BWM C.S.H.B. 1971 75(R)BILL ANALYSIS FINANCIAL INSTITUTIONS C.S.H.B. 1971 By: Marchant 4-2-97 Committee Report (Substituted) BACKGROUND The Texas Credit Code, as it is commonly called, was originally passed by the Texas Legislature in 1967. Since that time numerous amendments have occurred, the most significant being the "omnibus interest rate" bill in 1981. Chapter 1 of article 5069 (also Subtitle 1) 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. Generally, Chapter 1 does not apply to consumer transactions, which are governed by Subtitle II, consisting of chapters 2 through 8, and additionally, chapter 15 of Subtitle III. After the 74th Regular Session, the House Committee on Financial Institutions was assigned an interim charge by the Speaker of the House, James E. "Pete" Laney, to review the Texas Credit Code to identify areas that might need revisions. In response to this charge, Chairman Marchant created the Texas Credit Code Revision Task Force, chaired by Consumer Credit Commissioner Leslie Pettijohn and comprised of representatives of the financial services industry, small business community, and consumer groups, to develop the basic recommendations. H.B. 1971 is the result of the Task Force's recommendations and the work of the Consumer Credit Commissioner, her staff, and the staff of the Financial Institutions Committee. PURPOSE The provisions of Chapter 1 have been revised in this legislation to modernize the language and to begin the rewrite of the entire Texas Credit Code in the code format. The Legislative Council is undertaking a recodification of the financial services statutes; the revision project parallels and incorporates the council's effort. RULEMAKING AUTHORITY It is the committee's opinion that this bill expressly grants rulemaking authority to the Finance Commission in the following sections: Rulemaking authority is granted to the Finance Commission in SECTION 1, Art. 1B.002(c) to by rule adopt other definitions to accomplish the purposes of this subtitle. Rulemaking authority is granted to the Finance Commission in SECTION 2, Art. 3A.901 to adopt rules enforce this chapter (Chapter 3. Consumer Loans). SECTION BY SECTION ANALYSIS SECTION 1. Amends Subtitle 1, Title 79, Revised Statutes, by adding Chapters 1B-1H. Subtitle 1 establishes the usury rates and general provisions for credit transactions. CHAPTER 1B. GENERAL PROVISIONS. Article 1B.001 creates a short title: "Texas Credit Title." Article 1B.002 provides basic definitions for use in credit transactions: Article 1B.002(a)(1) defines "contract interest." This is a new term providing that two parties have agreed to contract for a rate or amount of interest in a written contract. Article 1B.002(a)(2) defines "credit card transaction." This is a restatement of existing law (article 1.01(g)). Article 1B.002(a)(3) defines "creditor." The definition of "creditor" is a new provision. Article 1.B002(a)(4) defines "interest" and restates existing law. Article 1B.002(a)(5) defines "judgment creditor." The definition of "judgment creditor" is a new provision. Article 1B.002(a)(6) defines "judgment debtor." The definition of "judgment debtor" is a new provision. Article 1B.002(a)(7) defines "judgment interest." The definition of "judgment interest" is a new provision. Article 1B.002(a)(8) defines "legal interest" and restates existing law (article 1.01(b)). Article 1B.002(a)(9) defines "lender credit card agreement" and restates existing law (article 1.01(i)). Article 1B.002(a)(10) defines "loan." Surprisingly, current law does not define a loan. This definition was created based upon the definition of loan instituted by the courts of this state. Article 1B.002(a)(11) defines "merchant discount" and restates existing law (article 1.01(h)). Article 1B.002(a)(12) defines "money judgment." This is a new term to describe a monetary amount awarded by a court. Article 1B.002(a)(13) defines "obligor." This is a new provision. Article 1B.002(a)(14) defines "open-end account." This definition amends existing law (article 1.01(f)) to make the definition consistent with Regulation Z. Article 1B.002(a)(15) defines "person." This definition amends existing law (article 1.01(e)) to include limited liability company in the definition. Article 1B.002(a)(16) defines "prepayment penalty." This is a new provision and incorporates existing case law into the definition. Article 1B.002(a)(17) defines "time price differential." Although the doctrine of time price differential has been around a long time, no statutory definition existed. The new definition incorporates the doctrine and existing case law. Article 1B.002(a)(18) defines "usury" and restates existing law (article 1.01(d)). CHAPTER 1C. INTEREST RATES. Article 1C.001 essentially restates existing law (article 1.02) regarding the authority of parties to contract for a rate or amount of interest, but modifies the provision to include time price differential. Subsection (c) describes the methodology to determine a rate of interest on a contract. Article 1C.002 restates existing law (article 1.03) regarding the maximum rate of interest when no rate has been specified. Article 1C.101 restates existing law (article 1.07(a)). Article 1C.102 restates existing law (article 1.07(f)) and incorporates an interpretation letter. Article 1C.103 is a new section that states the effect of federal preemption on late charges. This provision is necessary to modify the uncertainty created by the ruling in Seiter v. Veytia, 756 S.W.2d 303 (Tex. 1988) CHAPTER 1D. OPTIONAL RATE CEILINGS. Article 1D.001 - 1D.016 restates existing law regarding interest rate ceilings (article 1.04 and 1.11). Article 1D.101 - 1D.102 restates existing law regarding open-end accounts (article 1.04(h)). Article 1D.103 incorporates existing law (article 1.04(i)) but modifies the provisions to clarify the notification required when the lender unilaterally intends to change the any of the terms of the agreement. Article 1D.104 - 1D.105 restates existing law (article 1.04(h) and (j)). Article 1D.201 provides that loans for personal, family or household use are consumer loans, and thus, are subject to the consumer subtitle. Article 1D.301 - 1D.502 restates existing law (article 1.04 (n)-(r)). CHAPTER 1E. JUDGEMENT INTEREST. Article 1E.001 - 1E.302 essentially restates existing law (article 1.05), but does clarify provisions to be consistent with existing case law. CHAPTER 1F. PENALTIES AND REMEDIES. Article 1F.001 restates existing law (article 1.06(1) and (2)), but separates the provisions for usurious interest and usurious legal interest. It also clarifies that the article applies only to a transaction subject to this subtitle. Additionally, subsection (c) has clarifying language to determine appropriate penalties for certain transactions. This clarifies some of the court's deliberation in Hardwick v. Austin Gallery of Rugs. Article 1F.002 amends the existing statutory qualifications that trigger the forfeiture of principal penalty. The amended language would provide the creditor must actually receive the usurious interest (rather than just contract for it) to be liable for these penalties. Article 1F.003 restates existing law (article 1.06(1) and (2)), but separates the provisions for usurious contract interest and usurious legal interest. It also clarifies that the article applies only to a transaction subject to this subtitle. Article 1F.004 amends the existing statutory qualifications that trigger the forfeiture of principal penalty. The amended language would provide the creditor must actually receive the usurious interest (rather than just charge it) to be liable for these penalties. Article 1F.005 restates existing law. Article 1F.006 establishes limitations on filing usury litigation. Subsection (a) establishes proper venue. The prior law named "the county of the defendant's residence, or in the county where the interest in excess of the amount authorized by law has been received or collected, or where such transaction had been entered into or where the parties who paid the interest resided when the transaction occurred, or where the borrower resides" (article 1.06(3)). The legislation establishes these locations as the county in which: (1) the transaction was entered into; (2) the usurious interest was charged or received; (3) the creditor resides at the time of the cause of action if the creditor is a natural person; (4) the creditor maintains its principal office if the creditor is not a natural person; or (5) the obligor resides at the time of the accrual of the action. Subsections (b) - (d) establish a notice procedure prior to litigation. An obligor who has contracted for or been charged usurious interest must give notice to the creditor 60 days prior to litigation. The creditor has an opportunity to correct the violation. If the violation is corrected, the creditor will not be liable for usury penalties. Article 1F.007 establishes the exclusive nature of usury penalties and provides that additional common law penalties are not applicable. Article 1F.008 restates existing law but limits these penalties only to transactions for personal, family, or household use. Article 1F.101 - 1F.104 restates existing law (article 1.06 (1), (4) and (5)). Article 1F.105 is a new section that provides that if the creditor receives interest pursuant to a judgment award that exceeds the maximum lawful rate, the creditor is not liable for usury penalties. CHAPTER 1G. MISCELLANEOUS PROVISIONS RELATING TO INTEREST. Article 1G.001 - 1G.004 restates existing law (article 1.10, 1.11, and 1.12). CHAPTER 1H. COMMERCIAL TRANSACTIONS. Chapter 1H is created to deal exclusively with provisions in commercial transactions. Many of the provisions of Chapters 1B - 1G will also be applicable to commercial transactions. Article 1H.001 creates definitions for use in Subtitle B: Article 1H.001(5) defines "commercial loan" as a loan for business, commercial, investment, agricultural, or similar purpose. This definition is consistent with the application of existing law. Article 1H.001(9) defines a "qualified commercial loan." A qualified commercial loan is a commercial loan in the amount of $3,000,000 or more. Article 1H.001(2) defines "affiliate." Article 1H.001(4) defines "business entity." Article 1H.001(6) defines "guaranty." Article 1H.001(8) defines "prepayment charge or penalty." This definition provides for a charge as a result of partial or total prepayment. Article 1H.001(3) defines "asset-backed securities" and restates existing law (article 1.13). Article 1H.001(7) defines "pass-through entity" and restates existing law (article 1.13). Article 1H.001(1) defines "account purchase transaction" and restates existing law (article 1.14). Article 1H.002 provides that the maximum interest rates or amounts established in Chapter 1D are applicable to commercial transactions. Article 1H.003 provides that the use of a 360 day year consisting of 12 months comprised of 30 days each is an acceptable time frame for a commercial transaction in addition to the standard 365 day year. Article 1H.004 provides the method to determine the applicable or effective interest rate of a commercial transaction for the purposes of determining usury. Article 1H.005 provides that the parties may agree to include a charge for prepayment and that the charge will not be interest. Article 1H.006 provides that the parties may agree upon a delinquency charge and a returned check fee. Article 1H.101 provides that a lender may receive compensation on a qualified commercial loan in the form of equity participation, profit participation, or revenue participation and that compensation is statutorily defined as not constituting interest. Article 1H.102 restates existing law (article 1.13). Article 1H.103 restates existing law (article 1.14). SECTION 2. Amends Subtitle 2, Title 79, Revised Statues (Article 5069-2.01 et seq., Vernon's Texas Civil Statutes) by adding Chapter 3A. CHAPTER 3A. CONSUMER LOANS. The new chapter 3A is primarily a non-substantive revision of article 5069, chapters 3, 4, and 5. Chapter 3 deals with consumer installment loans. Chapter 4 governs installment loans and chapter 5 covers secondary mortgage loans. These chapters were initially written in 1967. Many of the provisions of each chapter are identical or similar. Combining the provisions into a single chapter is a more efficient way to handle all types of consumer transactions consistently. One substantive change incorporates all consumer transactions that are payable in a single installment within this chapter. In existing law, some single installment transactions were governed by this chapter and others were covered in the general usury law. This amendment assures consistent treatment of these transactions. Article 3A.001 defines various terms. Article 3A.001(1) defines "irregular transaction." This is a new statutory definition. The term has been used informally for many years to identify the applicability of various provisions, such as refunding methods, to these types of transactions. Article 3A.001(2) defines "regular transaction." This is a new statutory definition. The term has been used informally for many years to identify the applicability of various provisions, such as refunding methods, to these types of transactions. Article 3A.001(3) defines "secondary mortgage loan." The definition restates existing law. Article 3A.002 defines the various interest computation methods. These are new statutory provisions, but have been applied by regulatory interpretations for many years. Article 3A.003 restates existing law. Article 3A.004 restates existing law and clarifies the applicability of the chapter. Article 3A.005 primarily restates existing law and clarifies the applicability of the chapter. Articles 3A.101 - 103 restate existing law. Articles 3A.201- 256 restate existing law. Article 3A.257 clarifies existing law and accommodates compliance with the Administrative Procedures Act. Articles 3A.258 - 263 restate existing law. Article 3A.301 restates the provisions of Art. 5069-3.15 and clarifies the earnings methods allowable on these types of transactions. Article 3A.302 creates specific provisions to deal with loans payable in a single installment. These types of loans have been permissible under this authority. These new provisions clearly state this and also provide for a minimum interest charge of $25 in the event that the loan is prepaid. Articles 3A.303-306 restate existing law. Articles 3A.401 - 402 restate the provisions of Art. 5069-3.16 and clarify the earnings methods allowable on these types of transactions. Article 3A.403 creates specific provisions to deal with loans payable in a single installment. These types of loans have been permissible under this authority. These new provisions clearly state this and also provide for a minimum interest charge of $25 in the event that the loan is prepaid. Articles 3A.404 - 408 restate existing law. Article 3A.501 restates the provisions of Art. 5069-5.01 and clarifies the earnings methods allowable on these types of transactions. Articles 3A.502-508 restate existing law. Articles 3A.601 - 603 restate existing law. Articles 3A.701- 716 restate existing law. Articles 3A.801 - 806 restate existing law. Articles 3A.851- 858 restate existing law. Article 3A.901 - 910 restate existing law. SECTION 3-43. These sections are modified to reflect the new statutory reference citations. SECTION 44. Repeals Chapters 1, 1A, 3, 4, and 5, Title 79, Revised Statutes. SECTION 45. This language specifies that any changes made in this legislation apply only to acts occurring on or after the effective date of the act. SECTION 46. This transition provision specifies treatment of this act if conflicting legislation is passed. SECTION 47. Effective date: September 1, 1997. SECTION 48. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The Committee Substitute to H.B. 1971 adds Art. 1H.006 to SECTION 1 of the original bill to provide for allowing the parties to a written contract to agree to an "amount" of interest in a finance transaction. The Substitute makes clarifying changes in Art. 1B.002 to the definitions of "person" in subsection (a), paragraph (15) and to subsection (b). Furthermore, the Substitute makes several conforming changes to language in Articles 1F.001, 1F.002, 1F.005, and 1F.006. The Substitute also inserts language into Art. 1H.002 to align Chapter 1 with similar provisions in Chapters 6, 6A, and 7. Lastly, the Substitute inserts language into Article 3A.402 for clarification purposes.