BILL ANALYSIS


C.S.H.B. 3071
H.B. 3071
By: Carona
Committee Report (Substituted)
Introduced

BACKGROUND

Chapter 1, Title 79, Vernon's Texas Civil Statutes defines
"interest," fixes maximum rates of interest, and provides penalties
for contracting for, charging or receiving interest at a rate in
excess of the maximum rate.  (Chapter 1 does not, with only minor
exceptions, apply to consumer credit transactions but, rather, to
what are commonly considered "commercial" transactions.)

Though the interest rate structure established by the Legislature
in 1981 and codified in Article 1.04 of the Chapter remains viable
and should not be significantly changed, other provisions of the
Chapter have been construed or applied by the courts in ways that
have created uncertainty as to whether or not many, otherwise
routine and standard commercial transactions which are permitted by
the laws of virtually every other state are, in fact, permitted by
Texas law.  For example, Chapter 1 has not been amended to codify
judicial interpretations that have excluded certain items (such as
prepayment premiums) from the definition of interest. 
Additionally, in some cases, the courts have construed the term
"interest" to include certain items that are not traditionally
regarded as interest.  These uncertainties have created an
unfavorable business climate for the consummation of large-scale
commercial transactions in the State.

PURPOSE

CSHB 3071 creates a new category of commercial credit involving a
"qualified commercial loan" to a "business entity" limited to loans
in the original principal amount of $5,000,000 or more that are
made for business, commercial, investment, or other similar
purposes to a business entity.  CSHB 3071 does not, therefore,
affect the Texas Consumer Credit Code.

RULEMAKING AUTHORITY

It is the committee's opinion that this bill does not expressly
grant any additional rulemaking authority to a state officer,
department, agency, or institution.

SECTION BY SECTION ANALYSIS

SECTION 1.  Amends Article 1.01, Title 79, Revised Statutes
(Article 5069-1.01, V.T.C.S.) by defining terms utilized in the
amended Chapter and confirming that the amendments apply only to
"qualified commercial loans" defined as commercial loans in the
original principal amount of $5,000,000 or more to a business
entity.  Also defines several different types of interest:

     1.    Legal interest, where an obligor has not contracted to
           pay interest;
     2.    conventional interest, where an obligor has agreed to
           pay interest;
     3.    contract interest, where an obligor has agreed to pay
           a specific amount of conventional interest; and
     4.    judgement interest, defined as interest on a money
           judgement.

SECTION 2.  Amends Article 1.02, Title 79, Revised Statutes
(Article 5069-1.02, V.T.C.S.) to provide that contracting for
conventional interest or a time price differential is explicitly
permitted.

SECTION 3.  Amends Article 1.03, Title 79, Revised Statutes
(Article 5069-1.03, V.T.C.S.).  Does not alter the rate of legal
interest contained in Article 1.03 but, rather, clarifies that
legal interest is permitted unless the parties have agreed that the
creditor may not charge any interest to the obligor.

SECTION 4.  Amends Article 1.04, Title 79, Revised Statutes
(Article 5069-1.04, V.T.C.S.) to makes a conforming, non-substantive change to the title of Article 1.04.

SECTION 5.  Amends Article 1.04(a), (b), (c), and (o), Title 79,
Revised Statutes (Article 5069-1.04, V.T.C.S.) to make conforming
changes to confirm that time price differentials do not constitute
interest and also that a creditor and an obligor may agree to
compute contract interest on the basis of a 360 day year of twelve
30-day months.

SECTION 6.  Amends Article 1.13, Title 79, Revised Statutes
(Article 5069-1.13, V.T.C.S.) to modify the definition of a "pass-through entity" contained in Article 1.13 to conform that
definition to other provisions of the law.

SECTION 7.  Amends Subtitle 1, Title 79, Revised Statutes (Article
5069-1.01, et seq., V.T.C.S.) to add new articles 1.14 and 1.15 to
exclude from the definition of interest time price differentials,
discounts or commissions paid to securities underwriters, options
to exchange indebtedness, equity participation, and a guaranty
required as a condition for making a loan.

SECTION 8.  Effective date:  September 1, 1995.

SECTION 9.  Emergency clause.

COMPARISON OF ORIGINAL TO SUBSTITUTE

CSHB 3071 creates a new category of commercial credit involving a
"qualified commercial loan" to a "business entity" limited to loans
in the original principal amount of $5,000,000 or more that are
made for business, commercial, investment, or other similar
purposes to a business entity.  Agriculture loans are deleted from
the definition of "Commercial loan" in the original bill.

The definition of "Judgement creditor" and "Judgement debtor" which
were definitions (o) and (p) of amended Article 1.01 of the
original bill were deleted in the substitute.  Additionally, in the
definition of "Obligor" in the substitute, any reference to
"judgement debtor" was deleted.  The definition of "Prepayment
premium" was deleted.

In Section 5 of the substitute, at page 8, line 8, the present
language found in Article 1.04(a) of Title 79 of the Revised
Statutes is reinstated, with minor language amendments, and the
amended Article 1.04(a) found in Section 5 of the original bill was
deleted from the substitute.

The substitute deletes entirely what was Section 6 of the original
bill amending Article 1.05 of Title 79 of the Revised Statutes
regarding "Judgement interest" and also deletes entirely what was
Section 7 of the original bill amending Article 1.06 dealing with
penalties and remedies.  Also deleted in its entirety in the
committee substitute is what was a new Article 1.15 of the original
bill regarding "prepayment premiums."  Article 1.17 of the original
bill regarding penalties pursuant to final judgements was deleted.

Lastly, the committee substitute deletes in its entirety what was
Section 10 of the original bill regarding the application of the
effective date.

SUMMARY OF COMMITTEE ACTION

The committee considered HB 3071 in a public hearing on April 3,
1995.

The committee considered a complete committee substitute for the
bill.

The following people testified in favor of the bill:
Dennis Anderson;
Dan L. Nicewander;
James W. Paulsen;
J. Michael Lewis;
John W. Rain;
William F. Stutts; and 
Karen Neeley.

The following person testified neutrally on the bill:
Gayle Vickers.

The substitute was withdrawn.
The bill was left pending.

The committee considered HB 3071 in a public hearing on April 10,
1995.

The Chair laid out a complete committee substitute for the bill.

The following person testified in favor of the bill:
Arthur Val Perkins.

The motion to adopt the committee substitute and report the bill
favorably as substituted, with the recommendation that it do pass
and be printed, prevailed by the following record vote:  6 Ayes, 0
Nays, 0 PNV, 3 Absent.