Brief⁽¹⁾

Sub. for S.B. 301, as amended, amends several sections of the Uniform Consumer Credit Code (Code) relating to rates, terms, and conditions on consumer credit sales and consumer loans for personal, family, or household purposes; and brings or allows certain real estate transactions to be brought under the Code and specifies the rates, terms, and conditions for such loans. In addition, the bill adds new sections to the Code that impose new obligations upon persons making loans under the Code.

The bill:

• Enacts a new section to the Code to require the lender, before making a first or second real estate mortgage loan on the consumer's principal residence, to obtain the appraised value of the real estate to be encumbered:

• if the loan to value ratio exceeds 100 percent, provide a copy of the appraisal to the borrower and give the consumer notice, not less than 5 days before the loan is made, containing names and telephone numbers of selected consumer credit counseling providers;



• if, upon receipt of the notice, the consumer elects not to enter into the loan, the lender must promptly refund any application fees or other amounts paid by the consumer, except appraisal fees need not be refunded; and

• also, Section 8, page 10 redefines the term "consumer loan" to include a first mortgage on real estate if the loan to value ratio of the loan at the time it is made exceeds 100 percent or the annual percentage rate exceeds the Code mortgage rate (this provision does not apply to banks, savings and loan associations, and credit unions).





• Enacts a new section to the Code to prohibit lenders from making false, misleading, or deceptive advertisements regarding loans, the availability of loans, and rates and conditions of loans.



• Enacts a new section to the Code to prohibit balloon payments and negative amortization on consumer loans secured by a first or second mortgage on the consumer's principal residence if the loan to value ratio of the loan exceeds 100 percent or the annual percentage rate exceeds the Code mortgage rate (the prohibition does not apply to a loan pursuant to open end credit, a purchased money loan, or a reverse mortgage transaction.



• Enacts a new section to the Code to require lenders to credit payments on a consumer's account on the date of receipt, except when a delay in crediting does not result in a finance or other charge.



• Amends the general usury statute for real estate transactions (K.S.A. 16-207(b)):



• to clarify that it applies to first mortgages and contracts for deeds to real estate, unless the parties agree to making the transaction under the Code, and that the interest rate set in this statute does not apply to second real estate mortgages governed by the Code; and



• to notify persons that certain high loan to value first mortgages and certain high interest rate first mortgages are subject to the Code except for the usury rate.

• Clarifies that a consumer credit transaction is made in Kansas, if, among other things, the creditor induces the consumer who is a resident of this state to enter into the transaction by solicitation in this state, including without limitation, by mail, telephone, or other electronic means.



• Amends several definitions in the Code and adds new terms, in general, to conform to the federal Consumer Protection Act and Regulation Z, including:



• defines the term "Appraised value" as either the value reflected in the most recent records of the county tax assessor or the fair market value reflected in a written appraisal performed by a Kansas licensed or certified appraiser within the last 12 months (the definition relates to the new requirement that high loan to value loans be subject to the Code);



• adds and defines the term "Code mortgage rate," the greater of 12 percent or the rate set in K.S.A. 16-207(b) plus 5 percent;



• clarifies that a "consumer credit sale" does not include a sale of an interest in land, unless the parties to the sale agree to make the transaction under the Code;



• strikes the definition of "Origination fee" and adds a definition of "Prepaid finance charge," which

• for a consumer loan secured by a first or second mortgage may not exceed 8 percent of the amount financed, except the amount payable to the lender may not exceed 5 percent, and



• for any other consumer loan and for closed end consumer credit sales may not exceed the lesser of 2 percent of the amount financed or $100; and





• rewrites the definition of "Finance charge" and prescribes the method of calculation to be done by rules and regulations.



• Establishes that the finance charge on a consumer loan or consumer credit sale must be computed using either the 365/365 or 360/360 method but not on a 365/360 method. (The Senate Committee of the Whole allows a lender to assume that a month has 30 days, regardless of the actual number of days in the month.)



• Rewrites to streamline current law on closed end consumer credit sales related to the finance charge.



• Rewrites to streamline current law on open end consumer credit sales.



• Makes several changes regarding the issue of licenses to supervised lenders under the Code by:



• deleting the requirement that each place of business operated under the Code have and display a license (single office or master licensing is left to the administrator to be established by rules and regulations);



• requiring applicants for licensure to show proof acceptable to the administrator of a surety bond of at least $100,000; and



• allowing the administrator to deny, revoke, or suspend the license of a supervised lender or an application or a renewal for a license if the administrator finds the applicant or licensee has violated the provisions of the Code or rules and regulations adopted pursuant to the Code, failed to maintain the surety bond, become insolvent, provided false or misleading information to the administrator, been convicted of a crime involving fraud or deceit, failed to keep adequate records, been subject to disciplinary action in another jurisdiction, or engaged in deceptive business practices.





• Makes several changes in the law regarding consumer loans:

• removes interest rate limitation on open end consumer loans, including on lender credit cards;



• as amended by the Senate Committee of the Whole, reinstates an interest rate of 36 percent on the first $860 of a closed end consumer loan (this amendment reinstates a cap of $860 on payday loans);



• increases the maximum allowable interest rate on amounts of a closed end consumer loans in excess of $860 from 18 percent to 21 percent (not applicable to loans secured by a first or second mortgage);



• establishes 18 percent as the maximum rate of interest that may be charged on a loan secured by a second mortgage; and



• establishes 18 percent as the maximum rate of interest that may be charged on a loan secured by a first mortgage if the parties make the loan subject to the Code.





• Makes changes necessary to reflect the removal of interest rate limitations on open end consumer loans and lender credit card transactions.



• Makes several changes concerning additional charges permitted on consumer credit sales and consumer loans, including:



• deleting the cap on annual fees that may be charged for the privilege of using an open end credit account;



• allowing a service charge for giving an insufficient check to a creditor under a lender credit card in an amount agreed upon by the drawer and maker (consumer and lender);



• allowing a creditor to charge fees on an annual or monthly basis, over limit fees, and cash advance fees on open end credit in an amount agreed to by the consumer; and

• allowing the parties to a lender credit card agreement to contract for a delinquency charge in an amount agreed to by the consumer and may impose the charge on any installment not paid in full on the next business day following the payment due date.





• Allows the consumer or consumer's estate the same rebate for prepayment of a loan with credit insurance proceeds as though the consumer had prepaid the agreement and the rebate is to be made not later than 10 business days after the proof of loss is furnished to the creditor.



• Increases from $1,000 to $3,000 the size of a loan or consumer credit sale before a lender or seller may contract for an interest in land.



• Increases from $300 to $900 the size of a sale before a seller may take an interest in the goods financed.



• Raises from $300 to $900 the amount financed before a creditor may contract for a separate charge for insurance against the loss of or damage to property.



• Makes it unlawful for any person to violate the law or rules and regulations adopted under the Code and makes a conviction for an intentional violation a class A nonperson misdemeanor (second and subsequent convictions would be a severity level 7 nonperson felony).



• Adds to the administrator's authority to enforce the Code by providing that the administrator may periodically examine the loans, business, and records of every licensee and refer evidence of violations to the Attorney General or the proper county or district attorney, and also deletes the requirement that the administrator report annually to the Governor and the Legislature on the operation of the office.



• Authorizes the administrator to conduct public or private examinations or investigations within or outside this state to determine whether a license should be granted, denied, or revoked or whether any violation of the Code has been committed.



• Provides that the administrator may administer oaths and affirmations, subpoena witnesses, compel witness attendance, adduce evidence, and require the production of relevant matter to an examination or investigation.



• Permits the administrator to charge the cost of examinations and investigations to the party or parties under investigation and maintain an action in any court to recover those costs.



• Authorizes the administrator, after notice and an opportunity for hearing, to issue cease and desist orders to persons who have engaged, are engaging, or are about to engage in any act or practice that would constitute a violation of the Code (the administrator may issue an emergency cease and desist order if the public interest will be irreparably harmed by a delay in issuing a regular order).



• Grants to the administrator, in addition to any other power under the Code, to censure a violator, impose a civil penalty up to a maximum of $5,000 for each violation, or revoke or suspend the person's license or bar the person from subsequently applying for a license under the Code.



• Increases the civil penalty upon any person who fails to disclose information as required under the Code from not less than $100 or more than $1,000 to not less than $200 or more than $2,000.



• Directs the administrator to adopt rules and regulations to carry out the Code that are consistent with or no less restrictive than federal law and regulations.



• Continues the requirement that persons subject to the Code give notice to the administrator but specifies the information required will be provided in accordance with rules and regulations (corrections to the information filed also must be made as prescribed by rules and regulations).



• Makes the bill effective upon publication in the statute book.

Background

Sub. for S.B. 301 is the work product and recommendation of a task force created by the Acting Consumer Credit Commissioner in the 1998 interim to study and update the provision of the Uniform Consumer Credit Code, particularly as the Code is the primary statutory framework for the regulations of the subprime lending industry active in the Kansas first and second mortgage market. Additionally, from the banking industry perspective, the bill removes several of the provisions that would make lender credit cards less competitive in other states because of the restrictions in the Code.

The bill was supported by the Kansas Association of Financial Services, the Kansas Bankers Association, and Intrust Bank.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html