. .

Honorable B. J. Leyendecker, Chairman Committee on Banks and Banking House of Representatives Austin, Texas

Dear Sir: OpintonNo. 0-3206 Re: The constitutionalityofHouse B111 No. 6 and ofHouse Bill No. 174.

You have requested, 8s Chairman of the Commlttee
on Banks and Banking, the opinion of this departmentupon the constitutionalityofHouse Bill No. 6 and House Bill No. 174, each ofwhich 1s penaFng before the Forty-seventhLegislature,and each of which is designed to regulate the business ofmaklng personal loans in the sum of Five Hundred Dollars or less.

House Bill No. 174 Is identFca1with House Bill No. 420 of the Forty-sixth Legislature In respect to provisionswhich this department,under date of May 13, 1939, in opinionNo. o-726, heldwere 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 ofHouse 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 otherbills in relation to 3,ctlon 11 ofArticleXVI of the Constitutionwhich 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 appropriatemeans and penalties to prevent the same * *'

The vice appearing inHouse Bill No. 174, and In House Bill No. 420 of the Forty-sixthLegislature, existsby 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 ofmoney for expenses lncurred, or service3rendered, in addition to the maximum rateHonorable B. J. Legendecker, page 2 0-3206

of Interest, irrespectiveof whether such expenseswere incurred or such servicesrenderedby the borrower, and whether such chargeswould constitute Interestas a matter of law.

House Bill No. 6, however, is designed to authorize the payment of expenses incurred or servicesrendered only if the expensesare actually incurredand the servicesactually rendered in connectionwith eachparticular loan, and when such chargeswould not constitute interestas a matter of lawe
The constitutionalquestionpresented, In respect to House Bill No. 6, iswhether the bill authorizes the collectlon of sums ofmoney in addition to the maximum interest rate,which sums of money actually constitute 'interest", whereby the bill would be unconstitutionalas authorlzlng usurious contracts.

It iswell settled in Texas that charges made for expenses or serviceswhich are not actually incurredor rendered in relation to the particular loan and for the benefit of the particularborrower constitute interest. Clearly any contractproviding for the collection of such additional sums, in addition to the maximum rate of interest,under the guise of expenses incurred or servicesrendered,would be usurious and invalid. LIkewise, any legislative enactmentwhich authorizes such collectionsmust fall. See our opinionNo. o-726.

The courts of Texas have never held directly that chargesmade for expenses actually incurred or services actually rendered,when paid to the lender,rather than to
a third party,would, orwould not, constitute Interest as a matter of law.

The question thus posed seems to have been reserved. This isdemonstratedby the following excerpts from opinlons in certain cases,

Joy v. ProvidentLoan Socletg, 37 S. W. (2d) 254, (writ of errordismissed):

"In otherwords, it was the pro rata cost of the society's overhead expenses * * * *

"In nowisewere such expenses 30 incurred intended to be chargedas expenses for special servicesrendered 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 servicesrendered were those necessarilyrequired inmaking the ordinary loan. The interestallowed by statute is intended to compensate for such services. The evidencewholly failed to show that any such extra servicewas rendered as would authorize a charge therefor. The means employed 1n this case cannotbe 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 errordismissed):

"Underthis state of facts it Is clear that the expenses, testified to by Viner as going to make up note 2, were expenses incurredby 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. Theywere not in any proper sense expenses incurred or servicesrendered to appelleesby the bond company in the capacity of broker or agent for appellees (theborrowers) or otherwise. * + +I(
IndependentLumber Companyv. Gulf State Bank, 299 S.W. 939 (writof,error refused):

"Admittedly itwas never even contemplated that appellant (theborrower)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 * * *

"Themere taking out in advance,by the discountingmethod, of the full conventionalrate in Texas of ten per cent per annum, on short-term loans lfke these,did not constituteusury, but thatmalum prohlbitum lay In tacking on still another per cent per annum charge for no additional or different service to the borrower,but for 'theamount of trouble' to the bank in carrying that type of loan. * * *'

It is the settled law in Texas that a borrowermay be properly chargedwith expenses arisIng in connectionwith
a loanwhich are paid to the lender's specialagent or to third parties. The Supreme Court of Texas, speaking throughHonorable B. J. Leyendecker,page 4 O-3206

Mr. Justice Critz, declared inNevels, et al v. Harris, 129 Tex. 190, 102 S. W. (2d) 1046, 109A. L. R. 4264:

'In this connectionwe hold that It Is the law of this State that bona fide fees, such as these,paid to the lender's specialagents, are not to be consideredas Interestunder our usury lawswhere such agents have only limited or special authority,and the lenderdoes not partlcipate in the funds so paid. Sales v. Mercantile National Bank at Dallas, (Tex. Civ.App.) 89 S. W. (2d) 247; Noel v. PanhandleBuilding & 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 lenderwill be considered as interestunder our usury laws. That a borrower may compensate the lender for certain servicesrendered in connectionwith a loan is clearly implied,however, in the cases. In Slaughter Co. v. Eller, 196 S. W. 704, itwas said:

"Theborrowermight legitimatelyagree 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 behindwhich to conceal the true purpose of the parties. We think the contract In this case Is not necessarilyusurious, but whether it is or not would be dependent upon the intention of the parties, to be ascertained in accordancewith the principles announced In the foregoing authorities."

InHugman v. Foster, 210 S.W. 262, (Reversedon other grounds, 231 S.W. 346) it was declared:

"The law as applicable to the facts of this
casemay be briefly stated as follows:

"If the amount pa1d by the borrower to the lender in excess of the legal Interestwas as compensati.on

for the use of themoney loaned, it is usury, whatever may be the guise under which the transaction is clothed. In such case 'the court shouldpenetratebeneath 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 inwhat manner or form, or under what pretense It 1s cloaked, if the intentionwas to reserve a greater rate of interest thar,

the law allows for the use ofmoney, Ltwill vitiate the contractwith 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 connecttonwith the loanwill not render Itusurious. 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 inmany other Instances,lies,not in ascertaining the abstract principles of law, but in applying them to the facts of the case."

The case of IndependentLumber Co. Q. Gulf States Bank, supra, involveda contractunder which 16 per EenYwair collectedby the bank as lender, 8 per cent being chargeable
as interestand 8 per cent chargeable for inspectioncharges. The court said:

"Had the contract required the Inspections, and the eightper cent-(8s) on that accountbeen onlv chargeablewhere the-v were actuallymade,
as well as shown to be a reasonable compensation for the service, the majority of this court are unwilling to hold that, so far, Itwould have been usurious * * + The authority cited by the appellee as upholding a contrarydoctrine are thought to be distinguishable, in that, inmost, If not all instances, they involve legitimate benefit's

to the borrower,,

eitherby third uersons not sharing themwith the lender, or from the lender direct for some distinctly separate and additional considerationthan the simple loaning of the money.”

Doubtless there are chargeswhich a borrower could. pay to a lender, incident to a loan, which would not constitute interest for the use of money. We construeHouse BllI' No. 6 to authorize the payment by the borrower to the lender of such charges. If the chargesmade for the expenses incurred, or for servicesrendered, by the lender, do not,“Si? individualcases, constitute legitimate chargesbut Interest for the use and detention of money, the chargeswould, of. -

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

course fall. The theory ofHouse Bill No. 6 is that in such
cases the chargeswill not be made, or, if made, will not have been pursuant to any authoritygiven by the bill.

Passing upon the constitutionalityof a proposed legislativebill, as we are doing in this oplnlon,as to whether it authorizesusurious Interest,presents and entirely differentmatter from passing upon an id.iQildUal contract entered intopursuant 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 theAct itself to be unconstituAona1.

It has been pointed out that the courts of Texas have not passed upon either a legislativeenactment embodging the provisions of House Bill No. 6, or directly upon the fundamentalquestions presented in a judicialreview 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 constitutionalityof the small loan act of Tennesseewas challenged. The principles invokedby the court in holding the Act constitutionalappear in the following excerpts from the court's opinion:

'Nordoes 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 investigatingthe moral and financial standing of the applicant and the nature and value of the assurance for repayment of the loan and other necessary expensesand losses for closing ' the loan to a maxlmum charge of 3 per cent, per month. By thus prescribing the maximum expense fee, the Legislaturedid 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 7Mallory 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 receivedwhereeverHonorable B. J. Leyendecker, page 7 O-3206

made shallbe enforceable in this State and any personwho in any wise participates therein shallbe subject to:the provisions of thisAct.'

"'Theweight 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 necessitatedby, It,when paid and received in good faith, for suchpurposes only, and not as consideration .forthe~loan,do not constituteusury, 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 sensebe considered compensa-' tion for the use of the money loaned."' Note III, 21 A. L. R. page 819.

"TheLegislature 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 objectwas..tofix a maximum service charge beyondwhich the lender could not go without making a conclusive case against him resulting in the forfeiture to the borrower of the entire loan, togetherwith the charges thereon. It left the loan company and the borrower free to agree upon a reasonable service chargewhich inno 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 invalidunless 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 settledas law, or not as law, in Texas. Notwithstandingwhich, it is our opinion,under the cases in Texas, thatHouse Bill No. 6 Is not clearly unconstitutional, and that, therefore, this department shouldresolve all doubtsHonorable B. J. Leyendecker,page 8 0-3206

in favor of its constitutionality.

We have pretermittedany discussion of specific provisions of House Bill No. 6. We do, however,wish to call specificattention to the followingprovision appearing in Section 18 of the Bill, which reads:

'Furthermore,such charges shallbe 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 foregoingprovision ofHouse Bill No. 6 Is construed to mean that the charges authorizedby Section 17 of the Act for expenses incurredand services rendered shall be authorizednotwithstandingwhether they are actually incurred or rendered, this provisionwould 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 InHouse Bill No. 174 rests in the fact that the Bill authorizes the collection of charges In excess of the lawful rate of interest irrespectiveof whether such charges are for expensesactually Incurred or servicesactually 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 severableand the remainder of the Act would be protectedunder the saving clause; nevertheless,we feel impelled to call your attention to the probable invalldityof this particularprovision 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 opinionNo. 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/WalterR. 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 ATTORNEYGENERAL OF TEUS
Approved Opinion CommitteeBy s/BWB Chalrman