KANSAS COMMENT, 2010

The consumer purpose test is the basic standard for determining the coverage of the U3C. This section permits creditors, by inserting an appropriate clause in the contract, to be certain that the transaction is a consumer credit sale, lease or loan for the purposes of the U3C. See K.A.R. 75-6-1. Creditors often contract into the U3C in order to charge the higher rates of finance charges it permits. Of course, contracting into the U3C to take advantage of its higher rate ceilings makes the creditor subject to all of the U3C's restrictions. Thus, the creditor must weigh the costs of complying with the U3C, such as its limits on additional charges (including strict limits on the recovery of attorneys' fees) and its consumer protective default and right to cure provisions against the benefits of the higher finance charge rates it authorizes.

Since the general reform of Kansas usury laws in the early 1980's, there have been no interest rate ceilings on business and agricultural loans. See K.S.A. 16-207(f). In some cases, business creditors have inadvertently subjected themselves to the restrictions of the U3C by using forms designed primarily for consumer loans which contained language bringing the transactions within the U3C. See, e.g., United Kansas Bank & Trust Co. v. Rixner, 4 Kan. App. 2d 662, 610 P.2d 116 (1980), aff'd 228 Kan. 633, 619 P.2d 1156; Farmers State Bank v. Haflich, 10 Kan. App. 2d 333, 699 P.2d 533 (1985). Compare Farmers State Bank v. Cooper, 227 Kan. 547, 608 P.2d 929 (1980), where the printed form was ambiguous because the parties had typed in the words "business loan," and the court allowed the intent of the parties to control.

Creditors might want to contract into the U3C to justify charging a higher rate — in the case of first mortgage loans, purchase money or "margin" loans for securities and transactions that otherwise would be governed by the U3C but for the fact that the amount financed exceeds $25,000. First mortgage loans are generally exempt from the U3C (see K.S.A. 16a-1-301(17)(b) and the Kansas comment to that section), and are subject to their own floating interest rate ceilings. K.S.A. 16-207(b). In addition, while certain high loan-to-value first mortgage loans are covered by the U3C, those loans remain subject to the floating interest rate ceilings of K.S.A. 16-207(b), rather than the U3C's rate ceilings. See K.S.A. 16-207(i)(1) and 16a-2-401(8). If the rates permitted by the floating rate ceilings of K.S.A. 16-207(b) are lower than the rates allowed by the U3C, and the lender wants to charge the higher U3C rates, it can do so by inserting a clause in the agreement making the transaction subject to the U3C. See also the Kansas comment to K.S.A. 16a-2-401.

Similarly, advances by a broker-dealer used by the borrower to buy or carry securities pledged to secure those advances are subject to a floating rate ceiling based on the broker-dealer's own bank loans, although those loans may carry rates up to 10% in any case. K.S.A. 16-214. Those loans are expressly exempted by that section from all aspects of the U3C. Again, however, a broker-dealer can charge the higher U3C rates by contracting into the U3C.

Along the same line, a credit sale or a loan in which the amount financed exceeds $25,000 (and which, in the case of a loan, is not secured by an interest in land) is not covered by the U3C, even if all the other elements of a consumer credit transaction are present. See the definitions of "consumer credit sale" and "consumer loan" in K.S.A. 16a-1-301(14) and 16a-1-301(17) and the Kansas comments to those sections. This dollar limit excludes a growing number of traditional consumer credit transactions from the scope of the U3C as items such as automobiles, boats, and recreational vehicles continue to increase in price. Because they are not covered by the U3C, the general 15% interest rate ceiling in K.S.A. 16-207(a) would be applicable to those high-dollar transactions. Just as with first mortgage loans and margin loans, however, the creditor presumably can take advantage of the higher U3C rates by contracting into the U3C under this section.

Law Review and Bar Journal References:

"The New Kansas Consumer Legislation," Barkley Clark, 42 J.B.A.K. 147, 193, 194 (1973).

"Interest Rates in Kansas: The Decline and Fall of Ezekiel," Barkley Clark, 49 J.B.A.K. 81, 87 (1980).

"The U.C.C.C. and Real Estate Financing: A Square Peg in a Round Hole," Thomas L. Griswold, 28 K.L.R. 601, 604, 605 (1980).

"New Kansas Usury Laws and Interest Rate Regulation," Robert G. Martin, 20 W.L.J. 572, 591 (1981).

"Creditor Beware: From Default Through Deficiency Judgment," Wanda M. Temm, 60 J.K.B.A. No. 8, 17 (1991).

"The FTC Holder Rule: A Sword and a Shield for Defrauded Consumers," Robert E. Hiatt, J.K.T.L.A. Vol. XXI, No. 5, 13 (1998).

Attorney General's Opinions:

Interest and charges; usury. 79-252.

Interest rates applicable to certain real estate mortgages; loan agreements applying consumer credit code (UCCC) rates. 97-99.

CASE ANNOTATIONS

1. Challenge as to constitutionality of section abandoned. Rosedale State Bank and Trust Co. v. Stringer, 2 Kan. App. 2d 331, 340, 579 P.2d 158 (1978).

2. Cited; intent of parties determinative when note ambiguous as to applicability of UCCC. Farmers State Bank v. Cooper, 227 Kan. 547, 550, 608 P.2d 929 (1980).

3. Parties may contract to have transaction subject to uniform consumer credit code. United Kansas Bank & Trust Co. v. Rixner, 4 Kan. App. 2d 662, 665, 610 P.2d 116 (1980).

4. Cited in dispute over business loans where parties agreed to subject themselves to UCCC. Farmers State Bank v. Haflich, 10 Kan. App. 2d 333, 336, 699 P.2d 533 (1985).

5. Cited; creditor seeking deficiency judgment must prove collateral sold in "commercially reasonable manner" or judgment absolutely barred. Garden Nat'l Bank v. Cada, 11 Kan. App. 2d 562, 566, 729 P.2d 1252 (1986).