In Unifund CCR Partners v. Harrell, a recent case involving collection of an open-end consumer credit card account, the Kentucky Supreme Court held that by entering a written contract specifying interest at a contract rate in excess of 8%, the lender extinguished its right to later claim interest under KRS 360.010(1), Kentucky’s general usury statute. The Court also held that by Unifund’s decision to stop adding interest to the Account following charge-off, the lender waived its right to collect contractual interest from that point.
Although some of its language is broad in scope, the Unifund decision appears to be limited to cases involving open-end consumer credit card accounts and other consumer revolving credit accounts such as home equity lines of credit where, following a charge-off, the lender also decides not to add fees and interest to the account. However, the way in which the Court addressed “charge-offs” relating to a waiver of the right to charge interest could also affect commercial loans.
Unlike commercial loans, consumer accounts are subject to the Fair Debt Collection Practices Act and the Truth in Lending Act which were cited in the decision. For business reasons, including saving costs associated with providing periodic account statements to customers, and in accord with TILA, consumer lenders sometimes decide to stop adding fees and interest to accounts following charge-off. Pursuant to Regulation Z (12 C.F.R.226.5(b)(2)(i)), consumer creditors who have charged-off an account, and will no longer charge fees and interest thereto, may stop sending periodic statements to the customer.
Unifund is a case in which Citibank entered into an open-end consumer credit card agreement with its customer, which included interest at the contract rate of 27.24%. After default, Citibank charged-off the account, decided to stop charging interest, and stopped sending periodic statements in accord with Regulation Z.
Following charge-off, Citibank sold the account to a debt buyer which assigned it to Unifund. Unifund filed a collection action demanding prejudgment interest from the date of charge-off at 8%. The debtor answered and counterclaimed that Unifund’s demand for prejudgment interest violated the FDCPA. After losing in the circuit court, the debtor prevailed in both the Kentucky Court of Appeals and the Kentucky Supreme Court.
The Unifund decision references provisions in TILA, the FDCPA, related regulations, and the Kentucky usury statute, in holding that Citibank’s actions waived its right to charge interest at the contract rate and extinguished its right to post charge-off interest at the statutory rate. The decision cites the 6th Circuit’s opinion in Stratton v. Portfolio Recovery Associates, LLC, in holding that “KRS 360.010(1) does not create an entitlement to statutory interest, rather it sets a default rate in the absence of a contractually agreed upon interest rate.”
The Kentucky Supreme Court found that when Citibank entered the written account agreement for interest at a contract rate higher than the statutory rate, it was bound by that decision and its right to seek interest at the statutory rate was extinguished. The Court held that the general usury statute “… specifically states that the parties to a contract – and their assignees – ‘shall be bound for such rate of interest as is expressed in any such contract…and no law of this state prescribing or limiting interest rates shall apply to any such agreement ….’”
The Court also held that, after the charge-off occurred, “[b]y then forgoing its right to collect contractual interest during the ten months following the charge-off of Harrell’s account, Citibank waived its right to collect that [contractual] interest.” Because an assignee acquires no greater rights than those possessed by its assignor, the Court found Unifund was bound by Citibank’s extinguishment and waiver of its rights.
In today’s low interest rate environment, it should be noted that the usury statute’s use of the words “any such contract” refers only to contracts or obligations in writing that provide for interest “in excess of” the statutory rate. Thus, Unifund does not apply to written agreements with a contract interest rate less than the 8% statutory rate, and the election of a contract rate should not be deemed as an extinguishment of the ability to agree to, or, in a later collection action, demand an interest rate under KRS 360.010(1).
Neither Unifund nor Stratton directly addresses KRS 360.040, the judgment rate statute, which provides that “a judgment shall bear … interest compounded annually from its date.” [emphasis added]. While prejudgment interest may not be available in the factual settings of Unifund and Stratton, interest on a judgment should still be available under KRS 360.040.
It is possible that Unifund could also apply to commercial accounts in that the decision is not entirely clear as to whether the act of charge-off alone (without regard to TILA or FDCPA) constitutes a waiver of the right to continue to add interest. However, other courts have held that creditors are entitled to charge post charge-off interest. Peters v. Financial Recovery Services, Inc., 46 F. Supp. 3d 915 (WD Mo. 2014) indicates that the act of charge-off itself does NOT constitute a waiver of a right to charge interest; and McDonald v. Asset Acceptance LLC, 296 F.R.D. 513 (ED MI 2013), held that after charge-offs had been taken, creditors “had the absolute right to continue to impose interest.” The act of charge-off alone should not be held as a waiver of the right to add and collect interest thereafter.
The ultimate resolution of the issues presented by Unifund may require a legislative revision of KRS 360.010 to clearly show a lender is always entitled to collect post charge-off interest even if at a rate less than the contract rate.
In a decision on June 12, 2017, Henson v. Santander, the U.S. Supreme Court found that debt buyers, when collecting debts they own, are outside the scope of the FDCPA. The U.S. Supreme Court’s decision may be a defense for Unifund to the FDCPA violation, however, it does not change the result of the reasoning of the Kentucky Supreme Court on post charge-off waiver of interest by the original lender. If lenders encounter arguments based on Unifund or Stratton on commercial lending facilities, they should contact counsel for advice as to if and how those cases may apply and how to address any issues.
Lessons from Unifund
- Entering a written agreement providing interest at a rate higher than the usury rate extinguishes the right to subsequently collect a statutory rate under KRS 360.010(1);
- A charge-off itself may, and a decision not to add fees and interest thereafter on a consumer account will, waive the right to the contract rate going forward;
- Claiming prejudgment interest on an open-end consumer credit card or HELOC subject to TILA and FDCPA following extinguishment of contractual right to claim interest could result in an FDCPA violation.