Judges: Carla J. Stovall, Attorney General of Kansas
Filed Date: 12/19/1997
Status: Precedential
Modified Date: 7/5/2016
William F. Caton, Commissioner Office of the Consumer Credit Commissioner Jayhawk Tower 700 S.W. Jackson, Suite 1001 Topeka, Kansas 66603
Dear Commissioner Caton:
You request our opinion concerning whether first and second real estate mortgages are subject to the interest rate prescribed in K.S.A.
Second and subordinate mortgage loans that are not held by the first mortgagee are subject to the Code [K.S.A. 1996 Supp.
"(7) This section (K.S.A.
16a-2-401 ) shall not apply to a loan secured by an interest in land . . . the interest rate of which is governed by subsection (b) of K.S.A.16-207 . . . unless made subject hereto by agreement."(8) [T]his section shall not apply to a loan secured by an interest in land subordinate to a prior mortgage and held by a lender other than the lender of the first mortgage, the interest rate of which is governed by subsection (b) or (h) of K.S.A.
16-207 , . . . unless made subject hereto by agreement." (Emphasis added).
In order to understand how the different interest rates operate on real estate mortgages it is helpful to understand the circumstances which prompted the Kansas Legislature to amend K.S.A.
In 1980, the Kansas Legislature enacted a comprehensive package of interest rate legislation in order to address the consequence of massive inflation which pushed the prime lending rate to 20% in the state of Kansas at a time when the interest rate ceiling for first mortgages was 11%. Clark, Interest Rates in Kansas, 49 J.B.A.K. 81, 84, 87 (1980).
K.S.A.
1980 House Bill No. 3220 amended K.S.A.
The bill brief prepared by the Legislative Research Department indicates that section 7 of House Bill No. 3220 [which is now subsection (7) of K.S.A.
In 1982, the Kansas Association of Finance Companies argued successfully to the Kansas Legislature that finance companies who are not first mortgagees should not be treated differently when charging interest rates on subordinate mortgages. In response, the Legislature added subsection (8) of K.S.A.
"Subsections (7) and (8) relate to real estate loans. Note that first mortgage loans are exempt from the entire UCCC as are second and other subordinate mortgage loans made by the lender that holds the first mortgage. . . . As a result, subsections (7) and (8) will primarily affect home improvement lenders and others that take second mortgages without also having made the first mortgage loan. These subsections make clear that the interest rate ceiling of K.S.A.
16-207 , and not the rate ceilings of the UCCC, apply in such cases." (Emphasis added.)
With this information in mind, we address your queries:
1. Does the fact that second mortgage loans made by a lender other than the first mortgagee are automatically subject to the Code permit the lender to charge rates allowed in K.S.A.
Based upon the legislative history described in the foregoing and the 1996 Kansas Comment to K.S.A.
2. If a creditor states in a loan agreement "this loan is subject to the Kansas Uniform Consumer Credit Code and the rates allowed therein," is that statement sufficient to allow them to charge rates allowed by the Code?
K.S.A.
"The parties to a sale, lease, or loan or modification thereof, which is not a consumer credit transaction may agree in a writing signed by the parties that the transaction is subject to the provisions of K.S.A.
16a-1-101 through16a-9-102 applying to consumer credit transactions. If the parties so agree the transaction is a consumer credit transaction for the purposes of K.S.A.16a-1-101 through16a-9-102 ."
The 1996 Kansas Comment to K.S.A.
"By making a specific reference to the UCCC rate ceilings, the creditor may avoid a dispute with the consumer (and with the administrator) as to whether the higher rates allowed by the UCCC have been agreed to by the parties."
Of course, the Code applies to second mortgage loans that meet the definition of a consumer loan but if the lender wants to avail itself of the higher Code interest rates, it is our opinion that the agreement should clearly state that interest rates provided by the Code shall apply so that the borrowers are apprised which mortgage interest rate applies to their transaction. Otherwise, the interest rate provided in K.S.A.
The 1996 Kansas Comment to K.S.A.
3. Is the creditor required to specifically state in the loan agreement that rates charged under this loan agreement are subject to K.S.A.
As indicated previously, the agreement should clearly state that the Uniform Consumer Credit Code interest rates will apply so as to apprise the borrower of the rate of interest that will apply to the loan transaction. Citing specifically to K.S.A.
Very truly yours,
CARLA J. STOVALL Attorney General of Kansas
Mary Feighny Assistant Attorney General
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