. . 

Honorable B. J. Leyendecker, Chairman 

Committee on Banks and Banking 

House of Representatives 

Austin, Texas 

Dear Sir: Opinton No. 0-3206 

Re: The constitutionality of House B111 

No. 6 and of House Bill No. 174. 

You have requested, 8s Chairman of the Commlttee 

on Banks and Banking, the opinion of this department upon 

the constitutionality of House Bill No. 6 and House Bill No. 

174, each of which 1s penaFng before the Forty-seventh Legislature, and each of which is designed to regulate the 

business of maklng personal loans in the sum of Five Hundred 

Dollars or less. 

House Bill No. 174 Is identFca1 with House Bill 

No. 420 of the Forty-sixth Legislature In respect to provisions which this department, under date of May 13, 1939, in 

opinion No. o-726, held were vlolatlve of Article XVI, Section 11, Article III, Section 56, and Article I, Section3 

3 and 19, of the Constitution of Texas. 

House Bill No. 6 does not embody the various unconstitutional features of House Bill No. 174 or of House 

Bill No. 420 of the Forty-sixth Legislature, in respect to 

Section 56 of Article III, and Sections 3 and 19 of Article 

I, of the Texas Constitution. Its provisions also differ 

from the provisions of the other bills in relation to 3,ctlon 11 of Article XVI of the Constitution which reads: 

"All contracts for a greater rate of interest than ten per centum (10s) per annum shall be 

deemed usurious, and the first Legislature, after 

this amendment is adopted, shall provide appropriate means and penalties to prevent the same * *' 

The vice appearing in House Bill No. 174, and In 

House Bill No. 420 of the Forty-sixth Legislature, exists by 

virtue of the provisions of the proposed bills, pertaining 

to personal loans, which would authorize the payment to the 

lender by the borrower of sums of money for expenses lncurred, or service3 rendered, in addition to the maximum rate 
Honorable B. J. Legendecker, page 2 0-3206 

of Interest, irrespective of whether such expenses were incurred or such services rendered by the borrower, and whether 

such charges would constitute Interest as a matter of law. 

House Bill No. 6, however, is designed to authorize 

the payment of expenses incurred or services rendered only 

if the expenses are actually incurred and the services actually rendered in connection with each particular loan, and 

when such charges would not constitute interest as a matter 

of law e 

The constitutional question presented, In respect 

to House Bill No. 6, is whether the bill authorizes the collectlon of sums of money in addition to the maximum interest 

rate, which sums of money actually constitute 'interest", 

whereby the bill would be unconstitutional as authorlzlng 

usurious contracts. 

It is well settled in Texas that charges made for 

expenses or services which are not actually incurred or rendered in relation to the particular loan and for the benefit 

of the particular borrower constitute interest. Clearly any 

contract providing for the collection of such additional sums, 

in addition to the maximum rate of interest, under the guise 

of expenses incurred or services rendered, would be usurious 

and invalid. LIkewise, any legislative enactment which authorizes such collections must fall. See our opinion No. 

o-726. 

The courts of Texas have never held directly that 

charges made for expenses actually incurred or services 

actually rendered, when paid to the lender, rather than to 

a third party, would, or would not, constitute Interest as 

a matter of law. 

The question thus posed seems to have been reserved. 

This is demonstrated by the following excerpts from opinlons 

in certain cases, 

Joy v. Provident Loan Socletg, 37 S. W. (2d) 254, 

(writ of error dismissed): 

"In other words, it was the pro rata cost 

of the society's overhead expenses * * * * 

"In nowise were such expenses 30 incurred 

intended to be charged as expenses for special 

services rendered to borrowers on particular loans. 

There was no added benefit to the pa+rki;uis$ borrower by reason of such expenses. 

. 
Honorable B. J. Leyendecker, page 3 0-3206 

Forreston State Bank of 

S. W. (2d) 645: 

Forreston v. Brooks, 51 

"It is apparent that the, only services rendered were those necessarily required in making 

the ordinary loan. The interest allowed by statute is intended to compensate for such services. 

The evidence wholly failed to show that any such 

extra service was rendered as would authorize a 

charge therefor. The means employed 1n this case 

cannot be used to avoid the effect of the usury 

statute. To allow extra charges for such services 

would destroy the purpose of the usury laws, * * *' 

Baltimore Trust Company v. Sanders, 105 S.W. (2d) 

710 (writ of error dismissed): 

"Under this state of facts it Is clear that 

the expenses, testified to by Viner as going to 

make up note 2, were expenses incurred by the 

bond company in the conduct of its own business; 

that is for printing, negotiating, etc., its own 

bonds and guaranteeing the collateral securing 

them. They were not in any proper sense expenses 

incurred or services rendered to appellees by the 

bond company in the capacity of broker or agent 

for appellees (the borrowers) or otherwise. * + +I( 

Independent Lumber Company v. Gulf State Bank, 299 

S.W. 939 (writ of,error refused): 

"Admittedly it was never even contemplated 

that appellant (the borrower) was to, nor did it 

in fact ever, get anythlng except the use of the 

money. No quid pro quo could therefore have gone 

to it for anythlng else * * * 

"The mere taking out in advance, by the discounting method, of the full conventional rate 

in Texas of ten per cent per annum, on short-term 

loans lfke these, did not constitute usury, but 

that malum prohlbitum lay In tacking on still 

another per cent per annum charge for no additional or different service to the borrower, but for 

'the amount of trouble' to the bank in carrying 

that type of loan. * * *' 

It is the settled law in Texas that a borrower may 

be properly charged with expenses arisIng in connection with 

a loan which are paid to the lender's special agent or to 

third parties. The Supreme Court of Texas, speaking through 
Honorable B. J. Leyendecker, page 4 O-3206 

Mr. Justice Critz, declared in Nevels, et al v. Harris, 129 

Tex. 190, 102 S. W. (2d) 1046, 109 A. L. R. 4264: 

'In this connection we hold that It Is the 

law of this State that bona fide fees, such as 

these , paid to the lender's special agents, are 

not to be considered as Interest under our usury 

laws where such agents have only limited or special authority, and the lender does not partlcipate in the funds so paid. Sales v. Mercantile 

National Bank at Dallas, (Tex. Civ. App.) 89 S. 

W. (2d) 247; Noel v. Panhandle Building & Loan 

Association, (Tex. Civ. App.) 85 3. W. 773; 

Hughes v. Security Buildin 

(Tex. Civ. App.) 62 S. W. 7 

& Loan Association 

2d) 219." 

The courts of Texas have not passed upon the questlon of whether, paraphrasing the foregolng language of Mr. 

Justice Critz, bona fide fees paid to the lender will be 

considered as interest under our usury laws. That a borrower may compensate the lender for certain services rendered 

in connection with a loan is clearly implied, however, in 

the cases. In Slaughter Co. v. Eller, 196 S. W. 704, it was 

said: 

"The borrower might legitimately agree to 

compensate the lender for services of such character, although performed in the interest of the 

lender * * * provided always that such charges 

are not made a mask behind which to conceal the 

true purpose of the parties. We think the contract In this case Is not necessarily usurious, 

but whether it is or not would be dependent upon 

the intention of the parties, to be ascertained 

in accordance with the principles announced In 

the foregoing authorities." 

In Hugman v. Foster, 210 S.W. 262, (Reversed on 

other grounds, 231 S.W. 346) it was declared: 

"The law as applicable to the facts of this 

case may be briefly stated as follows: 

"If the amount pa1d by the borrower to the 

lender in excess of the legal Interest was as 

compensati.on for the use of the money loaned, it 

is usury, whatever may be the guise under which 

the transaction is clothed. In such case 'the 

court should penetrate beneath the lawful appearance, and reach the unlawful transaction.' Lawrence v. Griffen, 30 Tex. 401. 
. . 

Honorable B. J. Leyendecker, page 5 0-3206 

“‘It is quite immaterial in what manner or 

form, or under what pretense It 1s cloaked, if 

the intention was to reserve a greater rate of 

interest thar, the law allows for the use of money, 

Lt will vitiate the contract with the taint of 

usury. ' Mitchell Q. Napier; 22 Tex. 129; bullding & Loan Ass'n Q. Robinson, 78 Tex. 169, 14 

5. W. 227, 9 L. R. A. 292, 22 Am. St. Rep. 36. 

"On the other hand, a’ bona fide charge by 

the lender In connectton with the loan will not 

render It usurious. Bomar Q. Smith, 195 S. W. 

965: Huddleston Q. Kempner, 1 Tex. Civ. App. 

211, 21 5. W. 947: 39 Cyc. 981-983. 

" The difficulty in this, as in many other 

Instances, lies, not in ascertaining the abstract 

principles of law, but in applying them to the 

facts of the case." 

The case of Independent Lumber Co. Q. Gulf States 

Bank, supra, involved a contract under which 16 per EenYwair 

collected by the bank as lender, 8 per cent being chargeable 

as interest and 8 per cent chargeable for inspection charges. 

The court said: 

"Had the contract required the Inspections, 

and the eight per cent-(8s) on that account been 

onlv chargeable where the-v were actually made, 

as well as shown to be a reasonable compensation 

for the service, the majority of this court are 

unwilling to hold that, so far, It would have 

been usurious * * + The authority cited by the 

appellee as upholding a contrary doctrine are 

thought to be distinguishable, in that, in most, 

If not all instances, they involve legitimate 

benefit's to the borrower,, either by third uersons not sharing them with the lender, or from 

the lender direct for some distinctly separate 

and additional consideration than the simple 

loaning of the money.” 

Doubtless there are charges which a borrower could. 

pay to a lender, incident to a loan, which would not constitute interest for the use of money. We construe House BllI' 

No. 6 to authorize the payment by the borrower to the lender 

of such charges. If the charges made for the expenses incurred, or for services rendered, by the lender, do not,“Si? 

individual cases, constitute legitimate charges but Interest 

for the use and detention of money, the charges would, of 
. - 

Honorable B. J. Leyendecker, page 6 O-3206 

course fall. The theory of House Bill No. 6 is that in such 

cases the charges will not be made, or, if made, will not 

have been pursuant to any authority given by the bill. 

Passing upon the constitutionality of a proposed 

legislative bill, as we are doing in this oplnlon, as to 

whether it authorizes usurious Interest, presents and entirely different matter from passing upon an id.iQildUal contract 

entered into pursuant to the purported authority of the bill 

as to whether it, in fact, is usurious. 

The:possibi.lity that the privileges granted by 

House Bill No. 6 will be abused affords no basis for this 

department to hold the Act itself to be unconstituAona1. 

It has been pointed out that the courts of Texas 

have not passed upon either a legislative enactment embodging the provisions of House Bill No. 6, or directly upon 

the fundamental questions presented in a judicial review 

of such legislation. It 1s significant t0 Observe, however, 

that the Supreme Court of Tennessee has upheld similar legislation in that State. In Koen Q. State, 39 S. W. (2a) 

283, the constitutionality of the small loan act of Tennessee was challenged. The principles invoked by the court 

in holding the Act constitutional appear in the following 

excerpts from the court's opinion: 

'Nor does the act violate article 110 7, of 

the Constitution, requiring the Leglslature to fix 

an equal and uniform rate of Interest. It fixes 

the uniform rate at 6 per cent, per annum, and 

limits the maximum service fees that the lender 

may impose for investigating the moral and financial 

standing of the applicant and the nature and value 

of the assurance for repayment of the loan and 

other necessary expenses and losses for closing ' 

the loan to a maxlmum charge of 3 per cent, per month. 

By thus prescribing the maximum expense fee, the 

Legislature did not Intend to fix it as a definite 

charge In addition to the interest. Recognizing 

the rLght of a lender to char e a reasonable fee 

for services to the borrower 7 Mallory v. Columbia 

Mortgage & Trust Co., 150 Tenn. 219, 263 S. W. 

68)) the Legislature fixed this maximum to prevent abuses of the system, and declared in the 

last paragraph of section 17 of the act that -- 

"'No loan for which a greater rate of tnterest, fee or charge than is allowed by this, 

Act, has been contracted for or received whereever 
Honorable B. J. Leyendecker, page 7 O-3206 

made shall be enforceable in this State and any 

person who in any wise participates therein 

shall be subject to:the provisions of this Act.' 

"'The weight of authority Is clearly to 

the effect that payment by the borrower of reasonable expenses Incident to the loan, and of reasonable compensation for trouble and,services involved in, or necessitated by, It, when paid and 

received in good faith, for such purposes only, 

and not as consideration .for the~loan, do not constitute usury, even though they make the cost of 

the transaction to the borrower exceed the maximum legal interest. 

"'This is on the theory, as stated in Lassman 

v. Jacobson (1914) 125 Minn. 218, 51 L. R. A. 

(N. S.) 465, 146 N. W. 350, Ann. Cas. 1915C, 774, 

that "exoenses incident to making the loan and 

furnishing the lender satisfactory security for its 

repayment can in no sense be considered compensa-' 

tion for the use of the money loaned."' Note III, 

21 A. L. R. page 819. 

"The Legislature could not authorize the 

lender to arbitrarily fix a monthly expense fee 

of 3 per cent, in addition to the annual interest on loans and did not intend to do so. As 

stated, the object was..to fix a maximum service 

charge beyond which the lender could not go without making a conclusive case against him resulting in the forfeiture to the borrower of the 

entire loan, together with the charges thereon. 

It left the loan company and the borrower free 

to agree upon a reasonable service charge which 

in no event could exceed the maximum of 3 per 

cent per month. The act is susceptible to that 

construction. If a doubt existed, it must be 

resolved in favor of the act, because the courts 

cannot properly adjudge an act invalid unless 

the violation of the Constitution Is, in their 

judgment, clear, complete, and unmistakable. 

* * * " 

Certain of the premises In support of the conclusion 

reached by the Supreme Court of Tennessee in the above case 

have not been settled as law, or not as law, in Texas. Notwithstanding which, it is our opinion, under the cases in 

Texas, that House Bill No. 6 Is not clearly unconstitutional, 

and that, therefore, this department should resolve all doubts 
Honorable B. J. Leyendecker, page 8 0-3206 

in favor of its constitutionality. 

We have pretermitted any discussion of specific 

provisions of House Bill No. 6. We do, however, wish to call 

specific attention to the following provision appearing in 

Section 18 of the Bill, which reads: 

'Furthermore, such charges shall be presumed 

in any suit in any court in this State to be prima 

facie reasonable and proper, and such charges shall 

not be considered to be interest or compensation 

for the use, forbearance or detention of money." 

If the foregoing provision of House Bill No. 6 Is 

construed to mean that the charges authorized by Section 17 

of the Act for expenses incurred and services rendered shall 

be authorized notwithstanding whether they are actually incurred or rendered, this provision would be invalid for 

the same reason that House Bill No. 420 of the Forty-sixth 

Legislature and House Bill No. 174 of this Legislature are 

invalid. As pointed out before, the vice in House Bill No. 

420 and In House Bill No. 174 rests in the fact that the Bill 

authorizes the collection of charges In excess of the lawful 

rate of interest irrespective of whether such charges are 

for expenses actually Incurred or services actually render,&. 

It is not, in our opinion, within the power of the Legislature, under the Constitution to do this. Probably the provision quoted from Section 18 is severable and the remainder 

of the Act would be protected under the saving clause; nevertheless, we feel impelled to call your attention to the 

probable invalldity of this particular provision of the Bill. 

It is the opinion of this department that House 

Bill No. 174 of the present Legislature is unconstitutional 

for the reasons set out in our opinion No. o-726 relating 

to House Bill No. 420 of the Forty-sixth Legislature. 

Resolving all doubts In favor of the Act, it is 

the opinion of this department that House Bill No. 6 is constitutional. 
Honorable B. J. Leyendecker, page 9 0-3206 

Yours very truly 

ATTORNEY GENERAL OF TEXAS 

By s/Walter R. Koch 

Walter R. Koch 

Assistant 

By s/Zollie C. Steakley 

Zollle C. Steakley 

Assistant 

zcs :LM:wc 

APPROVED MARCH 29, 1941 

s/Gerald C. Mann 

ATTORNEY GENERAL OF TEUS 

Approved Opinion Committee By s/BWB Chalrman