     .    ~.




                            ORNEY          GENERAL
                           OFTEXAS




Honorable Jno. Q. M&Adams
Commissioner, Department of Banking
Austin, Texas

Dear NC. MC&darns:                    Opinion No. O-5384
                                      Re: Construction of Article 8, Ch.
                                      V, of the State Banking Code, 48th
                                      Legislature.

           This will acknowledge receipt of your letter requesting our opinion
upon questions involved in the above subject matter. Article 8, Chapter V, of
the Texas Banking Code of 1943, (not yet effective) is as follows:

"No bank shall charge or oolleot any loan fee or any other charge, by whatever
name called, for the granting of a lean. Provided, however, a bank may require
an applicant for a loan or discount to pay the cost of any abstract, attorney's
opinion or title insurance policy, or other form of insurance, and filing or
recording or appraisal fees. Expenses necessary or proper for the protection
of the lander, and actually inourred in connection with the making of the loan
may be charged, and further provided that a bank may charge any borrower the
reasonable value of servioes rendered in conneotion tith the making of any
loan, including the drawing of notes, the taking of acknowledgplentsand affi-
davits, the preparation of financial statements, and the investigation or
analysis of the financial responsibility of the borrower or any endorser,
surety, or oo-si@er, in an amount agreed upon, but not to exceed One Dollar
($1) for each Fifty Dollars ($50) or fractional nart thereof loaned3 but
the charges for such services shall not be deemed a loan fee or interest
or compensation for thd use of the money loaned; and the last charge next
above shall not be collected unless the loan is actually made."

           Literally, your inquiry calls for an interpretation only of this
Artiole, and ordinarily it is the policy of this department toconfine our
opini,~nsto the specific questions propounded, but where such specific
,:uestionsby neaessary 'implication involve the constitutionality of a
:;tatute,this polioy should not apply. To construe this Article, as you
request, and to advise that the charges thoroin named and involved in your
questions could be made and collected, would be to advise that they were
not in violation of the Constitution. We have thnr fore considered the
zc~::titutionalvalidity of this Article.

           Section 11 of Article XVI of the Constitution declares:

"All contra&s for a greater rate of interest than ten per centws per an-
   ) shall be deemed usurious, and the first Legislature after this amend-
illm
wnt is adopted, shall provide appropriate pains and penalties to prevent
the same3 but when no rate of interest is agreed upon, the rata shall not
Hon. Jno. Q. &Adams,   Page 2(0-5354)



exceed six per centum per annun."

               Bo statute which authorizes the charging and collecting of inter-
est in excess of ten par cant can in any event be valid. Rhat is thus mandatori-
ly forbidden by law can never be lawful. These indisputable principles require
that we consider the statute to determine whether or not, and to PS1atextent if
*w, it violates the Constitution.

                 Interest is compensation for money retained. The Constitution
means today   exactly what it meant when it MS adopted, The word 'interest", as
used in the   Constitution, means today what it meant when the Constitution was
adopted and   during all the years intervening. Our consideration of the statute
is directed   to that portion of Article 8 reading as follows:

"Provided that a bank may charge any borrower the reasonable value of sel-rrioe
rendered in connection n th the making of any loan, including drawinrows,
taking of actiowledeJnentsandaffidavits, the preparation of financial state-
ments, and the investigation or analysis of the financial responsibility of the
borrower or any endorser, surety or co-signer in an amount agreed upon, , . .a
(Bnphasis ours).

               The question for determination is whether or not such service
charges constitute interest within the meaning of the Constitution. This sub-
ject has been repeatedly before the courts, and numerous decisions have been
rendered. We cite several, though by no means all of them. In inverse ohron-
ological order they are as follows:
 " . . . It is held by the courts of this State and practically all other states
 of the Union, that as a general rule, when an agent of the lender charges and
 is paid by the debtor a commission or bonus in oonnection with a contract for
 a loan fras his principal to a borrower andhis action in doing so is ratified
 by the lender, the transaction is usurious if the amount so paid, plus the
 amount charged and designated as interest, exceeds the amount allowed by law
 to be charged for the use or detention of the money."--Great Southern Life
 Ins. Co. v. ~lliams, 135 S.W. (2) 241.
 11. . . ??hhen
              it (the lander) disbursed the prooeeds of this loan, it retained
 in its own hands $600 thereof. According to the statement which it furnished
 the borrower at the time of such disbursement, this $600 was retained as a
 ~ccmmission~ for making the loan. . . . If it was retained by the lender as
 cxwission for lending its ownmoney, it wuld constitute interest as a matter
 of  1 2w.      l If it was applied to the.overhead cost of the lender's business,
 it ?iouldillo be interest." --Eastern MortgaSe & Securities Co. v. Collins,
 115 s.n. (2) 479.

 "T$ ,:sclear that the expanses forming the consideration of note 2 were charg-
 aabla absolutely against the proceeds of that note or in other vords were ab-
 solutely payable by appellees. (Sanders and wife). . . . The entire payments
 for the first year of the loan ware therefore a credit against this expense
 debit; and not returnable in any way to appellees. . . . Considering the ex-
 :>ensesas an improper charge and therefore as interest, the transaction was
Hon. John Q. MaAdams, page 3 (O-5384)



manifestly usurious in the light of the construction of the application most
favorable to appellants." -- Baltimore Trust Co. v. Sanders et ux, 105 S.W. (2)
710. Followed in Eastern Mortgage E Securities Corporation et al v. Sanders
et ux, 106 S.W.(Z) 1118.

"1. . . If there be an intention to charge usury, no matter how the transaation
may be veiled or disguised, the courts will look through the form to the sub-
stanoe of the transaction and condemn the contract as usurious. . . . The
courts of Texas have exercised jealous vigilance in discovering and rebuking
usury whenever and in whatever disguise it may have been shown to exist."
Quoting 42 Tex. Jur. p. 885. -- Glover v. Buchanan, 104 S.W. (2d) 66.

"In subsitting the above+nentioned issues to the jury, the trial court, in its
charge, gsve the following definiticm of interest: '"Interest? as used harein
means the oonpensation fixed by the parties to a contract for the use or forbear-
anos or detention of money irrespective of the tern or name applied to it by
the parties.'
II
 . . . In this connection, had the definition of interest as presoribsd by
article 5069 alone been given, the jury might not have understood that interest
indirectly charged or interest concealed was still interest at law. We espeoial-
ly call attention to the fact that the contract of June 11, 1926, simply says
that this $12,000 is pid 'for handling the loan.1 It does not oall it interest."
n . . . When we come to considea-what constitutes the contract in this case we
are compelled to the conclusion that all of the inatrumen s we have mentioned
above, the contract of June 11, 1926, the bonds, the deed of trust, and the
contract with referenoe to the $12,000, constitute the contract just as oomplete-
ly and just as effeot<vely as if they were all comprised within the four corners
of the instrmnent. . . ."
I    . We are fully anare of the fact that a borrewer may lawfully pay an agent
of ; broksr a fee to prooure him a loan from a third Marty. We* re also fully
aware of the fact that it is not a violation of our usury laws for an agent or
a broker~to promote the sale of bonds, such as these, to legitimate investors, and
to the general public, and charge the borrower a fee or commission therefor. In
spite of this we are absolutely unable to find any fact or ciroumstaace in this
record that would oonstitute J. E. Jarrett Mortgage Company a promoter, an under-
writer, a broker, or an agent for the borrower in this instance, or even raise
       issue on these questions. On the other hand, the contracts and all
a ?;,lct
surrounding facts completely and absolutely negative suah conclusion. . . .a
" . . . The judgments of the District Court and of the Court of Civil Appeals
am both affirmed." Trinity Fire Ins. Co. v. Kerrville Hotel Co., 103 S. W.
(2) 121.

                The 'udgment of the Court of Civil Appeals thus affirmed was for
usury.   (91 s.n. (23 973).
Honorable 3no. &. DoAdams, page 4 (O-5364)



"If the Demming Investment Company was the agent of National Life Insurance
Company for the purpose of lending its money, or if it was aatually engaged
in lending its own money, and, as a subterfuge for avoiding the effect of the
usury statute, stipulated that second-lien note for #798.75 which was due
February 1, 1924, represented a ocasaissionfor making the loan, whereas it
actually represented a part of the interest aharged for the use of the money
loaned, then the contract was usurious. . . .* --National Life Ins. Co. v.
Schroeder, 94 S.W. (2) 868.

"Although the note was executed for the prinoipal sum cf #6000 the aeb&@l
ameunt of the loan was but $5760, beoauoe at the very time plaintiff in er-
rcr Adlesonlsoeived $6000 from the agent Flynn he paid to Flynn as se-callled
oomission $240. . . . His note ia the principal sum of #SO00 was given fer
a loan of but $5760. In such case, for the purpcseof testing the contract
for usury, the real principal is the amount actually received by the borrower.
. . ." Adleson v. D. F. Dittman Co., 80 S.W. (2) 939.

               ~Upon this baois the rate of interest stipulated exceeded ten
per cent.
" . . . It is apparent that the only services rendered (the tenk) were those
necessarily required in making the ordinary loan. The interest allwed by
statute is intended to compensate for such services. The evidence whclly fail-
ed to shovthat any suoh extra servioe was rendered as lAouldauq%riae a
charge therefor. The means employed in this ease can not be used to avoid the
effeot of the usury statute. To allow extra charges for such servicer would
destroy the purpcae of the usury laws." Forreston State Bank v. Breaks, 51
S.W. (2) 645.

'In oonaidori,Wgthis prevision further, in the tvm notes, we are of the opinion
that it aimply means to say, 'while thir contract on ita face shows that it is
tainted with usury which is exacted during tie firat 25 months of the life of
the contract, nevertheless if the borrcwer makes default and for aay reason
given the lander accelerates the maturity, the lender will them charge only 10%
interest and will take all the payments that have theretofore been paid and
aredit them on the principal indebtednear and all interest acorued frem the
date of the loan at the rate of lC$a' To ua this is tantamcumt to eayiagc   Ws
are charging usurieus interest, but if anything happens ws will apply it on the
contract just aa if we had charged no more than lO$ per annws interest therecn
from the beginning.' We do not believe that any such provision purges the con-
tract of the usury pmvided fer thereia." --Federal Mortgage Co. v. Hawkins, 95
Y. ;i'.
      (2) 744.

               After a careful review of the authorities, this department held im
Opinion Bo. O-3206 that House Bill No. 174, then pendiag before the 47th Legirla-
ture, was unconstitutional, saying among other things:

“We have pretermitted any discussion of speaifio prcvisiona of House Bill Be. 6.
We de, however, wish to call specific ;ttenticn to the following previsiona ap-
pearing in Section 18 of this Sill, tiich readar 'Furthermore, suoh charger
Honorable Jno. Q. YcAdams, Page 5 (O-6384)



shall be presumed in any suit in any court in this State to be prima facie
rearonable and proper, and suoh charges shall not be considered to be inter-
est.or eempeaaation for the use, forbearance or detention of money.’

"If the foregoing provision of H, B, No. 6 is aonrtrud tc mean that the cbrg-
,I autherised by Section 17 of the Act for sxpenrrr incurred and aervice~ ren-
derrd shall be authorized notwithstanding whether they are actually incurred or
rendered, thin provision would be indid   for the 8ame reason that House Bill
No. 420 of the 46th Legirlature and Hcuas Bill Ho. 174 of this Legirlatun are
invalid. As pointed out before the vice in House Bill No. 420 and in Houre Bill
No. 174 resta fa the faot that the Ml1 authorizea the collection of chargee in
excess of the lawful rate of interest irrespective of whether such charges are
fcr ~~~ia~s actually incurred or services actually rendered. It ir net, in
our opinion, within the power of the Legislature under the Conatitutioa to do
this."

       It is the considered opinion of thi8 department that Article 8, Chapter
V, of the Tea8 &king    Code, a8 enacted bythe 48th Legirlature, authorizing
the service charger~hereln discussed, should be aonstrued to apply only to
those loans where such chcrgeo added to the rtipulnted interest shall not exceed
$6~ per cent. T%ir construotioa is compelled in order to give it any validity
wh##ower,   rinca,if it b otherwise construed aa authorizing such ohargon when
their inolunioq, would exceed that rate weuld render the same nholly void.

      .These service charger are not for expeaaee properly chargeable to a
borrower. They are "interert" within the meaning of the Cenrtitution, since
they are rolely fcr the loan. The rtatuto itself acoentuataa this cc~clwfo8.
It deolarer that *the last charge next above shall not be ccllected wle8e the
loan ia actually made." If such charge be no charge wlera a lean is mado, it
necessarily could be a charge only for the lean, and should bs included A# such
im tr8tingefor usury.

       Im other nerd's,%e think the rervice charger therein named are as a
matter of law interest within the Conrtitution, and should be cenaidered in
determining tha usurious chrracter of any loan.

       Since we have not held Article 8 to be void, -inwill dieonar yaur ape-
cifio qussfio*l.

                The mrd "rananal" ia connection with a loan ia of dubiour
mcanilg. It bra a popular meaning which is not in exact accord with the atriot
legal aignificuoe mf the term. In legal terminology, a ren*wal of a leaa ir
an oxtenaion of the time of payment of MI exi&ing IOW, whether the same be
evidenced by a mere andorsanent cf the agreement upon the exirting note, or
whether it be evidenced by the execution of mother or nuanote. Im suoh a
0860 thati is at no time more than one loma. Or the other hand, where a new
note is executed aad accepted by the holder of the old note, with the inten-
tion of diecharging the old note, the traaaacticn ia not t*chBically a renewal
but on the oontrary is a new loam. This is true, whether the nenact Ia axeeutod
by the maker of the original note or not, and whether there be ldditicnal
Honorable Jy.   Q. &Adams,   Page 6 (O-5384)



parti** makers or not. The taking of the newncto with the intsntioa of dis-
charge is a novation and substitutes completely the new note for the old on*
which has been discharged. W* nsad not antor m*ro fully into the details ef
the prec*ss of determining whether the transaation is a renewal inth* sense
of an extension, or tiether it be a novaticn and a new loan made. There is
a legal distinction between the two situations.

       T&ers the transaotion is an *xttisica ef th* due dat* of the original
mote, there is but on* loan, and no further charges wht*o*ver may ba made *x-
o*pt where, as in th* original loan, they have been actually paid or inourred
Iy the lander bPnk. Where, however, in connection with the extenrioa &I cut-
lay is mad* or liability incurrod by the lending bank, as fcr an abstract af
title, attorney% opinions, a releaas, or the lik* *uoh axpenses would of
oourst)be a legitimate charge against the borrower, and would not constituts
interest within-the meaning of the Constitution and statute* governing usury.

       A,r to service charges by the bank, other thaa totual lxpenditur*s mado
or liabilities incurred, what w* have *aid above wald apply, and thy rould
bs censidered as inter*& upon a usury tent. Upon any so-called renewal *f a
loan, uneunting to P discharge of tha old iadebt*dn*rs and the creation of a
n*mne, the n*w loan thu* lff*ct*d would be gov*rn*d by precisely the *am*
prinoiplar as an original loan.

       You further inquire, * . . . what effect, if any, will the small looa
injuaction bill, prssd by ths 48th L*gi*latur*, hav* upon our by&* operating
under the *action r*ferr*d to above? We r*f*r *speciallytc the languag* oon-
tain*d in S*ctioa 2a of the measur. of whioh th* fellewiag I* v*rhtSmc

"Ncthiag in thir A& shall in any ay modify, alter or change any valid pro-
vision of Articlea 8 of Chapter V of &use Bill No. 79, A&r of the Regular
Session, 48th Lagirlature, nor shall anything in this Act prevent charging of
my actual cad necessary expens*, now or hereafter permitted and authorized
by law, and such shall not be considered interest.

"In the trial of any application for injunatisn under thin Act, there shall
exist P prima Paale preauinptio~that the actual and necessary expensea of
making my such leu **1 CR* (#l.OO) Dollar for saoh Fifty ($50.00) Dollars,
or fractional prt thereof loaned; but this prima facie proamaa      *ball *x-
tei:ti
     only te the first note or debt owing at the same tim* by u individuaL
tc zry person, firm, corporation, partnership or association and shall net
apply to any r*n*wal or *xteasi*n thereof unless the original note or debt
a:lZall extensiona thereof wwr* for a period of not l**s than rixty (80)
days.'"

               Ycu are advised that no valid prevision of Artid.  8 of Chapter
V of the Tsxas Banking Cod* io in anywise altelrd, changed or mcdifi*d by what
you call the "smell loan injuntion bill."" Therefore, the small loan injum-
tion bill is c\mulntiv* of and not a substitution for the Banking Code, *r any
part th.-m*f. When ths two Act* are ccnrtrued together, as they should be, it
would follow that a bank landing money and charging unurimus interest "habitu-
ally," as defined in tha iajunotion Act, would be subjsot t* the preoeeding
       .   . ..-




Hanom~ble Jno. Q. Yai%dwns,%ge   7 (O-5384)



therein authorized, that is to iay, a bankwhich has been "habitually" ohrrg-
ing usuricur interest to a bemower m&y be enjsined nocording to the previsions
of the injunotion Aot. A bank atmde upon precisely the mme footing 18 my
other lender of money in my ruoh preoeeding.

       Wairuirurt
               that what we have mid   above fully answers your iaquirier,

                                                 Voryt ruly yours

                                          A!lTORUEYGEZ?RRALOFTEXM


                                                By /s/ Ooie Sossr

                                                       0010 Spser
                                                       Aaaistmt

-ROVED   AUG 4, 1943
/s/ GROVER SELL=
FIRST ASSISTANT
ATTORIIEYGENERAL


os-MR:0gw                               Tbir opinion oonsidered and
                                        approved in limited conference.
