TEXAS TECH LAW REVIEW
VOLUME 18
1987
NUMBER
BANKS AND THE TEXAS DECEPTIVE TRADE
PRACTICES ACT
by John Krahmer* Clyde Reece McCormick, II** Joe L. Lovell***
INTRODUCTION
The purpose of this article is to provide the practicing attorney
with a useful reference source in the prosecution and defense of
Deceptive Trade Practices Act ("DTPA") claims involving banks
and other financial institutions" This article contains three primary
parts. The first part contains an overview of DTPA actions in the
context of bank transactions. The second part is a detailed analysis
of the term "consumer" as defined in the DTPA and applied in
banking litigation. 2 The third part develops a theory of "financial
intermediation" as an inherent part of banking activity and suggests
that the service of financial intermediation should be considered by
the courts in DTPA litigation.
I.
OVERVIEW
A. The Statutory Framework
The Texas Deceptive Trade Practices-Consumer Protection Act
(the "DTPA" or the "Act") was originally enacted in 19733 for the
• B.A., J.D., University of Iowa; LL.M., Harvard University. Professor of Law, Texas
Tech University.
•• J.D. expected 1987, Texas Tech University School of Law.
••• J.D. expected 1987, Texas Tech University School of Law.
I. Throughout this article, the terms "bank," "banking institution," and "financial
institution" will be used generically to describe those entities that perform banking functions.
As the distinctions between commercial banks, savings and loan associations, and other types
of financial institutions continue to disappear under deregulation, there is little reason to
distinguish between them for deceptive trade practices purposes.
2. The term "consumer" is defined in TEX. Bus. & COM. CODE ANN. § 17.45(4) (Vernon
Pamph. Supp. 1986).
3. Deceptive Trade Practices-Consumer Protection Act, ch. 143, 1973 Tex. Gen. Laws
322.
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expressed purpose of "protect[ing) consumers against false, misleading, and deceptive business practices, unconscionable actions, and
breaches of warranty and to provide efficient and economical procedures to secure such protection."4 The statute was designed to
make consumer litigation feasible, to give consumers incentive to
seek recovery of their damages, and to deter conduct that the Act
makes unlawful. s The legislature mandated that the Act be "liberally
construed and applied to promote its underlying purposes."6 The
Texas Supreme Court has held that the courts are required to give
the Act "its most comprehensive application possible without doing
any violence to its terms."7 Liberal construction of the DTPA is
essential if it is to fulfill its purpose. 8
The Act created two enforcement mechanisms, one of public
enforcement by the Consumer Protection Division of the Office of
the Texas Attorney General, -J and the other by private civil actions
authorized by the terms of the statute. 1O
B.
Statutory Claims and Defenses under the DTPA
There are four statutory causes of action under the DTPA. '1
First, an action can be maintained under the "laundry list" of twenty-
4. TEX. Bus. & COM. CODE ANN. § 17.44 (Vernon Pamph. Supp. 1986).
5. Curry. The 1979 Amendments to the Deceptive Trade Practices-Consumer Protection
Act, 32 BAYLOR L. REV. 51,51 (1980).
6. TEX. Bus. & COM. CODE ANN. § 17.44 (Vernon Pamph. Supp. 1986).
7. Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 541 (Tex. 1981). The court had
earlier noted that, in evaluating construction of the Act, "[I)egislative intent should be
determined from the language of the entire Act and not isolated portions. The court is not
necessarily confined to the literal meaning of the words used, and the legislative intent rather
than the strict letter of the Act will control." Pennington v. Singleton, 606 S. W.2d 682, 686
(Tex. 1980).
8. TEX. Bus. & COM. CODE ANN. § 17.44 (Vernon Pamph. Supp. 1986); see also
McCarthy, An Analysis of the 1979 Texas Deceptive Trade Practices Act and Possible
Ramifications of Recent Amendments: Is the Act Still Consumer Oriented?, 11 ST. MARY'S
L.J. 885, 912 (1980) ("The Act is ... fundamentally a consumer protection act and should
be liberally construed."); D. BRAGG, P. MAXWELL & J. LONGLEY, TEXAS CONSUMER LITIGATION
§ 2.04 (2d ed. 1983) ("liberal construction of the Act not only is mandated by its terms, but
also is required if the Act is to fulfill its purposes").
9. TEX. Bus. & COM. CODE ANN. § 17.46(a), (c) (Vernon Pamph. Supp. 1986). Special
powers to enforce the Act against deceptive practices are granted to the Consumer Protection
Division by TEX. Bus. & COM. CODE ANN. §§ 17.47, 17.58, 17.60, 17.61, 17.62 (Vernon
Pamph. Supp. 1986).
10. ld. § 17.50(a).
II. This four-point analysis was used by Mr. J. SCOIl Sheehan in his excellent material
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BANKS AND THE DTPA
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three deceptive acts or practices described in the Act. 12 This list
includes some acts that are narrowly defined, such as a representation
that goods are new if they are actually used, reconditioned or
secondhand;13 some that have a common law base or regulatory
history, such as passing off goods or services as those of another 14
or using deceptive representations of geographic origin; IS and some
acts or practices that are extremely general, such as representing that
an agreement confers or involves rights, remedies or obligations that
it does not have or involve l6 or failing to disclose information known
at the time of the transaction if the falure was intended to induce
the consumer to enter into the transaction. 17 If an act or practice fits
one or more of the twenty-three proscribed activities, it can form
the basis of a cause of action under the DTPA.18
The second statutory cause of action is for breach of express or
implied warranty .19 While the DTPA does not itself create warranties,
an action can be maintained under the Act for the breach of express
or implied warranties created by other law, such as the Uniform
Commercial CodeZ° or the common law. 21 An issue of some impor-
prepared for a series of State Bar of Texas Institutes on the DTPA. See Sheehan, How the
DTPA Affects Banks and Other Lending Institutions, SUING, DEfENDING & NEGOTIATING WITH
BANKS & OTHER FINANCIAL INSTITUTIONS, STATE BAR Of TEXAS INST. § C (1986). This analytical
approach is a useful method for understanding the statutory framework.
12. TEX. Bus. & COM. CODE ANN. § 17.46(b)(1)-(23) (Vernon Pamph. Supp. 1986). The
phrase "laundry list" has been in use since the Act was adopted and has become the popular
name for referring to the statutorily described acts or practices that are prohibited by the Act.
13. TEX. Bus. & COM. CODE ANN. § 17 .46(b)(6) (Vernon Pamph. Supp. 1986).
14. Id. § 17 .46(b)(1).
15. Id. § 17.46(b)(4). Misrepresentations of geographic origin also have a substantial
common law history. See generally Segal v. FfC, 142 F.2d 255 (2d Cir. 1944); FTC v.
Walker's New River Mining Co., 79 F.2d 457 (4th Cir. 1935) (both discussing misrepresentations
of geographic origin).
16. TEX. Bus. & COM. CODE ANN. § 17.46(b)(12) (Vernon Pamph. Supp. 1986).
17. Id. § 17.46(b)(23).
18. Id. § 17 .50(a)(1). Section 17.50 contains the remedial provisions of the Act.
19. Id. § 17.50(a)(2).
20. The warranty provisions of the Uniform Commercial Code are contained in id. §§
2.313-2.315 (Tex. ucq (Vernon 1968).
21. An example of common law warranties developed by the Texas courts are the implied
warranties of habitability and good workmanship in the construction and sale of dwellings.
See Evans v. J. Stiles, Inc., 689 S.W.2d 399, 400 (Tex. 1985) (implied warranties of workmanship and habitability); Gupta v. Ritter Homes, Inc., 646 S.W.2d 168, 169 (Tex. 1983)
(implied warranty of workmanship and habitability); Kamarath v. Bennett, 568 S. W .2d 658,
660-61 (Tex. 1978) (implied warranty of habitability); Humber v. Morton, 426 S.W.2d 554,
555 (Tex. 1968) (implied warranty of workmanship and habitability).
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tance in asserting claims for breach of warranty is whether a disclaimer of warranty can effectively disclaim liability under the DTPA
in light of the strong language in the Act prohibiting the waiver of
rights. 22 A growing number of cases have upheld the validity of
warranty disclaimers,23 but it has also been held that such disclaimers
are not effective to waive separate claims founded on a DTPA
violation even when the same facts give rise to both the warranty
claim and the laundry list violation. 24
The third statutory cause of action is for "any unconscionable
action or course of action by any person. "25 An unconscionable
action or course of action is defined as an act or practice that "takes
advantage of the lack of knowledge, ability, experience, or capacity
of a person to a grossly unfair degree"26 or which "results in a gross
disparity between the value received and consideration paid. "27
22. Disclaimers of warranty in lhe sale of goods are allowed by TEX. Bus. & COM. CODE
ANN. § 2.316 (Vernon 1967) and are also permitted for the common law warranties of
habitability and good workmanship. G-W-L, Inc. v. Robichaux, 643 S.W.2d 392, 393 (Tex.
1982). Section 17.42 of the DTPA provides that "[a)ny waiver by a consumer of the provisions
of this subchapter [the DTPA) is contrary to public policy and is unenforceable and void
.... " TEX. Bus. & COM. CODE ANN. § 17.42 (Vernon Pamph. Supp. 1986). See generally
Comment, VCC Warranty Disclaimers and the "No Waiver" Provision 0/ the Deceptive Trade
Praeliees and Consumer PrOleClion Ael: Can Ihe Con/liel Be Resolved?, 18 TEX. TECH L. REV.
211 (1987) (examining COnniCI between UCC warranly disclaimers and "no waiver" provision).
23. E.g., G-W-L, Inc. v. Robichaux, 643 S.W.2d 392, 393 (Te.x. 1982) (upholding the
waiver of the implied warranties of workmanship and habitability); McCrea v. Cubilla Condominium Corp., 685 S.W.2d 755, 758 (Tex. App.-Houston [1st Dis!.) 1985, writ ref'd n.r.e.)
(holding that a waiver of implied warranty of fitness and all express warranties was effective).
24. Reliance Universal, Inc. v. Sparks Indus. Serv., Inc., 688 S.W.2d 890, 892-93 (Tex.
App.-Beaumont 1985, writ ref'd n.r.e.). The disclaimer of warranties should be distinguished
from contracts that seek to impose a limitation of remedy, such as that permitted by TEX.
Bus. & COM. CODE ANN. § 2.719 (Tex. UCC) (Vernon 1967). There is some authority for the
proposition thaI attempts 10 limit a remedy (as opposed to disclaimer) will nOI be effective to
prevent a consumer from seeking the remedies allowed under the DTPA and preserved by
section 17.42. See Hycel, Inc. v. Wittstruck, 690 S.W.2d 914 (Tex. App.- Waco 1985, writ
dism'd w.o.j.) (court held that disclaimer in a brochure would not release defendant from
liability); Rinehart v. Sonitrol of Dallas, Inc., 620 S.W.2d 660 (Tex. Civ. App.-Dallas 1981,
writ ref'd n.r.e.) (holding that limitation of recovery under DTPA is contrary to public policy
and unenforceable).
25. TEX. Bus. & COM. CODE ANN. § I7.50(a)(3) (Vernon Pamph. Supp. 1986). It should
be particularly noted that the DTPA allows unconscionability to be used as the basis of a
claim as contrasted to the purely defensive use allowed under the Uniform Commercial Code.
Compare id. § 17.50(a)(3) wilh id. § 2.302 (Tex. UCC) (Vernon 1967). A landmark decision
on how unconscionability can be used as a claim and the damages recoverable in such an
action is Luna v. North Star Dodge Sales, Inc., 667 S.W.2d 115 (Tex. 1984).
26. TEX. Bus. & COM. CODE ANN. § 17.45(5)(A) (Vernon Pamph. Supp. 1986).
27. [d. § 17.45(5)(B).
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The fourth statutory action is for an act or practice that violates
article 21.21 of the Texas Insurance Code. 28 Prohibited practices
include such things as misrepresentation of the terms or benefits of
an insurance policy, misrepresentations with regard to dividends, and
misrepresentations about an insurer's financial condition. 29
In addition to the causes of action established by the OTPA
itself, a few other statutes make violations of their provisions a
violation of the OTPA as well. These include the Texas Home
Solicitation Sales Act,30 the Texas Debt Collection Practices Act, JI
the Residential Service Company Act 32 and the Manufactured Housing
Standards Act. 33
Much of the incentive for maintaining a DTPA action lies in
the remedial provisions of the Act. A successful claimant may be
able to recover actual damages multipled by a statutory penalty
formula,34 injunctive relief,35 orders for the return of money or
property36 and any other relief the court deems proper, including the
appointment of a receiver or the revocation of a license to do business
if a judgment under the Act remains unpaidY In addition to these
remedies, the Act allows a successful plaintiff to recover attorneys'
fees. 38
At least thirty days before filing an action for damages under
the OTPA, a claimant must give the prospective defendant written
28. {d. § 17.50(a)(4).
29. TEX. INS. CODE ANN. art. 21.21 § 4 (Vernon 1981).
30. TEX. REV. CIv. STAT. ANN. art. 5069-13.03(e) (Vernon Pamph. Supp. 1986).
31. TEX. REV. CIv. STAT. ANN. art. 5069-11.11 (Vernon Pamph. Supp. 1986). An
interesting recent decision considering the Debt Collection Practices Act in a counterclaim
against a bank is Brown v. Oaklawn Bank, 718 S.W.2d 678 (Tex. 1986) (where the bank, in
attempting to recover funds erroneously paid to customer by teller, was held to violate Debt
Collection Act because of the bank's threats of criminal prosecution).
32. TEX. REV. CIv. STAT. ANN. art. 6573b § 23 (Vernon Supp. 1986).
33. {d. art. 5221 f § 17(d) (Vernon Pamph. Supp. 1986); see also TEX. Bus. & COM. CODE
ANN. §§ 35.71-35.74 (Vernon Pamph. Supp. 1986) (making a violation of the Rental-Purchase
Agreement Act a violation of the DTPA).
34. TEX. Bus. & COM. CODE ANN. § 17.50(b)(I) (Vernon Pamph. Supp. 1986). In addition
to actual damages:
each consumer ... may obtain ... two times that portion of the actual damages
that does not exceed $1000 [and) [i)f the trier of fact finds that the conduct of the
defendant was committed knowingly, the trier of fact may award not more than
three times the amount of actual damages in excess of $1000.
{d.
35.
36.
37.
38.
{d.
{d.
Jd.
{d.
§
§
§
§
17 .50(b)(2).
17 .50(b)(3).
17.50(b)(4).
17 .50(d).
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notice of the specific complaint and the amount of actual damages
and expenses, including attorneys' fees, if any, reasonably incurred
in asserting the claim against the defendant. 39 The person receiving
notice may choose to make a settlement offer which, if rejected, can
be filed with the court for possible later use as a defense to the
claim. 40 If the court finds that the offer of settlement tendered was
an amount substantially the same as the actual damages found by
the trier of fact, the plaintiff may not recover an amount greater
than the amount of the settlement offer or the amount of the actual
damages determined by the trier of fact, whichever is less. 41 In
addition to defenses based on general law or the special notice and
settlement provisions of the Act, a defendant in a DTPA action may
avoid liability if the violation is based on written information received
from third parties, including governmental agencies, where that information is found to be false or inaccurate. 42 In these cases, the
defendant must prove that the plaintiff was given written notice,
before consummation of the transaction, that the defendant was
relying on such third party information. 43
In 1979, the DTPA was amended to provide a two-year statute
of limitations on all cases brought under the Act. 44 Actions must be
commenced within two years after the deceptive act or practice
occurred or within two years after the plaintiff discovered or should
have discovered the deception. 45 The two-year time period may be
extended for 180 days if the plaintiff proves that the defendant
knowingly engaged in conduct calculated to induce the plaintiff to
refrain from filing suit. 46
Judicial Interpretation in Actions against Financial Institutions
The outline of DTPA claims and defenses described above is
equally applicable to sellers of goods, vendors of real property and
providers of services. 47 Financial institutions have not been specifically
C.
39.
40.
41.
Id. § 17.50A(a).
Id. § 17.50A(d).
Id.
42. Id. § 17.50B(a).
43. Id.
44. Act of June 13, 1979, ch. 603, § 1756A, 1979 Tex. Gen. Laws 1332.
45. TEX. Bus. & COM. CODE ANN. § 17.56A (Vernon Pamph. Supp. 1986).
46. Id.
47. Flenniken v. Longview Bank & Trust Co., 661 S.W.2d 705. 707 (Tex. 1983). "The
range of possible defendants is limited only by the exemptions provided in section 17.49." Id.
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BANKS AND THE DTPA
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exempted from DTPA coverage48 and the Act cannot be regarded as
being facially inapplicable to them. 49 Financial institutions however,
have enjoyed a degree of freedom from DTPA liability on the theory
that bank customers are not "consumers" for DTPA purposes. The
DTPA grants a private right of action only to "consumers" as
defined in the Act. 50 Section 17.45(4) of the Act defines a "consumer"
as "an individual, partnership, corporation, this state, or a subdivision or agency of this state who seeks or acquires by purchase or
lease, any goods or services . . . . "51 The Texas courts have maintained that money is not a "good" and that the simple extension of
credit is not a "service. "52 Consequently, bank customers asserting
claims otherwise cognizable under the DTPA have often been frustrated in their attempts to establish consumer status with regard to
banking institutions. 53
48. Subsections 17.49(a) and 17.49(b) contain the exemption provIsions of the Act.
Subsection (a) exempts owners and employees of advertising media (newspapers, broadcasting
stations, etc.) from liability unless they have knowledge that an advertisement is false,
misleading or deceptive or unless they have a direct or substantial financial interest in the sale
or distribution of the good or service being advertised. TEX. Bus. & CoM. CODE ANN. §
17.49(a) (Vernon Pamph. Supp. 1986). Subsection (b) provides that nothing in the DTPA shall
apply to acts or practices that have been authorized by specific rules or regulations of the
Federal Trade Commission under section 5 of the Federal Trade Commission Act (15 U.S.C.
§ 45(a)(I) (1982». [d. § 17.49(b).
49. It was argued in Farmers & Merchants State Bank v. Ferguson, 605 S.W.2d 320, 325
(Tex. Civ. App.-Fort Worth 1980), modified, 617 S.W.2d 918 (Tex. 1981), that banks were
exempt from DTPA liability because section 17.46(c)(I) requires that courts be guided by
interpretations of section 5 of the Federal Trade Commission Act. The Federal Trade Commission Act expressly excludes banks. 15 U.S.c. § 45(a)(2) (1982). That argument was rejected
because interpretations of the Federal Trade Commission Act were only to be used as guidance
in applying the DTPA, not as binding authority. The court stated, "No interpretation on this
particular issue could arise under the Act's own explicit language. Had the Texas legislature
chosen to make the DTPA parallel to the Federal Trade Commission Act in this regard, it
[would) have done so. The DTPA does not specifically except banks." 605 S.W.2d at 325.
50. The term "consumer" is defined in TEX. Bus. & COM. CoDE ANN. § 17.45(4) (Vernon
Pamph. Supp. 1986) and the private right of action is created by id. § 17.50(a).
51. ld. § 17.45(4). The text of this section further excludes a business consumer that has
assets of $25 million or more, or that is owned or controlled by a corporation or entity with
assets of $25 million or more. ld.
52. Riverside Nat' I Bank v. Lewis, 603 S.W.2d 169, 174-76 (Tex. 1980).
53. See, e.g., Kilgore Federal Sav. & Loan Ass'n v. Donnelly, 624 S. W.2d 933, 939 (Tex.
Civ. App.-Tyler 1981, writ ref'd n.r.e.); Genico Distrib., Inc. v. First Nat'l Bank, 616 S.W.2d
418,419-20 (Tex. Civ. App.-Texarkana 1981, writ ref'd n.r.e.); First Slale Bank v. Chesshir,
613 S.W.2d 61,62-63 (Tex. Civ. App.-Amarillo 1981), rev'd on other grounds, 620 S.W.2d
101 (Tex. 1981).
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D.
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The Riverside Rule oj Consumer Status
The seemingly broad exception to bank liability was articulated
by the Texas Supreme Court in the landmark case of Riverside
National Bank v. Lewis. 54 There the bank customer, Lewis, had
purchased a car with the proceeds of a loan from another bank.
Lewis was soon in default and, at the first bank's request, was
searching for a new bank to refinance the car. Lewis applied for
refinancing at Riverside National Bank, where an officer eventually
told Lewis and the first bank that his loan request had been approved.
After the first bank had sent Riverside a draft, the title to the car,
and other security, Riverside refused to make the loan. The first
bank repossessed the car, and Lewis subsequently filed suit against
Riverside, alleging a violation of the DTPA.55
The issue before the supreme court was whether Lewis had
standing as a "consumer," determined by whether Lewis sought
goods or services in the transaction with Riverside. 56 The court began
its analysis with the premise that Lewis sought only to borrow money.
The court defined "goods" as tangible chattels, concluding that
money, as an intangible, could not be a "good. "57 The court next
held that the extension of credit was not a "service. "58 The court
stated:
Seeking to acquire the use of money likewise is not a seeking of
work or labor [service]. Rather, it is an attempt to acquire an
item of value. We hold that an attempt to borrow money is not
an attempt to acquire either work or labor as contemplated in the
DTPA.59
Shortly after the supreme court announced its rule in Riverside,
the Amarillo Court of Civil Appeals in First State Bank v. ChesshirW
applied that rule to protect the other side of a bank's balance sheets,
where the bank acts as a borrower by accepting deposits. That court
held that a certificate of deposit only represents money to be paid
54.
55.
56.
57.
58.
59.
603 S.W.2d 169 (Tex. 1980).
Jd. at 171.
Jd. at 173-74.
Jd. at 174.
Jd.
Jd.
60. 613 S.W.2d 61 (Tex. Civ. App.-Amarillo 1981), rev'd on other grounds, 620 S.W.2d
101 (Tex. 1981).
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in the future, the same as a loan; therefore, the sale of such a
certificate was held not to constitute a good or service. 61
Under the holding that money is not a good and the extension
of credit is not a service, banking institutions were apparently excluded from DTPA liability for their primary activities. However,
the limitations of Riverside and Chesshir are as important as the rule
they articulated. In both cases it was carefully noted that the existence
of services collateral to the extension of credit or the sale of the
certificate were neither pled nor proven. 62 The Riverside court held
that since the bank customer had not complained of any collateral
activities, "such as the availability of financial counseling, the cost
of processing a loan or the ability to pay a customer's monthly
bills ... ,"63 it could not address whether such activities were "services" under the DTPA.64 The Chesshir court took the same approach,
limiting its review only to whether the purchase of a certificate of
deposit, standing alone, constituted the purchase of a good or service. 65
This limitation built into the Riverside and Chesshir cases has
required the courts to weigh a bank customer's consumer status on
a case-by-case basis. Subsequent courts have used the limitation to
narrow the protection offered to banks by Riverside and Chesshir.
These courts have afforded DTPA standing to bank customers where
they have been able to discern specific facts under which the customer
satisfies the "consumer" test. 66
The most recent case, First Federal Savings & Loan Association
v. Ritenour,67 provides the best example of how the courts have come
full circle to give bank customers standing as consumers, based on
the limitation of Riverside and Chesshir. In Ritenour, First Federal
issued a certificate of deposit to Mr. and Mrs. Ritenour jointly. Mr.
Ritenour later told a First Federal employee that he wanted to prevent
Mrs. Ritenour from withdrawing the funds without Mr. Ritenour's
approval. The First Federal employee told Mr. Ritenour that a
"hold" could be placed on the certificate of deposit which would
61.
62.
63.
64.
65.
66.
67.
Id. at 62.
Riverside, 603 S.W.2d at 175; Chesshir, 613 S.W.2d at 62 n.3.
603 S.W.2d atl75 n.5.
Id.
Chesshir, 613 S. w .2d at 62.
See infra text accompanying notes 76-130.
704 S.W.2d 895 (Tex. App.-Corpus Christi 1986, writ ref'd n.r.e.).
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require both signatures for withdrawal. After the "hold" was placed
on the certificate, Mrs. Ritenour, acting alone, withdrew the money.
Mr. Ritenour sued First Federal for misrepresenting that the "hold"
would protect the money. 68
The key issue was whether Mr. Ritenour was a "consumer. "69
The court noted Riverside and Chesshir and specifically pointed out
that both cases refused to address "collateral" services because none
had been pled or proven. 70 Mr. Ritenour did, however, produce
evidence that First Federal had provided "collateral services. "71 He
produced testimony that First Federal had set up a "customer service
department" designed to provide advice and counseling to all its
customers. 72 There was no additional charge for the service, it being
paid for out of First Federal's profits. 73 The court found that First
Federal had contemplated the need for such services since it was
made available to every customer who opened an account. 74 The
court held that the "customer service department" was a "collateral
service" which was purchased by the Ritenours. 75
Following Ritenour, then, pleading and proving that a banking
institution provided a "service department" to its customers will be
sufficient to show a "service" and it will certainly be sufficient if
the customer can show that he sought some type of assistance from
the "service department." Under this approach, it is a rare banking
institution that does not provide some "service."
11.
ESTABLISHING CONSUMER STATUS
A.
The Necessary Elements
In DTPA litigation against banking institutions, the first and
most important question to be addressed is whether the customer is
68.
69.
70.
71.
72.
73.
74.
75.
[d. at 897.
[d. at 899.
[d.
[d.
[d.
[d.
[d.
[d. at 900.
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a "consumer. "76 Consumer'status is a question of law to be answered
by the judge. 77
"Consumer status" has evolved into a three-part analysis, focusing on (1) the plaintiff (bank customer), (2) the defendant (banking
institution), and (3) the transaction which connects the two. This
analysis is to be accomplished by first measuring the customer's
relationship to the transaction to determine whether the customer
meets the statutory requirements of a consumer. 78 Next, the court
determines whether the transaction in question forms the basis of
the complaint,79 and finally, it considers the bank's relationship to
the transaction. 80
In order to answer these three questions it is first necessary to
test each case for the elements of consumer status. Were (1) goods
or services (2) sought or acquired by purchase or lease?81
B.
Goods or Services
The DTPA defines "goods" as "tangible chattels or real property purchased or leased for use. "82 Tangible chattels are "those
items of personal property which may be seen, weighed, measured,
felt or touched. "83 Therefore, only intangible property is excluded
from coverage by the DTPA. The Texas Supreme Court, in Riverside National Bank v. Lewis,84 held that money, as an intangible,
is not a "good. "85 Other intangibles that have been excluded from
76. Riverside Nat'l Bank v. Lewis, 603 S.W.2d 169, 173-74 (Tex. 1980).
77. First Fed. Say. & Loan Ass'n v. Ritenour, 704 S.W.2d 895, 898 (Tex. App.-Corpus
Christi 1986, writ ref'd n.r.e.); Ridco, Inc. v. Sexton, 623 S.W.2d 792, 795 (Tex. App.-Fort
Worth 1981, no writ). If the trial judge determines that the plaintiff is not a consumer, no
issues are to be submitted to the jury concerning the DTPA claim and a directed verdict is
proper. Ritenour, 704 S.W.2d at 898; Ridco, 623 S.W.2d at 795.
78. Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 541 (Tex. 1981); see also
Mercantile Mortgage Co. v. University Homes, Inc., 663 S.W.2d 45, 47 (Tex. App.-Houston
[14th Dist.) 1983, no writ); English v. Fischer, 649 S.W.2d 83. 92 (Tex. App.-Corpus Christi
1982), rev'd on other grounds, 660 S.W.2d 521 (Tex. 1983) (both cases following Cameron).
79. Cameron, 618 S.W.2d at 539.
80. See id. at 541.
81. See TEX. Bus. & COM. CODE ANN. § 17.45(4) (Vernon Pamph. Supp. 1986).
82. Id. § 17.45(1).
83. United Postage Corp. v. Kammeyer, 581 S.W.2d 716, 721 (Tex. Civ. App.-Dallas
1979, no writ) (citing WEBSTER'S NEW INT'L DICTIONARY (2d ed., unabridged 1941».
84. 603 S.W.2d 169 (Tex. 1980).
85. Id. at 174.
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DTPA coverage are stock certificates,86 securities,87 accounts receivable,88 bills and notes,89 certificates of deposit,9° documents of title,91
choses in action,92 and other "evidence of incorporeal rights. "93
Services are defined by the DTPA as "work, labor, or service
purchased or leased for use, including services furnished in connection
with the sale or repair of goods. "94 The term "service" is also
defined as "[a]ction or use that furthers some end or purpose:
conduct or performance that assists or benefits someone or something: deeds useful or instrumental toward some object. "95 In the
banking context, services are more often the foundation of the
transaction.
The only actions which have been clearly held not to constitute
services are the mere extension of credit,96 the mere purchase of a
certificate of deposit,97 the making and accepting of ordinary deposits,98 the proceeds of an insurance policy,99 and the purchase of
86. Swenson v. Engelstad, 626 F.2d 421, 428 (5th Cir. 1980).
87. Portland Say. & Loan Ass'n v. Bevill, Bresler & Schulman Gov't Sec., Inc., 619
S.W.2d 241, 245 (Tex. Civ. App.-Corpus Christi 1981, no writ).
88. Snyders Smart Shop, Inc. v. Santi, Inc., 590 S.W.2d 167, 170 (Tex. Civ. App.Corpus Christi 1979, no writ).
89. See Swenson, 626 F.2d at 428 (citing Cowen v. First Nat'l Bank, 94 Tex. 547, 551,
63 S.W. 532, 533 (1901».
90.
91.
[d.
93.
[d.
Portland Say. & Loan Ass'n, 619 S.W.2d at 245 (citing TEX. Bus. & COM. CODE
ANN. § 9.105(a)(8) (Tex. vcq (Vernon Supp. 1986».
92. Swenson, 626 F.2d at 428.
94. TEX. Bus. & COM. CODE ANN. § 17.45(2) (Vernon Pamph. Supp. 1986).
95. Farmers & Merchants State Bank v. Ferguson, 605 S.W.2d 320, 324 (Tex. Civ. App.Fort Worth 1980), rev'd on other grounds, 617 S.W.2d 918 (Tex. 1981) (quoting Riverside,
603 S. W.2d at 174 and Van zandt v. Fort Worth Press, 359 S.W.2d 893, 895 (Tex. 1962».
96. Riverside, 603 S. W.2d at 174.
97. First State Bank v. Chesshir, 613 S.W.2d 61, 62 (Tex. Civ. App.-Amarillo 1981),
rev'd on other grounds, 620 S.W.2d 101 (Tex. 1981) (where the plaintiff alleged only that the
certificate of deposit was a service). But cf. First Fed. Say. & Loan Ass'n v. Ritenour, 704
S. W.2d 895, 899 (Tex. App.-Corpus Christi 1986, writ ref'd n.r .e.)(where the plaintiffs
successfully proved that they sought and obtained other services, such as advice and counseling,
with the purchase of the certificate of deposit); see supra notes 67-75 and accompanying text.
98. Genico Distrib., Inc. v. First Nat'l Bank, 616 S.W.2d 418, 420 (Tex. Civ. App.Texarkana 1981, writ ref'd n.r.e.). But cf. La Sara Grain Co. v. First Nat'l Bank, 673 S.W.2d
558, 564 (Tex. 1984) and Farmers & Merchants State Bank v. Ferguson, 605 S.W.2d 320, 324
(Tex. Civ. App.-Fort Worth 1980), rev'd on other grounds, 617 S.W.2d 918 (Tex. 1981)
(both cases holding that the bank provides a service by maintaining a checking account for a
customer where the customer sued for wrongful dishonor).
99. English v. Fischer, 660 S.W.2d 521, 524 (Tex. 1983).
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a note secured by a deed of trust. 100 Actions which have been held
to constitute services include: 101 Checking accounts,102 advice regarding certificates of deposit,103 preparation of documents,l04 providing
insurance, 105 pro~essing title documents, I(J6 and loan brokerage. 107
Other actions which mCiY be servi~esl08 include filling out, investigating, and processing loan applications,l09 financial counseling,11O processing a 10an,111 paying a customer's monthly bills by automatic
withdrawal,1I2 overdraft protection,113 escrow services,114 commissions
on securities transactions, I 15 assistance in completing tax forms,116
100.
Thompson v. First Austin Co., 572 S.W.2d 80, 81-82 (Tex. Civ. App.-Fort Worth
writ ref'd n.r.e. per curiam, 22 Tex. Sup. CL J. 240 (Feb. 28, 1979). The court, holding
that the Thompsons had not purchased a service, stated:
The provisions in the deed of trust are for the benefit of First Austin [the lender)
in securing repayment of its loan and the options provided therein are First Austin's.
Such provisions apply to the Thompsons only in the sense that they provided for
them to perform their duties in return for what they had already received in fullthe money to pay for their house.
Id. at 82.
101. See generally Sheehan, How the DTPA Affects Banks and Other Lending Institutions,
SUING, DEFENDING & NEGOTIATING WITH BANKS & OTHER FINANCIAL INSTITUTIONS, STATE BAR
OF TEXAS INST. (1986); Neely, Consumer Counterclaims, SUING, DEFENDING & NEGOTIATING
WITH BANKS & OTHER FINANCIAL INSTITUTIONS, STATE BAR OF TEXAS INST. (1984) (both
discussing the application of the Texas DTPA to banking institutions).
102. La Sara Grain Co. v. First Nat'l Bank, 673 S.W.2d 558, 564 (Tex. 1984); Farmers &
Merchants State Bank v. Ferguson, 605 S.W.2d 320, 324 (Tex. Civ. App.-Fort Worth 1980),
rev'd on other grounds, 617 S.W.2d 918 (Tex. 1981).
103. First Fed. Say. & Loan Ass'n v. Ritenour, 704 S.W.2d 895, 899 (Tex. App.-Corpus
Christi 1986, writ ref'd n.r.e.). But cf. First State Bank v. Chesshir, 613 S.W.2d 61, 62 (Tex.
Civ. App.-AmariUo 1981), rev'd on other grounds, 620 S.W.2d 101 (Tex. 1981) (holding that
the purchase of a certificate of deposit is not the purchase of a "service").
104. First Texas Say. Ass'n v. Stiff Properties, 685 S.W.2d 703, 705 (Tex. App.-Corpus
Christi 1984, no writ).
105. Juarez v. Bank of Austin, 659 S.W.2d 139, 142 (Tex. App.-Austin 1983, writ ref'd
n.r.e.); McNeill v. McDavid Ins. Agency, 594 S.W.2d 198,202 (Tex. Civ. App.-Fort Worth
1980, no writ).
106. Fortner v. Fannin Bank, 634 S.W.2d 74, 76 (Tex. App.-Austin 1982, no writ).
107. Mercantile Mortgage Co. v. University Homes, Inc., 663 S.W.2d 45, 47-48 (Tex.
App.-Houston [14th DisL) 1983, no writ); Lubbock Mortgage & Inv. Co. v. Thomas, 626
S.W.2d 611, 613 (Tex. App.-EI Paso 1981, no writ).
108. See supra text accompanying note 94.
109. See Riverside, 603 S.W.2d at 175.
110. See id.
III. See id.
112. Neely, supra note 101, at G-15.
113. Id.
114. Id.
115. Id.
116. Id.
1978),
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and cash draw rights on credit cards. 117 A bank customer could argue
that care for and liquidation in a commercially reasonable manner
of collateral securing a loan is a "service" which the bank provides
in secured lending transactions. 1I8 Financial intermediation is another
potential service. 119 The range of possibilities is limited only by the
skill of attorneys who can artfully frame the transaction through
pleading and proof.
To determine if goods or services are involved, Texas courts
utilize an "objective" or "purpose" test that focuses on the intent
of the bank customer. I2O In other words, the courts look to see if
the "objective" or "purpose" of the bank customer in the transaction
was the purchase or lease of a good or service. The Texas Supreme
Court, in La Sara Grain Co. v. First National Bank,121 stated that
"a lender may be subject to a DTPA claim if the borrower's
'objective' is the purchase or lease of a good or service thereby
qualifying the borrower as a consumer." 122
The application of the "purpose" test is well-illustrated by
Knight v. International Harvester Credit Corp. 123 There, the plaintiff's
purpose was to purchase a good-a dump truck. 124 The extension of
credit by the lender was only one part of a transaction in which the
plaintiff's purpose was to purchase a good; therefore, the plaintiff
was held to be a consumer. 125 Knight indicates that if the customer's
ultimate purpose in entering into a transaction in which the bank
1l7. Id.
118. A similar argument could be made by a debtor about the "services" of a trustee
under a deed of trust. Such an argument was disfavored. however, in Thompson v. First
Austin Co.• 572 S.W.2d 80 (Tex. Civ. App.-Fort Worth 1978), writ ref'd n.r.e. per curiam,
22 Tex. Sup. Ct. J. 24 (Feb. 28, 1979). The court reasoned that the debtors did not purchase
services with the note and deed of trust, but rather, used the note and deed of trust to
purchase the use of money. Id. at 81-82.
119. See infra text accompanying notes 232-70.
120. See La Sara Grain Co. v. First Nat' I Bank, 673 S.W.2d 558, 566-67 (Tex. 1984);
Martin v. Lou Poliquin Enter., Inc., 696 S.W.2d 180, 183-84 (Tex. App.-Houston [14th
Dist.) 1985, writ ref'd n.r.e.); Irizarry v. Amarillo Pantex Fed. Credit Union, 695 S.W.2d 91,
92 (Tex. App.-Amarillo 1985, no writ); First Texas Sav. Ass'n v. Stiff Properties, 685 S.W.2d
703, 705-06 (Tex. App.-Corpus Christi 1984, no writ). The "purpose" test is also referred
to as the "objective" test. Use of that term could lead to confusion because, while it is a test
for the customer's objective, it is a "subjective" test.
121. 673 S.W.2d 558 (Tex. 1984).
122. Id. at 566.
123. 627 S.W.2d 382 (Tex. 1982).
124. Id. at 388-89.
125. Id.
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becomes involved is to "seek or acquire by purchase or lease" any
good, consumer status may be conferred. Purchase money loans thus
subject a bank, whose only involvment in the transaction is as a
lender, to potential DTPA liability. 126
The same rationale has been applied to services. For example,
in Farmers & Merchants State Bank v. Ferguson,127 the plaintiff's
purpose was to receive the bank's "services" in the form of maintaining a checking account. 128 Seeking or acquiring services establishes
the customer's status as a consumer under the DTPA.'29
C.
Sought or Acquired by Purchase or Lease
The second element of the consumer status test is whether the
goods or services were sought or acquired by purchase or lease. l3o A
conflict has developed in the cases because this inquiry has been
made from two perspectives. The earlier approach involved focusing
on the "purchase or lease" aspect of a given transaction to see
whether valuable consideration had passed. 131 Under this approach,
the cases made the transfer of valuable consideration a prerequisite
to consumer status. 132 The newer approach focuses on the "seeks or
acquires" aspect and requires an inquiry into the customer's intent
126. See La Sara Grain Co., 673 S.W.2d at 566-67; Knight, 627 S.W.2d at 389; Irizarry
v. Amarillo Pantex Fed. Credit Union, 695 S.W.2d 91, 92 (Tex. App.-Amarillo 1985, no
writ); First Texas Say. & Loan Ass'n v. Stiff Properties, 685 S.W.2d 703, 705-06 (Tex. App.Corpus Christi 1984, no writ).
127. 605 S.W.2d 320 (Tex. Civ. App. - Fort Worth 1980), modified, 617 S.W.2d 918 (Tex.
1981).
128. Jd. at 324. The Texas Supreme Court ultimately found that the plaintiff was not a
consumer because the applicable earlier version of the DTPA had a "commercial or business
use" exclusion which was later deleted in 1977. 617 S.W.2d at 920.
129. Riverside, 603 S.W.2d at 173.
130. TEX. Bus. & COM. CODE ANN. § 17.45(4) (Vernon Pamph. Supp. 1986)
131. See Longview Sav. & Loan Ass'n v. Nabours, 673 S. W.2d 357, 362 (Tex. App.Texarkana 1984), aiI'd, 700 S.W.2d 901, 905 (Tex. 1985); Juarez v. Bank of Austin, 659
S.W.2d 139, 142 (Tex. App.-Austin 1983, writ ref'd n.r.e.); Fortner v. Fannin Bank, 634
S.W.2d 74, 76 (Tex. App.-Austin 1982, no writ); Bancroft v. Southwestern Bell Tel. Co.,
616 S.W.2d 335, 337 (Tex. Civ. App.-Houston [14th Dist.) 1981), overruled, Martin v. Lou
Poliquin Enter., Inc., 696 S.W.2d 180, 182, 184 (Tex. App.-Houston [14th Dist.) 1985, writ
ref'd n.r.e.); Rutherford v. Whataburger, Inc., 601 S.W.2d 441, 444 (Tex. Civ. App.-Dallas
1980, writ ref'd n.r.e.); Hall v. Bean, 582 S.W.2d 263,265 (Tex. Civ. App.-Beaumont 1979,
no writ); Exxon Corp. v. Dunn, 581 S.W.2d 500, 501 (Tex. Civ. App.-Dallas 1979, no writ);
Thompson v. First Austin Co., 572 S.W.2d SO, 82 (Tex. Civ. App.-Fort Worth 1978), writ
ref'd n.r.e. per curiam, 22 Tex. Sup. Ct. J. 240 (Feb. 28, 1979).
132. See supra note 131 and accompanying text.
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in the transaction without requiring evidence of a transfer of valuable
consideration. 133 This trend waS begun by Martin v. Lou Poliquin
Enterprises, Inc. '34 That case expressly held that valuable consideration was not required for DTPA consumer status. 135
The Martin holding was based upon three factors: (I) the requirement that the DTPA be liberally construed; (2) the legislative
intent; and (3) the development of the "purpose" test for determining
consumer Status. 136 In deriving legislative intent, the Martin court's
emphasis was on the words "seeks or acquires" and other provisions
of the DTPA not requiring an actual purchase. 137 The court also
believed that the "purpose" test for determining consumer status,
articulated by the Texas Supreme Court in the La Sara case,138 had
changed the focus of inquiry in deciding consumer status. 139
An important factor in qualifying as a DTPA consumer, then, is
whether a person intended to purchase or lease the good.s or
services in question, or more succinctly, whether that person's
objective was to purchase or lease. The La Sara opinion makes
no reference to valuable consideration as a requirement for consumer status. Although the necessity of valuable consideration
was not squarely before the Supreme Court under the circumstances of that case, we believe La Sara illustrates to some degree the
current trend of the supreme court's reasoning with respect to
this issue. '40
As an alternative to the passing of valuable consideration as a
prerequisite, the Martin court established a test requiring that a
consumer must initiate the purchasing or leasing process in good
faith. 141 Under this test, the consumer must (I) approach the banking
133. Kennedy v. Sale, 689 S.W.2d 890, 892 (Tex. 1985); Martin v. Lou Poliquin Emer.,
Inc., 696 S.W.2d 180, 182-85 (Tex. App.-Houston [14th Dist.) 1985, writ ref'd n.r.e.);
Dickson Distrib. Co. v. LeJune, 662 S.W.2d 693,695 (Tex. App.-Houston [14th Dist.) 1983,
no writ).
134. 696 S.W.2d 180 (Tex. App.-Houston [14th Dis!.) 1985, writ ref'd n.r.e.).
135. [d. at 182.
136. [d. at 184; see also supra notes 120-29 and accompanying text.
137. 696 S.W.2d at 183-84. As an example, the court cited TEX. Bus. & COM. CODE ANN.
§ 17.46(b)(I0) (Vernon Pamph. Supp. 1986), which declares unlawful "bait and switch"
advertising schemes and does not require a purchase to instill consumer status. 6% S. W.2d at
184.
138. 673 S. W.2d 558; see supra notes 120-29 and accompanying text.
139. 696 S.W.2d at 183-84.
140.
141.
[d.
[d. at 184.
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institution "as a willing buyer with the subjective intent" of purchasing or leasing, and (2) possess "some credible indicia of the
capacity to consummate the transaction" with consideration. '42
The Martin decision was a departure from the older cases which
made the transfer of valuable consideration a prerequisite to consumer status by emphasizing the "purchase or lease" aspect of the
statutory definition. 143 For example, the Martin court overruled its
own previous decision in Bancroft v. Southwestern Bell Telephone
CO.,I44 which had almost identical facts but opposite results on
consumer status. 145 Most of those older cases can nevertheless be
reconciled with Martin's two-part "good faith intent" test. 146
The Martin "good faith intent" test does not change the rule
that a gratuitous act may not form the basis of a claim under the
DTPA.147 For example, Rutherford v. Whataburger, Inc. 148 and Hall
v. Bean l49 both held that winners of contests were not consumers by
virtue of the prizes they won, because they did not seek the prizes
by purchase or lease. 150 Likewise, in Russell v. Hartford Casualty
Insurance Co., 151 the plaintiffs sued the insurance company for
cancelling a gratuitous rent-car arrangement following a car accident,152 but the court held that the plaintiffs did not purchase or
lease the rent-car so they were not DTPA consumers. 153
142. Id. at 184-85. The court placed the burden of proof on the plaintiff-buyer to prove
that he initiated the purchasing process. Jd. at 185. The DTPA defendant-seller. however,
must first challenge the plaintiff-buyer's status. Jd.
143. See supra note 131 and accompanying text.
144. 616 S.W.2d 335 (Tex. Civ. App.-Houston [14th Dis!.) 1981, no writ), overruled.
Martin v. Lou Poliquin Enter., Inc., 696 S.W.2d 180, 182, 184 (Tex. App.-Houston [14th
Dis!.) 1985, writ ref'd n.r.e.).
145. Both Martin and Bancroft involved suits by persons who had contracted to have
advertisements placed in the defendants' telephone directories. When the ads did not appear.
the plaintiffs sued. In both cases. the plaintiff had not paid for the ads. The plaintiff was
found to be a consumer in Martin. but not in Bancroft. Martin, 696 S.W.2d at 182; Bancroft,
616 S.W.2d at 336.
146. See supra note 142 and accompanying text.
147. See Rutherford v. Whataburger. Inc., 601 S.W.2d 441. 444 (Tex. Civ. App.-Dallas
1980, writ ref'd n.r.e.); HaD v. Bean, 582 S.W.2d 263. 265 (Tex. Civ. App.-Beaumonl 1979,
no writ).
148. 601 S.W.2d 441 (Tex. Civ. App.-Dallas 1980, writ ref'd n.r.e.).
149. 582 S.W.2d 263 (Tex. Civ. App.-Beaumont 1979, no writ).
150. Rutherford. 601 S.W.2d at 444; Hall, 582 S.W.2d at 265.
151. 548 S.W.2d 737 (Tex. Civ. App.-Austin 1977, writ refd n.r.e.).
152. Jd. at 741.
153.
Id.
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In Longview Savings Association v. Nabours,154 the plaintiffs
sued the savings institution for failing to comply with the assurances
which one of its officers made to the plaintiffs, that the savings
institution did not enforce "due-on-sale" clauses in its deeds of
truSt. 155 When the plaintiffs later requested, in writing, the savings
association's written consent to a wrap-around sale, the savings
association refused. 156 The plaintiffs nevertheless consummated the
wrap-around sale leading to the acceleration of the note and posting
of foreclosure.1 57 The Nabours court held that the plaintiffs had
requested the savings association to gratuitously consent to the transaction and were thus not consumers. 158
In Thompson v. First A ustin Co., 159 the plaintiffs sued the
mortgage company for failing to comply with a letter it wrote
promising not to foreclose a deed of trust lien against the plaintiffs'
home while they tried to sell the home. l60 The court first held that
the note and deed of trust were not services, but rather that the
plaintiffs "purchased the use of money [which is not a "good or
service"] with the 'note and deed of trust.' "161 The court then went
on to state that an agreement by the plaintiffs to pay what they
already owed was no consideration for an extension of a note
payment. 162 That statement not only suggested that a new consideraton was required, but it was inconsistent with the holding that the
plaintiffs had "purchased" the use of money.J63 Since the controlling
determination was that the plaintiffs purchased the use of money,
which was not a service, the discussion of consideration could be
regarded as dictum. Furthermore, the Thompson holding is in conflict
with the more recent case of Fortner v. Fannin Bank, which held
that interest on a loan was consideration for the bank's title processing services. l64 The Thompson result is best explained as another
673 S.W.2d 357 (Tex. App.-Texarkana 1984), a/I'd, 700 S.W.2d 901 (Tex. 1985).
Id. at 359-60.
Id.
Id. at 360.
Id. at 362.
159. 572 S.W.2d 80 (Tex. Civ. App.-Fort Worth 1978), writ ref'd n.r.e. per curiam, 22
Tex. Sup. Cl. J. 240 (Feb. 28, 1979)
160. Id. at 81.
161. Id. at 82 (emphasis added).
162. Id.
163. Id.
164. Fortner v. Fannin Bank, 634 S.W.2d 74, 77 (Tex. App.-Austin 1982, no writ).
154.
155.
156.
157.
158.
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gratUlUous transaction case in which the court inadvisedly focused
on considering the service, rather than whether the plaintiffs sought
to acquire a service.
The Martin "good faith intent" test would not change the result
in any of the "gratuitous act" cases because the plaintiffs did not
have the subjective intent to purchase or lease the goods or services
which formed the basis of the complaint. 165
Juarez v. Bank of Austin '66 and Fortner l67 both assumed that
consideration was necessary for consumer status, without specifically
addressing that issue. In Juarez, the court decided that the plaintiff,
who took out two installment loans and purchased disability insurance
from the bank in the same transaction, was a consumer because the
interest paid on the loan and the premium paid for the insurance
were consideration for the "service" of credit insurance. 168 The result
would be the same under the Martin "good faith intent" test because
the plaintiff had the subjective intent to purchase the insurance and
the capacity to purchase it, both of which were manifested by the
plaintiff actually paying for the insurance. '69 It was unnecessary for
that court to base its determination on consideration.
In Fortner, the court of appeals decided that interest on a loan
was consideration not only for the extension of credit, but also for
the bank's promise to process car title papers. I7O The bank did not
prove, as a matter of law, that the plaintiff was not a "purchaser,"
and thus not a "consumer," because the plaintiff paid consideration
in the form of interest. 171 Under the Martin "good faith intent" test,
the plaintiff had the subjective intent to purchase the bank's services
and apparently possessed "credible indicia" of the capacity to pay
interest. Under a Martin analysis, therefore, the real issue in Fortner
165. [d. It should also be noted that the Texas Supreme Court, when it refused to review
the Thompson decision, stated that it was reserving the question of whether the OTPA could
apply to a loan transaction as part of its decision in Riverside, which could be interpreted as
undermining the precedential value of Thompson. 22 Tex. S. Ct. J. 240 (Feb. 28, 1979) (per
curiam). Riverside ultimately decided that money was not a "good" and the mere extension
of credit was not a "service" under the OTPA. Riverside, 603 S.W.2d at 174; see supra notes
54-75 and accompanying text.
166. 659 S.W.2d 139, 142 (Tex. App.-Austin 1983, writ ref'd n.r.e.).
167. 634 S.W.2d at 77.
168. Juarez, 659 S.W.2d at 142.
169. Id. at 140.
170. Fortner, 634 S. W.2d at 77.
171. [d. at 75-77.
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would not be whether there was any consideration, but whether
processing title papers was a "service. "172
One case cannot be easily reconciled with Martin. In Exxon
Corp. v. Dunn,173 the plaintiff took his car to the defendant's carcare center for gasoline and to have the battery recharged. 174 When
he later came back to pick up his car and pay for the services, he
learned that the car had overheated. 175 The next day he noticed that
the air conditioner was not working, so he returned it to the center,
which unsuccessfully attempted to repair the air conditioning. 176 Exxon
did not charge the plaintiff, nor did he pay for the attempts to repair
the unit. l77 The court noted that the plaintiff failed to elicit evidence
sufficient to establish that the manner in which Exxon recharged the
battery was the producing cause of the damage to the air conditioner;
however, the decision was not made upon that ground. 178 The court
held, simply, that since the plaintiff "did not 'purchase or lease' the
repairs, he [was] not a consumer within the definition of section
17.45(4)."179
Under the Martin "good faith intent" test,.80 the result would
have been different because the plaintiff apparently did have the
subjective intent to purchase Exxon's repair services and there was
nothing to indicate that he did not possess some "credible indicia"
of the capacity to consummate the transaction with consideration;
therefore, he would have qualified as a consumer. The Martin court
disapproved of the Exxon case by noting its conflict. 181 Perhaps the
Exxon decision should have rested on the court's finding that there
was no evidence to sustain the trial court's judgment that Exxon's
actions were the producing cause of the plaintiff's damages. 182
172.
173.
174.
175.
176.
177.
178.
179.
The court held that processing title papers was a "service." [d. at 76.
581 S.W.2d 500 (Tex. Civ. App.-Dallas 1979, no writ).
[d. at 500.
[d.
[d.
[d.
[d. at 501.
[d. (citing Thompson v. First Austin Co., 572 S. W.2d 80, 81-82 (Tex. Civ. App.-
Fort Worth 1978), writ ref'd n.r.e. per curiam, 22 Tex. Sup. Ct. J. 240 (Feb. 28, 1979);
Russell v. Hartford Casualty Ins. Co., 548 S.W.2d 737 (Tex. Civ. App.-Austin 1977, writ
ref'd n.r.e.».
180. See supra notes 135-42 and accompanying text.
181. 696 S.W.2d at 183 n.4.
182. 581 S.W.2d at 501.
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21
Despite the seeming conflict in the cases on whether the transfer
of valuable consideration is a prerequisite to consumer status, the
Martin court's decision is sound and does recognize the recent trend
which looks to the customer's subjective intent '83 and the statutory
language. Pleading and proving consideration may not be required
after Martin; however, in light of the still existing case law to the
contrary, it is recommended that consideration be pled and proven
whenever possible.1 84
D.
Must Form the Basis of the Complaint
Another basic element of DTPA standing as a consumer is that
the goods or services sought or acquired by purchase or lease must
form the basis of the complaint. 18s This element is not nearly so
troublesome as the requirement that a customer satisfy the definition
of a consumer. This "basis" test is not explicitly required by the
statute, but instead is a judicially articulated causation requirement. 186
The causation requirement of the "basis" test is to establish only
DTPA standing (consumer status), not liability.
The "basis" test is well illustrated by English v. Fischer. 18 ? That
case involved a dispute between a mortgagor and a mortgagee over
the benefits of a homeowner's fire insurance policy.188 The deed of
trust gave the mortgagee the right to any such proceeds. 189 The
mortgagor claimed that the mortgagee committed a deceptive act or
183. Martin, 696 S.W.2d at 184; see also supra notes 133-46 and accompanying text.
184. In so pleading and proving, the bank customer should note the holding in Fortner
that interest paid on a loan is consideration for the bank's collateral lending services. 634
S. W .2d at 77. The Martin court also pointed out that valuable consideration need not be
pecuniary consideration, but "may exist in the form of a right, interest, profit, or benefit to
one party or a forebearance, loss, responsibility, or detriment to the other party." 696 S. W.2d
at 185 n.7.
185. Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 539 (Tex. 1981); Mercantile
Mortgage Co. v. University Homes, Inc., 663 S.W.2d 45, 47 (Tex. App.-Houston [14th Dist.)
1983, no writ); English v. Fischer, 649 S.W.2d 83, 92 (Tex App.-Corpus Chtisti 1982), rev'd
on other grounds, 660 S.W.2d 521 (Tex. 1983).
186. Section 17.50(a) states that "[a) consumer may maintain an action where any of the
following constitute a producing cause of actual damages .... " TEX. Bus. & COM. CODE
ANN. § 17.50(a) (Vernon Pamph. Supp. 1986) (emphasis added). That section applies to the
question of liability and not to whether the claimant is a "consumer."
187. 649 S.W.2d 83 (Tex. App.-Corpus Christi 1982), rev'd on other grounds, 660 S.W.2d
521 (Tex. 1983).
188. [d. at 85.
189. [d. at 86.
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practice by representing that the note and deed of trust gave the
mortgagee a right to accelerate which the mortgagee did not have. '90
The court held that the mortgagor was not a consumer as to the
mortgagee~191 The mortgagor was a consumer in regard to the purchase of the house in 1967. 192 However, the alleged misrepresentation
of the right to accelerate in 1979 did not arise out of the 1967
purchase transaction, but instead came from the actions taken by
the mortgagee in 1979"93 Thus, the purchase of the house did not
form the basis of the complaint, so the mortgagor was not a
consumer. 194
Another example of how the "basis" test operates is found in
Wynn v. Kensington Mortgage & Finance Corp.195 The lender was
sued along with the manufacturers of a mobile home because there
were excessive levels of formaldehyde in the construction materials. 196
The plaintiff claimed that the bank was a proper defendant because
it was involved in the purchase transaction as a lender .197 While the
bank's involvement in the purchase of the mobile home would have
been sufficient to establish that the plaintiff was a "consumer" as
to the bank,198 the basis of the complaint - that the mobile home
was a defective product - did not arise out of any acts or practices
on the part of the bank. l99
The Wynn case should be compared with Knight v. International
Harvester Credit Corp.,2oo where the Texas Supreme Court held that
the purchaser of a truck was a DTPA consumer as against the
lender. 201 In Knight, however, the basis of the complaint arose out
of the acts or practices of the defendant-lender in the transaction
upon which the plaintiff-buyer sued. 202
[d.; see TEX. Bus. & COM. CODE ANN. § 17.46(12) (Vernon Pamph. Supp. 1986).
649 S.W.2d at 92.
192. [d. The supreme court, in affirming that part of the decision, noted that insurance
proceeds were neither goods nor services, but merely money. 660 S. W.2d at 524.
193. 649 S.W.2d at 92.
194. [d.
195. 697 S.W.2d 47 (Tex. App.-Austin 1985, no writ).
196. [d. at 48.
190.
191.
197.
198.
[d.
See supra note 133 and accompanying text.
199.
200.
697 S.W.2d at 49.
627 S.W.2d 382 (Tex. 1982).
[d. at 389.
[d. at 388-89. The plaintiff bought a truck from another defendant which was financed
201.
202.
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E.
BANKS AND THE DTPA
23
The Proper DTPA Defendant-The "Transaction" Test
Once the court determines that the customer is a consumer under
the Act and that the transaction in question forms the basis of the
complaint, the court must then determine if the banking institution
is a proper DTPA defendant. The question of whether a particular
defendant may be liable for DTPA damages is the correlative issue
to consumer status. It is also closely akin to the second element of
consumer status-the "basis" test. 203 This question can become especially important with respect to banking institutions, due to their
indirect involvement in many transactions which might subject them
to DTPA liability. 204
The statute imposes liability on "any person" who violates its
provisions. 205 A "person" is "an individual, partnership, corporation,
association, or other group, however organized. "206 In order to find
the right "person," the courts must measure the relationship between
the "person" and the "consumer. "207 The relationship between the
customer and the transaction is what determines "consumer" statuS. 208 The common element which connects the "consumer" to the
"person" to establish DTPA liability is the "transaction."
The analysis for determining if a bank is the proper "person"
is thus basically the same analysis used for determining the "consumer" status of the customer-the relationship to the transaction. 209
This can be illustrated by a comparison between two cases, Cameron
v. Terrell & Garrett, Inc. 2IO and Flenniken v. Longview Bank & Trust
by International Harvester Credit Corporation. [d. at 388. The plaintiff signed a document
entitled '''retail installment contract,' which provided: 'Purchaser hereby purchases, and seller
hereby sells ... [the dump truck) ... .' The sale was made subject to 'Additional Provisions'
printed on the reverse side of the document, one of which was the prohibited waiver clause."
[d. It was that clause which formed the basis of the plaintiff's complaint. [d.
203. See supra notes 185-202 and accompanying text.
204. An example of such a transaction is a purchase-money loan. See supra notes 123-26
and accompanying text.
205. TEX. Bus. & COM. CODE ANN. § 17.50 (Vernon Pamph. Supp. 1986).
206. [d. § 17.45(3).
207. See Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 539-41 (Tex. 1981).
208. [d. at 541; see also DeWitt v. Prudential Ins. Co., 717 S.W.2d 414, 418 (Tex. App.Houston [14th Dis!.) 1986, no writ) (court determined that plaintiff establishes his consumer
status by his relationship to a transaction and not by a contractual relationship with the
defendant).
209. [d. at 539-41; see also Flenniken v. Longview Bank & Trust Co., 661 S.W.2d 705,
707 (Tex. 1983).
210. 618 S.W.2d 535 (Tex. 1981).
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CO.211 In Cameron, the Texas Supreme Court held that "[c]onsumer
is defined in section 17.45(4) only in terms of a person's relationship
to a transaction in goods or services. It does not purport to define
a consumer in terms of a person's relationship to the party he is
suing."212 The same court held in Flenniken that "[i]f, in the context
of a transaction in goods or services, any person engages in an
unconscionable course of action which adversely affects 213 a consumer, that person is subject to liability under the DTPA."214
In Cameron, the plaintiff home buyers sued the sellers' real
estate agent for misrepresenting the square footage of the home. 215
The defendant argued that for the buyers to have consumer status
as to the defendant agency, there must be some type of contractual
privity.216 The defendant contended that a consumer must seek or
acquire goods or services furnished by the person he is suing to have
standing under the DTPA.217 The Cameron court disagreed, noting
that privity requirements had been eliminated from negligence suits,
implied warranty actions, and for the most part, strict liability suits. 218
The court went on to find the defendant liable. 219
Flenniken was a case where the plaintiffs entered a mechanic's
lien contract for the construction of a home, which was financed by
assigning that note and its deed of trust to the defendant bank. 220
The builder abandoned the project before it was completed and the
bank later foreclosed on the unfinished home. 221 The plaintiffs sued
the bank, alleging that it had engaged in an unconscionable course
of action. 222 The supreme court held that the plaintiffs were con-
211. 661 S.W.2d 705 (Tex. 1983).
212. 618 S.W.2d at 541.
213. TEX. Bus. & COM. CODE ANN. § 17.50(a) (Vernon Pamph. Supp. 1986) was amended
in 1979 from reading "[a) consumer may maintain an action if he has been adversely affected
by any of the following ...... to "[a) consumer may maintain an action where any of the
following constitute a producing cause of actual damages .... " Act of June 13. 1979. ch.
603. § 4, 1979 Tex. Gen. Laws 1329 (emphasis added).
214. 661 S.W.2d at 707; see also First Texas Say. Ass'n v. Stiff Properties. 685 S.W.2d
703, 705 (Tex. App.-Corpus Christi 1984, no writ) (quoting Flenniken).
215. 618 S.W.2d at 537.
216. [d. at 539.
217. [d.
218. Id. at 541.
219. Id.
220. 661 S.W.2d at 706.
221. [d.
222. [d.
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BANKS AND THE DTPA
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25
sumers as to the bank. 223 The court held that treating the assignment
of the note and deed of trust as a separate transaction erroneously
suggested that the plaintiffs "were required to seek or acquire goods
or services from the bank .... "224 The court further held that there
was no requirement that the deceptive or unconscionable act occur
simultaneously with the sale or lease which formed the basis of the
complaint. 225 As pointed out earlier, however, the deceptive or unconscionable act must occur in the same transaction which establishes
the customer as a consumer. 226
The "transaction" test was also applied in Knight v. International Harvester Credit Corp., 227 where the court found that the
defendant lender was so "inextricably intertwined" in the sales
transaction as to be equally responsible. 228 By contrast, in Fuller v.
Preston State Bank,229 the court held that the plaintiff debtor was
not a consumer because "[t]he bank's only connection with the
transaction was as a lender and as a creditor attempting to secure
its debt. "230 The deceased debtor's wife had sued the bank which
foreclosed on her home, alleging that the conveyance of the home
to her son was a sham transaction made in order to secure a preexisting, past-due debt that her late husband owed to the bank. 231
III.
FINANCIAL INTERMEDIATION AS A "SERVICE"
A.
Intermediation
The problem of applying the DTPA to banking institutions has
been that in the past the courts have not recognized the everyday
activities of accepting deposits and making loans performed by banks
223. [d.
224. [d. at 707. The note and the deed of trust were originally executed in favor of the
home builder. The homebuilder <lssigned both instruments to the bank on the same day. The
appellate court treated this assignment as a separate transaction from the plaintiff's original
agreement with the builder. [d. at 706-07.
225. [d. at 707. There is also not a requirement of privity between a plaintiff and defendant
in establishing a plaintiff's status as a consumer. [d.
226. See supra notes 187-202 and accompanying text.
227. 627 S.W.2d 382 (Tex. 1982).
228. [d. at 389.
229. 667 S.W.2d 214 (Tex. App.-Dallas 1983, writ ref'd n.r.e.).
230. [d. at 219.
231. [d. at 216.
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or banking institutions as "services. "232 The definition of "services"
has been established by the Texas Supreme Court as "action or use
that furthers some end or purpose: conduct or performance that
assists or benefits someone or something: deeds useful or instrumental toward some object."233 Having established that service is an
activity on behalf of one party by another, the courts have not
inquired into the economic details of the actual banking function.
Likewise, attorneys have not raised the issue.
Banks and banking institutions serve as intermediaries between
those with money-depositors, and those in need of money-borrowers. 234 Throughout this discussion, the term "depositor" will be used
generically to refer to investors, credit union shareholders, and similar
funding sources for financial institutions. The term "customer" is
used to apply to both borrowers and depositors as consumers of
banking services.
Intermediation may be defined as the act of "coming between. "235 An intermediary serves as a conduit for the orderly flow
of money between two individuals or entities by acting as the middleman, intermediate agent, or agency. 236 The service of financial
intermediation is most readily evident when it is not working properly.
Therefore, a good definition of "disintermediation" has evolved
which is instructive on the nature of the relationship between banks,
credit, and the economy. "Disintermediation is the term applied to
a situation in which the normal flow of funds through financial
institutions is disrupted because of sudden switches in the preferences
of the nonfinancial sector toward direct investment in financial
instruments.' '237
232. Riverside Nat'l Bank v. Lewis. 603 S.W.2d 169. 174-75 (Tex. 1980); First State Bank
v. Chesshir. 613 S.W.2d 61. 62 (Tex. Civ. App.-Amarillo 1981). rev'd on other grounds, 620
S.W.2d 101 (Tex. 1981); see supra notes 54-64 and accompanying text.
233. Riverside, 603 S.W.2d 169, 174 (Tex. 1980) (quoting Van Zandt v. Fort Worth Press,
359 S.W.2d 893, 895 (Tex. 1962». In Riverside, the term "service" was held to include "an
activity on behalf of one party by another. This characterization indicates that 'services' is
similar in nature to work or labor." [d.
234. D. GREENWALD, ENCYCLOPEDIA OF ECONOMICS 247 (1982). "Financial institutions serve
as intermediaries for individual and nonfinancial corporations that typically changed the bulk
of lheir investible funds into the credit market." [d. "Intermediation: The investment process
in which savers and investors place funds in financial instilutions ... to make loans and other
investments." J. ROSENBERG, DICTIONARY OF BANKING & FINANCIAL SERVICES 369 (2d ed.
1985).
235. WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY 1180 (1976).
236. RANDOM HOUSE DICTIONARY OF THE ENGLISH LANGUAGE 742 (1966).
237. D. GREENWALD, ENCYLOPEDLA OF ECONOMICS 247 (1982).
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BANKS AND THE DTPA
27
Financial intermediation is not a new concept. Indeed, it was
well-understood when American banking began. Alexander Hamilton
understood intermediation and discussed it in his proposal to Congress for a national bank in 1790.
The following are among the principle advantages of a bank:
First. The augmentation of the active or productive capital of a
country. Gold and silver, when they are employed merely as the
instruments of exchange and alienation, have not been improperly
denominated dead stock; but when deposited in banks, to become
the basis of a paper circulation, which takes their character and
place, as the signs or representatives of value, they then acquire
life, or, in other words, an active and productive quality ....
[A depositor's] money, thus deposited or invested, is a fund upon
which himself and others can borrow to a much larger amount.
It is a well-established fact, that banks in good credit can circulate
a far greater sum than the actual quantum of their capital in gold
and silver. ... This faculty is produced in various ways. [First],
a great proportion of the notes which are issued, and pass currently
as cash, are indefinitely suspended in circulation, from the confidence which each holder has, that he can, at any moment, turn
them into gold and silver. [Second], every loan which a bank
makes is, in its first shape, a credit given to· the borrower on its
books, the amount of which it stands ready to pay, either in its
own notes, or in gold and silver, at his option. But, in a great
number of cases, no actual payment is made in either. The
borrower, frequently, by check or order, transfers his credit to
some other person, to whom he has a payment to make; who, in
his turn, is as often content with a similar credit, because he is
satisfied that he can, whenever he pleases, either convert it into
cash, or pass it to some other hand, as an equivalent for it. And
in this manner the credit keeps circulating, performing in every
stage the office of money, till it is extinguished by a discount
with some person who has a payment to make to the bank, to
The motivation for such switches is economic-more specifically, interest rates in
the open market that exceed rates available from financial institutions by an unusual
margin. What is meant by "unusual" is open to question, but it will help to recall
that in long-term equilibrium, the intermediaries must cover all costs, including a
return on capital. Hence, some margin-[1.5) or 2 percentage points-in favor of
open-market rates over institutional rates represents the normal compensation the
market exacts for the financial intermediation service.
If open-market rates rise above institutional rates by more than the normal margin,
competing forces will compel institutions to raise their rates in order to protect their
intermediary function.
Id. at 248.
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an equal or greater amount. Thus large sums are lent and paid,
frequently through a variety of hands, without the intervention
of a single piece of coin. [Third], there is always a large quantity
of gold and silver in the repositories of the bank, besides its own
stock, which is placed there, with a view partly to its safekeeping,
and partly to the accommodation of an institution which is itself
a sort of general accommodation . . . . [E]xperience proves, that
the money so much oftener changes proprietors than place, and
that what is drawn out is generally so speedily replaced, as to
authorize the counting upon the sums deposited, as an effective
fund, which, concurring with the stock of the bank, enables it to
extend its loans, and to answer all the demands for coin, whether
in consequence of those loans, or arising from the occasional
return of its notes. These different circumstances explain the
manner in which the ability of a bank to circulate a greater sum
than its actual capital in coin is acquired. This, however, must be
gradual, and must be preceded by a firm establishment of confidence-a confidence which may be bestowed on the most rational
grounds, since the excess in question will always be bottomed on
good security of one kind or another .... The same circumstances
illustrate the truth of the position, that it is one of the properties
of banks to increase the active capital of a country. This, in other
words, is the sum of them; the money of one individual, while
he is waiting for an opportunity to employ it, by being either
deposited in the bank for safekeeping, or invested in its stock, is
in a condition to administer to the wants of others, without being
put out of his own reach when occasion presents. This yields an
extra profit, arising from what is paid for the use of his money
itself in a state of incessant activity . . . . This additional
employment given to money, and the faculty of a bank to lend
and circulate a greater sum than the amount of its stock in coin,
are, to all purposes of trade and industry, an absolute increase
of capital. 2J8
Hamilton's thoughts were echoed almost twenty years later by
Albert Gallatin, Secretary of the Treasury, in his "Report on the
Bank" in 1809.
The profits of a bank arise from the interest received on the loans
made either to Government or to individuals; and they exceed six
per cent, or the rate of interest at which the loans are made,
238.
Hamilton,
Treasury Report on a National Bank, 1
H.
Koos & P. SAMUELSON,
230,231-34 (1977).
DOCUMENTARY HISTORY OF BANKING AND CURRENCY IN THE UNITED STATES
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BANKS AND THE DTPA
because every bank lends riot only the whole of its capital, but
also a portion of the moneys deposited for safe keeping in its
vaults, either by Government or by individuals. For every sum of
money thus deposited, the party making that deposite, either
receives the amount in bank notes, or obtains a credit on the
books of the bank. In either case, he has the same Tight at any
time to withdraw his deposite; in the first case, on the presentation
and surrender of the bank notes; in the other case, by drawing
on the bank for the amount. Bank notes and credits on the books
of the bank, arise, therefore, equally from deposites, although
the credits alone are, in common parlance, called deposites; and
the aggregate of those credits, and of the bank notes issued,
constitutes the circulating medium substituted by the banking
operations to money; for payments from one individual to another
are equally made by drafts on the bank, or by the delivery of
bank notes. Experience has taught the directors what portion of
the money thus deposited, they may lend; or, in other words,
how far they may, with safety, extend their discounts beyond the
capital of the bank, and what amount of specie it is necessary
they should keep in their vaults. The profits, and, therefore, the
dividends of a bank, will increase in proportion as the directors
will increase loans of the money deposited, and suffer the amount
of specie on hand to diminish. Moderate dividends, when not
produced by some particular cause, which checks the circulation
of bank paper, are the best evidence of the safety of the institution,
and of the wisdom of its direction. 239
A bank's utility to its customers is centered on the service of
intermediation and the benefits that customers receive from that
service. As one authority on banking has stated:
Banks are to the commercial world what arteries are to the human
system. Through them passes the vitalizing life-giving medium of
exchange, and upon their healthy condition commercial activity
and prosperity in the main depend. They substitute their own
credit which has general acceptance in the business community
for that of individuals which has only limited acceptability . . . .
Public confidence is the soul of any banking system. The banking
business itself, therefore, is in the nature of a public trust . . . .
Their purpose is to provide safe places of deposit, to aid the
239.
Gallatin, Treasury Report on the Bank, March 2, 1809, I
H.
Koos & P. SAMUElSON,
362, 363, 365-66
DOCUMENTARY HISTORY OF BANKING AND CURRENCY IN THE UNITED STATES
(1977).
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business community by loans at fixed and living rates of interest,
and to transmit money to other points through the agency of bills
of exchange . . . . Banks ... serve the interests of the public by
receiving money which depositors do not need or do not care
personally to handle by way of deposits and loaning it out at
interest to people who desire to borrow. 240
Banking institutions, as financial intermediaries, perform their
service by obtaining the funds of savers and investors in exchange
for their own liabilities. It is true, as the Corpus Christi Court of
Appeals noted in First Federal Savings & Loan Association v. Ritenour,241 that depositors may be viewed as having purchased the right
to future payment of money;242 however, there are other transactions
present as well. The depositor obtains a degree of security and
liquidity. The bank appears to pay the depositor for being allowed
to use the money, so on the surface it may appear that the depositor
is merely buying the right to future payment of the sum deposited,
plus accrued interest to be paid by the bank. 243 However, the customer
is actually buying the service of financial intermediation, of which
the payment of interest on deposits is a part.
Banks are in business for profit. Likewise, the public will not
pay for something unless they perceive some benefit to themselves.
The questions, then, are: (1) How does the banker get paid? and (2)
What is the customer paying for? Banks obtain their revenue on the
difference between the interest rates they charge on loans and the
interest rates they pay to depositors. 244 "A banker is a dealer in
capital; an intermediate party between the borrower and the lender.
He borrows from one party, and lends to another, and the difference
240. I C. ZoLLMANN, THE LAW OF BANKS AND BANKING § 64 (1936).
241. 704 S.W.2d 895 (Tex. App.-Corpus Christi 1986, writ ref'd n.r.e.).
242. [d. at 899.
243. J. ROSENBERG, DICTIONARY OF BANKING & FINANCIAL SERVICES 365 (1985) (interest is
the price paid); see also First State Bank v. Chesshir, 613 S.W.2d 61, 62 (Tex. Civ. App.Amarillo 1981), rev'd on other grounds, 620 S.W.2d 101 (Tex. 1981) (stating that the depositors
sought only right to future payment of the money plus accrued interest).
244. A. HAGGESTAD, REGULATION OF CONSUMER FINANCIAL SERVICES 27 (1981).
Commercial banks may obtain deposits or lendable funds from the public at lower
cost than such funds would otherwise be available. By providing borrowers with
funds at the time required, in appropriate amounts, and at convenient locations,
commercial banks seek higher yields than can be obtained from investments in credit
market securities. The net income of the banks is derived from the "spread" between
costs and yields on earning assets, in which payments for credit services are included.
[d.
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BANKS AND THE DTPA
31
between the terms at which he borrows and lends is the source and
measure of his profit. "245 Gross profits are earned by the banking
institution in a fashion similar to a commission earned for having
"sold" the use of funds to a borrower at a rate higher than that
demanded by the source of such funds-the depositor. The depositor
receives not only interest, but also security246 and liquidity. 247
The banking intermediary accepts deposits, usually on demand
or for short terms, and makes loans of varying terms, often on a
much longer-term basis than the deposits. 248 Based on experience, a
banking institution can predict how much reserve is needed to cover
ordinary daily business. 249 When dealing with large numbers of independent depositors, predictability of reserve requirements is quite
high. 250 A bank is therefore able to accept short term or demand
deposits and make long-term or fixed-term loans. 251 These functions
constitute the "service" of intermediation for which the financial
institution is paid in an amount equal to the difference between the
average rate of interest paid to the depositor and the average interest
rate received from borrowers. 252 For example, a bank having liquid
assets of $100 million might have the following asset/liability structure:
245. I C. ZOLLMAN, THE LAW OF BANKS AND BANKING § 67 (1936) (quoting Deposit Bank
v. Fleming, 19 Ky. L. Rep. 1947, 44 S.W. 961 (1898»; see also T. MAYER, 1. DUESENBERRY
& R. AUBER, MONEY, BANKING & THE ECONOMY 20-24 (1981) (for a more detailed analysis of
the functions and benefits of financial intermediation services).
246. See supra text accompanying note 240.
247. E. ROUSSAKIS, MANAGING COMMERCIAL BANK FUNDS 50-52 (1977) (discussing objectives
of portfolio management and liquidity); see also Hamilton, supra text accompanying note 238.
248. E. ROUSSAKIS, supra note 247, at 24. "Deposits are the most important source of
bank funds. At the end of 1975, deposits accounted for approximately 81.5 percent of the
total bank liabilites and capital-which means that 81.5 percent of total assets are financed
by deposits." [d.; see also 3 ENCYCLOPEDIA AMERICANA; INTERNATIONAL EDITION 176 (1986)
(over 90 percent of funds available to commercial banks are from deposits). The ability of
banks to profit on the lending of the deposits of others is discussed by Hamilton (supra text
accompanying note 238) and by Gallatin (supra text accompanying note 239). An additional
source for an expanded discussion of bankers' use of other people's money is L. BRANDEIS,
OTHER PEOPLE'S MONEY AND How THE BANKERS USE IT (1914).
249. T. MAYER, J. DUESENBERRY & R. MIBER, MONEY, BANKING AND THE ECONOMY 23
(1981); E. ROUSSAKIS, supra note 247, at 51-60.
)50. T. MAYER, J. DUESENBERRY & R. ALlBER, supra note 249, at 23.
251. [d.; see also E. ROUSSAKIS, supra note 247, at 50-52.
252. See E. ROUSSAKIS, supra note 247, at 60-140 (statistics summarized and reflect the
approximate situation of a typical member bank in the Federal Reserve System in 1975.
Projections were made from the data provided by Roussakis to arrive at some of the estimates
provided here).
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32
Liabilities
Demand deposits
Time deposits
Capital
Dollars
(in millions)
Interest
Payout
(Percent)
Amount
Paid
($millions)
90
5
3
8
~.7MM
.4MM
5
NOTE: Interest payout on demand deposits generally runs less
than the stated amount because of account minimum balance
requirements. Some accounts may produce income in the form of
a service charge when the balance drops below minimum requirements. Payout on the capital account comes from operating profits
and requirements vary according to capital structure. 254
Assets
Reserves (cash &
cash equivalents)
Deposits
Long-term loans
Short-term loans
Investments
Dollars
in millions
REVENUES
Interest
Rate
Income
10.0
10.0
30.8
9
2.7
25.2
15
3.8
24.0
9
2.2
$8.7MMm
In the example here, the total operating revenue of the bank is
$8.7 million. A typical distribution of operating expenses is as follows, as a percent of operating revenues.
Interest paid on deposits
Salaries & benefits
All other expenses
Operating earnings
39.0010
19.0%
28.0%
14.0%2>6
For the period 1940 to 1975, the rate of return on capital of all
insured commerc.al banks averaged 9.4 percent compared to an
average rate of return of 8.3 percent for corporations, based on
253.
254.
255.
256.
[d. at
[d. at
[d. at
[d. at
2-47, 72-77.
34-38, 65-66, 72-77.
67-73, 77.
74-75.
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BANKS AND THE DTPA
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33
corporate tax returns. 257 The real cost of this income to the bank is
shared by the borrower and the depositor because most of the money
loaned by banking institutions belongs to depositors. 258
Each individual acts in his own economic interest. 259 For any
person to engage in a transaction with a banking institution, that
person must perceive some benefit from that transaction. Banks are
now exerting considerable effort to distinguish themselves 260 in the
mind of the consumer by advertising their services. 261 If banks offered
no services they would have nothing to advertise.
The customers of financial intermediaries receive at least three
kinds of benefits from the service of intermediation. First, intermediation reduces costs to each customer by congregating intermediary
financing activities in one place so that borrowers and depositors are
relieved from the need to search each other out individually. 262 In
addition, costs of transactions are reduced because they are done on
a large scale and in an efficient operation designed for precisely that
purpose. 263 Second, the large number of depositors in a financial
intermediary allow the bank to plan for adequate reserves to provide
the liquidity to respond to the needs of each depositor while still
257.
258.
Id. at 76.
See supra note 248.
259. P. SAMUELSON. ECONOMICS 37-39 (11th ed. 1980) (each individual expends his resources
to obtain the greatest value, seeking only his own security and his own gain).
260. P. KOTLER, MARKETING MANAGEMENT 22 (5th ed. 1984). "The marketing concept
holds that the key to achieving organizational goals consists in determining the needs and
wants of target markets and delivering the desired satisfactions more effectively and efficiently
than competitors." Id. "Consumers will favor those products [or services) that offer the most
quality, performance and features." Id. at 17. "A powerful form of segmentation is the
classifications of buyers according to the different benefits that they seek from the product."
Id. at 26.
261. Munro, Banks Lift Their Lamps Beside the Golden Door of Promotion, AMERICAN
BANKER, May 27, 1986, at 4; Munro, Ad Man Sees Battle for Business Waged Inside
Consumers'Minds, AMERICAN BANKER, April 29, 1986, at 14; Hard Work Message to Help
Restore Confidence, BANK MARKETING, April 1986, at 41 (review of bank advertising); Welch,
Banks Kick Off New Ad Campaigns; "Money is Not Funny," Ad Experts Say, ATLANTA
BUSINESS CHRONICLE, March 24, 1986, § B, at I, col. 2; Financial-Services Advertising Jumps
as Competition Heats Up, ABA BANKING J., April 1985, at 29; Current Bank Advertising,
BANK MARKETING, Aug. 1984, at 109-12; Sudo, Sears Financial Ads on TV Leap Past American
Express, AMERICAN BANKER, April 10, 1984, at 18, col. I; Golden & Anderson, Bank Promotion
Strategy, J. OF ADv. RESEARCH, April-May 1984, at 53-65; Mulcahy, Financial Companies
Taking to the Airwaves in Droves: Seventh Biggest TV Advertizers in 1st Quarter, AMERICAN
BANKER, Oct. 18, 1983, at 39, col. I.
262. T. MAYER, J. DUESENBERRY & R. ALIBER, supra note 249, at 22.
263. Id.
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TEXAS TECH LA W REVIEW
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maintaining sufficient reserves to support new loans. 264 Third, because
financial intermediaries process large volumes of loans, each loan is
relatively small when compared to the assets of the institution. 265 The
risk of large losses to the loan portfolio is therefore smaller. Effectively, the depositors have reduced their risk by spreading it over a
large number of loans. 266 The financial institution is usually able to
cover the depositors' risk from revenues placed in a loan loss reserve. 267
B.
Application to the DTPA
It is clear that banking institutions are profitable and derive
their income through payment for the services they offer. It has been
held, however, that the customer of a banking institution is buying
only the use of money, so the customer does not qualify as a
consumer under the DTPA.268 Nevertheless, in the case where a
service accompanies the sale or lease of an intangible, such as money
or a security, Texas courts have held that a private right of action
can be maintained on the basis of the accompanying service. 269
Intermediation is the service that accompanies every financial transaction of a bank with its customer.
Bank customers give consideration for intermediation services.
Borrowers pay interest and depositors give the bank the use of their
money. The use of money, like interest payments, acts as valuable
consideration to the bank. In addition, both borrowers and depositors
264.
265.
ld. at 23.
ld. at 24-28; see also E. ROUSSAKlS, supra note 247, at 14-15, 61-64 (for a more
detailed discussion of credit risk and interest rate or market risk to the bank portfolio).
266. T. MAYER, J. DUESENBERRY & R. ALIBER, supra note 249, at 24.
267. ld. at 20; H. FINNEY & H. MILLER, PRINCIPLES OF ACCOUNTING 75-77 (6th ed. 1963)
(describing accounting procedures for uncollectible accounts); E. ROUSSAKlS, supra note 247,
at 5; J. GRANT & L. CRUM, STATE-CHARTERED BANKING IN TEXAS 230-35 (1978) (Texas
implemented a statutory alternative to the Federal Deposit Insurance Corporation in 1933 with
the bill creating the Bank Deposit Insurance Company).
268. Riverside Nat'l Bank v. Lewis, 603 S.W.2d 169, 174 (Tex. 1980).
269. D. BRAGG, P. MAXWELL & J. LONGLEY, TEXAS CONSUMER LITIGATION § 2.01 (2d ed.
1983). The question was reserved in Riverside, 603 S.W.2d at 175 n.5 (Tex. 1980). See also
Farmers & Merchants State Bank v. Ferguson, 617 S.W.2d 918, 920-21 (Tex. 1981) (checking
account held to be a service); Fortner v. Fannin Bank, 634 S.W.2d 74, 75-76 (Tex. App.Austin 1982, no writ) (bank promised to perform service of filing title papers regarding auto
loan); First Fed. Sav. & Loan Ass'n v. Ritenour, 704 S.W.2d 895, 899 (Tex. App.-Corpus
Christi 1980, writ ref'd n.r.e.) (purchaser of certificate of deposit was consumer under DTPA
by virtue of institution's "customer service" department).
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BANKS AND THE DTPA
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give up certain rights. When a person deposits money or buys a
certificate of deposit, that person makes a decision to give up the
right to invest directly with one or more borrowers at a higher rate
of interest. In order to obtain the convenience, liquidity, security,
and spreading of risk benefits of the intermediary bank, the depositor
must give up the right to control the investment directly. It is the
individual's surrender of his rights to the bank which allow the
intermediary to make a profit. Whether the form of a "deposit" is
demand or time, purchase of a certificate of deposit or shares of a
mutual association or credit union, the economic substance of the
transaction is the same and should be the paramount factor upon
which the recognition of the customer's consumer status should
depend.
The borrower also goes to the banking institution to take advantage of the services of intermediation. The institution offers
liquidity and convenience for the borrower just as it does for the
depositor. The administration of loans is made more efficient by the
organization and experience of the institutional lender. It is much
easier to find a bank than to locate an individual who is willing to
make a loan of the required amount and on the required terms. The
individual may also lack the experience and credit investigating
resources that are available to the bank. The borrower relinquishes
to the bank his right to locate a lender to arrange a loan and to
obtain a lower rate of interest by cutting out the middleman. Instead
the borrower seeks the intermediary services of the bank, for which
the borrower pays a slight premium in interest.
The amount of interest paid by the borrower to the bank over
and above the amount paid by the bank to the depositor is retained
by the bank as payment for "services" rendered. This premium
represents a higher cost to the borrower and a lower income to the
depositor. Clearly, both the borrower and the depositor are paying
the bank for the service of intermediation, in the form of cash and
surrender of rights.
C. Riverside in Retrospect
Since it was handed down, the Riverside opinion270 has been
continually limited and narrowed. 271 Riverside has not been affirm-
270.
271.
603 S.W.2d 169 (Tex. 1980).
See supra text accompanying notes 66-75.
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atively overruled as subsequent cases still purport to follow it holding;
however, the practical effect of the recent cases has been to overrule
its holding that the extension of credit is not a service. Riverside's
primary value now, on that issue, is to serve as a pleading and proof
guide for the bank customer's attorney. The major result of the
Riverside case has been to shift away the emphasis in consumer
litigation against banking institutions from the merits of the complaint to an issue of standing. The courts should now recognize that
Riverside was incorrect when it stated that the extension of credit
was not a "service" under the DTPA.272 This is because banking is
a "service"-financial intermediation. The mistake in the Riverside
holding was not the result of error in its logic that money is not a
good, but in its premise that the borrower sought only the use of
money.273
There is no doubt that money, as an intangible, is not a "good"
under the DTPA,274 and that "[m]oney, as money, is quite obviously
neither work nor labor. "275 A loan is more than money, however. A
loan from a banking institution is one part of the service of financial
intermediation. It includes the processes of application, approval,
and documentation. The bank must also locate the funds and make
them available to the borrower. A loan most often includes making
a wide range of other services available, from financial or business
advice to assistance with accounting or tax preparation, not to
mention all other services made available by "full service banks."
Following this reasoning, the Riverside rule also conflicts with
cases holding that "loan brokering" is a service under the DTPA,
such as Lubbock Mortgage & Investment Co. v. Thomas. 276 There
272. 603 S.W.2d at 174.
273. Supra notes 56-57 and accompanying text.
In this case, Lewis sought to borrow money: he sought nothing else. Money, as
money, is quite obviously neither work nor labor. Seeking to acquire the use of
money likewise is not a seeking of work or labor. Rather, it is an attempt to acquire
an item of value. We hold that an attempt to borrow money is not an attempt to
acquire either work or labor as contemplated in the DTPA.
Riverside, 603 S.W.2d at 174. This premise had its origin in Thompson v. First Austin Co.,
572 S.W.2d 80, 81-82 (Tex. Civ. App.-Fort Worth 1978), writ ref'd n.r.e. per curiam, 22
Tex. Sup. Ct. J. 240 (Feb. 28, 1979).
274. 603 S.W.2d at 174.
275. [d.
276. 626 S.W.2d 611, 614 (Tex. App.-EI Paso 1981, no writ); see also Mercantile Mortgage
Co. v. University Homes, Inc., 663 S.W.2d 45, 47-48 (Tex. App.-Houston [14th Dist.] 1983,
no writ) (holding that loan brokering was a service under the DTPA).
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BANKS AND THE DTPA
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the plaintiff had entered a "contract for services" under which the
mortgage company would arrange for a loan for the plaintiff. 277 In
exchange, the plaintiff paid the defendant "loan fees. "278 The plaintiff never got a loan and sued the mortgage company for representing
that its services had characteristics, uses, benefits and standards which
it did not have, and that the agreement conferred or involved rights
which it did not have. 279 The court distinguished Riverside because
the mortgage company was not a "direct lender."280
As explained earlier, the function of banking is that of intermediation. Intermediation is the act of being the "middleman"
between the depositors and the borrowers in our society. Intermediation is essentially the same as "loan brokering" -acting as the
"middleman" between the lender and the borrower. 281
D.
Private Rights of Action as a Necessary Supplement To
Regulation
Banking institutions are a powerful force in our economy. Almost every citizen is involved with a bank on a daily basis. Thus,
the activities of banks and bankers affect everyone. Economic wellbeing depends upon the orderly flow of financial capital through
banking intermediaries. Justice Brandeis once stated the importance
of concentrated capital in financial institutions in the following terms:
A great industrial nation is controlled by its system of credit. Our
system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men, who,
even if their actions be honest and intended for the public interest,
are necessarily concentrated upon the great undertakings in which
their own money is involved and who, necessarily, by every reason
of their own limitations, chill and check and destroy genuine
economic freedom. This is the greatest question of all; a'nd to
this, statesmen must address themselves with an earnest determination to serve the long future and the true liberties of men. m
277. 626 S.W.2d at 612.
278. [d.
279. [d. at 613.
280. [d.
281. How the Texas Supreme Court would rule on loan brokering is still something of an
open question because there is no writ history for either Lubbock Mortgage, 626 S.W.2d 611
or Mercantile Mortgage, 663 S.W.2d 45.
282. L. BRANDEIS, OTHER PEOPLE'S MONEY AND How THE BANKERS USE IT I (1967)
(quoting President Wilson in a speech made while he was governor of New Jersey in 1911 and
originally published as a series of articles in HARPER'S MAGAZINE in 1913-14).
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Justice Brandeis was far from being the first person to recognize
the problems that could result from a concentration of capital in
financial institutions. Writing a hundred years before, the prominent
economist and publisher Mathew Carey described the benefits and
hazards of banking in an 1812 pamphlet on the banking system.
Many of his observations are still echoed today.
The grand object proposed by our legislatures in granting charters
of incorporation to Banks, is to promote the public interest-and,
subservient thereto, to hold out adequate advantages to the subscribers. This grand object ought to be undeviatingly borne in
mind in all the operations of the Banks. It is highly improper for
Banks to lose sight of this object, and have a single eye directed
to large dividends, and to pursue them to the disregard of public
accommodation. A well-managed Bank operates in the commercial
and trading world, as beneficially as a mild, enlivening sun and
refreshing showers do in the natural world. It fosters industryextends trade and commerce-enables men of moderate fortune
and good credit, to compete with wealthy capitalists. In a word,
it is pregnant with countless blessings. An ill managed Bank
operates as a sirocco, a blast, a blight, a mildew. It is a curse to
the community which is the sphere of its operations. The grand
and leading future of the good management of a Bank, is to
preserve an even tenor in the business of loaning money. Every
material departure from this course is a departure from the line
of rectitude and duty. Immoderate and abrupt loans foster and
encourage speculation, luxury, and extravagance. They have a
strong tendency to demoralization. Abrupt and precipitate curtailments of discounts, produce the most baleful effects. Wretchedness and bankruptcy follow in their train. They reduce pricesarrest the progress of trade, commerce, and manufactures-throw
the poor out of employment-and enable the capitalists to purchase at low prices, and to retain till prices rise, the property the
other classes of society are obliged to sacrifice. They invariably
make the rich richer, and the poor poorer. They are among the
heaviest and most dire curses that can befall a community. When
immoderate curtailments of discounts tread on the heels of immoderate extensions, the calamity has every possible aggravation.
They produce exactly the same destructive effects on the prosperity
and happiness of a community, that severe frosts and blasting
hail storms do on the early vegetation in spring. Banks, not paying
specie, or having a full supply of it, need not, and indubitably
ought not, even when, from over issues of paper, curtailment is
absolutely necessary, reduce their discounts abruptly. Nothing but
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BANKS AND THE DTPA
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danger of bankrutpcy, can justify a Bank in the measure of great
and abrupt curtailment. More alarm is excited, and more injury
is done, by a curtailment of 200,000 dollars in one month, than
by a curtailment of 600,000 dollars in six months. Banks owe it
to the community by which they thrive and prosper, to do
whatever is in their power, consistent with their own interest, for
public accommodation; and whenever they can produce a great
public good by a small private sacrifice, the sacrifice is an imperious duty. In times of distress and difficulty, and stagnation of
trade and commerce, policy, as well as humanity, dictates an
extension of accommodation, and of course in the most imperious
manner forbids Banks to press upon their debtors. In times of
distress, to make large loans to wealthy men who "keep good
accounts," and who only borrow when money is scarce, whereby
the middle classes who borrow when money is plenty, are debarred
from the necessary accommodation, is highly pernicious. It adds
unduly to the natural advantages possessed by the former, and as
unduly increases the disadvantages under which the latter labour. 283
The power of concentrated capital creates the opportunity for
wrongdoing, unfairness, misrepresentation, or deception in banking
activities. Concerns about banking have been an integral part of
Texas history, sometimes amounting to paranoia. The constitutional
convention of the Republic of Texas, under the influence of Sam
Houston, Dr. Anson Jones, and Andrew Jackson, passed a constitutional prohibition against banking corporations in the Republic of
Texas: 284 "No corporate body shall hereafter be created, renewed or
extended, with banking or discounting privileges. "285 The historical
attitude regarding banking in Texas is described as follows:
The prevailing attitude toward banking in Texas during the last
days of the Republic was an outgrowth of the existing social and
economic conditions. The Panic of 1837 had left the United States
in the midst of its most severe depression, which lasted until 1843;
the distressed economic conditions gave rise to widespread bank
failures . . . . [Between 1840 and 1843) total loans and discounts
of all banks decreased from $463 million to $255 million, and
Refleclions on Ihe Presenl Syslem of Banking in Ihe Cily of Philadelphia, H.
P. SAMUELSON, DOCUMENTARY HISTORY OF BANKING AND CURRENCY IN THE UNITED
STATES 2045 (1977) (the paragraph numbers contained in the original have been deleted).
284. See 1. GRANT & L. CRUM, THE DEVELOPMENT OF STATE-CHARTERED BANKING IN TEXAS
15 (1978).
285. TEX. CONST. art. VII § 30 (1845).
283.
Carey,
Koos &
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capital decreased from $358 million to $229 million. The many
bank failures and concomitant defaults on bank notes were severely felt by the Texans, and, generally speaking, they resulted
in a revulsion of public feeling against banks and bankers. In
addition, the leadership of the Republic from December 1841 until
annexation on February 16, 1846, was in the hands of Sam
Houston and Dr. Anson Jones, the Republic's two most prominent
opponents of banking. 286
The deep-seated mistrust of banks was reflected in the remarks
of General Thomas Rusk during the 1845 Texas Constitutional Convention: "Thousands upon thousand [of individuals] have been ruined
by [banks] . . . . I wish by no vote of mine, here or elsewhere, to
authorize the institution of a bank which may benefit a few individuals, but will carry, here as elsewhere, ruin, want, misery, and
degradation in its train. "287 Polemics, however, could not overcome
the need for financial institutions with their efficiencies of intermediation. These needs gave rise to a fairly active private banking
business in Texas during the nineteenth century despite the lack of
state charters for banks. 288 Not until after the state constitution of
1869 was state-chartered banking approved in Texas. 289 In the twentieth century, after banking had achieved a degree of respectability
in Texas, bank failures were a matter of concern. Twenty-four state
banks failed in Texas between 1910 and 1920-of those, fifteen were
due to management fraud, one due to loan losses, and one due to
inadequate cash reserves. 290 From 1920 to 1929, 262 state banks
failed. 291 In a speech to the Texas Bankers Association in 1923, W.e.
Peterson, an agent in the state Department of Insurance and Banking,
identified causes of bank failure as follows:
First, in importance, I should say that outright thievery, corrupt,
illicit, and illegitimate banking practices are to blame. Second, I
should say that economic conditions are responsible. Third, I
think that reckless, injudicious advances of credit are to blame.
Some of you may question the correctness of the first important
cause as given by me. I tell you, however, ladies and gentlemen,
286.
287.
288.
289.
290.
291.
J. GRANT & L.
[d. at 15-16.
[d. at 23-25.
[d. at 26.
[d. at 103.
[d. at 129.
CRUM,
supra note 284. at 11-12.
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BANKS AND THE DTPA
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that something must be done to stop these corrupt practices of
high financing on the part of state bank officials. 292
Banking Commissioner James Shaw, speaking in 1928, blamed
bank failures on one or more of the following: "(1) incompetence
of officers and directors; (2) excessive lines of credit to a few
customers; (3) carrying speculative lines; (4) embezzlement by officers
or employees. "293 The problems associated with financial institutions
apparently continue today. In 1985, William M. Isaac testified before
a Senate Committee that "over the past several years, bank failures
have been the result of various factors which have affected the asset
quality of the institutions involved. Principal among them have been
fraud, insider abuse and bad management. "294 There have been
numerous acts passed by the legislatures of both Texas and the
United States designed to regulate banks295 and make them safer and
more responsive to the needs of the consumer. 296 Unfortunately,
much of this regulation has not been altogether effective in solving
consumer problems, though some progress has certainly been made.
Greenwald finds considerable fault with the irregular application
of regulations to banking institutions,297 blaming the problem, in
part, on the fact that many regulations are promoted by bankers and
292.
Id. at 148.
293.
294.
[d.
Comprehensive Reform in the Financial Services Industry: Hearings Before the Committee on Banking, Housing and Urban Affairs, 99th Congo 1st Sess. 204 (1985) (letter
supplement to testimony of Mr. Issac in his capacity as Chairman of the Federal Deposit
Insurance Corporation).
295. See, e.g., CAMBRIDGE RESEARCH INSTITUTE, TRENDS AFFECTING THE U.S. BANKING
SYSTEM 109-30 (1976) (discussing the regulatory environment of commercial banks); see also
J. GRANT & L. CRUM, THE DEVELOPMENT OF STATE-CHARTERED BANKING IN TEXAS 37-63, 163,
235 (1978) (Texas State Bank Law of 1905 and its effects on banking in Texas, stale banking
laws enacted during the 1920's and 1930's); id. at 71-87, 230-34 (discussion of state deposit
guaranty legislation, role of the Reconstruction Finance Corporation and the Federal Deposit
Insurance Corporation); C. GREENWALD, BANKS ARE DANGEROUS TO YOUR WEALTH 215-56
(1980) (discussion of problems in bank regulation). See generally A. HAGGERSTAD, REGULATION
OF CONSUMER FINANCIAL SERVICES ch. 7-9 (1981) (for an expanded discussion of Federal
regulation affecting the consumer finance industry); K. BIEDERMAN & J. TUCCILLO, TAXATION
AND REGULATION OF THE SAVINGS AND LOAN INDUSTRY 37-64 (1976) (income effects of regulation
within the savings and loan industry).
296. COMPTROLLER GENERAL, REPORT TO CONGRESS: EXAMINATIONS OF FINANCIAL INSTITUTIONS Do NOT ASSURE COMPLIANCE WITH CONSUMER CREDIT LAWS, Gov't Dir. No. Ga 1.13
GGD 81-13, 44-45 (1981) (listing and description of thirteen major consumer credit protecIion
acts passed between 1968 and 1979); C. GREENWALD, BANKS ARE DANGEROUS TO YOUR WEALTH
215-16 (1980) (Ms. Greenwald was the Massachusetts Banking Commissioner from 1975-79).
297. C. GREENWALD, supra note 296, at 216.
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their 10bbyists. 298 In addition, she argues that bank regulators tend
to see banks as their constituency and to see the public as the
opposition. 299 Regulatory agencies are often less effective than they
might be at enforcing the laws. 3°O There appears to be some motivation by the regulatory agencies to "compete for clients" among
the banking institutions. 301 As Chairman of the Federal Reserve
Board, Arthur Bums accused federal regulators of competing with
each other through lax standards and enforcement and described the
regulatory apparatus as complex, fragmented, and inefficient.
I must say to you, however, that I am inclined to think that the
most serious obstacle to improving the regulation and supervision
of banking is the structure of the regulatory apparatus. That
structure is exceedingly complex. At the Federal level, every bank
whose deposits are insured is subject to supervision and regulation,
but authority is fragmented . . . . Those of you who have been
intimately concerned with regulatory matters will realize that I
have oversimplified, that our system of parallel and sometimes
overlapping regulatory powers is indeed a jurisdictional tangle that
boggles the mind . . . . There is, however, a stiD more serious
problem. The present regulatory system fosters what has sometimes been called "competition in laxity." Even viewed in the
most favorable light, the present system is conducive to subtle
competition among regulatory authorities, sometimes to relax constraints, sometimes to delay corrective measures. I need not explain
to bankers the well-understood fact that regulatory agencies are
298. [d. at 218.
299. [d. at 216.
300. COMPTROLLER GENERAL, supra note 296, at 6, 34. .. Agencies are not consistently or
adequately enforcing compliance, enforcement is inadequate and inconsistent." C. GREENWALD,
supra note 296, at 219-36. Federal examiners are spending less time examining banks and
finding far fewer errors than they should. [d. at 225. This is illustrated by a comparison of
FDIC and state examinations in Connecticut, Maine, and Massachusells. [d. at 223.
The structure of banking regulation is unique. In no other situation does a regulated
301.
industry have an opportunity to choose its regulatory agency. This ability to select
a regular through switching charters, joining the Federal Reserve System, or
applying for Federal deposit insurance had led to forum-shopping among the banks.
That is to say. banks can and do select a federal regulator which best suits their
needs. In turn, forum-shopping has led to competition among the three agencies 10
aUract members. The existence of three Federal bank regulatory agencies has led to
inconsistent and often inefficient regulation.
C. GREENWALD, supra note 296, at 237 (quoting SENATE COMM. ON GOVERNMENTAL AFFAIRS,
95TH CONG., 1ST SESS., STUDY ON FEDERAL REGULATION. REGULATORY ORGANIZATION 222
(COMM. PRINT 1977».
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BANKS AND THE DTPA
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sometimes played off against one another. Practically speaking,
this sort of competition may have served a useful purpose for a
time in loosening overly cautious banking restrictions imposed in
the wake of the Great Depression. But at this point, the danger
of continuing as we have in the past should be apparent to all
objective observers . . . . My own present thinking . . . is that
building upon the existing machinery may not be sufficient, and
that substantial reorganization will be required to overcome the
problems inherent in the existing structural arrangement. 302
State legislators have the power to giye the individual consumer
a private right of action against banks by way of consumer protection
statutes. The consumer with a private right of action can help to
effectively police banking activities, on a case-by-case basis, by
seeking private redress for injury. State courts can help assure that
banking institutions are held accountable for wrongdoing affecting
private citizens.
The impact of actions, decisions, and representations made by
a bank and relied on by bank customers may be extraordinary, for
example, to the individual customer buying a home or car, or to one
who relies on a representation that financing is forthcoming and
enters a contract only to find that there is no financing. As Justice
Brandeis stated,
the goose that lays golden eggs has been considered a most
valuable possession. But even more profitable is the privilege of
taking the golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege.
They control the people through the people's own money. If the
bankers' power were commensurate only with their wealth, they
would have relatively little influence .... Bank deposits represent
the really quick capital of the nation. They are the life blood of
businesses. Their effective force is much greater than that of an
equal amount of wealth permanently invested. 303
Because of the power and influence of banking institutions and
the shortcomings of regulation and inspection to police banking
activies, it· is appropriate that consumers have a private cause of
action against banking institutions under the DTPA. There is no
justification for bestowing on banking institutions a greater level of
302. 121 CONGo REC. 27746 (1975) (speech by Sen. William Proxmire, quoting a speech by
Arthur Burns, chairman of the Federal Reserve. to the American Bankers Association).
303. L. BRANDEIS, OTHER PEOPLE'S MONEY AND How THE BANKERS USE IT 12-13 (1967).
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protection from DTPA claims than upon other persons and entities
which may commit false, misleading, deceptive, or unconscionable
acts and practices.
IV.
CONCLUSION
Under the approach traditionally taken by Texas courts, bank
customers have been forced to "mold" their cause of action to fit
within artificial parameters to establish standing as "consumers"
when attempting to recover against banks for violations of the
DTPA. Requiring bank customers to engage in such maneuvers is
a wasteful practice. Not only is the current approach unwise, but it
is also wholly unnecessary. Indeed, by searching for so-called "collateral" services, Texas courts have overlooked the basic underlying
service of financial intermediation which a banking institution necessarily affords to each of its customers. The economic realities of
the banking relationship, when coupled with the social policies embodied in the DTPA, mandate that courts turn their emphasis in
such cases away from the artificial standing issue and focus on the
merits of the customer's complaint.
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