Untitled Texas Attorney General Opinion

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
b%lST ASSISTAKT
A’JX’O~ G@UtRAL
i