Article
Proposed Constitutional Amendment #5
This week, I will continue outlining each of the proposed constitutional amendments so that you may make an informed decision as you head to the polls on November 8 to help ratify or reject amendments to the Texas Constitution.
The fifth proposed constitutional amendment was passed by the legislature as Senate Joint Resolution 21. On the ballot, the proposal will be labeled as Amendment #5 and will read as follows: "The constitutional amendment allowing the legislature to define rates of interest for commercial loans."
SUMMARY: The proposed amendment amends Section 11, Article XVI, Texas Constitution, to allow the legislature to exempt commercial loans from the maximum interest rate limits established under that section. The amendment defines a commercial loan as a loan made primarily for business, commercial, investment, agricultural, or similar purposes and not primarily for personal, family, or household purposes.
Arguments For: Usury laws are meant to protect borrowers in weak bargaining positions from coercive and unscrupulous practices by lenders. In commercial transactions, however, both parties have the bargaining power necessary to protect against those practices. Application of usury laws to commercial transactions limits the parties' ability to structure the transactions in flexible and imaginative ways that could benefit both parties. Most other states do not have the stringent restrictions on commercial lending that exist in Texas. Federal law that allows certain banks to apply the interest rate laws of the state where the banks are domiciled and contractual provisions that are used by other lenders to apply another state's law to the transaction result in many commercial loans being made to borrowers in this state by lenders from outside the state. Removal of the usury restrictions would allow Texas lenders to compete more equally with out-of-state lenders.
Arguments Against: Not all commercial lenders and borrowers have equal sophistication and bargaining power. Owners of small businesses and other borrowers that need small amounts for commercial purposes may not be able to bear the cost of obtaining legal counsel to protect against disadvantageous contractual provisions. The proposed amendment does not limit the exception from usury laws to large commercial transactions. Although the legislature has adopted enabling legislation setting the minimum size of a loan to which the exemption applies, the minimum may not be high enough to ensure that only borrowers with adequate sophistication and bargaining power are included. Moreover, the legislature in the future could lower or altogether remove the minimum loan size.
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