Request By:
Mr. L. R. McGuire
President
First National Bank/Grayson
P.O. Box 67
Grayson, Kentucky 41143
Opinion
Opinion By: Steven L. Beshear, Attorney General; Elizabeth E. Blackford, Assistant Attorney General
You have written concerning the following matter. Pursuant to KRS 287.215(2) a lender is permitted to charge an investigation fee on installment loans which is not to exceed one dollar for each fifty dollars or a fraction thereof of the first eight hundred dollars of the principal amount of the loan. You have asked whether the term "principal amount" as used in this subsection means the net proceeds of the loan (the unpaid balance) or whether it means the total amount of the note which includes not only the unpaid balance, but also the amount paid for credit life insurance and the prepaid finance charge. Under the latter approach the investigation fee is higher than it would be if it was calculated solely upon the basis of the net proceeds.
This office is of the opinion that the term "principal amount" as used in KRS 287.215(2) means net proceeds only, for that is the sum which is the same as the sum referred to by the term "principal amount" as it is used in KRS 287.215(1).
KRS 287.215 provides that two charges are to be calculated on the basis of the "principal amount" of the loan. Under KRS 287.215(1) the interest is charged at the rate of six dollars per every one hundred dollars of the "principal amount" of the loan. Obviously the sum that term is referring to is the amount of money the borrower is trying to borrow ab initio. It does not include any prepaid finance charge or other charges.
Once the full amount of the loan has been calculated and is discounted, the term "net proceeds" refers to that amount of money which was originally the amount the borrower is trying to borrow. This is the amount that was used as the basis for the calculation of the interest charges, or, in other words, the principal amount of the loan.
Inasmuch as there is no indication that the amount of money referred to by the term the "principal amount" of the loan as it is used in KRS 287.215(1) is to be any different from the amount referred to by the term "principal amount" as it is used in KRS 287.215(2), this office is of the opinion that the term refers to the same amount in both sections. That amount is that which is deemed to be net proceeds, or the unpaid balance of the loan.