BWM C.S.H.B. 1277 75(R)BILL ANALYSIS FINANCIAL INSTITUTIONS C.S.H.B. 1277 By: Eiland 4-1-97 Committee Report (Substituted) BACKGROUND In 1983, the Texas Legislature significantly reduced the interest rates on credit cards and eliminated fees. Although this was intended to protect Texas consumers, its real world economic impact was to make credit card operations not feasible in Texas. As a result, all major banking operations with credit card activities moved these to friendly venues. Also, credit card clearing operations left the state. At a conservative estimate, approximately 10,000 jobs in this sector left Texas. Without these changes, Texas lenders will be disadvantaged in their credit card operations. Under numerous recent U.S. Supreme Court interpretations, it is quite clear that lenders can export both rates and charges from whichever state is their state of domicile. This encourages lenders to locate in rate friendly states. At the same time, those fees and charges may be legally imposed on credit card borrowers, no matter where they are located. This has led to a lose/lose situation with customers paying high exported fees and charges and Texas losing the jobs and Texas banks unable to offer a full range of credit card services without affiliating with out of state operations. PURPOSE The object of this bill is to make credit card operations more attractive in Texas without permitting the excesses found in other states. Thus, at the same time, consumers will receive protections through the caps placed on fees and rates. This bill amends Chapter 15 of the Texas Credit Code to increase the interest rates on revolving loan and revolving tri-party accounts (primarily credit cards) to the same rate as is permissible on all other written, lending transactions in Texas. In addition, reasonable fees are authorized in line with those commonly found in other states. The proposed changes should reverse and create a win/win situation. 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 15.02, Title 79, Revised Statues (Article 5069-15.02, Vernon's Texas Civil Statutes) by allowing a rate equal to the current maximum legal rate of 18% per annum. In addition, this section now authorizes certain fees, but places a cap on the authorized fees. SECTION 2. Amends Chapter 15, Title 79 Revised Statutes (Article 5069-15.01 et seq., Vernon's Texas Civil Statutes) by adding Articles 15.12-15.14. Art. 15.12 authorizes variable rate arrangements. Art. 15.13 provides mechanism to give notice of a rate change on variable rate cards. Art. 15.14 clarifies that certain fees charged in connection with an account which also has a credit feature are not interest. This section mirrors an interpretation from the Consumer Credit Commissioner and thus is not a change in existing law. Rather, it statutorily codifies that interpretation. SECTION 3. Amends Article 1.04, Title 79, Revised Statutes (Article 5069-1.04, Vernon's Texas Civil Statutes) to clear up a conflict in the law. SECTION 4. Amends Article 1.11(d), Title 79, Revised Statutes (Article 5069-1.11, Vernon's Texas Civil Statutes) to refer to the correct subsection previously amended in the bill. SECTION 5. Effective date: September 1, 1997. SECTION 6. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The Committee Substitute to H.B. 1277 amends Article 15.02, Title 79, Revised Statutes (Article 5609-15.02, Vernon's Texas Civil Statutes) rather than deleting the entire article and substituting new language, and in the process makes several substantive changes. The $50 per year charge limit found in the original bill is bracketed in the Substitute to $50 per year on an account with a credit limit of $5,000 or less, $75 per year on credit limits from $5,000 to $25,000, and $125 per year on accounts with credit limits in excess of $25,000. Furthermore, the late charge on these accounts is changed from being the greater to the lesser of five percent or $15. The grace period is also changed from ten to fifteen days. Article 15.12 is changed in the Substitute to mandate that any percentage rate changes be applicable to future charges and not applicable to any outstanding balance on the account. Article 15.13 is added to provide the mechanics to give notice of rate changes on variable rate credit cards. Article 15.13 as found in the original bill is changed to Article 15.14. Lastly, Article 1.04, Title 79, Revised Statutes (Article 5609-1.04, Vernon's Texas Civil Statutes) is amended to clear up a conflict in the law.