Request By:
Ronald Redden
Vice President and Loan Manager
Citizens-Deposit Bank
400 Second Street
Vanceburg, Kentucky 41179
Opinion
Opinion By: Steven L. Beshear, Attorney General; Elizabeth E. Blackford, Assistant Attorney General
You have stated that it is no longer profitable for the bank to finance mobile homes pursuant to KRS 287.215 where the applicant requests that the term of the loan exceed sixty months. Therefore, you have asked whether the bank may legally engage in the practice you call third-party lending whereby the installment sales contract is made between the retailer and the purchaser and then is assigned to the bank by the retailer in order to get around the six-add rate limit imposed on loans made pursuant to KRS 287.215.
The six-add rate established by KRS 287.215 is only applicable to loans made pursuant to KRS 287.215. On retail installment loans made between the retailer and the purchaser permissible time price differential is governed by KRS 371.210 to KRS 371.330. 1 The permissible time price differential on the retail installment sale may be higher than the six-add rate which is permitted on installment loans made pursuant to KRS 287.215.
KRS 371.310 provides that retail installment sales contracts may be sold to assignees. Under this provision banks may purchase retail installment sales contracts or retail charge agreements made between a retailer and a purchaser pursuant to KRS 371.210, etseq. from the retailer seller. As assignee, the bank stands in the shoes of the retailer seller, and acquires all rights of the seller including the right to collect the time price differential set out in the sales contracts.
From the foregoing it is clear that the third party lending arrangement, as you call it, is a legal device pursuant to which banks may take over contracts made between the retailer and the purchaser, and may collect a time price differential as set out in such contracts even though the time price differential exceeds the six-add rate which would be permitted to the bank had it directly loaned the money to the purchaser pursuant to KRS 287.215.
You have also enclosed a form contract and have asked whether it is sufficient to cover such transactions. The contract contains the standard provisions and provides, at the foot of the first page, for sale of the contract to the bank. This office sees no problem with the contract except for paragraph seven of the additional terms and provisions which says that upon default the purchaser shall automatically be liable for a 15% attorney fee and for court costs. This type of provision is specifically allowed on contracts made pursuant to KRS 287.215 or KRS 190.090 etseq. by KRS 287.215(3) and KRS 190.100(d). However, there is no specific provision allowing such fees on contracts made pursuant to KRS 371.210, etseq.
The court has taken the position that stipulations or provisions in contracts for the payment of set attorney's fees upon default are void and unenforceable absent specific provision therefor upon that type of loan. Mammoth Cave Production Credit Association v. L. D. Geralds, Ky.App. 551 S.W.2d 5 (1977). Inasmuch as the legislature has not specifically provided for an advance agreement that attorney's fees of 15% shall be paid by the purchaser upon default for contracts made pursuant to KRS 371.210 et seq. we are of the opinion that that provision would be void and unenforceable and should not, therefore, be included in the retail installment sale contract.
Finally, you have asked whether the APR on the disclosure statement which is made in accordance with the Truth in Lending Act is the same as the annual rate once the loan is set up on the computer and billing begins. While this office has no authority to interpret federal statutes we would note that these are the same. See 12 CFR § 226.8(b)(2) and 12 CFR 226.8(7)(i).
Footnotes
Footnotes
1 Retail installment sales of mobile homes would not fall within the ambit of KRS Chapter 190 which sets out the provisions for installment contract sales for motor vehicles whose cash sale price is $5,000 or less, because mobile homes do not fall within the category of motor vehicles as defined in KRS 190.090(4). Therefore, such contracts are covered by the provisions of KRS 371.210 et seq.