                                April   7, 1949.

Hon. Keith Kelly, Chairman
Senate Committee ‘on Ranking
51st Legislature
Austin, Texas                           Opinion No.’ V-804.
                                        Re:    Constitutionality
                                               of Senate Bill 334,
                                               regulating   and li-
                                               oensing small loan
                                               concerns.
 Dear Sir:
           In aooordance with the request of the Senate
Committee on Banking, we have considered.the   constitu-
tibnality  of Senate Bill 334, by Strauss, licensing
and regulating  small loan concerns.  ’
                This bill,     styled “The Texas Small Loan Act”,
~-is a comprehensive measure which fin& detailed                 facts
 to neoessitate        regulation    of the described smell loan
 field,      details   the “administrative      machinery” td pro-
 vide such regulation,          and limits both the interest         ana
 the expense charges of these lenders.               To enumerate,
 discuss,      and pass upon each provision         of this act %rndd
 unnecessarily       lengthen this opinion.         As to the propri-
 ety of such an act as a whole, we think it sufficient
 to say tha the loan business in Texas is subject to
 regulation 1 and that a legislative            classification     which
 regulates money lenders as a group separate from other
 lenders “wilI.be        upheld unless it appears, clearly           ana
 witho% doubt, that it has no reasonable basis for sup-
 port”.        No such,unquestionably       clear lack of any rea-
 sonable bgsis for this bill,            in its entirety,      appears
 to exist;        so we  turn   to  consideration    of   ~those few pro-
 visions      of this measure which, by their specific            subject
 matter raise some doubt regarding their relation                   to con-
 stitudofial       provisions :respecting      usury.       ‘~

1      Juhan~v. State; 216 S.W. 873 (Tex. Crim. 1918.1
2:     Watts v. Mann, 187 S.W.2d     917 (Tex. Civ. App. 1945
       error ref.)  at p. 925.
 3.    As to recfsonablelless Of al~&M.fying the s&l1 loan
       hueiness as a-distinotive    class for regulation, .reaa
       Koen v.. Stake, 39 S.W.2d 283 (Term. Sup. 1931.)
Hon., Keith Kell’y - Page 2      (V-804)


     \    Section     11 or Article    KVI of the Constitution
or Texas provides:
            “All contracts  for a greater rate or in-
      terest than ten per centum (lO$) per annum
      shall be deemed usurious,    and the first Leg-
      islature., after this amendment   is adopted,
      shall provide appropriate .pains and penalties
      to prevent th6 same; ; . . ”
            Whil 8 wusury is defined and denounced by the
Constitutionw,      the terin “interest”      is not there defined;
and it r0ii0w3 that the word “interest”           was used in its
conunon law sense.      “‘Interest.‘,    as known to the common              I,
law, is defined as ‘a compensation usually reckoned by a5                     c
percentage for ttle ‘lqan,. use, or forbearance of money’“,
and  it 1s~ in this sense that ‘we must apply the term. The
vice of H.B. 334, if there be one, would seem. to ‘be in
those provisions     of Se&ion 12 which all&v t~he‘licensee         _
to charge,.in    aaaitiqo.   to interest    at lC$ per  annum,  a
fee at the time.,g? the- leea for “reasonable         expenses in-’ -
ourred” and wse*vices rendered* in connection with the
loan, as well as a subsequent fee for services kenaered               *
or expenses incurred in codnection with this loan, all
within specif iea limit 8. If this provision          authorizes an
aaaitional    charge “for the loan, use, or forbearance of
money”, that charge is winterestw and this section would
be unconstitutional      in attempting to authorize usurious
practices.
           The general rule respecting  a distinction be-
tween “interest”  and ‘other charges to the borrower has
been stated thus: ’
            “The weight of authority is clearly    to the
     effect   that payment by the borrower of reason-
     able expenses inaident to the loan, and of rea-
     sonable compensation for trouble and services
     involve& in, or necessitated     by, it, when paid
     ana received in good faith,    for such purposes
     only, and not as consideration     for the loan, do
     not ,.constitute usury, even though they make the

 .   Watts ve- Man ti 187 s.W.2a      917 “(Tex.     civ:App.        1945,
     error ref. )     p. 925.
5.   Parks v, Lubbock, 92 Tex.        635, 51,S.W.      322     (lS99)
                                                                        279
 Hon. Keith Kelly    - Page 3     (V-804)


      cost of the transaction to the borr wer
      exceed the maximumlegal interest.w 8
            That Texas is in accord with this gen&al
rule, at least as respects sums paid for bona fide
services   or third parties, is t 0 well settled to
need discussion    of authorities.   s It Is equally clear,
however-, that the courts of Texas will look to the
substance of such transactions,       rather than the form,
and will label usurious'any      attempt to create a sub-
terfuge bo cogceal interest under the guise of legiti-
mate charges.     The rule in usury cases is that the
question of whether a given contract was undertaken
and discharged in good faith or was undertaken'with
intent to collect    usurious interest     is a fact question
for jury.-determination,    and the courts will naturally
uphold fact findings'8f     usury if there is evidence to
support that rind%*.
           The Texas courts,   on the other hand, have
not made a square holding on the legality    of aaaition-
al charges by the lender himself;    rather than by a
third party.   They have neither squarely held such
charges to be winterest,w nor have they squarely held
such charges are not interest.     Assuming, however,
that actual services  are rendered to the borrower by
the lender, there is ample reason to feel the courts

i;   21 A L R 819 .
7:   Slau&ieG Co. v. Eller,          196 S.W. 704, (Tex. Civ.
     A       1917.eHorNevels               v. Harris, 129 Tex.
      l!%' 102 s.w.2a 104: IT937 ) Woqldrid~e v. State,
      183'S.W.Zd 746 (TeZ. Civ. ipj. l944;error             ref;
     w.m.)
8.   Slaughter Co. V. Eller,         196 S.W. 704 (Tex. Civ.
     *PP. 1v;Hudmon                         v. Fodter, 210 S.W;
     262, revtiised on-other grounds., 231 S W 346 (Tex.
     comm. App. 1921);Glover         v. Buckman; 164’S.W.za       66,
      (Tex. Civ.     App. l~,Baltimo~e                          '
     Trust Co. v. Sanders;~lOS S.W. 2d 7‘10 (Tex. Civ.
     A       1937          'dism.).   DonoRhue v. State, 211
     ST;:26 62j,eTgzza Civ. jlpp.'l948,          error ref.
     n.r.e.)
9.   Orzc8v. McDaniel, 5 S.W.2d 175, (Tex. Civ. App.
     19 ); Starks v; National Bond & Mod; Corp. 85
     S.W.2d 1056      (T     Cl     APP. 1935 error aism:)*Na-
     tional Bond & &,.          &&. 'v; Mah&ey, 70 S W 2&-
     26         difi d on other groutId       124 ‘Fex. 5LT    %O
     S?Wi % '947e(1935)*Trinity         F&    Ins. Co. vi ierr-
     ville Hotel Co., lk9 Tex. 310, 103 S.W.26             129
      (1937).
280
      Hon. Keith~Kelly    - Page 4     (V-804)


      would not find the presence in a.single      person of both
      lender ana performer of'services,     in and or itself,   a
      basis to deny him reasonable remuneration for the work            :
      he performed.      That the work must actually be done and
      that the-oharge for this work must be.for services       spe-
      cifically   related to this transacltion,   yet separate
      and distinct    from the simple operation of making an or-
      dinary loan, is well settled.      Given the proper facts,
      we feel the courts have indicated     such a.situation
      would not be usurious as a matter of law, for we'find
      such statements as'these.:
                     "The borrower'might      legitimately   agree
            to compensate the lender for services'of             such
            character      (lender's    labor to keep informed of
            the oonaition of the borrower's business and
            to see the funds were not used except in the .
            business-being       financed),    although performed
            in the interest        of the lender, . . . provided
            always that such chruiges are not made a mask
                                   conceal the true purpose of
            ;",:~r;;:","wE3          (Parenthetical   explanation
            ours.)
                  W        Admittedly it was never even con-
            templadei'ihat     appellant was to, nor a ia 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, and so it results
            practically    that the use of the money was alike
            the only advantage to the one party to the 'ar-
            rangement,' and the only detriment to the oth-
            er. . . .
                   "Had the.contract  required the inspec-
            tions,   and the 8 per cent on that account been
            only chargeable where they were actually made,
            as well as shown to be a reasonable compensa-
            tion for the service,    the majority of this
            court are unwilling to hold that, so far, it
            would have been usurious;    but, as pointed out,
            that is not the case made for the appellee here.
            . . .

        .   Slaughter:Co..v.    Eller,  196 S.W. 704 (Tex. Civ.
            App. 1917, error    ref.)  at p. 708.
                                                                  281
Hon. Keith Kelly     - Page 5   (V-804)


             "The authorities   oited. . . involved
      legitimate   benefits   to the borrower, either
      from third persons not sharing them with the
      lender or from the lender direct for some
      distinctly   separate and aaaitional    consia- 11
      eration than the simple loaning of the money."
             "Admittedly,   a lender may, without v~io-
      lating the usury law, make an extra charge
      for any distinctly     separate and additional
      consideration    other than the simple lenaing
      or money.. . . ; and where there is any dis-         .,
      pute in the evidence as to whether there was
      any other separate and additional     considera-
      tion      question of fact is raised for the
      3-r. '"a2
             Finally,  on this point, we have the recent
holding in WOolaridge v. State, 183 S.W.2a 746, (Teq.
Civ. App. 1944, error ref. w.m.); ruling upon the con-
stitutionality     of Senate Bill 43, 48th Legislature,
1943, codified     as Article  4646b, V.C.S.,   an act which
empowers injunctive     relief  against habitual usurers.
This act contains provisions      that "actual,and   necessary
expense n may be charged and that there shall be a pre-
sumption that the actual expense "of making any such
loan" was at a designated rate inrelation         to the~e0cunt
loaned.     In passing upon this act, the court said, at
p. 748:
            “We are unable to find anything in Ar-
      ticle  4646b which conflicts     with the consti-
      tutional  provision   prohibiting   the charging
      or usurious interest.
           W
               . 0 . .
            "The next clause provides that nothing
      in the Act shall prevent charging of any ac-
      tual and necessary expense, now~or hereafter
      permitted and authorized by law, and that


11.   Independent Lumber~Co..v. Gulf State Bank, 299 S.W.
      939 (T . Cl     App. 1927, error ,rsf;-)
12.   GreeveExv. Pzisky , 140 Tex. 64, 165 S.W.2a 709
      n942).
Hon. Keith Kelly    - Page 6    (V-804)


      such shall not be considered interest.
      The clause is so plain that it is not
      necessary to call attention     to its'qual-
      ifying'phrase   'now or hereafter permit-
      ted and authorized by law.'      It contains
      no suggestion that charges may be made
      that are forbidden by the Constitution.
      The implication   of the language used is
      quite to the oontrary.     . . It is not
      necessary to cite authority for the
      proposition   that the.lender   may charge
      the borrower for certain types of ex-
      penses incurred in making the load, and
      that such charges are not interest."
           Were it not for the fact that the above
language is followed by three examples of permissi-
ble charges, all three of which relate to services
rendered by thira parties,   we would reel the Wool-
&ridge  Case,'above,  is ample author,ity for ouF$Z-
sition.   l%e holding certainly  contains nothing to
weaken our view that the lender can charge for his
own services   in a proper fact situation.
             Turning to the language of Section 12 of
S.B. 33&, we find great care has been evidenced to
specify the permissible      oharges shall be for."reason-
able expenses inaurredw, "services       renderedw,wspeci-
ric expenses incurred'or      specific  services    rendered
solely in connectionwith       the particular    loan", and
shall not be "collected      until such services have been'
rendered*.      One familiar with the Texas cases will        ~.~
find it obvious that the framers of this section sought
carefully    to guard against the practices      the courts
have condemned, such as not actually performing the
services,13     or charging for services which relate to
the general overhead of the bu~in~~~t:~~t~"zdd"b~st~~t~
specific    transaction   at hand.
however, attempt to detail and specify charges which'
may be made. It includes examples of charges but makes
no effort    to describe all of the-charges which might
be legitimate     in a pf8per fact situation.      While there
are many Texas cases        passing upon various types of
charges, we find none expressly passing upon the items
given as examples in S.B. 334.
  .   Independent  Lumber Co.‘ v. GuJ2f State Bank,~"299
                                  19 7, error ref.)
14.                                     37 s.w,2a 254,
             Civ. App. 1931 error d&m )
           ions to at leas; 38 such Tegas cases have
      been found in this search.
                                                                       283
Hon. Keith Kelly     - Page 7     (V-804)


There is a very close parallel between the language if6
S.B. 334 and that of the small loan act of Tennessee,
and the Tennessee act has been thoroughly tested and
approved by the Supreme Court of Tennessee.17
              Since we have demonstrated that we cannot
categorically      hold charges as authorized by Section 12
of S.B. 334 to be usurious as a matter of law, we can-
not say this provision      violates  the Constitution.        It
is axiomatic that to hold a legislative          act to be un-
constitutional,      it must appear clearly     to contravene an
express provision      of the Constitution.      If, as we think
might well be found, there is a present rightin              the
lenders to charge for legitimate        services    distinct   from
furnishing     the money loaned, then S.B:334,         rather than
enlarging any present right of lenders, actually             oper-
ates to reduce the amounts to be charged for such ser-
vices to the fixed maximums stipulated          in Section 12.
             While Section 12 fixes maximums for charges,
it does not allow,that       maximum to be charged-unless       it
is reasonable for the services rendered or expenses in-
curred.     Subseotions   (c) and (a) of Section 12 do pro-
vide that charges not in excess of the maximum shall be
  resumed to bear a reasonable relation         to the service
h            and,  if the  charge   is found   not  to bear a
reasonable relation     to the services     rendered, the bor-
rower can recover only the excess charge.            A similar     i
feature in House Bill 6;47th         Legislature,    1941, occa-
sioned some concern by thi~80ffice         when holding that
bill to be donstitutional.           We think'the'courts     would
confine this provision,to       its express terms.       As stated
in Wooldridge v. State, 183 S.W.2d 746 (Tex. Civ. App.
1944, error ref. w.m.1 at page 749, "Under elemental
rules of law, this provision       only serves to relieve       the
lender of the burden of proving such expenses so long
as there is no proof to the contrary.          . . The rule
        does not of itself    purport to authorize the col-
ie&ion    or usurious interest."
  0   The Tennessee act allows fees "for investigating-
      the moral and financial  standing of the applicant
      and the nature and value of the assurance for re-
      payment of the loan and other necessary exnenses
      and losses for closing the loan." Koen'v..State,
      39 S.W.2d 283 (Term. Sup. 1931)
17.   Koen v..State,  39 S.W.28~'283, (Term. Sup. ~1931);
      Family Loan co. V* Hickerson, 73 S.W.Zd 695
      TTenn. SUD. 1934)
18.   dpinion Noi O-3266, March 29, 1941, at p. 8.
Hon. Keith Kelly     -   Page 8    (V-804)


             Since the bill does not allow charges except
for services      actually    performed, the presumption above
considered could only arise to show that services done
in good faith were of the value charged.              But, should
a court rind the facts in a given case to raise a fact
question-that      charges may have been made in bad faith;
with no intent to comply with the 'spirit          of this bill,
the presumption would lose its effect           in the face of
the ract.issue      created..     In this connection,    we invite
attention,     without comment, to language in Subseotion
(o) of Section 12 which makes reference to services
"to be rendered" and expenses "to be incurredw,              No
provision    to allow any charges for any such services
or expensgs exists in this bill.           Given a fact situa-
tion which revealed a scheme and a subterfuge to make
charges,. for the.use of money, in excess of ten per
centum per annum, we think a court, statutory             presump-
tion notwithstanding,         would find usury in the,transac-
tion.     In any event, our problem here ,is whether this
bill,   ifs followed,    would violate    the Constitution,     not
whether the bill might possibly          be thwarted by-illegal
abuses.     There are several "pains and penalties",           to
usa the constitutional         language, in S.B. 334 for suoh
abuses, and nothing contained in this bill could re-
lieve anyone from the penalties          provided if he used
the bill or the presumption thereunder as a subterfuge
for collecting      what amounted to usury.
             It will be noted that there is no presump-
tion under the bill that the services were rendered.
The only presumption created is that charges, if made
in accordance with the bill,      would be presumed to bear
a reasonable relation      to the services  rendered.   It
should be noted, however, that while the courts have
distinguished    between charges for the use and detention
of money (winterestw)      and charges for additional   ser-
vices rendered, they have looked very carefully        into
transactions    to uncover abuses.     Whether a charge is
for interest    or for actual additional    services  render-
ed is generally     regarded as a question of fact.     The
following    are excerpts from some cases which are illus-
trative:
      "It is quite immaterial,     in what manner
      or form; or under what pretense it is
      cloaked,  if the intention was, to reserve
      a greater rate;of   interest   than the law
      allows for the 'use of money, it will vi-
      tiate the contract with the taint of us-
      ury.   Whether the transaction    was so in-
      tended, where upon its face, it does not
Hon. Keith Kelly        - Page 9     (V-804)


          appear to be usurious,   is a question 01 in-
          tentionfor  the decision   of the jury." 9
           "It is apparent that the only services         ren-
           dered were those necessarily        required in
           making the ordinary loan.         The interest   al-
           lowed by statute is intended to compensate
       .'. for such services.        The evidence wholly
           failed      to show thatany    such extra service
           was rendered as would authorize a charge
           therefore.       The means employed in this,case
           cannot be used to avoid the effect         of the
           usury statute.        To allow extra~charges   for
           ;,"~",;~;;i;;;;~a&d       destroy the purpose of

          =Ir it was applied to the overhead cost 0r
                    's business, it would also be in-
         “,:;,;$a%
           "Admittedly,     a lender may, without violat-
           ing the usury law, make an extra charge for
      .. any distinctly       separate and additional    con&
           sideration'other‘than      the simple lending of
           money. .' .; and where there is any dispute
           in the evidenoe as to whether there was any
           other separate and additional      considerati6n,
           a question of fact is raised for the jury;
           But since, aoooraing to his own testimony,
           Greever did'not render any service whatever
           to the borrower other than procuring and
           lending the money to him, for which he had
           no right to charge an extra: commission or
           bonus, there was no question of fact to be
           determined by the jury as to whether the
           parties   intended that the commission Should
           be: charged as interest     for the use of the
           money or as compensation for Greever's ser-
           vices 12 procuring the money from a third'
        ..~party."   2


19.      Mitchell v.,Napier,    22 Tex. 120 (1858) '
20.      Forreston State Bank of Forreston vi-~Brooks, 51
         SWZd65      !T      Cl   A   ' 1932)
21.      Et%ern ~ort."~'Seo~~it';%      Co V Collins    118'
         S.W,~~d~479 (T6x. Civ. A       19&3 *error rei )
22.      Greever v. Persky, 140 '%. -64,*165 S.W.2d.709
         (1942)
                                                                            !


286
      Hon. Keith Kelly     - Page 10    (V-804)


                The validity    of the bill and contracts made
      thereunder is dependent upon the giving by the lender
      of some additional   consideration;    he must in fact per-
      form some service other than those orainarily       inci-
      dent to the making of a loan;       This bill contemplates
      the actual performance of such additional      service.
      Otherwise the lenderts charge would be usurious if,
      when it was added to the "interest",      the total rate of
      return exceeded ten per centum per annum.
                  . In concluding that S.B. 334, viewed.in the
        most ravorabie light,     is not unconstitutional,     we are
        supported by the prior official      opinions of this of-
 lrioe.          This office   condemned as unconstitutional      two
        bills,   House Bill 420, 46th Legislature       1939,23 and '
        House Bill 174, 47th Legislature,      1941,24 because
        those bills would.have authorized charges for
        tive services    as well as services   rendered andY?=-  ecause
        those bills deprived the licensees      of proper notice of
        actions against them. These unconstitutional          features
        were not.present     in House Bill 6, 47th Legislature,       and
        they are not present in Senate Bill,334,        51st Legisla-
        ture.    When, as above indicated,    the administration      of
        Attorney General Gerald C. Mann carefully        considered
        two small loan bills     in a single opinion and held one
        constitutional     and the other unconstitutional;     a line
        of demarcation was clearly drawn, The bill now before
        us is the parallel     of that which the Mann admiaistra-
        tion approved in every respect significant         to the prob-
        lem at hand. We follow those prior holdings of this
        office   on small loan legislation.
                                       SUMMARY'

        \         The Texas Small Loan Act (S.B. 334,
            51st Leg., 1949) is constitutional.       It
            would not make lawful any act not already
            so, as it enacts the principle     that a
            lender may contract with a borrower for a
            reasonable fee (within maximums fixed by
            the bill)  for additional  services   actually
            rendered, in addition to the lender's
            charge for the use of money. Whether such
            fee is a charge for actual additional
      23    Opinion Ho.,O-726, Way 13, 1939.
      24:   Opinion.No. O-3206, March 29, 1941.
                                                          28’7
    Hon. Keith Kelly   - Page 11   (v-804)


         services   rendered or is a mere subterfuge
         to conceal usurious interest    will be a
         question of fact in each transaction.
         Such fees, when legitimately    ohargea in
         good faith,    would not be a part of the’
         interest   charged; so this bill would not
         violate   Section 11 of Article  KVI of the
         Constitution    of Texas.
                                     Yours very truly,
                               ATTORNEY
                                      GYNKRAL
                                            OF TFXAS


                               ,&8LDavid B. Irons
    DBI:wb                     Administrative Assistant




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