PSI, a debt collector, sought to collect a delinquent account from Grace, a consumer who had received medical services in the emergency room of a Louisville hospital. She failed to pay her bill, and when PSI tacked on a 1 ½% per month “service charge,” she filed a usury action and a claim under the Fair Debt Collection Practices Act (FDCPA) in the federal court for the Western District of Kentucky (WDKY) in Louisville.
Many businesses charge a “service charge” or “finance charge” on delinquent accounts, both to deter delinquency and to recover some of the carrying costs of the bad account. The amount is generally 1 to 1 ½% per month, or 12 to 18% per annum. The creditor generally does not intend to be a lender – rather it seeks payment in the ordinary course of business, usually “net 30” – but recognizing that some individuals won’t pay on time, it imposes this charge to discourage that reality.
The Kentucky usury statute is KRS 360.010. It establishes a general rate of 8%, but allows parties to agree on higher rates in certain cases, so long as the rate does not exceed the lesser of 4% over the federal discount rate on 90-day commercial paper, or 19%. In the current interest rate climate, the 90-day commercial paper rate index is only about 0.10% - so the maximum annual rate permitted by the general usury statute would be 8%.
Kentucky permits many institutions to charge higher interest rates under special statutes – consumer loan companies can charge 36% per annum on loans less than $3000, and 24% for loans above that. Kentucky credit unions and banks are authorized to charge up to 24% on loans and 21% on credit cards. Certain federal laws affecting interstate banking may authorize higher rates too. But this case is about non-financial institution “lenders,” who really are in the business of selling goods or services, rather than making loans.
So, can a debt collector enforce a contractual provision imposing a “service charge” on delinquent accounts? Judge John G. Heyburn II said no – he reasoned that, despite the name of the charge, there were no services performed. Rather, he held it was a charge for the use of money – in other words, it was “disguised interest.” And since it was interest, it was subject to Kentucky’s general usury statute and cannot exceed 8% per annum. Grace v. LVNV Funding, Inc., 22 F. Supp. 3d 700 (W.D. Ky. 2014). Under the usury statute, the penalty is to forfeit all future interest, and a borrower may recover twice any amounts paid. If the transaction is also subject to the FDCPA, a consumer can demand statutory penalties and attorney’s fees. This case is unlikely to be appealed, so we are likely stuck with this decision.
Service providers, such as doctors, dentists, lawyers, and builders, often extend short-term credit, expecting payment within 30 days of billing. In light of this case, they need to reconsider the service charge and perhaps revise their contracts. The effect of the decision is also limited by two factors: the above restrictions apply only to “loans” of $15,000 or less, and to natural persons (the defense of usury is not available to corporate or LLC entities).