COMMONWEALTH of Kentucky, ex rel. A.B. CHANDLER III, Attorney General, Appellant, v. KENTUCKY TITLE LOAN, INC. d/b/a Cash Loans of Louisville d/b/a Cash Loans of Bowling Green, Appellee.
Decided: June 11, 1999
The Commonwealth of Kentucky ex rel. A.B. Chandler III, Attorney General (the Attorney General), appeals from the judgment of the Fayette Circuit Court which held that Kentucky Title Loan, Inc. (KTL) fell within the scope of the definition of “pawnbroker” as set forth in KRS . Accordingly, the court dismissed the action brought by the Attorney General against KTL.
On July 16, 1996, the Attorney General filed a complaint against KTL, alleging that it was operating its business in violation of KRS and KRS . KRS requires a person engaged in making loans for $15, or less to obtain a license from the commissioner of financial institutions. KRS prohibits any person from receiving “any interest, discount or consideration greater than six percent(6%) per annum” on any loan of $15, or less.
The Attorney General also claimed that KTL “engaged in a pattern of practice” whereby it charged consumers interest rates that violated KRS , which set forth the legal rate of interest, and that this practice was unconscionable and unfair under KRS . In addition, the complaint asserted that the interest and fees charged by KTL did not bear any relationship to the actual costs of servicing the loan or storing property. The Attorney General sought to have the court declare void all the loans made by KTL; to order KTL to forfeit the principal, interest, and fees it had collected through these allegedly illegal transactions; and to impose civil penalties upon KTL.
In response to the Attorney General’s complaint, KTL maintained that it was a pawnbroker as defined by KRS and that it was operating its business in accordance with the statutes governing pawnbrokers set out at KRS Chapter 226. KTL engaged in quasi-pawn transactions commonly referred to as “title pledges” by advancing money to customers on “deposit” of their motor vehicles. However, customers did not actually deposit their cars with KTL but were allowed to retain physical possession of their vehicles. In lieu of relinquishing actual possession of a car, a customer gave KTL: a set of keys to the vehicle; the original certificate of title to the vehicle; and an executed document for power of attorney, which would enable KTL to complete transfer of ownership of the vehicle to itself if the customer should breach the pawn agreement. KTL’s lien on the vehicle was then recorded with the county clerk, and the customer was issued a title evidencing the lien. Upon the customer’s fulfillment of the pawn agreement, KTL would release the lien on the vehicle and return the keys to the customer. KTL customarily charged its customers 2% interest per month and fees of 20% per month on the unpaid balance. KTL maintained that its interest rate and fees were in compliance with KRS , the statute governing the interest rate and fees of pawnbrokers.
The Attorney General argues that KTL was not payday loans in Pennsylvania a pawnbroker because it did not make loans “on deposit of personal property.” Essentially, the Attorney General contends that KTL has invoked the subterfuge of a “pawnbroker” while in reality it was engaging in the business of making loans of $15, or less without obtaining a license as required by KRS as well as charging fees in excess of the rates set out in KRS and KRS . Construing the 20% fees as interest, the Attorney General maintains that KTL was actually making consumer loans on which it was charging interest equivalent to an interest rate of 264% or more per annum when its combined fees or finance charges were analyzed pursuant to the Federal Truth in Lending Act.