Structuring a commercial loan can be a challenge for banks based in Texas.
Though out-of-state banks can lend there under their home states' usury laws, Texas banks must contend with restrictions that they say have forced them to charge higher rates.
But that could soon change. A bill that would amend Texas' commercial-lending laws was passed last month and is awaiting Gov. Rick Perry's signature. If the governor, a Republican, does not sign the bill by Wednesday, it would automatically become law and take effect Sept. 1.
Bankers and others say the law would make lending less complicated, saving Texas banks time and money so that they could compete more effectively with the larger out-of-state banks that dominate much of their market.
Indeed, with more outside banks entering the state, Karen Neeley, the general counsel for the Independent Bankers Association of Texas, said the bill had become a top priority.
It would give Texas banks "greater flexibility to make loans that are more attractive to customers," Ms. Neeley said.
Texas has among the most restrictive commercial lending laws in the country. Though most states do not even have interest rate caps on commercial loans, Texas law sets a cap - currently 18% - based on a sliding scale.
Few banks would charge that much interest per se, but the problem for Texas banks is a requirement that they count any fees associated with a loan as interest. That can easily push them over the cap.
The law, more than a century old, was meant to protect residents and business owners from gouging and loss of property, which secures most loans.
However, Ms. Neeley said that the law is no longer keeping rates low. In fact, she said, in-state banks often charge above-average rates to pay for the cost - in time, manpower, and sometimes legal fees - of making sure their loans comply.
Downey Bridgwater, the chief executive officer of the $3.4 billion-asset Sterling Bancshares Inc. of Houston, said that when structuring loans its lenders check multiple times for charges that could count as interest.
"That's the approach we have taken in pricing, because we want to make sure we stay well under the usury limit," Mr. Bridgwater said. The law is "pretty onerous, and virtually everything is interest."
It is hard to assess out-of-state banks' market share in Texas commercial lending, but their share of all Texas banking assets has been rising fast - from 33% at the end of 2000 to 43% four years later .
In arguing for the bill in the spring of last year, Texas Banking Commissioner Randall S. James said the laws governing commercial lending have put Texas banks at a "competitive disadvantage."
The bill the Legislature passed narrows the definition of interest. Most fees associated with a loan would no longer be counted as interest. Also, if a company assumed an affiliate's debt, that debt would no longer be considered interest, as it is now.
Rachel Dennis, the deputy counsel for the Texas Bankers Association, said, "The amendment basically says that if its not interest anywhere else, it isn't interest here."
The bill would also remove the 18% cap from loans over $7 million that are secured by real estate and unsecured loans over $500,000. The removal, however, would depend on Texas voters, since the usury limit is in the state's constitution. If the bill became law, Texans would vote on that provision in November.
But since few Texas banks make such large loans, removing the cap would have much less effect than narrowing the definition of interest. Mr. Bridgwater said that less than 10% of Sterling's loans are for more than $5 million, and that it has no unsecured commercial loans.
