Request By:
Hon. Stuart A. Handmaker
Attorney at Law
Handmaker, Weber and Meyer
Twenty Third Floor
Citizens Plaza
Louisville, KY 40202
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Thomas C. Jacobs, Deputy Attorney General
In your letter of February 13, 1978, you have asked the following question:
"May a bank organized and licensed under the provisions of Chapter 287 of the Kentucky Revised Statutes make a loan in excess of $15,000, repayable on an installment basis, at an interest rate in excess of 8-1/2% per annum, with interest charged in advance, the loan being secured by a first mortgage on real estate?"
The simple answer to the question, thus stated, is "Yes".
The question that you presented is one which we understand to have arisen by virtue of the apparent conflict between KRS 287.215 and KRS 360.010. Upon study, we have reached the conclusion that the two cited Sections are not in conflict, but, rather, are supplementary to each other; that is, a bank may lend money under the provisions of either of the cited Sections.
KRS 287.215, which is contained in the chapter relating to banks and trust companies, provides that, "In addition to the powers heretofore granted, any bank . . . shall have the power to lend money repayable in installments; [under the terms and for the charges specified in the Section]". Subsection 9 of the cited statute provides that, "KRS . . . 360.010 shall not apply to loans made under authority of this Section."
KRS 360.010 provides in part that, "The legal rate of interest is 6% per annum, but any party or parties may agree, in writing, for the payment of interest in excess of that rate as follows . . . (b) at any rate on money due or to become due upon any contract or other obligation in writing where the original principal amount is in excess of $15,000 . . . and no law of this state prescribing or limiting interest rates shall apply to any such agreement or to any charges which pertain thereto or in connection therewith. . .".
Subsection 2 of KRS 360.010 provides that any state bank may charge $10.00 for any loan even if the legal interest does not amount to that sum.
The sole significance of the last referenced citation, that a bank can charge a $10.00 minimum fee, is that it indicates the clear intention of the Legislature that the pertinent provisions of KRS 360 apply to banks, as well as to unlicensed lenders. Thus, installment loans may be made by a bank under either KRS 287.215 or KRS 360.010. If a loan is made for more than $15,000.00, any rate may be charged, and the 5 and 10 year restrictions of KRS 287.215, the only purpose of which is to limit the amount of interest, would not be applicable.
With regard to the second part of your question, it is our opinion that so called "add on and discount" rates may be charged on loans of over $15,000. The question of whether interest is charged in advance, in arrears, currently, as incurred, or in whatever manner, is merely another method of determining the amount or rate of interest to be paid.
KRS 287.215 was enacted nominally to grant banks additional powers, but in reality to avoid the then stricter usury laws, affording banks the incentive to make small loans to consumers. Until this statute was enacted, the cost of servicing such consumer loans and the risks involved were simply too great to attract banks' money away from other more attractive loan opportunities. By permitting add on or discount rates, the General Assembly effectively raised permissable interest rates without amending KRS 360.010. It is thus clear that interest may be added on in advance, discounted, or computed in any manner the bank sees fit on such loans. To hold otherwise would be in obvious disregard of Legislative intent.
If additional information is necessary, please feel free to call or write at your convenience.