Request By:
Mr. H. Foster Pettit
Secretary
Cabinet for Public Protection and Regulation
U.S. 127 South
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; Elizabeth E. Blackford, Assistant Attorney General
You have written to ask whether industrial lending companies are permitted to make gross loans in the amount of $16,666 with a disbursement to the borrower of $10,000 or a gross loan of $10,000 with a disbursement of $6,000 to the borrower where the interest is to be taken in advance under the discount method pursuant to HB 894; Acts 1980, Chapter 108.
House Bill 894 makes the following provision:
"An industrial loan company organized under KRS 291.410 to 291.600 in addition to its powers heretofore granted shall be authorized to charge interest on loans or extensions of credit in the same manner and at the same rate as is permitted by KRS 289.215 for banks or trust companies or combined banks and trust companies, and provided further that the principal amount of such loan or extension of credit exclusive of interest or other charges shall not exceed ten thousand dollars ($10,000)."
Pursuant to the rationale discussed at length in OAG 76-464, this office is of the opinion that an industrial lending company is permitted pursuant to HB 894, as it has been under KRS 291.460, to take interest in advance by the discount method (where the maturity date of the loan does not exceed five years and thirty two days) or to add the interest onto the principal. The following examples demonstrate the difference between the methods:
1. Borrower desires the maximum permissible loan where the interest is taken in advance or discounted. Principal Amount$10,000Interest at 8% on $10,000for 5 years-4,000Proceeds to Borrower$ 6,000
2. Borrower desires the use of the maximum permissible amount where the interest is added on. Principal Amount$10,000Interest at 8% on $10,000for 5 years4,000Total amount of loan$14,000
As is apparent from the examples, this office is of the opinion that where the interest is taken in advance by way of a discount, the maximum amount of the loan permitted pursuant to HB 894 is $10,000 with a disbursement to the borrower of $6,000. In like manner, where the interest is added on and repaid over the life of the loan, the maximum amount of the loan is $10,000, with interest of $4,000 being required to be paid by the borrower in addition to the principal.
This opinion is in accord with OAG 76-464 which, when considering the $7,500 maximum principal amount then permitted pursuant to KRS 291.460, said:
"The significant point is that the maximum principal allowed is $7,500, regardless of whether the interest is taken out in advance or whether it is added on to the principal. The amount turned over to the borrower after a legal discount is of no significance standing alone. The significant point is that $7,500 is the maximum 'principal', and the interest of 7% for five years can be deducted from the original principal sum. . . . It must be borne in mind that the 'original principal' is not to be equated with the 'proceeds to the borrower' , which is the net amount of money turned over to the borrower after the interest is taken out under the discount method."
This reasoning is still valid under HB 894, the only difference being that the maximum principal amount has been raised to $10,000 and the permissible interest rate has increased.
OAG 80-39 is hereby modified in accordance with this opinion.