Case Information

*1 . ~.

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 acknowledgplents and 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 or fractional nart thereof loaned3 but Dollars ($50) 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,~ns to the specific questions propounded, but where such specific ,:uestions by 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~::titutional validity 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- illm ) shall be deemed usurious, and the first Legislature after this amend- 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 *2 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 PS1at extent 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 actiowledeJnents andaffidavits, 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 l If it was applied to the.overhead cost of the lender's business, of 12w. it ?iould illo be interest." --Eastern MortgaSe & Securities Co. v. Collins, 115 s.n. (2) 479.

"T$ ,:s clear 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- :>enses as an improper charge and therefore as interest, the transaction was *3 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 a ?;,lct issue on these questions. On the other hand, the contracts and all 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. (2 3 973).

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 ocasaission for 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 lAould auq%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,Wg this 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 *5 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. -in will dieonar yaur ape-

Since we have not held Article 8 to be void, 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 l dditicnal

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 l xpenditur*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* l ff*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:lZ all 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 *7 . . ..-

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 Tbir opinion oonsidered and

os-MR:0gw approved in limited conference.