HBA-ATS, TYH H.B. 2337 76(R)BILL ANALYSIS


Office of House Bill AnalysisH.B. 2337
By: Ehrhardt
Financial Institutions
6/7/1999
Enrolled



BACKGROUND AND PURPOSE 

Texas credit law permits lenders to make precomputed loans that rebate
interest under the Rule of 78s method.  The Rule of 78s allows higher
interest to be charged at the beginning of a loan repayment period and
obligates the borrower for the entire amount of interest over the life of a
loan. The borrower receives a rebate on a portion of the interest if the
borrower pays off the loan early. Some community banks, as well as other
lenders, use the Rule of 78s transactions because they want to be able to
charge late charges if the customer is delinquent without having to
accelerate the entire loan.  Prior to the 76th Legislature, late charges
were not permitted on pure simple interest loans in Texas. 

The Internal Revenue Service amended tax accounting rules so that interest
on consumer installment transactions must be reported on the simple
interest or constant yield basis rather than the Rule of 78s.  This is
required even though Rule of 78s is permissible under both federal and
state banking and credit laws.  Because of the complexity of keeping two
sets of records or developing two financial reports on interest earned,
many institutions in Texas are converting to simple interest loans.
However, this conversion has an impact on non-interest fee income for many
of these institutions.  Prior to the 76th Legislature, many of these
institutions might have chosen to increase interest rates on the loans to
make up the yield, but that would have been unfair to those customers who
paid on time. 

H.B. 2337 authorizes the traditional late charge of five percent of the
installment after 10 days on simple interest interactions. 

RULEMAKING AUTHORITY

It is the opinion of the Office of House Bill Analysis that this bill does
not expressly delegate any additional rulemaking authority to a state
officer, department, agency, or institution. 

SECTION BY SECTION ANALYSIS

ARTICLE 1.  AMENDMENTS TO TITLE 79, REVISED STATUTES

SECTION 1.01.  Amends Article 3A.303, Title 79, Article 5069-3A.303,
V.T.C.S., to authorize a loan contract that includes simple interest and
that is a regular transaction to provide for additional interest for
default if any part of an installment remains unpaid after the 10th day
after the date on which the installment is due, including Sundays and
holidays.  Makes conforming changes. 

SECTION 1.02.  Amends Article 3A.306, Title 79, Article 5069-3A.306,
V.T.C.S., to authorize a loan contract that includes simple interest and
that is an irregular transaction to provide for additional interest for
default if any part of an installment remains unpaid after the 10th day
after the date on which the installment is due, including Sundays and
holidays.  Prohibits the additional interest from exceeding five cents for
each $1 of a scheduled installment.  Prohibits interest under this
subsection from being collected more than once on the same installment.
Makes a conforming change. 

ARTICLE 2.  AMENDMENTS TO FINANCE CODE

SECTION 2.01.  Amends Section 342.203, Finance Code, to make conforming
changes. 
 
SECTION 2.02.  Amends Section 342.206, Finance Code, to make conforming
changes. 

ARTICLE 3.  EFFECTIVE DATE; EMERGENCY

SECTION 3.01.  (a)  Provides that this Act takes effect September 1, 1999,
except as provided by Subsections (b) and (c) of this section.  
 
(b)  Provides that Article 1 of this Act takes effect only if the Act of
the 76th Legislature, Regular Session, 1999, relating to nonsubstantive
additions to and corrections in enacted codes does not take effect.  
 
(c)  Provides that Article 2 of this Act takes effect only if the Act of
the 76th Legislature, Regular Session, 1999, relating to nonsubstantive
additions to and corrections in enacted codes takes effect. 

SECTION 3.02.  Emergency clause.