Request By:
Sen. Morgan McGarvey
Opinion
Opinion By: Jack Conway,Attorney General;Matt James,Assistant Attorney General
Opinion of the Attorney General
Sen. Morgan McGarvey has requested an Opinion of the Attorney General on whether credit service organizations are consistent with Kentucky statutes regulating consumer loan companies and loan brokers. We advise that credit service organizations are consistent with Kentucky statutes regulating consumer loan companies and loan brokers.
Sen. McGarvey asks "whether a lender can offer an installment loan product in Kentucky through the referral services of a . . . Credit Service Organization" ("CSO"). As described by Sen. McGarvey:
The CSO operates a storefront location or a website that the borrower visits. The CSO assists borrowers in obtaining loans from the Lender for a fee that will only be charged if the borrower successfully obtains a loan from the Lender. The CSO will disclose to the borrower that the CSO is not the lender but is assisting the borrower in obtaining a loan from the Lender. . . .
. . . .
Although the CSO assists with Loan origination and may perform its own credit check of the borrower, the Lender will have sole discretion in approving or denying loan applications. The Lender will fund the Loan and receive payment on the Loan. The CSO operates as an independent contractor providing services to the borrower and is not an agent of the Lender. The Loans will be made online through the Lender's website. . . .
The CSO will disclose its fee for services in the CSO agreement with the borrower and will not be paid until the CSO completes all services to the borrower and the borrower receives the funds from the Lender.
Although Kentucky does not, many other states have acts regulating CSOs, which typically define them as follows:
A credit services organization is a person who, with respect to the extension of credit by others and in return for the payment of money or other valuable consideration, provides, or represents that the person can or will provide, any of the following services:
W. Va. Code R. § 46A-6C-2(a); see also, e.g. , Ohio Rev. Code Ann. § 4712.01(C)(1); Tex. Fin. Code Ann. § 393.001(3). A CSO provides services for improving a person's credit rating or obtaining an extension of credit for a buyer, while other entities actually provide the loans.
KRS Chapter 286, Subtitle 4 governs consumer loan companies. KRS 286.4-420 provides that "no person shall, without first obtaining a license from the commissioner, engage in the business of making loans in the amount or of the value of fifteen thousand dollars ($ 15,000) or less at a greater rate of interest, or consideration therefor than otherwise permitted by law." KRS 286.4-420 requires all persons making loans of $ 15,000 or less at interest rates greater than those otherwise permitted to obtain a license from the commissioner of financial institutions. KRS 286.4-530 sets the rates and charges that a consumer loan company may assess. KRS 286.4-530(10) provides that "no further charge . . . for any examination, service, brokerage, commission, expense, fee, or bonus or other thing shall be directly or indirectly charged, contracted for, or received," except for lawful filing fees or insurance premiums. It further provides that "if any amount in excess of the amounts authorized by this subtitle is charged, contracted for, or received, . . . the lender shall have no right to collect or receive any charges whatsoever."
KRS 286.4-420 regulates persons who "engage in the business of making loans." "As used in connection with consumer credit and small-loan laws, the phrase 'to engage in business' means to pursue the occupation as a livelihood or as a source of profit." 47 C.J.S. Interest & Usury § 447. CSOs are not in the business of making loans as a livelihood or a source of profit; their source of profit comes solely from brokerage fees for obtaining loans from third parties. As such, CSOs are not consumer credit lenders under Kentucky's consumer loan laws. "Sums paid by a borrower to his own agents as commission for procuring a loan is not usury." Union Cent. Life Ins. Co. v. Edwards, 294 S.W. 502, 504 (Ky. 1927); see also 44B Am. Jur. Interest & Usury § 181 ("A broker's commission paid for obtaining a loan from a third person does not constitute usury.").
Although KRS 286.4-530(10) may appear to forbid brokerage fees, "in ascertaining the intent of the legislature, a court must not be guided by a single sentence, but must look to the provisions of the whole act and its object and policy." Jones v. Commonwealth, 366 S.W.3d 376, 380 (Ky. 2011). The last sentence of KRS 286.4-530(10) provides that if any such fees are charged, "the lender shall have no right to collect or receive any charges." KRS 286.4-530(10) expressly punishes only lenders for violations of it. Further, KRS 286.4.-530(1) provides the rates and charges that "every licensee" may apply, and KRS 286.4-530(8) also provides that "in lieu of computing and collecting charges as provided . . ., a licensee may contract for . . . charges as permitted in subsection (1) of this section computed on the unpaid principal balance of the loan." These uses of "licensee" further indicate that KRS 286.4-530 regulates only licensees or lenders. Taken as a whole, the statutes regulating consumer loan companies regulate only those companies actually making loans, not brokers who obtain loans from third parties. Accordingly, CSOs are consistent with Kentucky's consumer finance provisions. The lenders providing the loans must still register for a license consistent with the consumer finance provisions.
KRS 367.380-389 regulate loan brokers. KRS 367.380(4)(a) provides that:
"Loan broker" means any person, not exempt under paragraph (b), who:
KRS 367.380(4)(a) defines "loan broker" as anyone who attempts to arrange or assist in arranging a line of credit in expectation of consideration. KRS 367.381 provides that "no loan broker shall: (1) Assess or collect an advance fee from a borrower to provide services as a loan broker, " and KRS 367.381(2) prohibits false, misleading or deceptive representations by loan brokers.
Since CSOs assist in arranging lines of credit in expectation of consideration, they are loan brokers under KRS 386.380(4)(a). As such, they are prohibited by KRS 386.381(1) from assessing advance fees. Black's Law Dictionary (10th ed. 2014) defines "advance" as "the furnishing of money or goods before any consideration is received in return." The CSOs described would not collect any fees until after they have provided their services and the borrower receives the funds from the lender, and therefore would not violate KRS 386.381(1). Accordingly, although CSOs are considered loan brokers, they may operate as long as they do not charge advance fees.
In summary, we advise that CSOs are consistent with Kentucky's consumer finance statutes, as those statutes regulate only lenders and not brokers. CSOs are loan brokers, but may operate consistent with Kentucky's loan broker statutes as long as they do not charge advance fees.