In a decision entitled American Pearl Group, LLC v National Payment Systems, LLC, the Texas Supreme Court ruled that Texas usury law requires the use of the actuarial method to calculate whether an interest rate is usurious. The justices imposed a lower maximum interest ceiling than previously allowed on commercial loans.
The case arose from a dispute over whether a loan and option agreement violated Texas usury law. NPS loaned Pearl about $375,000 for 42 months, obliging Pearl to pay back nearly $685,000 on a prescribed schedule of increasing monthly payments. The agreement incorporated an option under which NPS could pay Pearl a “five-figure sum in exchange for a six-figure slice of Pearl’s residuals portfolio, allegedly worth some multiple of the scheduled interest charges.” In 2022 Pearl sued NPS in a Texas federal court to invalidate the deal. The lower court ruled in favor of NPS, concluding that the interest payments were not usurious. Pearl appealed to the Fifth Circuit, who certified the question to the Supreme Court.
The Supreme Court reversed the lower court’s decision on the usury issue. The justices clarified that the Texas Finance Code no longer allows lenders to calculate interest by “spreading the interest over the term of the loan in equal parts”. Instead, interest calculations must be calculated based on the declining principal balance during each payment period. In plain language, this is what the formula will look like:
Interest for each period= (APR/payment per year) x outstanding principal balance at the start of the period
You don’t have to be an accounting genius to see how this will impact lenders’ bottom lines.
For you legal beagles out there, I found it interesting that the Texas Supreme Court looked to the venerable Black’s Law Dictionary definition of “actuarial method” for guidance. BLD is clearly considered an oldie but goodie!
This law is now in full force and impacts commercial loans in Texas effective immediately. Lenders may recall that the state has a usury cap of 18% per annum. There are significant potential damages for non-compliance with these usury laws, as newly interpreted by the Supreme Court, including forfeiture of the entire loan amount and treble damages.
Although the ruling is only applicable within the state of Texas, lenders in other states with similar statutory language regarding “spreading” or “actuarial” interest may face increased scrutiny. Lenders beware!
The Case: https://www.ca5.uscourts.gov/opinions/unpub/23/23-10804.0.pdf
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