From “Equal Parts” to the “Actuarial Method”: Texas Supreme Court Mandates Declining-Balance Calculations for Usury Analysis Under Finance Code § 306.004(a)

I. Introduction

In American Pearl Group, L.L.C., et al. v. National Payment Systems, L.L.C., the Supreme Court of Texas answered a certified question from the United States Court of Appeals for the Fifth Circuit concerning how courts must calculate interest for purposes of Texas’s commercial usury statute, Texas Finance Code § 306.004(a).

The core issue was narrow but critically important: when a commercial loan provides for periodic principal payments, must the statutory “spreading” of interest be performed using the actuarial method based on the declining principal balance, or may courts instead continue to apply the older “equal parts” method that multiplies the original principal by the maximum permissible rate and the loan term?

The Texas Supreme Court’s answer—an unqualified yes to the declining-balance, actuarial approach— establishes a significant interpretive rule for Texas usury law:

This decision not only resolves a concrete dispute between a lender and a borrower in the credit‑card‑processing industry; it also clarifies how Texas courts must implement statutory usury caps going forward, especially in the common context of amortizing commercial loans.

II. Factual and Procedural Background

A. The Parties and Their Business Relationship

The dispute arises within the credit-card payment-processing ecosystem:

• National Payment Systems, L.L.C. (NPS) acts as an intermediary between merchants and payment service providers (payment processors and banks). It submits merchant processing applications and receives a share of transaction fees (called “residual payments”).
• American Pearl Group, L.L.C., John Sarkissian, and Andrei Wirth (collectively, “Pearl”) market NPS’s services and receive a portion of those residual payments. Pearl also has comparable arrangements with other intermediaries and thus holds a portfolio of residual payment streams.

In short, Pearl holds a portfolio of ongoing revenue streams derived from credit-card processing residuals, and NPS is both a commercial counterparty and, in this case, a lender.

B. The Loan and Option Agreements

In May 2019, NPS made a loan to Pearl on the following principal terms:

• Principal amount: $375,100.85.
• Term: 42 months (3.5 years).
• Total repayment obligation: $684,966.76.
• The loan carried a and an increasing interest component, resulting in increasing total monthly payments.

Additionally, the parties entered into a contemporaneous Option Agreement. Under that agreement:

• NPS could pay Pearl a five-figure sum to acquire a six-figure portion of Pearl’s residuals portfolio.
• Pearl alleged that this residuals slice was worth a multiple of the scheduled interest charges on the loan.

Pearl would later argue that this Option Agreement disguised additional interest and therefore formed part of a usurious scheme.

C. Federal District Court Proceedings

In March 2022, Pearl sued NPS in the U.S. District Court for the Northern District of Texas, seeking a declaration that the Loan and Option Agreements violated Texas usury law. Pearl contended that:

• The scheduled loan payments themselves were usurious when properly analyzed under § 306.004(a); and
• The Option Agreement effectively extracted further interest in disguise, because NPS allegedly paid far less for the portfolio slice than its supposed fair value.

The district court granted NPS’s motion to dismiss. It held:

1. Applying the “spreading doctrine” using the historical “equal parts” method, the scheduled interest payments did not exceed the usury cap.
2. The Option Agreement’s value was too uncertain and speculative to be treated as “interest.”
3. Pearl failed to plead adequately that NPS used a scheme to conceal usury.

Central to the dismissal was the district court’s method for computing the maximum permissible interest. Using the “equal parts” method drawn from earlier Texas cases, the court:

• Multiplied the original principal ($375,100.85)
• By the applicable statutory maximum annual rate (28%, under Texas Finance Code § 303.009(c))
• By the term of the loan in years (3.5 years).

This yielded a maximum lawful interest figure of $367,598.83. Since the loan’s scheduled interest totaled only $309,865.91, the court concluded there was no usury.

D. The Appeal to the Fifth Circuit and the Certified Question

Pearl appealed, arguing that the district court had applied the wrong computational method. Under Pearl’s interpretation of § 306.004(a), courts must:

• Use the actuarial method, and
• Compute interest based on the declining principal balance in each payment period, not on the original principal over the entire term.

Pearl’s experts calculated that, if the statutory maximum 28% annual rate is applied by the actuarial method to a 42‑month amortizing loan where principal is steadily reduced, the total lawful interest would be only $207,277.80. On that view, the $309,865.91 actually charged would be usurious.

Pearl also claimed the Option Agreement added disguised interest of approximately $783,394, based on the alleged difference between the portfolio’s value ($832,320) and NPS’s payments to Pearl ($48,926).

The Fifth Circuit:

• Accepted that Texas law governs the usury claims, without re‑examining a choice-of-law issue argued below.
• Remanded the Option Agreement issue for further factual development and closer evaluation.
• However, found itself uncertain whether the district court’s reliance on the “equal parts” method accorded with current Texas Finance Code § 306.004(a), especially given the statute’s 1990s revisions substituting “actuarial method” for “equal parts.”

Rather than making an Erie guess, the Fifth Circuit certified the following question to the Texas Supreme Court:

The Texas Supreme Court accepted the certification and, after merits briefing and oral argument, issued the opinion at hand.

III. Summary of the Opinion

Justice Sullivan, writing for the Court, answered the certified question in the affirmative:

• When § 306.004(a) requires that the interest rate be computed by “amortizing or spreading, using the actuarial method,” that directive has concrete content.
• The ordinary meaning of “actuarial method,” as reflected in Black’s Law Dictionary, federal law (the Truth in Lending Act), Texas regulations, and similar state statutes, denotes a method that:
  • Allocates each payment first to interest and then to principal, and
  • Calculates the finance charge in each period from the then‑outstanding principal, not from the original principal amount.
• The Legislature’s deliberate shift from an “equal parts” spreading requirement to an “actuarial method” requirement in the late 1990s signals an intentional change in the law—not a stylistic update.
• As a result, where a loan provides for periodic principal reduction, courts must compute the maximum lawful interest by:
  • Re‑computing interest period by period using the statutory rate on the declining balance, and
  • Summing those period‑by‑period interest amounts over the loan term.
• The earlier “equal parts” methodology from Nevels v. Harris and Tanner Development Co. v. Ferguson arose under a different statute and in a different factual setting (interest‑only loans), and cannot override the current Finance Code’s text.

The Court thus provides a clear directive: for amortizing commercial loans, usury analysis under § 306.004(a) must be performed using a true actuarial, declining-balance method, not the simpler equal‑parts approach.

IV. Detailed Analysis

A. Statutory Framework: Texas Usury Law and § 306.004(a)

Texas usury law begins with broad definitions in Chapter 301 of the Finance Code:

• “Interest” is “compensation for the use, forbearance, or detention of money.” (Tex. Fin. Code § 301.002(a)(4)).
• A transaction is “usurious” if the interest contracted for, charged, or received exceeds the maximum amount authorized by law. (Id. § 301.002(a)(17)).

The Court reiterates traditional Texas doctrine: a usury transaction has three elements (Holley v. Watts, 629 S.W.2d 694 (Tex. 1982)):

1. A loan of money;
2. An absolute obligation to repay principal; and
3. An exaction of greater compensation than allowed by law for the use of the money.

Usury statutes are penal and thus strictly construed (First Bank v. Tony’s Tortilla Factory, Inc., 877 S.W.2d 285 (Tex. 1994)). This principle underscores that courts should not lightly expand usury liability; but it does not authorize ignoring unambiguous statutory text.

For the Pearl–NPS dispute, the relevant maximum rate is 28% per year (Tex. Fin. Code § 303.009(c)), but Texas usury analysis does not focus only on isolated years. Instead, Texas applies the “spreading” doctrine, under which interest must be “amortized or spread” across the full term of the loan (Tanner Development, 561 S.W.2d 777 (Tex. 1977); Pentico v. Mad‑Wayler, Inc., 964 S.W.2d 708 (Tex. App.—Corpus Christi–Edinburg 1998, pet. denied)).

Section 306.004(a) codifies how this spreading must be done for commercial loans:

Subsections (b) and (c) provide a safe harbor and remedy if the loan is paid off early and the interest actually received for the shorter period exceeds the lawful amount. A lender can avoid penalties by refunding or crediting the excess.

The present case turns on what “using the actuarial method” means in this statute when the loan amortizes principal.

B. Precedents and Authorities Considered

1. Usury Cases: Nevels, Tanner, Holley, Pentico, Tony’s Tortilla

The Court situates this case amid established Texas usury jurisprudence.

Holley v. Watts (1982) supplied the canonical three‑part definition of a usurious transaction, used here simply to reaffirm the basic elements of usury: loan, absolute repayment obligation, and unlawful interest.

First Bank v. Tony’s Tortilla Factory, Inc. (1994) is cited to emphasize that usury statutes are penal and must be strictly construed. This principle tends to favor lenders in close cases, but where a statute’s text has clear meaning, strict construction does not allow courts to rewrite it to be more lender‑friendly.

Tanner Development Co. v. Ferguson (1977) and Nevels v. Harris (1937) are the primary predecessors on interest “spreading.” In both, the Court had approved an “equal parts” method:

• Total principal × maximum lawful annual rate × loan term in years = maximum permissible interest.

Those decisions, however, involved:

• Interest‑only loans (no scheduled reduction in principal during the relevant period), or
• Issues like interest withheld at the outset or prepaid for a specific year.

In such settings, the difference between applying the usury cap to original principal (equal parts) and applying it to a constant outstanding principal (actuarial method) is trivial or nonexistent.

Pentico v. Mad‑Wayler, Inc. is a court of appeals case cited for its definition of “spreading” as a method of allocating total interest over the full term of the loan—consistent with the conceptual framework, but not controlling on the specific statutory question at issue here.

2. Statutory Interpretation Cases: Textualism and Statutory History

The Court heavily relies on its modern textualist canon:

• BankDirect Capital Finance, LLC v. Plasma Fab, LLC, 519 S.W.3d 76 (Tex. 2017) – “The text is the alpha and omega of the interpretive process.” This frames the analysis: legislative text is paramount.
• GEO Group, Inc. v. Hegar, 709 S.W.3d 585 (Tex. 2025); In re Facebook, Inc., 625 S.W.3d 80 (Tex. 2021); Whole Woman’s Health v. Jackson, 642 S.W.3d 569 (Tex. 2022); Pruski v. Garcia, 594 S.W.3d 322 (Tex. 2020) – these cases reiterate that courts apply unambiguous statutes as written, harmonize provisions, and eschew interpretations that render text meaningless.
• Fort Worth Transportation Authority v. Rodriguez, 547 S.W.3d 830 (Tex. 2018) – supports reliance on dictionary definitions to discern ordinary meaning.
• Texas State Board of Examiners of Marriage & Family Therapists v. Texas Medical Association, 511 S.W.3d 28 (Tex. 2017) – authorizes consideration of a term’s usage in other statutes and decisions when determining ordinary meaning.
• Brown v. City of Houston, 660 S.W.3d 749 (Tex. 2023), and Ojo v. Farmers Group, Inc., 356 S.W.3d 421 (Tex. 2011) (Willett, J., concurring) – these distinguish between statutory history (changes in enacted text over time) and legislative history (committee reports, debates). While the Court is wary of legislative history, it embraces statutory history as part of the text’s context, drawing on Scalia & Garner’s Reading Law.
• Texas Lottery Commission v. First State Bank of DeQueen, 325 S.W.3d 628 (Tex. 2010) – stands for the presumption that the Legislature chooses its words carefully and purposively.

Together, these cases undergird the Court’s methodology: start with the text, inform the ordinary meaning with authoritative definitions and related statutes, and take seriously explicit changes in statutory language.

3. Regulatory and Federal Definitions: The Meaning of “Actuarial Method”

Because “actuarial method” is not defined in the Texas Finance Code, the Court consults several external but authoritative sources:

• Black’s Law Dictionary (7th ed. 1999):
  “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.”
• Texas Department of Banking regulations, 7 Tex. Admin. Code § 12.33(a)(1), defining “actuarial method” as:
  “The method of allocating payments made on a debt between the amount financed and the finance charge pursuant to which a payment is applied first to the accumulated finance charge and any remainder is subtracted from, or any deficiency added to, the unpaid balance of the amount financed.”
• Federal Truth in Lending Act (TILA), 15 U.S.C. § 1615(d)(1), uses nearly identical language to define the actuarial method.
• Numerous other state statutes define the actuarial method in substantially the same terms (e.g., Arizona, Colorado, Delaware, Iowa, Kansas, Maine, Maryland, Minnesota, New Hampshire, New Jersey, Ohio, Oklahoma, South Carolina, Tennessee, Vermont, West Virginia, Wisconsin, Wyoming).

This convergence strongly indicates the ordinary, technical meaning of “actuarial method” in financial law: period‑by‑period allocation of payments first to interest (calculated on the outstanding balance), and then to principal.

C. The Court’s Legal Reasoning

1. The Textual Starting Point

The Court anchors its analysis in § 306.004(a)’s text, emphasizing:

The statute states that, to determine usury, the interest rate must be computed by “amortizing or spreading, using the actuarial method during the stated term of the loan.” Since “actuarial method” is undefined internally, the Court looks to:

• Black’s Law Dictionary;
• Texas Department of Banking regulations;
• Federal TILA; and
• Other states’ similar laws.

All converge on an actuarial approach that:

• Applies each payment first to accumulated interest;
• Then reduces the outstanding principal; and
• Calculates subsequent interest on the reduced balance.

This is fundamentally inconsistent with an “equal parts” method that simply treats the original principal as static.

2. Statutory History: From “Equal Parts” to “Actuarial Method”

The Court gives decisive weight to the Legislature’s change in language. The 1975 usury statute, governing loans secured by an interest in real property, provided:

In 1997 and 1999, the Legislature enacted new statutes—later codified as § 306.004(a) and its analogs—that replaced the “equal parts” language with:

Under the Court’s textualist approach and the canon cited from Scalia & Garner, such a substitution is presumed to signal a change of meaning. The Legislature is not presumed to alter statutory text idly; moving from “equal parts” to “actuarial method” indicates a substantive shift in how interest must be spread.

NPS argued that, as a policy matter, the “equal parts” method is simpler and more predictable. But the Court responds that policy preferences cannot override enacted text:

Section 306.004(a), read in context and in light of its statutory history, is unambiguous in requiring the actuarial method.

3. Distinguishing Nevels and Tanner

NPS relied heavily on Nevels and Tanner and the 1975 statute that had codified the equal‑parts approach. The Court acknowledges these cases but confines them to:

• Their different statutory regime (pre‑1997 “equal parts” language), and
• Their distinct factual setting of interest‑only loans.

Because the loans in those cases did not provide for periodic principal reductions in the relevant period, applying the usury cap to original principal versus outstanding principal made little practical difference. Here, by contrast, the NPS loan:

• Calls for regular principal payments (constant principal component each month), and
• Specifies an increasing interest component over time.

If courts ignored principal reductions and used the equal‑parts method, they would permit interest levels that no rational lender–borrower pair could have expected under an actuarial cap. The Court illustrates the absurdity by noting that, under the equal‑parts method, Pearl’s final monthly payment would contain $11,871.09 in interest when the remaining principal balance is only $8,930.97. Such a result is inconsistent with the notion that interest compensates for the use or detention of money.

Thus, Nevels and Tanner do not control the construction of the current Finance Code, and the actuarial method must be given its full effect where loans amortize principal.

4. Application to the Pearl–NPS Loan

While the Court does not perform the full mathematical calculation in the opinion, it clarifies the operative rule:

• The “total lawful interest” on the NPS Loan is the sum of the lawful interest amounts for each payment period,
• Where each period’s lawful interest is calculated by applying the maximum allowable rate (28% per annum) to the outstanding principal balance during that period, using the actuarial method.

Pearl’s figures—showing a lawful interest cap of $207,277.80 versus $309,865.91 actually charged—illustrate why the choice of method can ultimately decide whether the transaction is usurious. The Supreme Court does not resolve that ultimate question; it leaves application of the clarified method to the federal courts on remand.

D. Complex Concepts Simplified

1. What Is “Spreading” Interest?

“Spreading” refers to how courts allocate the total interest contracted for, charged, or received across the entire term of the loan to determine an effective interest rate. The idea is that occasional spikes or dips in interest in particular months or years should not control if the overall rate over the agreed term stays within the legal maximum.

2. What Is the “Equal Parts” Method?

Under the historical “equal parts” method:

1. Take the original principal amount of the loan.
2. Multiply by the maximum lawful annual rate.
3. Multiply by the loan term in years.

The resulting product is the maximum amount of interest that may be contracted for, charged, or received over the life of the loan without violating the usury cap.

This method assumes, explicitly or implicitly, that the full principal remains outstanding during the entire term. That assumption is reasonable for interest‑only loans, but it breaks down for amortizing loans, where principal steadily decreases.

3. What Is the “Actuarial Method”?

The actuarial method is a more precise, finance‑industry‑standard way of computing how payments are allocated between principal and interest. In simplified terms:

1. At the start of each period, determine the outstanding principal balance.
2. Compute the interest for that period by multiplying the balance by the periodic rate (e.g., annual rate ÷ 12 for monthly payments).
3. Apply that period’s payment first to pay the interest due for the period.
4. Apply any remaining amount of the payment to reduce principal.
5. Repeat the process for each subsequent period using the new, reduced principal balance.

If the statute caps the annual percentage rate at 28% and requires use of the actuarial method, the effect is that, in each payment period, the lawful interest may not exceed 28% (on an annualized basis) of the remaining principal.

4. Why Does the Method Matter So Much?

For amortizing loans, the difference between the two methods can be dramatic:

• Under equal parts, the law effectively treats the loan as if the entire principal remained outstanding for the full term, even after substantial principal has been repaid.
• Under the actuarial method, the law recognizes that, once a borrower pays down principal, there is less money being “used” or “detained,” and thus the maximum lawful compensation for that use should decline accordingly.

In the Pearl–NPS loan, ignoring principal reductions allowed what would otherwise be an extreme result: a final payment with more interest than remaining principal. The actuarial method prevents such distortions.

E. Impact and Implications

1. Immediate Effect on the Pearl–NPS Litigation

The Texas Supreme Court’s answer does not directly declare the NPS Loan usurious. Its role in a certified‑question proceeding is limited to interpreting state law. However, the opinion effectively:

• Replaces the district court’s equal‑parts analysis with an actuarial, declining-balance approach; and
• Strongly suggests that, if Pearl’s actuarial calculations are accurate, the interest may indeed exceed the statutory cap.

The Fifth Circuit, and potentially the district court on remand, must now:

• Apply the actuarial method to the loan’s actual amortization schedule;
• Determine whether the total interest contracted for, charged, or received exceeds the maximum lawful amount under § 306.004(a); and
• Further evaluate whether the Option Agreement constitutes additional “interest” and, if so, factor it into the usury analysis.

2. Broader Impact on Texas Commercial Lending

This decision has several important systemic implications:

• Mandatory actuarial compliance for amortizing commercial loans. Lenders must ensure that, when principal is scheduled to be repaid periodically, the total interest—when recomputed using the actuarial method on declining balances—does not exceed the statutory maximum.
• Obsolescence of the “equal parts” shortcut for amortizing loans. The equal‑parts method can no longer be used as a compliance safe harbor outside the narrow circumstances where the principal remains constant (e.g., interest‑only periods).
• Increased importance of precise amortization schedules. Drafting loan documents will require careful modeling of payment schedules against the usury cap using actuarial computations. Casual use of “factor rates” or total‑repayment‑only structures without regard to amortization may lead to inadvertent usury.
• Alignment with national lending standards. By adopting the same general meaning of “actuarial method” used in TILA and other states’ statutes, Texas makes compliance simpler for multi‑state lenders who already operate under an actuarial framework.

3. Litigation and Evidentiary Consequences

Practically, the opinion means:

• Expert testimony and detailed financial evidence will often be crucial in usury cases, as parties contest the correct actuarial allocations and effective interest rate.
• Borrowers will have stronger grounds to challenge loans that only appear compliant under an equal‑parts analysis but exceed the cap once principal reductions are taken into account.
• Lenders may need to re‑evaluate existing portfolios of amortizing commercial loans to assess whether any are usurious under the clarified rule, potentially triggering remedial actions under § 306.004(b)–(c).

4. Relationship to Older Case Law Going Forward

The Court does not overrule Nevels or Tanner, but it confines them:

• To the statutory environment in which they arose (pre‑1997 usury laws with equal‑parts language), and
• To fact patterns where principal did not amortize (interest‑only structures or special timing issues), or where the equal‑parts and actuarial results effectively converge.

Going forward, courts and practitioners must be careful not to treat those decisions as authorizing equal‑parts spreading under current § 306.004(a) in circumstances where principal declines over time.

5. Methodological Significance: Textualism and Statutory Change

Beyond usury, the opinion is also significant for its approach to statutory interpretation. The Court:

• Reaffirms that enacted text, not policy preferences or prior judicial gloss, controls, especially when the Legislature has changed the words of the statute.
• Demonstrates the legitimate use of statutory history, as opposed to legislative history, to infer that a change in language reflects a change in legal meaning.
• Illustrates how technical terms of art (like “actuarial method”) are to be understood by reference to dictionaries, regulations, and related federal and state enactments.

These interpretive moves will likely be cited in future cases addressing updated or re‑codified statutes where the Legislature substitutes new terms for old ones.

V. Key Concepts Recap (Plain-Language Summary)

• Usury – Charging more interest for the use of money than Texas law allows.
• Interest – The compensation a borrower pays for using or detaining the lender’s money.
• Spreading – Allocating interest across the entire loan term to test whether the effective rate exceeds the legal maximum.
• Equal parts method – A historical method that calculates maximum lawful interest as original principal × maximum rate × term in years, assuming principal remains outstanding throughout.
• Actuarial method – A period‑by‑period calculation where each payment is applied first to interest (computed on the outstanding principal) and then to reduce principal, with interest in later periods computed on the reduced balance.
• Core holding – For commercial loans with periodic principal payments, § 306.004(a) requires courts to apply the actuarial method and base the usury analysis on the declining principal balance in each payment period, not the loan’s original principal amount.

VI. Conclusion

In American Pearl Group, L.L.C. v. National Payment Systems, L.L.C., the Supreme Court of Texas decisively clarifies how courts must implement the state’s usury caps for commercial loans under Texas Finance Code § 306.004(a). By insisting that “actuarial method” means what it universally means in financial and legal contexts, and by recognizing the Legislature’s deliberate shift away from an “equal parts” approach, the Court requires a declining‑balance, actuarial calculation whenever a commercial loan amortizes principal.

This ruling aligns Texas’s usury methodology with national standards, increases the precision and complexity of usury analysis, and underscores that statutory language changes are not to be dismissed as mere cosmetic edits. For lenders, borrowers, and courts alike, the decision re‑sets the baseline for evaluating whether a commercial loan’s total compensation for the use of money stays within Texas’s stringent usury limits.