HBA-ATS H.B. 2779 76(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 2779 By: Pitts Financial Institutions 3/22/1999 Introduced BACKGROUND AND PURPOSE In 1967, the Texas Legislature enacted Title 79, V.T.C.S., otherwise known as the Texas Credit Code. The statute was later revised and rewritten as the Texas Credit Title. Like its predecessor, the law limits the amount of interest that can be charged by a creditor for a loan or an extension of credit. For consumer loans, a lender may charge a contract rate of 10 percent a year. Alternatively, a lender may charge a rate based on a weekly, monthly or quarterly ceiling, which is currently set at 18 percent per year. In the context of commercial loans, the law provides that a lender may charge a maximum rate of 28 percent for a loan amount greater than $250,000. Interest in excess of the amounts allowed by law constitutes usury. If the lender charges and receives interest greater than twice the amount permitted by the Texas Credit Title and that is not otherwise authorized by law, the lender will also be liable to the borrower for the principal amount, the interest and all other amounts charged and received. The Texas Credit Title permits a type of commercial loan known as a "qualified commercial loan." A qualified commercial loan is a commercial loan in the original principal amount of $3,000,000 or more, or a renewal or extension of a commercial loan in the original principal amount of $3,000,000 or more, whether the principal amount of the loan at the time of its renewal or extension is $3,000,000 or more. The important feature of a qualified commercial loan is that the lender and borrower may contract for additional charges for incentives such as the option to convert to equity, to purchase equity, and to share in the revenues or profit without fear of running afoul of the usury laws because the Texas Credit Title does not consider these additional charges as interest. These incentives are frequently used by small and "start-up" businesses to provide capital for their growth. A typical incentive in which lender participation is determined by the appreciation in value of the borrower or the borrower's assets was not included among the types of equity participation, however. H.B. 2279 amends Title 79, V.T.C.S., to include appreciation in value among the available incentives for which parties to a qualified commercial loan agreement are authorized to charge additionally without the charges being considered interest. In addition, this bill amends Section 306.101(b), Finance Code, to include appreciation in value among those incentives for which parties to a qualified commercial loan agreement are authorized to contract. 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 SECTION 1. Amends Article 1H.101(b), Title 79, V.T.C.S. (Article 5069-1H.101, V.T.C.S.), to include appreciation in value among the available incentives for which parties to a qualified commercial loan agreement (loan agreement) are authorized to charge additionally without the charges being considered interest. SECTION 2. Amends Section 306.101(b), Finance Code, to include appreciation in value among those incentives for which parties to a qualified commercial loan (loan) agreement are authorized to contract. SECTION 3. (a) Effective date for SECTION 1: upon passage, but 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. (b) Effective date for SECTION 2: September 1, 1999, but only if the Act of the 76th Legislature, Regular Session, 1999, relating to nonsubstantive additions to and corrections in enacted codes takes effect. SECTION 4. Emergency clause.