.    .




    Honorable B. J. Leyendecker, Chairman
    Committee on Banks and Banking
    House of Representatives
    Austin, Texas
    Dear Sir:            Opinton No. 0-3206
                         Re: The constitutionality of House B111
                              No. 6 and of House Bill No. 174.
              You have requested, 8s Chairman of the Commlttee
    on Banks and Banking, the opinion of this department upon
    the constitutionality of House Bill No. 6 and House Bill No.
    174, each of which 1s penaFng before the Forty-seventh Leg-
    islature, and each of which is designed to regulate the
    business of maklng personal loans in the sum of Five Hundred
    Dollars or less.
              House Bill No. 174 Is identFca1 with House Bill
    No. 420 of the Forty-sixth Legislature In respect to provi-
    sions which this department, under date of May 13, 1939, in
    opinion No. o-726, held were vlolatlve of Article XVI, Sec-
    tion 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 un-
    constitutional features of House Bill No. 174 or of House
    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 other bills in relation to 3,c-
    tlon 11 of Article XVI of the Constitution which reads:
               "All contracts for a greater rate of inter-
         est than ten per centum (10s) per annum shall be
         deemed usurious, and the first Legislature, after
         this amendment is adopted, shall provide appro-
         priate means and penalties to prevent the same * *'
              The vice appearing in House Bill No. 174, and In
    House Bill No. 420 of the Forty-sixth Legislature, exists by
    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 of money for expenses lncur-
    red, or service3 rendered, in addition to the maximum rate
Honorable B. J. Legendecker, page 2              0-3206



of Interest, irrespective of whether such expenses were in-
curred or such services rendered by the borrower, and whether
such charges would constitute Interest as a matter of law.
          House Bill No. 6, however, is designed to authorize
the payment of expenses incurred or services rendered only
if the expenses are actually incurred and the services actu-
ally rendered in connection with each particular loan, and
when such charges would not constitute interest as a matter
of law e
          The constitutional question presented, In respect
to House Bill No. 6, is whether the bill authorizes the col-
lectlon of sums of money in addition to the maximum interest
rate, which sums of money actually constitute 'interest",
whereby the bill would be unconstitutional as authorlzlng
usurious contracts.
          It is well settled in Texas that charges made for
expenses or services which are not actually incurred or ren-
dered in relation to the particular loan and for the benefit
of the particular borrower constitute interest. Clearly any
contract providing for the collection of such additional sums,
in addition to the maximum rate of interest, under the guise
of expenses incurred or services rendered, would be usurious
and invalid. LIkewise, any legislative enactment which au-
thorizes such collections must fall. See our opinion No.
o-726.

          The courts of Texas have never held directly that
charges made for expenses actually incurred or services
actually rendered, when paid to the lender, rather than to
a third party, would, or would not, constitute Interest as
a matter of law.
          The question thus posed seems to have been reserved.
This is demonstrated by the following excerpts from opinlons
in certain cases,
          Joy v. Provident Loan Socletg, 37 S. W. (2d) 254,
(writ of error dismissed):
           "In other words, it was the pro rata cost
     of the society's overhead expenses * * * *
           "In nowise were such expenses 30 incurred
     intended to be charged as expenses for special
     services rendered to borrowers on particular loans.
     There was no added benefit to the pa+rki;uis$bor-
     rower by reason of such expenses.


                                             .
Honorable B. J. Leyendecker, page 3         0-3206



          Forreston State Bank of Forreston v. Brooks, 51
S. W. (2d) 645:
          "It is apparent that the,only services ren-
    dered were those necessarily required in making
    the ordinary loan. The interest allowed by stat-
    ute is intended to compensate for such services.
    The evidence wholly failed to show that any such
    extra service was rendered as would authorize a
    charge therefor. The means employed 1n this case
    cannot be 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 error dismissed):
          "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 own 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 capacity of broker or agent
    for appellees (the borrowers) or otherwise. * + +I(
          Independent Lumber Company v. Gulf State Bank, 299
S.W. 939 (writ of,error refused):
         "Admittedly it was never even contemplated
   that appellant (the borrower) 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 * * *
         "The mere taking out in advance, by the dis-
   counting method, of the full conventional rate
   in Texas of ten per cent per annum, on short-term
   loans lfke these, did not constitute usury, but
   that malum prohlbitum lay In tacking on still
   another per cent per annum charge for no addition-
   al or different service to the borrower, but for
   'the amount of trouble' to the bank in carrying
   that type of loan. * * *'
          It is the settled law in Texas that a borrower may
be properly charged with expenses arisIng in connection with
a loan which are paid to the lender's special agent or to
third parties. The Supreme Court of Texas, speaking through
Honorable B. J. Leyendecker, page 4         O-3206


Mr. Justice Critz, declared in Nevels, et al v. Harris, 129
Tex. 190, 102 S. W. (2d) 1046, 109 A. L. R. 4264:
          'In this connection we hold that It Is the
    law of this State that bona fide fees, such as
    these, paid to the lender's special agents, are
    not to be considered as Interest under our usury
    laws where such agents have only limited or spe-
    cial authority, and the lender does not partlci-
    pate in the funds so paid. Sales v. Mercantile
    National Bank at Dallas, (Tex. Civ. App.) 89 S.
    W. (2d) 247; Noel v. Panhandle Building & Loan
    Association, (Tex. Civ. App.) 85 3. W. 773;
    Hughes v. Security Buildin & Loan Association
    (Tex. Civ. App.) 62 S. W. 72d) 219."
          The courts of Texas have not passed upon the ques-
tlon of whether, paraphrasing the foregolng language of Mr.
Justice Critz, bona fide fees paid to the lender will be
considered as interest under our usury laws. That a borrow-
er may compensate the lender for certain services rendered
in connection with a loan is clearly implied, however, in
the cases. In Slaughter Co. v. Eller, 196 S. W. 704, it was
said:
         "The borrower might legitimately agree to
   compensate the lender for services of such char-
   acter, 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. We think the con-
   tract In this case Is not necessarily usurious,
   but whether it is or not would be dependent upon
   the intention of the parties, to be ascertained
   in accordance with the principles announced In
   the foregoing authorities."
          In Hugman v. Foster, 210 S.W. 262, (Reversed on
other grounds, 231 S.W. 346) it was declared:
          "The law as applicable to the facts of this
    case may be briefly stated as follows:
         "If the amount pa1d by the borrower to the
   lender in excess of the legal Interest was as
   compensati.onfor the use of the money loaned, it
   is usury, whatever may be the guise under which
   the transaction is clothed. In such case 'the
   court should penetrate beneath the lawful appear-
   ance, and reach the unlawful transaction.' Law-
   rence v. Griffen, 30 Tex. 401.
.      .




    Honorable B. J. Leyendecker, page 5            0-3206



                 “‘It is quite immaterial in what manner or
           form, or under what pretense It 1s cloaked, if
           the intention was to reserve a greater rate of
           interest thar,the law allows for the use of money,
           Lt will vitiate the contract with the taint of
           usury. ' Mitchell Q. Napier; 22 Tex. 129; bulld-
           ing & 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 connectton with the loan will not
           render It usurious. 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 in many other
           Instances, lies, not in ascertaining the abstract
           principles of law, but in applying them to the
           facts of the case."
              The case of   Independent Lumber Co. Q. Gulf States
    Bank, supra, involved   a contract under which 16 per EenYwair
    collected by the bank   as lender, 8 per cent being chargeable
    as interest and 8 per   cent chargeable for inspection charges.
    The court said:
                 "Had the contract required the Inspections,
           and the eight per cent-(8s) on that account been
           onlv chargeable where the-vwere actually made,
           as well as shown to be a reasonable compensation
           for the service, the majority of this court are
           unwilling to hold that, so far, It would have
           been usurious * * + The authority cited by the
           appellee as upholding a contrary doctrine are
           thought to be distinguishable, in that, in most,
           If not all instances, they involve legitimate
           benefit'sto the borrower,,either by third uer-
           sons not sharing them with the lender, or from
           the lender direct for some distinctly separate
           and additional consideration than the simple
           loaning of the money.”
              Doubtless there are charges which a borrower could.
    pay to a lender, incident to a loan, which would not consti-
    tute interest for the use of money. We construe House BllI'
    No. 6 to authorize the payment by the borrower to the lender
    of such charges. If the charges made for the expenses in-
    curred, or for services rendered, by the lender, do not,“Si?
    individual cases, constitute legitimate charges but Interest
    for the use and detention of money, the charges would, of
                                                            .   -




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



course fall. The theory of House Bill No. 6 is that in such
cases the charges will not be made, or, if made, will not
have been pursuant to any authority given by the bill.
          Passing upon the constitutionality of a proposed
legislative bill, as we are doing in this oplnlon, as to
whether it authorizes usurious Interest, presents and entire-
ly different matter from passing upon an id.iQildUal contract
entered into pursuant to the purported authority of the bill
as to whether it, in fact, is usurious.

          The:possibi.litythat the privileges granted by
House Bill No. 6 will be abused affords no basis for this
department to hold the Act itself to be unconstituAona1.
          It has been pointed out that the courts of Texas
have not passed upon either a legislative enactment embodg-
ing the provisions of House Bill No. 6, or directly upon
the fundamental questions presented in a judicial review
of such legislation. It 1s significant t0 Observe, however,
that the Supreme Court of Tennessee has upheld similar leg-
islation in that State. In Koen Q. State, 39 S. W. (2a)
283, the constitutionality of the small loan act of Tennes-
see was challenged. The principles invoked by the court
in holding the Act constitutional appear in the following
excerpts from the court's opinion:
         'Nor does 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 investigating the moral and financial
   standing of the applicant and the nature and value
   of the assurance for repayment of the loan and
   other necessary expenses and losses for closing    '
   the loan to a maxlmum charge of 3 per cent, per month.
   By thus prescribing the maximum expense fee, the
   Legislature did 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 pre-
   vent 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 tn-
    terest, fee or charge than is allowed by this,
    Act, has been contracted for or received whereever
Honorable B. J. Leyendecker, page 7         O-3206


    made shall be enforceable in this State and any
    person who in any wise participates therein
    shall be subject to:the provisions of this Act.'
          "'The weight of authority Is clearly to
    the effect that payment by the borrower of reason-
    able expenses Incident to the loan, and of reason-
    able compensation for trouble and,services in-
    volved in, or necessitated by, It, when paid and
    received in good faith, for such purposes only,
    and not as consideration .for the~loan, do not con-
    stitute usury, even though they make the cost of
    the transaction to the borrower exceed the max-
    imum 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 sense be considered compensa-'
    tion for the use of the money loaned."' Note III,
    21 A. L. R. page 819.
          "The Legislature could not authorize the
    lender to arbitrarily fix a monthly expense fee
    of 3 per cent, in addition to the annual inter-
    est on loans and did not intend to do so. As
    stated, the object was..tofix a maximum service
    charge beyond which the lender could not go with-
    out making a conclusive case against him result-
    ing in the forfeiture to the borrower of the
    entire loan, together with the charges thereon.
    It left the loan company and the borrower free
    to agree upon a reasonable service charge which
    in no 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 invalid unless
    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 settled as law, or not as law, in Texas. Not-
withstanding which, it is our opinion, under the cases in
Texas, that House Bill No. 6 Is not clearly unconstitutional,
and that, therefore, this department should resolve all doubts
Honorable B. J. Leyendecker, page 8         0-3206



in favor of its constitutionality.
          We have pretermitted any discussion of specific
provisions of House Bill No. 6.  We do, however, wish to call
specific attention to the following provision appearing in
Section 18 of the Bill, which reads:
          'Furthermore, such charges shall be 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 foregoing provision of House Bill No. 6 Is
construed to mean that the charges authorized by Section 17
of the Act for expenses incurred and services rendered shall
be authorized notwithstanding whether they are actually in-
curred or rendered, this provision would 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 In House Bill No. 174 rests in the fact that the Bill
authorizes the collection of charges In excess of the lawful
rate of interest irrespective of whether such charges are
for expenses actually Incurred or services actually render,&.
It is not, in our opinion, within the power of the Legisla-
ture, under the Constitution to do this. Probably the pro-
vision quoted from Section 18 is severable and the remainder
of the Act would be protected under the saving clause; never-
theless, we feel impelled to call your attention to the
probable invalldity of this particular provision 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 opinion No. 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 con-
stitutional.
Honorable B. J. Leyendecker, page 9        0-3206



                               Yours very truly
                           ATTORNEY GENERAL OF TEXAS


                               By s/Walter R. 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
ATTORNEY GENERAL OF TEUS
Approved Opinion Committee By s/BWB Chalrman
