: 

NO. 3050 

(Affirmed by,Letter to Hon. Callan Graham, Ch. Comm$tte.e 

on State.Affair.4, Rouse of,Representatlves, Jan. 31, 1951) 

.HOU SE B ILL NO. 420~ IS'BECONSTITUTIONA L' 

Opinion holding House Bill~Ro..& .(&all 'A Bill3 

unconstitutional because:,. . 

.~ . 

'( .(1;. " It violates ~&tic& ‘XVI, Section 11, by -attempting 

to authorize interest' of -dre.thah-ten,pef,,,cent.per .an$um. .; ,. 

(2) It is a special'law.88flxing the +aii'$e of interest+in 

violation of .Constitution, Artlcle~ III;~?$@tlon 56i 

.~ 

Q)*.~ It.is dlscrimlnatory~ln violation of .*%qual"Protec-' .'.: 

tlon? Clause of Federal~Const@ut$onand-'TexasConstitution,: 

Article' I Section 3, Article I;.~S~otlon'1~,~~~~~~ticle 

III, SectIon 56;' ;.~ 

_’ 

OFFICE'OE THE AfiOREEY GENERAL '-' ':~': .' 

.: 

May 13, 1939 

Honorable R. Emmett' Morse .Opinion Eo; 9-726, 

Speaker of the House of Ret.Constltutionality of CommltRepresentatives .. .:: tee amendment to Iiouse.Bill No. 

,Austin,. Tees 420, ,whlch &'a bill to regulate 

the business of making loans of 

-~$5C@.OO or less-and provides.‘, 

that such lenders may make certain &are;@ in additlon,to lO$ 

Dear Sir: Interest. 

4ie beg ‘to ~ackno#edge receipt of your request .of May 

1st for an opinion of.th$s department on <the constitutionality 

,~ of the above mentioned .bill @ibh~ls now pending before the'cur: .'. 

,rent'session of,-the Legislature. Bue:to'the importance of-the 
Hon. R. Emmett Worse, r@e 2 (O-&6) 

question and the complexity of the many legal problems involved, 

we have given the matter extensive and deliberate consideration. 

We are pleased, therefore, to submit this conference.opinion 

which reflects the research and deliberation of the entire Attorney General's department. 

The Committee amendment to House Bill No. 420 constitutes a comprehensive act to regulate the business of making 

small loans not exceeding 9b5CQ.00. We attach hereto a copy of 

the bill so that the same may be referred to in conjunc. 

this opinion, but shall summar$.ze the salient features RhIith o 

:.bia,as follows~: .:' 

Section 1 sets gouts at length ~the purposes of the bill, 

which are stated to“b~"‘~~'lie~d':~or're~ted-~~credit .to small 

and necessitous bcrrowers, brought about by.econdc conditions. 

The bill provides for 'the su@ervisionand'licensI.ng by the Ranking Commissioner of the State:~of al.Yperscns,:corporations, etc., 

who engage in the business of making..smaU loans expressly ex- 

~. cepting however banks.' savings b&ks~.?4orris F&n banks industriai banks; &i'a&investni&t co&nies 

&es,~trust companies, ,building:~andl&n,..assoc Ia 

insurance gompantlons, credit 

unions Andy pawnbrokers (Section ,20)::~ ~Licensees'under the act are 

expressly permitted (under,Seotlon U-A) to charge inaddition to 

.lO$ per anuum interest (l).'an initial~.charge of 5$ and (2) a 

monthly charge of. lMeth8:~unpaid bal&nce of the loan not to 

8Xc88d,$2,CO.-- In th8 8v8nt these:pertissive '8additiona~ charges*' 

should be held by a~ court inn&y partlcula,r case %ot to be chargeable $o the borrower", the:licensed lender shall be entitled to a 

return of principal less 10% penalty (S8ctlon IQ-&. The bill con- 

~~~ins.many.regulatorj~.pr~9si~ns~and.provides.a'criminal penalty 

forvIolations (Section 19). The Bill, in Section 24 thereof, 

expressly repeals the 'Loan Brokers' Regulatory,Act (Acts 1927, 

40th Le 

annual 1 

islature, 1st Called Session, page 30, Chapter 171, the 

150.00 occupation tax on Loan Brokers (Section 14 of Artitle 5069,: 5071, 5073, Title 79 R.C.S. 1925). only in so far as 

they ar8 inconsistent w$th,thls <ill. 

The~Attorney General, in passing upon the constitutionality of proposed or enacted legislation, may.not look to the 

policy, wisdom, or deslrablllty of the'Act, but he is concerned 

solely with ~the question of whether or not the particular Act 

comes within the limitations prescribed by th8'State and Federal 

Constitutions.'~-,,In determining this question, he must b8 guided 

by the decisions .andpronotuicements of th8 Courts of Texas end 

the United States. 'When the Supreme~.Court of Texas has defined 

the.meaningand application of a particular provision of the Constitution of TexaS,.it.is$ot with%n the province of the Attorney 

General to seek,to ~place-any~'djffsrentconstruction upon it. It 

'.. is.hLs duty to follow the:interpretation as defined by the Court. 

: ,~, :; ;~~,: ; 
Hon. R. Emmett Morse, page 3 (O-726) 

The essence of House Bill 420 is the legislative sanction, contained in Section 13 thereof, permitting the lender "to 

contract for and receive8 from the borrower, in addition to ten 

per cent per annum interest, certain "charges as reimbursement 

for all expenses incurred and payment for all services rendered 

in connection with the loan." May the Legislature properly permit such charges in view of Article XVI, Section 11, of the 

Constitution of Texas? which provides: 

"All contracts for a greater rate of interest than 

ten per centum per annum shall be deemed usurious, and 

the first Legislature 

i 

after this amendment is.adopted, 

shall provide appropr ate pains and penalties to prevent the sam8....". 

What-is the definition ,of interestas used in this provision of the Constitution? Does it.mean.tW ekf; return on the 

loan to th8~ lender, or does it mee.the total amgmt paid by the 

borrawer to-the lender including incidental expenses in connection with the loan? Gaines J speakingfor .the..Supreme Court 

of Texas.in Parks v.. Lubbo&(i899), 92.Tex. 635, 5l. S.W. 322, 

.quo$?d-the.,common law definition of'.interest from Abbott's Law 

Dictionary as 'being 8aUcompensation usually .reckoned by a percentage of the loan, use,or forb8arance'of the money;" Article 

5069 Revised Civil Statutes.of Texas, 

tention" to this common law definition. 

1925, :adds&he word "deIt reads: 

n'Interestl ,is the'compensation allowedby law or 

fixed by the parties ,to a contract for the use or forbearance or detention of mosey......" 

With the possible excepticnof..the word Nd8tention1f 

the stat$itory~ definition is.declaratory of the common law. 1% 

is self-evident that the legislature,.~y not change the meaning 

and effect of the constitutional provision by altering either 

the statutory definition of !%iteresttl or by amending the statutes heretofore enacted,providlng pains and penalties to prevent 

usury as directed~by the.Consti.tution. 

As to whether expenses connect8d.witha Sloan are included in VnteresV1 as that word is used in Article jor1, Section 

11, of the Texas Constitution, let uslookto the ~cases. Texas 

courts have uniformly held that .the,compensation to the lender 

may in no event be more than 10 per cent. This prohibition may 

not be circumventedby subterfuge suchas calling a part of the 

compensation a "service charge?, ncommission~t 

or "storage charge 91 if it isin fact'V.nteres , .I; in disguise". 

Inspection fee" 

ItIf the amount paid.by th8~ borrower to the lender 

in excess of the.legal,,interest was as.compensation 
.- . 

Hon. R. Rmmett Morse, page 4~ (O-726) 

for the us& of the money loaned it is usury, whatever 

may be the guise under which the transaction is 

clothed." Hudman v. Foster (Austin Court of Civil 

Appeals) 210 S.W. 262, 

Thus in Joy v. Provident Loan Society 37 S.W.(2) 2% 

(writ of error diSIdSS8d) the Texarkana Court :f Civil Appeals 

held that a pawn broker 'dght not collect."s.torage charges'! 

from the borrower in addition to ten percentinterest. 'The 

court said: 

than the 

sis ours) 

regular.zra~ of&$erest :. woXi&dgiv8.*!'. . . . .,. - ,,_ - :. (Empha- 

- ,. 

.~-~Forres~o~~S~~~~~~~~o~~~~~~e~to~'~v..:~ooks~ ~(Waco 

Courtof~ Civil ;Appeals:,1932)zq,51 ‘&W;'(2); &5 ,:the':court:~declared 

theloan:usurious.~becapse the-barik:&arged &e.%rrower'a ten 

y er 'center "servlce~~charge"-:~~'-ddit~on.~to::'a,,:ten 'R&:cent: interest. 

that:. opinion tht$ -icourt said?,,-., .:' 

such e v c s. The evidence wholly 

.failed .to~,sh~~.~t--~~~i,~~,,tra~ service wasrendered 

as would authorize a charge therefor,~'.~~:.~means em-... 

ployed in this case cannot be used to avoid the effect 

of the usury:statutei~~r To;allowextra;c&rgas:~for such 

service~s;,.would:de.stroy::.the~ pqrp0se.I o$-.,thel usury flaws. 

Independent:::L~ber,~~Company,-~..'.Gulf,,Sta.te;Bank,.. 299 :ZLW. 

939;:~':Slaughter:Com$any,~v.~~,,Rller,- 196~.-S.W.~~,704.",... (Empha- sis. o*.,)., ..- ~. 

.:$&.ce :RcCl&d~on sp&king,f'&j~jjh,~ 'Austin. Court of Civil 

Appeals In Reltimore.Trus~t 6ompan.y ;r;.:-.~nders.,~~~,:S.fdo,(2) 710, 

(writ- of error ~diq&ssed)l said:, ~~ 
. . 

Hon. R. Emmett Morse, page 5 (o-726) 

"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 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 ca city of broker or 

agent for appellees (the borrowers p" or otherwise. The 

bona company might as properly charge to appellees 

its office rent salaries of its officers,~agents and 

employees and o-& er expenses of operating its business." 

In the case of Independent Lumber Company v. Gulf State 

Bank 299 S.W. 939,'(writ of error refused), the Galveston Court 

of Civil Appaals held to be usurious a series of loans on which 

a bank charged the borrower eight per cent "inspection fee" for 

inspecting the property by which the.loans~were Secured. The 

evidence showed that the "inspectionfee? was charged in all in-. 

stances regardless of whether or.not an:inspection.actually was 

made. The court said: 

%idln&tte~~ it 'was &v8% ~eken .contemplated that appellant(the borrower) was to..nor did it in fact ever get 

anything except the use of'the money. No quid pro quo 

could therefore have gone to it,for anything else..... 

Th8 mere takingoutin advance, by the, discounting method, of the full conv8ntional rate in Texas of 10 per 

cent per annum didnot constitute usury but that malum 

prohibitum lay in tacking on still another six per cent 

per annum charge,for ,no additional or different service 

to the borroweri,,but for 'th8 amount of trouble to the 

bank in carrying that type of loan.' Fowler v. Equitable 

Trust Company, 141 U.S. 384, 3.2 S.Ct. 1, 35 $.Ed. 786; 

F8d8ral Mortgage Company V. Bank, 254 S.W.,1002." 

98 &W.(2) 

In the case of Texas Farm~Mortgage Company v. Rowley 

8% the~Fort Worth Courtof Civil Appeals held that 

certain notes i earing 7&% interest secured by deed of.$&&t were 

usurious because the deed of trust stipulated that the borrower 

should pay all taxes which might be assessed against the notes, 

which contingent taxes When added to the 7+$interest of the 

notes tip&&& total more than 10% which would amount to usury. It 

is to be noted that th8Se taxes were clearly *expenses incurred 

in connection with the loan* as contemplated by Section 13-A of 

House Bill 420. Yet the Court of, Civil Appeals considered them 

to be within the meaning of "interest" if chargeable to the borrower. We quote from.that opinion: 
. . 

Hon. R. Emmett Morse, page 6 (O-726) 

"And th8 provision in the mortgage, to‘the effect 

that the borrower would gy~any taxes that might 

be assessed against the note while the holder is 

a resident of another~county 

4 

manifestly was intended.to prwide for ~paymen of taxes~ on the 

n ote in the event it shouId have"a taxable situs 

in that county by reason'of establishing anoffice or agency in that county for transaction of 

any.of~its buciness. The stipulation could not. 

have been employed,'with any other contingency fin 

view; and therefore.it manifests an intention 

to charge more than 10 Der cent interest fork the 

use of the monev borroved;' in the event of the 

happening ,of that. contingency a.@ if the ..taxes ofi $f&! ':cote ;.i !$,+$f ~f&$&j't;. ff44ereo$.; 'shotid :&- ; 

+&ea!;q:$.F ;dnt pr '&iilfm' "~‘ ~miiphasis: oys.).: '. .: 

.A~.cwT&'- &I: .&iT'@ &c.g*&#? yg.: t,j& i&a:&r qjy ;j@ Texas 

~&,~~~&&;:~~~i': !~fi&;~;,;.&&,j&~&~ w. ,~~i&&s~i,~~@a GeT'&&,;~ o;$'.ae 

&j~&g~~fix~~~ ~pfi&ql ~db~~ajibJi"t~:~~eine~,.~Co~t a*:~+~ '10, 

1939.;7*~~7+ig1 ygg&.*a) o~~y~~a,+&g&+~ ;.tibajssw cd** et 

.a1 v. Elizabeth Rowley e c al, the ab&:.Q~o~~jC@&~f &:::bpmon 

of 'the Fort,Worth.Court was expressly aaprovdd. though the case ,, 

,,,&.: keve'r&a f&.$$@' !,+@j-~d-i *hat: <jja~~$&~ :'t;ie ~hh~~~,lhad:;:6een..,

Didmrlv &e'dij&d..' Z We!.Qdbt& 'from 'wg. ejj&fon .b?: th& ~&~&ssion 

&&tis;ll;si”i, ‘. ~,- ..: :,-: .‘A .:r: ‘~ ., ;~;‘i:,~j- 

_i 

never 

stated: 

."Howeve.r; in'bur ~o$i#on the ,question has been 

foreclosed by the'SnI&me'~Court'in the recent case 

'of Kansas City 'Life Insurance Company v. Duvall,' 

: lOk'S.Wi(2) ll:'and~tkiat'-case controls 'this one..,. 

It was held that such prokision~in the contract created a contingency which madade the Ioan usurious from 

its beginning;.... The record shows that it'was proven. 

that'for the'year 1933 the rates for State, County, 

school and road purposes in~henton County; where 'the 

land was situated, were siich that upon the face'value 

of the note the taxes,-'woiild have amounted to such sum 

that when added to the interest provided for in the 
Hon. R. Emmett Morse, page 7 (O-726) 

loan the interest rate would have exceeded 10 par 

cent. We think the decision above mentioned has 

again decided the question thus urged. It was 

there held that because of the tax provision in 

the contract, if the contingency arose in the future by which the tax wh$bh might be paid would 

cause the rate to exceed 10 per cent then the 

contract was *potentially usurious' hrom the beginning." 

The foregoing cases clearly illustrate the well-established rule in Texas, that when it appears that any charges made 

against a borrower in addition to the maximum rate of Interest of 

10 per cent per annum, whether they b8 called nexpensesllanservice 

chargesnt, Ynspection fees", "storage chargesYor "taxes 

fact additional compensation to the, lender; ,and as such 4.n~~8% 

in alsguls8", it then follows as.8 matter of ,law'that the loan is 

usqrlous . We are, therefore, forced to the conclusion that the 

courts of Texas have-defined Ylnterestw so as to include all compensation paid to the lender for th8 ,nse' of money, though a part 

thereof mayrepresent nr8imburs8m8nt for expenses incurred in 

connection with the loan." Applying this definition of nlnt8rest1R 

to the "charges" expressly 

r 

rmitted to be made by lenders under 

Section 13-A of House Bill 20, we are unable'to excape the conclusion that these %harg8sn are presumptlv8ly additional %nter8st"within the meaning of Article~XVI, Section 11, of the *stitution of Texas. 

We are not-ware of the"&&,e holding ~that a borrower 

may be properly Charged without-of-pocket expenses arisi$ggin 

connection with a'loan which are paid to 

visions in notes providing that th8 

in the event the note be placed in the handsof an attorney for 

col.lection .have been upheld. Stanford V. united States InV8Stm8;t zorporatiQ@~< 272 S.W. ‘568; Min8r vi Paris Exchange ~Bank, 53 

. "A commission paid to.the agent or broker of a borrower 

for'services rendered in respect of the transaction, will not render a loan usuriou~.~~ ~42 Texas Jurisprudence 934; Williams v. 

Bryan, 68 Tex. 593, 5 S.W. &Ol. I?or.do the courts consider commissions pald'to agents of the lender to be in the nature of additional interest, where the'agent is ~the "special" as distinguished 

from the ng8neraln agent of the lender. This rule is well stated 

by Judge Smith of the San Antonio Court of Civil Appeals in Hughes 

v. Security F!ullding.and Loan Association, 62 S.W.(2) 219: 

Ylhe act of an agent, having only special and limited 

authority; in charging the borrower a fee by way of a 

commission for making a loan or for examining title 

to property to be mortgaged $0 s8cure th8 amount of 
. . 

Hon. R. Emmett Morse, page 8 : (O-726) 

the loan is not the act of his principal, and the 

fee so charged does not render the loan usurious. 

Jones on Mortgages, 642... 

'*The rule would be different, so as to charge the 

lender, if the agent were a general agent, with 

authority to make loans for the lender in such sums 

or at such.times as he pleases. Jones, 642-a. In 

this case the agent had no such authority. His authority extended no further than that of receiving and 

forwarding applications for loans, delivering moneys 

actually lent, and collecting and remitting installment payments from the borrower. He had no authority 

whatever to make loans, to :pass:upon~.risks,, or appraise se'curities for ..apuelleei.S. 

~i.~ 

t388 also: N ‘oel v.'Paahandle.~Building and- LoanAssoclatlon, 85 

S.W.@. 733 hrit of error~refus8d); ::.Sales v. .Wrcantile:lVa- 

.tional.Dank, 89 S.W.(2!3. 2+?7:.+rit of error~diSmiSS8d).'.-Pla. sme 

rule with respectto .ganeraLagents;~would apply: to Servants or .' 

~employees of the lender:: ..Baltimore:Trust CompanyV:Sanders, 105 

S.W.(2) 710 &rritof .8rror dh~missad)~.~ Cost of..-preparation: ana 

::examination'of.abstracts mayLbech+rged to~the borrowers:: e. 

: 

In all OS sh8se::caSes where'the cou&~sanction8d'papments by the borrower for.8xpenS8.6 &r.connection:with thelloan 

‘<is to be noted that in every instance the payments were:not mad8 

it 

to the lender, but to $hir nartieg We beli8V8 this fact:clearly 

distinguishes these caS8s ~rom~.the.&tuation~contemplated by Settion 13-A~:.Of this Bill&,. W8;hav8 been unable to find a ~Single T8XaS 

case which permits the lender.-to:collect from.the borrower, in 

addition to interest in8xcesS of ,lO&for expenses incurred or 

,servi.ces rendered:by him in connection with the loan. See.Trinity 

Fire Insurance Company v. Kerrville~ Hotel .Comuany (Texas Supreme 

Court) 103~~S.W,~ (2) 121. - : 

Doubtless it may be' argued that the lender could.render 

services to the borrower in connection with.th8~ ,loan which services are not .of the.ty$e ordinarily incidental.to a loan and which 

could be rendered by.the lender.more economically than the.same 

service could be rendered by, a&hird party. .It may~be further 

argued that compensationfor such service is.not to be construed 

as interest if the slender canrender an accurate.accounting.showing that such services represent out-of-pocket.expense,which can 

be isolated as chargeable to the particular loan and distinguishable from the lender's general overhead.expense or expenses, 

which are incidental tothe lender,'s general business.. 

The decisions of.ourvarious appellate courts negative 

this argument but if they did not, 'we think the bill attempts to 
Hon. R. Emmett Morse, page 9 (O-726) 

authorize interest of more than ten per cent in another respect. 

Section 13(A)(b) attempts to authorize the,borrower to contract at 

the time of the making of the loan to pay not to exceed 13 per 

cent per month of th8 monthly balance as a service charge presumably to compensate the lender for the cost of collecting {he 

amount of the note. It iS important t0 not8 that th8 borrow8r's 

obligation to pay for such potential services which have not been 

rendered at the time of the creation of the .fY o ligation to pay therefor is unconditional and is not dependent upon the lender actually 

rendering such services thereafter. The act would authorize the 

borrower to obligate himself to pay an amount certain whether such 

services may be rendered or not. Since the validity of the contract must be tested as of the date ~of its execution, the fact 

that such s8rvic86 are thereafter actually rendered by the lender 

do86 not remove th8 vice that the borrower uncond&tionally contracts to pay an additional sum for such services regardless of 

whether or not they may be rendered., It cannot be questioned 

that the borrower's obligation to pay for servlcas that are never 

readered is properly construed as .interest.- 3y the 'same logic 

the borrower's unconditional promise .to..pay:~foruture services 

which may ormay not be.rendered bye the '~8nd8r;must~also be 

construed as interest. .Sitice the bill.attempts to authorize such 

unconditional obligation in addition:to lnt+rest,of 10 per cent 

per annum; it is clearly contrary to :the constitutional prohibition against usury. 

&ikeWi& clearly diSt,ing&.habi8 ar8 ~those cases wherein 

the lender 1s. paid by the~?wrroy8r :for property or .s&-vic8s not 

connected with the customary cr8.ditor-d8btOr relationship. 

"Without violating the'usury law charges,may be tide for 

legitimate benefits to a borrower; .~received by him either .from 

third persons who did not share them with th8 lender or from the 

lender himself for some~ distinctly separate and additional consideration other than the simple loanof money" - 42 Texas Jurisprudence 931 40. Thus a man may'properly'charge for his services 

in buying b&ding materials although he may be lending the money 

to buy them with. ~Crr v. McLniei 5 S.W. (2) 175, 30 S.W.(2) 

487, affirmed by Corn. of App. 33 ~S!Wi (2) 427. 

In Slaughter v. Eller (Amarillo Court of Civil Appeals, 

writ of error refused) 196 S.W. 704; the court held that the 

lender might receive compensation for his labor in supervising the 

conduct of the borrower's business. The.court said: 

(IThe contract in this case provided the means by which 

Slaughter might keep informed of the condition of 

Eller's business and prevent a use of funds other than 

in the business which Slaughter ,was financing. The 
. . 

Hon. FL Emmett Morse, page 10 (C-726) 

attention to the details by which this was to be accomplished necessarily imposed some labor. !lke borrower might legitimately agree'to compensate the 

lender for servicers of. such char& ter, 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." 

The court said further: 

"It is also stated generally that any advantage or 

benefit exacted which, added to the interest reserved, 

increases the compensation received for the loan to 

an amount in excess g&the lawful interest constitutes 

us@f.i;;)' ". ',' ,;, 

Inthe~same~ category may be placed the.cases relating to 

building aud ~ldan~associati'ons !wherein then courtShave recognized 

,the am capacity,of a&an as borrower atia StOCkhOld8r. Contin8ntal 'Savings a.ria l3ui1ding~~~Association v. w00a @astlana~~Court of 

civil' AppeCI~~).~3.'S.W;:,~~2).:770i'affimaed by com+pp. 56 S.w.(2) ,641;: ,- ., :;: ;,: ,'~:. 

T&&g'n~'from :the 'qUestion~,of what is and what is 

not YnteresV' as d8fiXIed.by thecoUrts.of this state;let us conSid8r the more general question:. to what extent a-s the Usury 

revision of the T8xaSCOnStitUtiOn circumscribe the authority of 

%l 8 Legislatura~to .ex8rCise ,its'.discretion with'reference to 

regulatingthe busiriess;of making loans?. ~May the tigislature ignore'the constitutional mandate to.npr'ovide'appropriate pains ma 

penalties to prevent" us,Ury as to a,specific cla~ss of lenders in 

the furtherance of what it .deems'to be the public welfare? 

This question was squarely 'before the Supreme Court of 

Texas in Watson v. Alken,. Tex.' 536, wherein it considered an 

usurious loan made~ after the adoption of the Constitution of 1876 

but prior to the enactment by the Legislature of any statute providing "pains and penalties*' for usury. 'Chief Justice Gould in 

that opinion said: :~' 

“on 

ing 

I&y 27, 1876,~Watson ~%&r$@Ied of Aiken $3,000 agreeto pay interest at the ranted of eighteen per cent 

Der annum. The constitution which took effect in April 

of that year provided that in the absence of contract 

the rate of interest should not exceed eight per cent 

per annum, and authorised'parties to contra.& to "agree 

upon any rate not~to exceed twelve per cent per annum.' 

It then proceeds thus: 'All interest 'charged above 

this last named rate'shall be deemed u.su%=ious, and the 

Legislature shall at its first session provide appro-, 

priate pains and penalties'to prevent and punish usury.' 
- . 

Hon. R. Emmett Morse, page 11 (O-726) 

Article 16, Section 11. . . . 

"In our opinion Aiken occupies no more favorable 

position than if his loan had been made after the 

act of the Legislature took effect. When his loan 

bush it was left 

tue of the cpnsti t 0 

to the Legislature to 'nrescribe' rains and uenalties 

fl 'I a contr ct for usurious interest was a contract in violation of law." 

@mphas,i~ ours) 

Equally persuasive of the proper construction of such 

a constitutional prohibition isthe, more recent case by the Texas 

.Supreme Court, City of Wink v. Griffith .Amusement Company 100 

S.W. (2) 695, wherein the court was required to construe &ticle 

III, Section 47, of the Stat8 Constitution which prOVid86 that 

"the Iegislature shall pass laws prohibiting the establishment 

of lotteries and gift enterprises in this state, as we1.l as the 

sale of~tickets in lotteries, giftenterprises or other evasions 

involving the,lottery~principle, astablished~or existing in other 

states." Chief Justice'Cureton.found that "lotteries &have 

b88n prohibited by the.,Renal Code inaccordance withthe constitutional mandate. 'Gift enterpriss# ana~,%ther evasions involving the lottery principle I neverthel' 's;remain and stand con- ~~. demned by the constitution of'the sta as being against public 

policy....rfjefendant inError's 'Rank .Night' plan was obviously 

an evasion "o?"the lottery laws~ by the-~avoidance.of a direct charge 

for prize chances.... but neverth81ess.~r..manif8stly an attempted 

'avoidance' o,f the'lottery statute ~:'by artifice' in accordance 

with the generally accepted definition of ~'.evasion'. Tnerefore 

defendant in error's 'Rank Night' plan stands condemned bv the 

Constitution of Texas. Being condemn@ by the Constitution, it 

is against the 'public policy of the'Statelt'. (Emphasis ours) 

Chief Justice Cureton wasthere speaking of a constitutional provision which directea~ the legislature to pass remedial 

legislation as does the usury provision;,the Legislature had 

there failed to provide a remedy for a part of the evil recitedby the Constitution, and ye,tthe Chief Justice declared that the 

defendant's act "stands condemned by.the Constitution of Texas." 

Applying this reasoning to our question, it follows that the 

usury provision of the Constitution permits of no discretion by 

the Legislature to withhold as to any class the "pains and penalties" for usurywhich the Con,s.titution~prescribes. 

In view of the above,two clear pronouncements by the 

Supreme Court ~of Texas, we feel it unnecessary to burden this 

opinion with additional citation of authorities. Our conclusions 

as to the limitations placed upon the Legislature with reference 
Hon. R. Emmett Morse, page.12 (O-726) 

to loans 

the 

which, under the d8fiXXitiOn of ~'inter8st1~ announced by 

tour t s, are in fact usurious could not be better expressed 

than in the language of Judge Laitimore, speaking for the Texas 

Court of Criminal Appeals in Juhan v..:&ate, 216 S.W. 873: 

'We are not permitted to concern ourselves with the '. question as to whether the loan broker is necessary 

and useful in a community, to meet the wants of 

those~who lack ability to measure up to the financial 

standing required by the bankers, nor as to whether 

the loan shark is an evil that should be effectively 

banished from our midst. Evils must be met and 

abolish8d or minimized according to the wisdom of 

our ~&hl'8, u within he limits fixed bv our 

$%mstitution.w &m$Lasis 0-A) 

We therefore, respectfully adViS8 you that it is the 

opinion of t&is department that th8 Committee amendment to House 

Bill 420 exceeds the limitations of.Article XVI, Section 11, of 

th8 Constitution of -Texas in that Section 13-A thereof purports 

to put the cloak of legis~tive sanction about a special class 

of loans which may be usurious as a matter of law. 

We also believe that this bill is unconstitutional for 

several additional reasons. We shall mention th8Se briefly without attempting to discuss each one exhaustively. 

Section l3-C.of th8 bill seeks to give to,all charges 

permitted by Section 13-A a presumption of validity. This we 

believe is contrary to the spirit.of th8 constitutional i&bition 

against usury. As said by the Texas Supreme Court in Hemphill v. 

Watson, 60 Tex. 679: 

Vhe section of the Constitution above alluded to 

(Article 16, Section 11, of Constitution of 1876) made 

usury a quasi offense which the Legislature was 

charged with suppress Ll g and punishing. It even defined what should amount to the offense of usury, aeclaring such offense to consist in charging interest 

at a greater rat8 than twelve per cent per annum. 

This provision is prohibitory in its nature and selfexecuting so far as to render all contracts of the 

kind denounced immediately illegal; and it left to the 

.Legislature the only remaining duty of saying what 

penalties should be impo.sea upon offenders against 

this clause of the Constitution. Cooley on Constitutidnal Limitations, 100 nOtej Law v. People, 87 111. 

385. 

"'A3 

power to uass laws of a certain character is urohibitory 
a ,., 

Hon. R. Emmett Worse, page l3 (O-726) 

of such acts as those laws would authorize.13t 

We believe. Section 13-C of, this bill is discriminatory 

as to certain features thereof and therefore violates the "equal 

protection" clause of the United States Constitution and the 

following provisions of the Constitution of Texas: 

Article III, Section 56. "The Legislature shall 

not, except as otherwise provided in th&Constitution, pass any local or' special law authorizing..... 

fixing the rate of interest." 

Article I, Section 3. "All free men, when they form 

a social compact, have equal rights, .and. no man, or 

set of men, is entitled to exclusives separate public 

emoluments, or privil8ges,~~but in consideration of 

public services." : ,. 

Article. I 

shall.be' Jr 

Saction~19: oivo.'kti&i of. this state 

priV8d:'of'~,lif8.;~ liber.ty,.. property, privileges or immunities;.or inanymanner disfranchised:, 

~8XC8pt by Ch8 dUeCoUrS8,Of the +3W~Of th8.tind.w -1 

Section.l3 C prOvid8S.that~if: a;loan.made ~by a licensed 

lender in accorpance'with the rate provisions-of Section 13-A be 

found by a.court to.,be usurious, suchlender will be ~penalizea~ 

only to the extent of lC$.Of the principal amount of the lOan; 

whereas if.a'non-licensed lender (a!idhe;<may.be. in the 8Xempted 

categories and therefore:ineligible 'for .a license) should make 

the identical loan, h8 issubj8ct to the penalty of double the 

amount of usurious interestpaid, under Articla 5073 of the Revised Civil Statutes. 

The last paragraph of.Section 3 of the bill requires 

every licensee to appointthe RankingCommissioner his attorney 

for process of service; No provision is made in the bill requiring the Ranking Commissioner to give notice of any service of?; 

process to the defendant.. .Such provisions were held to invalidate the Loan Brokers statute of 1918. (Acts 34th Leg. 1915, 

C 28, Vernon's.Annotated Civil Statutes, Supplement 1918, Articles 6171-a-6171-1) as per the opinion of Lattimore, J in Juhan 

v. State (Tex.Ct. of Crim.App., 1919) 216 S.W.(2) 873 at page 877: 

n . . ..and then to fU#her write in section 7 of said 

act (article 617lg), as a.part of 'the law governing 

such business', that such private citizen shall file 

with the county clerk of each county where he does 

business a written, irrevocable power of attorney, 

naming the county judge of such county as his duly 
Hon. R. Emmett Morse, page 14 (O-726) 

authorized agent and attorney in fact, for the purpose of accepting service for him or it or being 

served with citation in any suit brought against him 

or it, in any court of this state, 'and consenting 

that the service of any civil process upon such 

county judge as his or its attorney for such purpose, 

in any suit or proceeding, shall be taken and held 

to be valid, waiving all claim and right to object 

to such service or to any error by~reason of such 

service,' is to attempt to place such obligation in 

said bond as to make it unreasonable and.discriminatory. No citizen of this state can be compelled to 

relinquish or.waive his right to his day in court' as 

a condition to engaging in any lawful business. Nor 

will a law requiring a bond seeking to impose such 

condition be upheld by us. We, are not surprised 

that the bonding companies and solvent citizens, as 

iS disclosed by this record, r8fUS8d t0 make for 

appellant the bona required by this act. uIId8r its 

conditions and th8 terms of this law, th8 county 

judge~mighi! accept service, or~b8 served with citation 

t 

in a suit against appellant in the most remote 

coun y in the state, and in a lawsuit wholly foreign 

to th8 loan brokerage business, ma In such case, 

even without lnnniledge on the part of appellant of 

Said Suit Or SeZTiC8, Or acC8pt8d 68IViC8, a-jUdgment m$ght be rendered against him and his bondsmen 

for any amount; ana,.8ven though the service be d8- 

fective, erroneous; and illegal, appellant andhis 

sureties would be powerless,-for by the express 

provisions of the law such written appointment of 

the county judge as his' attorney in fact must contain ~appellant's consent to,sUch service, and his 

waiver of any right to object..to:any error therein. 

'Notwithstanding the fact that; 'asto :the .ordinary 

citizan erroneous and defective service renders the 

judgment either void~or voidable, as the caSe may 

appear, for some reason effort.is here mad8 to take 

from the man engaged in the business of loan broker 

such right, and he is thus penalized and denied the 

right of equal protection of the law, and deprived 

of his property and privileges ~without due coUrse 

of law. !Phere is no provision in this law requiring 

the county judge to notify, or in any other way acquaint, the loan broker with the fact that he has 

accepted service or been served with citation in any 

suit against him, which facts may result from the 

consideration that it would do the loan broker no 

good, inasmuch as he could not take any steps to~release himself by reason of any defect in the citation....." 
Hon. R. Emmett Morse, page 15 (0-726) 

See also Hess v. Pawloski, 274 U.S. 352, 47 Sup.Ct. 632, 71 L.&I. 

1091, wherein the Massachusetts statute providing for substituted 

service on non-resident motorists was upheld because "it is required that he shall actually receive and receipt for notice of 

the service and a copy of the process." We, therefore, believe. 

this provision of Section 3 of the bill is a denial of due process. 

'Ihe committee amendment to House Bill No. 420 being unconstitutional for the various reasons above enumerated, we shall 

pretermit any more detailed consideration of its 

sions. 

Yours very truly 

AT!CORNEY GENERAL 

By/& Walter R. Koch 

Walter R. Koch~Assistant 

(s&Victor W. Bouldin 

Victor W.. Bouldin, Assistant : 

specific proviOF TEXAS 

WFtK:FL/wb 

This opinion has been considered in conference, approved, 

and ordered recorded. 

g;wCld&Mann 

. . 

Al!TORNEYGENERALGF!l!FXAS 

APPROVED: tX'&NI;~CQJC.TEE 

BY: , 

: