Honorable F.C. Branson
Banking Commissioner
Austin, Texas
Dear Sir:                           Opinion No. .1-1618
                                    Re:   Bank loan limit -- R.C.S. Article
                                          392 -- F.H.A. Title 1, Class 3
                                          132ns.

                 We beg to acknowledge rece:pt of your lette::of Janurr;
13,   1343, asking an opinfon from this department, ES follcv;~:

                "TineFederal Housing Act was originellp
      enacted 5.n1534, and 3n M.2~ 9, 1937, under its
      several titles and brovislons it authorized the
      insurance of several classes of loans. Each class
      of loan eligible for insurance was subject to
      divers tests and restrictions, and each was insured
      to a stipulated percentega 3f the em3unt 9f the
      loans.
                "On X2;- 2, 1337, the Legislature of Texas
      amended Article 332 of the Revised Statutes. That
      article, in its original form> prohibited 2 state
      bank from in::estingmore than half of its securities
      in real estate loans, and prohibited such banks from
      mak+ng real estate loans in excess of 50% of the
      value of the real estate securing the same. The
      Amendment of May 3: 1337, provided that the restrict-
      ions contained in Article 392, should not apply to
      mortgsge loans insured by the Federal Houscng Admin-
      istrator.
                 “Subsequent t3 May 2, 1937: m July 1, 1332,
       the Federal Housin Act (Sub-section B of Section 17,33,
       Title 12, U.S.C.A.$ was amended. This amendment prov%ed
       for the partial insurance of 2 new and different class,
       of loan; a loan not to exceed $2,503.,X to be made i”x-
       the purpose of erecting improvements uponland owned
       by or (with certain restrictions) held under lease b:-:
       the borrower, The Act did nat limit the amount of ty;e
       loan to an;-given percentage of the value of the land
       and improvements. The Insurance on this character of
       loan was 1LmIted to 1~3%of the amount of the loan.
       This new class of loan has been designated by the Fed-
       eral Housing Administrator as Title 1, Class 3 loans, end
       will be hereinafter referred to as such.
Honorable P.C. Branson,   Page 2                        .   I-1619


                "The Department is advised that certain state
       bon!csare now contemplating extensive   investments  in
       Title 1, Class 3 loans. The office Counsel of this
       Department has ruled that Article   392, 2s amended,
       permits unlimited investment of bank funds in loans
       which were insured by theeFederal Hmsing     Authority
       under the provisions of the Federal Housing Act is it
       existed on Nay 9, 1937. However, our counsel has
       ruled that the exceptionto Article 392, as provided
       in the above mentioned amendment, does not permit a
       state bank to invest in loans which were not eligible
       for insurance under the provisions of the Housing
       Act as it existed on May 9, 1937; that Title 1, Class
       3 loans, not being eligible fw insurance under the
       Housing Act as it then existed, are not eligible in-.
       vestments for state banks. I attach herewith a copy
       of his opinion.
                "IF Article 33°C is tc be construed to
       authorize staza banks to invest in Title 1 Class 3
       loansz such construction must necessarily be based
       upon the proposition tha~tthe amendement authorized
       investment, not only in loans which were insured under
       the then existing Federal Housing Act, but also in
       any loan which might thereafter be partially insured
       under the provisions of any subsequent amendment to
       the F.H.A. Act'. Tineamendment of July 1, 123$, pro-
       vided for 19;:insurance on loans, and made no re-
       striction as to the percentage of the value of the
       security that might be loaned. Ti>enext amendment
       may reduce the insurance coverage to 1%.
                'I am sure that I do not need to point out
       the far-reaching, and possibly serious effect which
       any construction of Article 392, as amended, may have
       on the banks of this State.

                 'In the light of the above, I respectfully
       submit   the fcllovringquestion:
                :'Underthe pro\Titinsof Article 532, as
       amended: ma:;state banks make unlimited investments
       in Title 1: Class 3 loans: 2s above defined?!'
               The limitation placed by the statutes upon a bcnk's loan
of its funds, whether such limitation be as to the customer or the
security, is a wholesome one for the bank, and even mre especially for
the public dealing with the institution.
               In the very nature of the matter any limitation upon
loans is a summery cne, but even so, it represents theesound judgment
of the Legislature, clothed with power to regulate such matters.
                So that ;'our question calls for   2   construction of Article
392.   That Article resds:
iI;nor2tle3.C.   Ercrssn,   F:CZ



                “B.znkFn~ Corporetions shall be 2uthorized
      to conduct the business of recc,ivingmane; on depc,sit,
      allowing interest thereon, and of buying 2nd sellirig
      exchange, gold and silver coins of 211 kinds; of lend-
      ing money upon re21 estate and person21 proper23 and
      upon collateral 2nd personal securities at a rste of
      interest not exceeding that allowed bj law; of buying
      and selling certificates, securities and shares insured
      by the Federal Savings and Loan Insurance Corporation;
      and of buying, selling, and discounting negotiable and
      non-negotiable commercial paper of all !cinds. N3 such
      bank shell lend more then fifty (59) per cent of Its
      securities upon reel estete, nor make 2 loan on real
      estate to an 2mount greater than h2lf the reasonable
      cash vslue thereof; provided that the restrictions 2s
      to the amount 2 ban? may in.:estin securities upon
      real estate 2nd as to the v2iue of sue:? real estate as
      compared to the secr.riQ of tile lo2n s&11 net 2pply to
      morcgege 13ans i7;71ii: c?i-e
                                  incured b;- the Feder21 E-12sing
      Administr2tor. As Emended, Acts l'j'i,45th Leg., p.
      1296, ch. 452, iii."
               F.H.A., Title 1, Class 3 lo2ns were not:inownst the time
Article 392 was smendetiin 1337. The Article should be construed in the
light of well-known conditions as the;:existed at the time of its enact.
ment. This is especf211:~true since the erticle specificall:.refers t:.
the existing conditions -- that is, lo2ns insured 5; the Federal Housing
Administrctor.
               It is the rule, to be sure, that all c!.v-ilstatutes ir$
t3 be liberelly construed with 2 view of effectuating their purr~ose. As
above indiceted, that purpose with respect to F.H.A. loens ~2s to except
those losns insured 0:~ the Federal Housing Adninistretor, 2nd this could
0nlS mean, Insured as they were at thet time. To construe the st2tute
as including any class of F.H.A. loans afterward suthorized or insured
by the Administretor without further qualification or limitation wh2tso-
ever would exceed all bounds of liberelity 3f construction 2:ndgo f2r
into thP field of license to legislate upon the subtect. Such 2r1extreme
rule of construction might, and would, -in the light of the present s-it-u
at:m, afford 2 very much less protection to the public 2nd the b2n!:Lnc,
institutions thzn vi2s contemplated by t:iestatute 2t 532 time It ~2s
adopted.
                  Y3u state that ;our office counsel has edr.~ised
                                                                 you that
yur   question          be ensuered in the negative. We concur in 'c:32t
                 sl:ov.ld
2dvice.
                                        Very truly >ours
                                      ATTORNEY GEiURAL OF TEUS
                                        B;, s,:'
                                               Ocie Speer
OS-MR .wc                                      Ocle S>eer
                                               Assist2nt

 APPROVRD JAN 31
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