Request By:
Mr. Ed McDougal
Assistant Vice President
Compliance Division
Citizens Bank and Trust Company
Paducah, Kentucky 42001
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Penny R. Warren, Assistant Attorney General
You asked whether under KRS 287.215(4), 190.120, 371.260(2) and 371.270(2) the $10 or $25 minimum finance charge is to be deducted by a bank before or after computing any rebate due upon prepayment. The answer depends upon the type of loan and statute involved.
For direct installment loans under KRS 287.215(4) banks are permitted to "retain a minimum charge of $10" to cover acquisition costs whenever the rebate computation results in a lesser charge. However, the statute explicitly provides that the bank "shall make a rebate at a rate not less than in accordance with the Rule of 78s . . ." Deduction of the minimum charge before computing the rebate would yield a rate less than in accordance with the Rule of 78s and is, therefore, prohibited. In other words, the rebate computation must be based on the total finance charge for direct loans.
For indirect loans or purchases of installment paper under KRS 190.120, 371.360(2) and 371.370(2), the statute expressly permits deduction of the $10 or $25 acquisition cost before computing the rebate. The proportion or ratio is established "after" the acquisition cost is deducted.
You also asked whether these acquisition costs may be considered income at the time the loan is acquired or only upon prepayment. We find nothing in the above statutes which addresses or controls this issue.
We hope this information is of some assistance to you.