On May 23, 2025, the Texas Supreme Court redetermined the method for calculating the maximum allowable interest for commercial loans under Chapter 306 of the Texas Finance Code. The decision is a radical change in how interest traditionally has been calculated under Chapter 306 and significantly lowers the maximum permissible non-usurious interest chargeable for commercial loans at the maximum allowable rate. In a decision that could subject the unwary to draconian penalties, the Court held that “[b]y deliberately changing the text of Section 306.004(a) from an ‘equal parts’ approach to the ‘actuarial method’ . . . the Legislature called upon courts to calculate the maximum permissible interest based on the declining principal balance for each payment period” rather than based upon the original principal balance, which had been the case under the prior statutes and Texas Supreme Court precedent going back nearly 100 years to Nevels v. Harris, 129 Tex. 190, 102 S.W.2d 1046, 1049 (1937). Commercial lenders operating in Texas should review and, if necessary, revise their interest calculation methodologies to minimize the risk of litigation and statutory penalties, which can include treble damages and loss of principal.1
After Texas codified its usury laws under the Finance Code in the late 1990s to require that commercial lenders calculate maximum permissible interest using the “actuarial method,” caselaw from Texas appellate courts continued to suggest that lenders could use the “equal parts method” to determine the maximum amount of interest that could be charged on a loan. In its recent decision in American Pearl Group, L.L.C. v. National Payment Systems, L.L.C. No. 24-0759, the Texas Supreme Court interpreted Texas Finance Code §306.004 to mean that lenders must use the actuarial method, which adjusts for a declining principal balance over each payment period, when determining the maximum non-usurious interest on a commercial loan.
Background
Loans made under Texas law must comply with the state’s strict usury laws, which set out the maximum amount of interest that may be charged on loans, how to compute the maximum allowable interest, and penalties for charging interest in excess of the maximum. Until 1997, Texas statutes provided that interest would be spread “in equal parts during the period of the full stated term of the loan.”2 When the Texas Finance Code was enacted that language was changed to provide that the maximum allowable interest would be calculated “by amortizing or spreading, using the actuarial method during the stated term of the loan.”3
Under the spreading approach, the maximum allowable interest that could be charged on a loan was equal to the product of the total original principal balance of the loan, the applicable statutory maximum interest rate for the loan type and the loan term in years. Despite the change in statutory language, Texas appellate courts had continued to suggest that commercial lenders could use the “equal parts” method when calculating maximum permissible interest for loans with periodic principal payments. This dichotomy led the Fifth Circuit Court of Appeals to send a certified question to the Texas Supreme Court in American Pearl Group, L.L.C. v. National Payment Systems, L.L.C. in September 2024, which the state court answered in May 2025.
Texas Supreme Court’s Decision
American Pearl Group, L.L.C., a commercial borrower, sought a declaration from the US District Court for the Northern District of Texas that a loan and option agreement it signed with National Payment Systems, L.L.C., violated Texas usury law by charging excessive, or usurious, interest on a $375,100.85 loan. Over the 42-month loan term, which required periodic principal payments, the borrowers would have to pay back $684,966.76, or the principal plus $309,865.91 in interest.
The district court found no usury violation after employing the “equal parts” method. By multiplying the $375,100.85 principal amount by the maximum legal interest rate for commercial loans of 28%4 and the 42-month, or 3.5-year, loan term, the district court held that the $309,865.91 total interest amount was less than the maximum allowable payment of $367,598.83.
The borrowers appealed to the Fifth Circuit Court of Appeals, which found that the statutory interpretation of the actuarial method of determining interest was unsettled. Accordingly, the appellate court sent a certified question to the Texas Supreme Court asking it to determine “[i]f 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?”.
In considering the question certified, Justice Sullivan noted the discrepancy between the language contained in the Finance Code and the application of Texas’ usury law in the years following its adoption. Holding that the continued use of the equal parts method “cannot be squared with the current statute's text and history,” Sullivan wrote that the state legislature had “expressly changed the computation method from the ‘equal parts’ approach to the ‘actuarial method.’”
As the Texas Finance Code does not define “actuarial method” or provide any guidance on how it is used to calculate interest, the Court considered various definitions from other sources before finding that the “plain common meaning of ‘actuarial method’ calls for interest amounts to be calculated for each payment period, based on the declining principal balance” and held that the “total lawful interest amount is the sum of each payment period's interest amount, calculated based on the declining principal balance resulting from each of Pearl's principal payments.”
George Bernhardt | Counsel | +1 713 425 3540 | Email
Isaiah Sirios * | Summer Associate | +1 404 853 8129 | Email
*Not admitted to practice.
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1 Texas Finance Code §305.001, 305.002.
2 Act of Mar. 12, 1975, 64th Leg., R.S., ch. 26, § 1, 1975 Tex. Gen. Laws 47, 47 (repealed 1997).
3 TEX. FIN. CODE § 306.004(a).
4 Note: Pursuant to Texas Finance Code §303.008, the Consumer Credit Commissioner calculates the maximum non-usurious interest rate for various periods according to §303.003-303.008. The computed rate is applied subject to floors and ceilings contained in §303.009 of the Finance Code. The Court refers to a maximum non-usurious interest rate of 28% for commercial loans pursuant to §303.009; however, pursuant to the Texas Office of Consumer Credit Commissioner’s records, the maximum rate for all periods has been 18% since approximately 1990, which is the floor for all maximum rates pursuant to §303.009(a). Twenty-eight percent (28%) represents the ceiling for maximum rates, not the rate that was the actual maximum rate at the time in question. Using the correct interest rate of 18% would have resulted in a maximum of $236,313 in interest rendering the choice of methods moot. https://occc.texas.gov/publications/interest-rates/historical-interest-rate-summaries.
