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.