Request By:
Mr. David B. Goldston
Attorney at Law
Federal Bar Building
1815 H Street, N.W.
Washington, D.C. 20006
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
Your question is whether the Attorney General of Kentucky still holds the view that a finance charge at the annual percentage rate of 12% on a retail installment sales contract would not be a violation of the Kentucky usury law. The answer is "yes".
Under KRS 360.010, the legal rate of interest is 6%, but where the loan is $15,000 or less the parties in writing may agree on an interest rate not to exceed 8.5% per annum. If the loan exceeds $15,000, the parties may agree in writing on any rate of interest. The taking or charging a rate in excess of that allowed by KRS 360.010, when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bill, or other evidence of debt carries with it or which has been agreed on. KRS 360.020.
The usury statutes are applied to only a loan of money or a forbearance of an existing debt. A loan is an advancement of money under an agreement that the borrower will repay at some future date, together with "interest" or a charge for the use of the money as may be agreed upon. "Forbearance" means that the lender will refrain, for a given period, from requiring the repayment of the debt or loan that is due and payable. 45 Am.Jur. 2d, Interest and Usury, § 117, p. 102.
In OAG 68-325, copy enclosed, we concluded that "carrying charges" or "finance charges" in retail sales installment contracts are not "interest" charged on a loan or "forbearance of a debt", and are therefore not affected by the usury statutes where they are provided for in the contract of sale as a part of the purchase price. However, the extension of the time of payment, of a purchase-money obligation beyond that fixed for its maturity under the original contract would constitute a "forbearance of a debt", and any charge made for such extension or forbearance would then be interest which could not exceed the maximum legal rate.
Our earlier opinion was based upon the wording of KRS 371.260(1), authorizing a "time price differential" in retail installment contracts, and the rule established in Munson v. White, 309 Ky. 295, 217 S.W.2d 641 (1949), holding that finance charges in retail installment contracts for the purchase of personal property does not violate the usury statutes.
We have found nothing in the Kentucky law, statutes or case decision, which would cause us to change our view. Thus we conclude that finance charges in connection with retail sales (personalty) installment contracts constitute part of the consideration for the sale, and the usury statutes (KRS 360.010 and 360.020) do not apply. As the court said in McAlister v. Gingles, 244 Ky. 254, 50 S.W.2d 551 (1932) 553, "where one person buys of another property at a certain price under such circumstances, he cannot claim that the transaction was usurious simply because the price was fixed too high." The essential element in these cases is that where the service or finance charge is in reality merely a part of the purchase price in the delayed payment for the purchase of personal property items, no "interest" or "loan" is involved. One is merely being charged a greater price for the goods because it is not a full payment, cash transaction, Cartwright v. C.I.T. Corporation, 253 Ky. 690, 70 S.W.2d 388 (1934) 391.
The "time price differential" , as set forth in KRS 371.260(1), means the difference between a cash sale price and an agreed upon time sale price. The statute permits the charge of sums of money in excess of the cash price of the goods in consideration of the agreed upon delayed payment for the goods on an installment basis. Thus the statute codifies the case decision principle to that extent.
The 3rd Circuit United States Court of Appeals in Aldens, Inc. v. Packel, 524 F.2d 38 (1975), construes "credit" charges under installment sales contracts regulations, as being synonymous with "interest." The court, in dealing with Pennsylvania's Goods and Services Installment Sales Act, in effect held that "credit" charges simply means that the consumer is paying for the temporary use of money [money due the seller] . As we said in OAG 76-664, copy enclosed, it seems unrealistic to conclude that a "credit" charge is not interest since it actually reflects a different price to the cash price because of the delay in the seller's getting his money. In the sale the seller has exchanged his goods for money, i.e., money to be paid in the future. Thus the sale of goods is converted into a loan of money. The cash price is the real purchase price. The "time price differential" is really the price paid for using the money due the seller for the delayed period of time. However, as we pointed out above, our Kentucky appellate court has taken the position in an unbroken line of cases that "charges" made for such delayed payment for goods do not constitute interest. Thus the Kentucky court has held consistently that the usury statutes are not involved. However, if this precise question were presented to the Supreme Court of Kentucky, it is possible that it might desire to follow Aldens, Inc. v. Packel, above.