components in different cities and has also been adopted by Seattle, California, Illinois, Denver and St. Petersburg, Fla., among others.

Other initiatives have been launched elsewhere. Lyn Haralson, a community affairs specialist for the Federal Reserve Bank of St. Louis, has been instrumental in developing an alternative payday loan program in Arkansas. The group, called Arkansans Against Abusive Payday Lending is a coalition of 36 consumer, military and faith-based organizations in the state.

It offers a loan of up to $500 with no application fee, and the interest rate doesn't exceed 17% a year. Borrowers are given free financial counseling. And they're also loaned an additional 100% of their loan that gets deposited into an interest-bearing savings account, as a first step toward a healthier financial life. The six- to 12-month repayment term is much more liberal than traditional payday loans, which require payment in full by the next paycheck.

It Pays to Do Some Homework

It's also worth reading fact sheet on alternatives to payday loans that the independent consumer advocacy group Consumers Union publishes. It advises, among other things, that consumers try to get an advance from employers to meet short-term cash needs.

Despite the pressure felt by people in dire financial straits, running into the first money store they see shouldn't be their first move because other options are often available. The extra homework will save people from getting into a bind that's hard to get out of, as others have found.