Pub. 2 2013 Issue 3

April / May 2013 7 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s K .S.A. 16-207 limits the amount of interest that a lender may charge on a loan se- cured by a first mort - gage on residential real estate located in Kansas.  The maximum amount permitted to be charged is 1.5% above a specifically defined Freddie Mac rate, which is updated monthly.  While this usury rate is lower than most other states, there had not been a significant issue until late last year when the Freddie Mac rate reached historic lows.  The decrease in the Freddie Mac rate left banks with commitments to lend at a rate that exceeded the usury rate when the monthly adjustment occurred.  The result was that the banks were unable to close these loans, because the secondary market lenders would not fund the loans.  Lenders were also unable to commit to new loans because secondary market lenders were unwilling to purchase loans at these rates, and the Kansas lenders did not have the ability to make these loans without a market to sell them to after closing.  Upon further review, Freddie Mac determined there had been an error in the calculation, and after correcting the error, the new rate was high enough to resolve the problems at that time.  To prevent this problem from recurring, a bill was introduced which raised the Kansas usury rate from Freddie Mac plus 1.5% to Freddie Mac plus 3.5%.  This bill was passed by the legislature, and while waiting on the Governor’s signature, the KBA learned that Freddie Mac was planning to discontinue the calculation of the specific rate that the Kansas statute relied upon.  The KBA requested that the legislature repeal the interest rate cap for residential real estate loans.  Using a bill that was currently being deliberated, the new language was adopted repealing the cap, and the bill has been presented to the Governor for his signature.  KBA expects that it will be signed into law.  Until new laws become effective on July 1, Freddie Mac has agreed to continue to provide the rate. After July 1, the Freddie Mac plus 1.5% will be eliminated, and Kansas first mortgage, residential home loans will be subject to the general usury rate for all contracts in Kansas, which is 15%.   This resolves the potential for Kansas creditors to be faced with inability to lend due to the low Freddie Mac rate.  However, banks should review any existing loans to determine if those loans use the Freddie Mac rate as an index.  If the notes do reference the Freddie Mac rate, the bank should further review the notes to determine if there is a provision that allows the bank to change the index the rate is tied to.  Banks need to address this issue before the next rate adjustment.  If the note contains a provision for changing the index, then the bank will follow its contract in making the substitution.  However, if there is no provision for changing the index, the bank will need to consult with its attorney to resolve this matter.  Freddie Mac Plus 1.5% Eliminated July 1 By Terri Thomas, KBA SVP-Legal Department August 8-10 Broadmoor Hotel Colorado Springs 2013 CEO & Senior Management Forum and Annual Meeting Insert List Here YOU MAY MAKE HOTEL RESERVATIONS AT THE BROADMOOR BY CALLING 1-800-634-7711 PLEASE ASK FOR THE KBA ROOM BLOCK . Featured Keynote by Mark Scharenbroich , author of “Nice Bike” Tom Hoenig , FDIC Vice Chairman Jerry Moran , U.S. Senator Lyn Farrell , What Every Bank CEO Should Know…. Jody Urquhart , How to Lead and Influence Others John Ikard , ABA Vice Chairman Robert Genetski , Economic Outlook Educational Resources | PO Box 4407, Topeka, KS 66604 | 785-232-3444 | www.ksbankers.com August 8-10 Broadmoor Hotel Colorado Springs 2013 CEO & Senior Management Forum and Annual Meeting Insert List Here YOU MAY MAKE HOTEL RESERVATIONS AT THE BROADMOOR BY CALLING 1-800-634-7711 PLEASE ASK FOR THE KBA ROOM BLOCK . Featured Keynote by Mark Scharenbroich , author of “Nice Bike” Tom Hoenig , FDIC Vice Chairman Jerry Moran , U.S. Senator Lyn Farrell , What Every Bank CEO Should Know…. Jody Urquhart , How to Lead and Influence Others John Ikard , ABA Vice Chairman Robert Genetski , Economic Outlook Educational Resources | PO Box 4407, Topeka, KS 66604 | 785-232-3444 | www.ksbankers.com