SCOTX: Texas Commercial Loan Usury Ceiling Is Based on Unpaid Balance

On May 23, 2025, the Texas Supreme Court answered a certified question from the U.S. Court of Appeals for the Fifth Circuit, ruling that if a commercial loan provides for periodic principal payments during the loan period, the maximum allowable interest that can be received, charged or contracted for must be calculated using the actuarial method, and not the equal parts method which had been applied in earlier cases.  The actuarial method of computing the maximum amount of allowable interest results in a lower usury ceiling than the equal parts computation method (or “spreading”), and could result in more loans being deemed usurious.

The borrower in the underlying case sued the lender in the U.S. District Court for the Northern District of Texas, seeking a declaration that the commercial loan it had been repaying for several years was usurious.  The court granted the lender’s motion to dismiss after determining the loan was not usurious, using the equal parts computation method.  This method multiplies the principal amount of the loan by the statutory maximum interest rate, and then by the term in years.

The borrower appealed to the Fifth Circuit, arguing that the District Court should have used the actuarial method to compute the usury ceiling.  The Fifth Circuit certified the question to the Texas Supreme Court after noting that prior Texas Supreme Court decisions (which supported the lender’s position) preceded legislative changes enacted in the 1990s that amended a provision which had referred to spreading interest “in equal parts during the full stated term of the loan,” introducing instead with the phrase “amortizing or spreading, using the actuarial method during the stated term of the loan . . . ” (emphasis added).

After reviewing various definitions of “actuarial method” in Texas banking regulations, TILA, and other states’ laws, the Texas Supreme Court held that “the plain, common meaning of ‘actuarial method’ calls for the interest amounts to be calculated for each payment period, based on the declining principal balance.”  While conceding that the equal parts calculation is simpler, the court stated that simplicity was not an excuse to override the clear language of the law.