Printable Format16a-3-405. (UCCC) Lender subject to defenses arising from sales and leases. (1) A lender, other than the issuer of a lender credit card, who, with respect to a particular transaction, makes a consumer loan for the purpose of enabling a consumer to buy or lease from a particular seller or lessee goods or services is subject to all claims and defenses of the consumer against the seller or lessor arising from that sale or lease of the goods and services if:
(a) The lender knows that the seller or lessor arranged, for a commission, brokerage or referral fee, for the extension of credit by the lender;
(b) the lender is a person related to the seller or lessor unless the relationship is remote or is not a factor in the transaction;
(c) the seller or lessor guarantees the loan or otherwise assumes the risk or loss by the lender upon the loan;
(d) the lender directly supplies the seller or lessor with the contract document used by the consumer to evidence the loan, and the seller or lessor significantly participates in the preparation of the document; or
(e) the loan is conditioned upon the consumer's purchase or lease of the goods or services from the particular seller or lessor, but the lender's payment of proceeds of the loan to the seller or lessor does not in itself establish that the loan was so conditioned.
(2) Claims or defenses of a buyer or lessee specified in subsection (1) may be asserted against the lender only:
(a) If the buyer or lessee has attempted in good faith to obtain reasonable satisfaction from the seller or lessor with respect to the claims or defenses;
(b) if the buyer or lessee, when requested in writing to do so by the seller, lessor or the lender, has given notice in writing to the seller or lessee and the lender stating the claims or defenses;
(c) to the extent of the amount owing to the lender with respect to the sale or lease at the time the lender has notice of the claims or defenses. Such notice, generally stating the claims or defenses, shall be in writing and shall be sent to the seller (or lessor), and to the lender if the buyer or lessee has received written notice of the name and address of the lender; and
(d) as a matter of defense to or setoff against claims by the lender except that the buyer or lessee shall not be prohibited from bringing an action to rescind an obligation against which it has a defense or setoff.
(3) For the purpose of determining the amount owing to the lender with respect to the sale or lease:
(a) Payments received by the lender after the consolidation of two or more consumer loans, other than pursuant to open-end credit, are deemed to have been first applied to the payment of the loans first made; if the loans consolidated arose from loans made on the same day, payments are deemed to have been first applied to the smaller or smallest loan or loans; and
(b) payments received upon an open-end credit account are deemed to have been first applied to the payment of finance charges in the order of their entry to the account and then to the payment of debts in the order in which the entries of the debts are made to the account.
(4) An agreement may not provide greater rights for a lender than this section permits.
(5) Notwithstanding any of the foregoing, the participation of the lender or lessor in any of the arrangements between seller and buyer to insure the perfection of the lender or lessor's security interest shall not in itself establish a relationship described and controlled by subsection (1).
History: L. 1973, ch. 85, § 60; L. 1975, ch. 127, § 2; L. 1981, ch. 93, § 14; L. 2024, ch. 6, § 81; January 1, 2025.
KANSAS COMMENT, 2000
1. This section extends the U3C's policy of preserving consumer claims and defenses to direct loan cases in those situations in which the relationship between the seller or lessor and the lender justifies allowing the consumer to raise claims or defenses against the lender. In order to preclude financiers from circumventing K.S.A. 16a-3-404 by shaping the transaction as a "direct loan" where it is really more like a purchase of dealer paper, this section sets forth five guidelines to test whether a true direct loan is involved. If it is, the consumer has no right to raise against the lender any claims or defenses against the seller whose product or service the consumer bought with the proceeds of the loan. Disguised dealer paper — sometimes called an "all in the family" loan — remains subject to the consumer's claims and defenses as if the transaction involved the assignment of an installment sales contract.
2. As indicated under subsection (1), any one of the following elements will subject the "direct lender" to claims and defenses of the consumer against the seller arising from the sale: (a) knowledge by the lender that the seller arranged for the extension of credit for a fee; (b) a close personal or corporate relationship between seller and lender (see the definition of "person related to" in K.S.A. 16a-1-301(34)); (c) dealer guarantee of the loan; (d) use of the lender's "direct loan" forms by a dealer who has significantly participated in their preparation; and (e) the lender's conditioning of the loan upon the consumer's use of the proceeds to purchase from a particular seller. With respect to this last element, the lender's making the proceeds check payable to a particular dealer does not in itself make the transaction an "all in the family" loan. Similarly, under subsection (5) any participation by the lender in the sales transaction solely to insure perfection of a security interest, such as notation of the lender's lien on a certificate of title, does not in itself make a "direct loan" subject to the buyer's claims and defenses against the seller.
3. Subsections (2) and (3) of this section parallel those found in K.S.A. 16a-3-404. See the Kansas comments to that section. Nothing in this section limits the rights of an "all in the family" lender to recover from the seller after being subjected to a consumer's claims or defenses under this section.
4. As with liability of assignees for claims and defenses under K.S.A. 16a-3-404, the liability of direct lenders may be affected by the F.T.C. Holder in Due Course Regulations, 16 C.F.R. Part 433. The F.T.C. Regulations require all consumer contracts which arise out of certain direct loans to contain a legend in ten point, bold face type expressly stating that the lender or other holder of the paper is subject to claims and defenses which the consumer debtor could assert against the seller or lessor of the goods or services obtained with the proceeds of the loan. The direct loans which are subject to the F.T.C. Regulations arise in two circumstances: (a) those in which the seller or lessor refers consumers to the lender, and (b) those in which the seller or lessor is affiliated with the lender by common control, contract or business arrangement. As in the case of assignees, liability is limited to refund of the amounts already paid by the consumer. See Kansas comment 5 to K.S.A. 16a-3-404. Because of the differences in definitions, the U3C and the F.T.C. Regulations will each reach some direct loans not covered by the other, but many "all in the family" lenders will be subject to both provisions.
5. As in the case of the assignee's liability under K.S.A. 16a-3-404, this section deals only with the "all in the family" lender's derivative liability for claims and defenses arising out of the underlying sale or lease contract. Neither this section nor the F.T.C. Regulations limit rights the consumer may have directly against the lender for the lender's own actions, either under the KCPA or similar statute or under developing concepts of lender liability.
Law Review and Bar Journal References:
"The New Kansas Consumer Legislation," Barkley Clark, 42 J.B.A.K. 147, 196 (1973).
Deficiency judgments, 22 K.L.R. 297, 308, 309 (1974).
The uniform commercial code, the statute of frauds, and the farmer, 25 K.L.R. 318, 323 (1977).
Warranty violations in Tripartite finance lease agreements, Winton A. Winter, Jr., 25 K.L.R. 573, 581 (1977).
"Summary Repossession, Replevin, and Foreclosure of Security Interests," Thomas V. Murray, 46 J.B.A.K. 93, 97 (1977).
"Survey of Kansas Law: Consumer Law," John C. Maloney, 27 K.L.R. 197, 202, 203 (1979).
"Farmers and the Law: Exemptions and Exceptions," J. W. Looney, 50 J.B.A.K. 7, 16 (1981).
"The U.C.C.C. and Real Estate Financing: A Square Peg in a Round Hole," Thomas L. Griswold, 28 K.L.R. 601, 615, 616 (1980).
"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).
CASE ANNOTATIONS
1. Lender not subject to defenses arising hereunder; not precluded by K.S.A. 16a-1-301 from obtaining deficiency judgment against debtor. Central Finance Co., Inc. v. Stevens, 221 Kan. 1, 2, 5, 8, 558 P.2d 122 (1976).
2. Restraint on deficiency judgments of lender who is subject to defenses arising from sales. Halloran v. North Plaza State Bank, 17 Kan. App. 2d 840, 843, 844 P.2d 764 (1993).