KANSAS COMMENT, 2010

1. Subsection (1) of this section allows the parties to agree to any periodic rate of finance charge on an open end consumer credit loan (other than one secured by a first or second mortgage). Subsection (10) of this section allows the parties to agree on a minimum finance charge for any period during which a finance charge would otherwise be due in an open end consumer loan.

2. Subsection (2) of this section establishes the following periodic rate ceilings for a closed end consumer loan (other than one secured by a first or second mortgage): (a) 36% per annum on the portion of the unpaid balance which is $860 or less, and (b) 21% per annum on the portion of the unpaid balance which exceeds $860. Legislation adopted in 2000 provides that these rate ceilings apply to the unpaid balance of the loan, and are not based on the original principal amount of the loan. Thus a promissory note for a loan subject to this subsection may have two different interest rates, with one rate applying to the portion of the unpaid principal balance of the loan which exceeds $860 at any given time and the other rate applying to the portion of the unpaid principal balance which is equal to or less than $860 at such time.

3. As mentioned above, mortgage loans are not governed by the provisions of subsections (1) or (2) of this section. The rate of finance charge for first mortgage loans (even if they are otherwise subject to all or part of the U3C because they are high-rate or high loan-to-value mortgages) is governed by K.S.A. 16-207. Of course, the parties to a first mortgage loan can always agree to make the transaction subject to the U3C. In that event, subsection (4) limits the maximum rate of periodic finance charge to 18% per annum.

Under subsection (3), the maximum rate of periodic finance charge on second mortgage loans is 18% per annum. However, the parties to a second mortgage loan can agree in writing to "opt out" of the U3C's rate ceilings and instead use the general usury limit authorized by K.S.A. 16-207(b). Note, however, that the parties to a second mortgage loan may only "opt out" of the U3C's rate ceilings. All other provisions of the U3C (including its limits on prepaid finance charges) would continue to apply to the transaction.

Subsections (3), (4) and (6)(a) were amended by legislation adopted in 2000 to address permissible finance charges on consumer loans secured by certain manufactured homes. Subsection (3), as amended in 2000, provides that a lender may charge a periodic finance charge not to exceed 18% on any consumer loan secured by a qualifying manufactured home. A specific rate authority (e.g., subsections (3) or (4) in the case of loans secured by manufactured homes) should control over a more general or non-explicit rate authority (e.g., subsections (1) or (2)). Subsection (6)(a), as amended in 2000, does not require that the prepaid finance charge in a loan secured by a manufactured home be used to "buy down" the interest rate. Compare this to K.S.A. 16a-2-201(3), also amended by legislation in 2000, which requires the maximum 5% prepaid finance charge in a credit sale of a manufactured home be used to buy down the interest rate that would otherwise apply.

Under subsection (4), the parties to a "consumer" loan secured by a qualifying manufactured home in which the amount financed exceeds $25,000 may agree to "opt in" to the U3C and, in so doing, may agree on a periodic rate not to exceed 18% (as well as prepaid finance charges permitted under subsection (6))— rather than being limited to the 15% usury rate found in K.S.A. 16-207(a) for unsecured or personal property loans not governed by the U3C.

4. While federal law generally subjects national banks to the usury limitations of the states in which they are located, see 12 U.S.C. § 85, national banks may "export" the interest rates and related charges permitted in their home state and are not bound by the interest rate limitations of the state of the consumer's residence. For example, a national bank located in South Dakota is not bound by the limits imposed by this section in the rates it charges its Kansas credit cardholders. See Marquette National Bank v. First of Omaha Corp., 439 U.S. 299, 99 S.Ct. 540, 58 L.Ed.2d 534 (1978). This same treatment has been expanded beyond the pure interest rate to include items such as late payment fees, returned check fees, over limit fees and the like. See Smiley v. Citibank (South Dakota), N.A., 116 S.Ct. 1730 (1996).

5. Subsection (6) deals with prepaid finance charges. Any prepaid finance charge would ordinarily need to be included in the calculation to determine whether the rate of finance charge on a transaction exceeds the limits prescribed by this section. Under the special rule of subsection (6), however, this result is changed. Note, however, that any prepaid finance charges still must be included in the annual percentage rate calculation for disclosure purposes under the TILA. As a result, it would be possible for a loan contract to disclose an annual percentage rate for purposes of the TILA that is greater than the stated rate allowed by this section, and yet not be in violation of this section. Moreover subsection (6) makes it clear that prepaid finance charges are earned at the time the loan is made. Thus, if a loan is prepaid no refund of any portion of the prepaid finance charges needs to be made, unless the parties have provided for a refund in a signed writing.

The maximum amount of prepaid finance charges depends on whether or not the transaction is a mortgage loan (including a loan secured by a qualifying manufactured home). Subsection (a) permits lenders who make loans secured by real estate or certain manufactured homes to impose prepaid finance charges of up to 8% of the amount financed. However, the total of all prepaid finance charges payable to the lender or any related person cannot exceed 5% of the amount financed. Two of the largest and most common prepaid finance charges in mortgage loans are "points" (or origination fees) and mortgage broker fees. As noted in the Kansas Comment to subsection (4), first mortgage loans that are subject to the U3C because their loan-to-value ratios exceed 100% remain subject to the interest rate limitations of K.S.A. 16-207. Under subsection (8) of this section, however, the U3C's limits on prepaid finance charges continue to apply to such loans. Similarly, if the parties to a second mortgage loan "opt out" of the U3C's rate ceilings under subsection (3), the U3C's limits on prepaid finance charges continue to apply to the transaction. Subsection (6)(b) permits lenders in loans not secured by real estate or certain manufactured homes to impose nonrefundable prepaid finance charges of up to 2% of the amount financed or $100, whichever is less.

Prepaid finance charges permitted under subsection (6) are expressed as a percentage of the "amount financed" of the loan. "Amount financed" is defined in K.S.A. 16a-1-301(4) as "the net amount of credit provided to the consumer or on the consumer's behalf." This definition — and the accompanying Kansas regulation, K.A.R. 75-6-26 — tracks the Regulation Z treatment of "amount financed." See Regulation Z, 12 C.F.R. § 226.18(b). This brings up a noteworthy point:

First, the "amount financed" is usually the principal amount of the loan minus the amount of any prepaid finance charges. (There are some minor exceptions to this general rule under Regulation Z.) This means that, when a prepaid finance charge is imposed, the "amount financed" will be less than the principal amount of the loan. Accordingly, a lender desiring to charge the maximum prepaid finance charge that can be paid to the lender itself under subsection (6)(a), that is 5%, would need to multiply that percentage (5%) by the amount financed, and not by the principal amount of the loan. To illustrate, if the principal amount of the loan is $100 and the prepaid finance charge is $4.76, then the amount financed would be $95.24. ($100 - $4.76 = $95.24.) This prepaid finance charge approximately equals the 5% limit under subsection (6)(a). ($4.76 / $95.24 = 5%, rounding issues aside.) Accordingly, in most situations, the maximum prepaid finance charge under subsection (6)(a) payable to the lender itself, when expressed as a percentage of the principal amount of the loan, is 4.7619% (.05 / 1.05 = .047619). This analysis assumes the entire prepaid finance charge is payable only to the lender, with no prepaid finance charge payable to a third party (e.g., a mortgage loan broker). If a prepaid finance charge is also payable to a third party (let's say $2 on a $100 principal amount loan), then the 4.7619% multiplier would need to be multiplied by the principal amount of the loan minus the third-party prepaid finance charge (in this example, $98). Similarly, in most cases the maximum prepaid finance charge under subsection (6)(a) payable to the lender and any third parties, again when expressed as a percentage of the principal amount of the loan, would be approximately 7.4% (.08 / 1.08 = .074070).

6. Subsection (9) of this section was added by legislation adopted in 1999 and is directed at the practice known as "loan flipping" — quick, repeated refinancings of a consumer loan that are often accompanied by significant prepaid finance charges. Under this provision, if a loan is refinanced within the first 12 months by the same lender or a related party, then the lender (or the related party) may not receive prepaid finance charges that exceed the specified limits based on the additional amount financed in the subsequent loan. In that regard, the additional amount financed is determined by subtracting the unpaid principal balance of the old loan and the closing costs for the new loan that are not included in the prepaid finance charges for the new loan from the amount financed for the new loan.

7. Subsection (11) of this section applies if the parties to a contract for deed to real estate "opt in" to the U3C and subject the transaction to the 18% limit on periodic finance charges and the 8%/5% limit on prepaid finance charges that apply to first mortgage loans.

8. In a nutshell, the Kansas maximum interest rate or finance charge structure as of July 1, 2000, is as follows:

(a) Open end consumer loans not secured by a first or second mortgage (or a qualifying manufactured home) — the rate agreed to by the parties, plus prepaid finance charges of 2% of the amount financed or $100, whichever is less (K.S.A. 16a-2-401(1) and (6)(b));

(b) closed end consumer loans not secured by a first or second mortgage (or a qualifying manufactured home)—36% on the unpaid principal balance which is $860 or less, and 21% on the unpaid principal balance which exceeds $860, plus prepaid finance charges of 2% of the amount financed or $100, whichever is less (K.S.A. 16a-2-401(2) and (6)(b));

(c) "consumer" loans (not secured by an interest in land) in which the amount financed exceeds $25,000 — 15%, with no specific limit on prepaid finance charges (K.S.A. 16-207(a); not covered by the U3C);

(d) open end consumer credit sales — the rate agreed to by the parties (K.S.A. 16a-2-202(1));

(e) closed end consumer credit sales — the rate agreed to by the parties, plus prepaid finance charges of 2% of the amount financed or $100, whichever is less; however, in the case of a closed end credit sale of a qualifying manufactured home, the seller may charge prepaid finance charges of 5% of the amount financed provided that they are used to buy-down the interest rate (K.S.A. 16a-2-201(2) and (3));

(f) "consumer" credit sales (other than a contract for deed) in which the amount financed exceeds $25,000 — 15%, with no specific limit on prepaid finance charges (K.S.A. 16-207(a); not covered by the U3C);

(g) consumer loans secured by a first mortgage and contracts for deed having a fixed rate, term and amortization schedule — 1 1 / 2 % above current rate for federal home loan mortgage corporation conventional mortgages, with no specific limit on prepaid finance charges (K.S.A. 16-207(b); rate not covered by the U3C regardless of the rate or loan-to-value ratio, but prepaid finance charges are subject to the U3C's limits if the loan-to-value ratio exceeds 100%);

(h) consumer loans secured by a subordinate mortgage having a fixed rate, term and amortization schedule — 18% plus prepaid finance charges of 8% of the amount financed (with a 5% of the amount financed limit on prepaid finance charges paid to the lender or a related party) (K.S.A. 16a-2-401(3) and (6)(a));

(i) consumer loans secured by a first or second mortgage and contracts for deed that permit adjustment of the rate, term or amortization schedule — the rate agreed to by the parties, subject to the prepaid finance charge limitations (K.S.A. 16-207(h) and K.S.A. 16a-2-401(6));

(j) non-consumer first mortgage loans and contracts for deed that permit adjustment of the rate, term or amortization schedule — the rate agreed to by the parties, with no specific limit on prepaid finance charges (K.S.A. 16-207(h) and K.S.A. 16a-2-401(7));

(k) consumer loans secured by qualifying manufactured homes — 18% plus prepaid finance charges of 8% of the amount financed (with a 5% of the amount financed limit on prepaid finance charges paid to the lender or a related party) (K.S.A. 16a-2-401(3), (4) and (6)(a));

(l) insurance premium financing — $12 per $100 (approximately 21.50%) plus a flat $10 (K.S.A. 40-2610; not covered by the U3C);

(m) pawnbroker transactions — 10% per month (120% per annum) on transactions of $5,000 or less only (K.S.A. 16-719; not covered by the U3C);

(n) business and agricultural loans — the rate agreed to by the parties, with no specific limit on prepaid finance charges (K.S.A. 16-207(f); not covered by the U3C);

(o) pension plan loans to an individual participant or family member— the rate agreed to by the parties, with no specific limit on prepaid finance charges (K.S.A. 16-207(g) and K.S.A. 16a-1-301(17)(b)(ii); not covered by the U3C);

(p) broker-dealer advances to purchase or carry securities —1 1 / 2 % above the broker-dealer's most recent commercial loan or 10%, whichever is higher (K.S.A. 16-214; not covered by the U3C);

(q) delinquent accounts which do not otherwise provide for interest and are not covered by the U3C — 10% (K.S.A. 16-201).

Note that whenever "no specific limit on prepaid finance charges" is used in the foregoing discussion, it is not meant to indicate that prepaid finance charges are prohibited. Rather, it is intended to indicate that there is no allowance for prepaid finance charges that are separate and apart from the general limit on finance charges, and that any prepaid finance charges must be included in determining if the applicable rate ceiling has been exceeded.

Revisor's Note:

Section was also amended by L. 2000, ch. 28, § 2, but that version was repealed by L. 2000, ch. 159, § 14.

Cross References to Related Sections:

Joint rules and regulations governing loans under subsection (7), see 16-207d.

Law Review and Bar Journal References:

"The New Kansas Consumer Legislation," Barkley Clark, 42 J.B.A.K. 147, 194 (1973).

"Survey of Kansas Law: Consumer Law," John C. Maloney, 27 K.L.R. 197, 201 (1979).

"Interest Rates in Kansas: The Decline and Fall of Ezekiel," Barkley Clark, 49 J.B.A.K. 81, 86, 87, 95 (1980).

"The U.C.C.C. and Real Estate Financing: A Square Peg in a Round Hole," Thomas L. Griswold, 28 K.L.R. 601, 603, 606 (1980).

"New Kansas Usury Laws and Interest Rate Regulation," Robert G. Martin, 20 W.L.J. 572 (1981).

Attorney General's Opinions:

Interest and charges; usury. 79-252.

Finance charge for consumer loans; supervised lenders. 79-286.

Supervised lenders; examination of national banks. 80-94.

Interest and charges; extension of most favored lender doctrine to state banks. 81-158.

Finance charges; additional charges not included therein. 81-209.

Consumer loans; finance charge; exemption of adjustable rate loans from maximum finance charge limits. 82-128.

Consumer loans; finance charge; effect of amendments passed in same legislative session. 82-153.

Consumer loans; finance charge; exception of adjustable rate loans from maximum finance charge limits. 82-227.

Consumer loans; maximum finance charges; loans secured by mortgage on real estate; charging of nonrefundable origination fee. 84-2.

Definitions; supervised lender; supervised financial organization. 84-11.

Disclosure; discounts for cash purchases. 86-115.

Interest rates applicable to certain real estate mortgages; loan agreements applying consumer credit code (UCCC) rates. 97-99.

CASE ANNOTATIONS

1. Unless creditor meets requirements of K.S.A. 16a-2-301, there is no authority to make supervised loans. United Kansas Bank & Trust Co. v. Rixner, 4 Kan. App. 2d 662, 667, 610 P.2d 116 (1980).

2. Section authorizes a nonrefundable origination fee based on amount financed, including refinancing rather than new money advanced. Gonzales v. Associates Financial Serv. Co. of Kansas, 266 Kan. 141, 142, 967 P.2d 312 (1998).

3. Allegation that prepaid finance charges exceed K.S.A. 16a-2-401 limit; prepaid insurance excluded, when. In re Miner, 369 B.R. 655, 664, 665, 666 (2007).

4. Cited; Kansas regulation of payday loans over internet held not to violate dormant commerce clause. Quik Payday, Inc. v. Stork, 549 F.3d 1302, 1305 (2008).