This is an analysis of the case "American Pearl Group, L.L.C. v. National Payment Systems, L.L.C." recently decided by the Texas Supreme Court in May 2025. You can read the full opinion by clicking here.
This case centers on how Texas usury law limits the interest rate on commercial loans and specifically how courts should calculate the maximum lawful interest rate under Texas Finance Code Section 306.004(a). The key question was whether the "actuarial method" for computing interest requires basing the calculation on the loan's declining principal balance over time or on the original total principal.
Background:
- National Payment Systems (NPS) loaned American Pearl Group $375,100.85 with a repayment schedule over 42 months including principal and interest payments.
- The loan required increasing monthly payments with constant principal portions and rising interest portions.
- American Pearl sued, claiming the interest charged exceeded the lawful maximum under Texas usury law. The district court used an "equal parts" method, spreading interest evenly over the loan term, and found no usury violation.
- American Pearl appealed, arguing that the law requires the actuarial method, which calculates interest based on the declining principal balance after each payment, producing a lower permissible interest amount and thus indicating usury.
Legal Issue:
The Fifth Circuit certified a question to the Texas Supreme Court: Does Section 306.004(a)'s requirement to use the actuarial method mean interest must be calculated on the declining principal balance rather than the total original principal?
Texas Supreme Court's Analysis and Holding:
- The court emphasized the importance of statutory text and the deliberate legislative change from an "equal parts" method (used in earlier law) to the "actuarial method" in the current statute.
- The actuarial method, as defined in legal and financial sources, requires allocating payments first to interest then to principal, reflecting the declining principal balance over time.
- The court rejected NPS's argument for the simpler equal parts method, holding that the legislature intentionally changed the calculation method to the actuarial one.
- Prior cases cited by NPS (Nevels and Tanner) involved interest-only loans without principal reductions and thus are not controlling here.
- The court concluded that when a commercial loan includes periodic principal payments, interest calculations must be based on the declining principal balance using the actuarial method.
Result:
The Texas Supreme Court answered yes to the certified question, requiring courts to calculate interest using the actuarial method based on the declining principal balance. This means the loan in question, as structured, must have its interest recalculated under this method, which may show the loan to be usurious.
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