Texas Supreme Court Clarifies Usury Law: Maximum Interest Must Be Calculated Using the Actuarial Method Resulting in Lower Interest Charges as Principal Balance Declines

Commercial lenders in Texas should be made aware of the Texas Supreme Court’s new decision in American Pearl Group, LLC v. National Payment Systems, LLC, No. 24-0758. In that case, the Court clarified the “actuarial method” for calculating maximum chargeable interest under state usury law, with the endorsed methodology notably imposing a lower maximum interest ceiling than previously allowed. In short, the Court confirmed that Section 306.004 of the Texas Finance Code no longer permits lenders to calculate interest by “spreading the interest over the term of the loan in equal parts.” Lenders must instead adjust their interest calculations based on the declining principal balance during each payment period. The statutory penalties for lenders’ non-compliance with this law are significant—namely treble damages and potentially a forfeiture of the entire loan amount. 

Case History

In the underlying lawsuit, a commercial borrower sought a declaration that it had been charged usurious interest on a $375,100.85 loan. The loan was to be repaid over 42 months with total payments amounting to $684,966.76, or $309,865.91 in interest. The borrower argued that the contracted interest payments exceeded Texas’s usury cap of 28% per annum under Section 303.009(c) of the Texas Finance Code. 

In resolving the claim at the motion to dismiss stage, the district court applied a traditional “equal parts” “spreading” analysis from decades’ old usury cases, by which it multiplied the total principal on the loan by the maximum lawful interest rate and the loan term. Under this formula, the district court concluded that state usury law permitted the lender to charge up to $367,598.83 in total interest. Because the lender only charged $309,865.91 in interest over the loan term, the district court held that state usury law was not violated and dismissed the borrower’s claim.

The borrower appealed to the Fifth Circuit, asserting that the district court failed to correctly apply the “actuarial method” set forth in the Finance Code by not considering the loan's declining principal balance during each payment period in calculating the usury cap. However, the Fifth Circuit—noting an ambiguity in the statute given that the Finance Code does not define the term “actuarial method”—declined to rule and certified the following question to the Texas Supreme Court for resolution:

Section 306.004(a) of the Texas Finance Code provides: “To determine whether a commercial loan is usurious, the interest rate is computed by amortizing or spreading, using the actuarial method during the stated term of the loan, all interest at any time contracted for, charged, or received in connection with the loan.” If the loan in question provides for periodic principal payments during the loan term, does computing the maximum allowable interest rate “by amortizing or spreading, using the actuarial method” require the court to base its interest calculations on the declining principal balance for each payment period, rather than the total principal amount of the loan proceeds?

Texas Supreme Court Determines Proper Application of “Actuarial Method” for State Usury Calculation

The Texas Supreme Court answered the Fifth Circuit affirmatively, holding that the “actuarial method” is a “a term with a well-established meaning in financial and legal contexts” that requires “courts to calculate the maximum permissible interest based on the declining principal balance for each payment period.” 

Persuasive to the Court’s decision, it relied on Black’s Law Dictionary’s definition of the “actuarial method” as being a “means of determining the amount of interest on a loan by using the loan’s annual percentage rate to separately calculate the finance charge for each payment period, after crediting each payment, which is credited first to interest and then to principal.” The Court also considered similar definitions of the “actuarial method” from the Texas Administrative Code and the federal Truth in Lending Act in reaching the same conclusion as to how the actuarial method applies.

In layman’s terms, a simplified expression of how interest during a payment period may be calculated under the actuarial method is as follows:

Interest for each payment period = (APR / payment periods per year) × outstanding principal balance at the start of the period

This calculation notably contrasts with the simplified “equal parts” spreading methodology, which does not account for declining principal balances over time. The difference in the two methodologies is particularly significant in its impact when applied under a state usury law analysis. For example, in the American Pearl Group case, the district court found that the “equal parts” spreading methodology resulted in a maximum interest calculation of $367,598.83, while the “actuarial method” would have resulted in a maximum interest threshold of $207,277.80. It is not difficult to see how lenders who are unaware of the differences between each methodology can easily overcharge a borrower in violation of usury prohibitions.

Implications for Lenders

The Texas Supreme Court’s decision sets a clear precedent for how commercial lenders must assess compliance with state usury law moving forward. They may no longer rely on the simplified “equal parts” interest-calculation method that some courts employed in years past. These lenders must instead apply the actuarial method, which affects the total interest that lenders may charge on a loan. In light of the new law, some lenders may now need to audit their existing portfolios for compliance, to avoid exposing themselves to usury claim risks and potential regulatory scrutiny.