Actuarial Method and Declining Principal: Redefining Usury Calculations Under Texas Finance Code § 306.004(a)

I. Introduction

In American Pearl Group, L.L.C., et al. v. National Payment Systems, L.L.C., No. 24‑0759 (Tex. May 23, 2025), the Supreme Court of Texas answered a certified question from the United States Court of Appeals for the Fifth Circuit concerning the proper method for calculating interest under Texas’s commercial usury statute, Texas Finance Code § 306.004(a).

The certified question went to the heart of modern usury analysis in Texas commercial lending: when a commercial loan requires periodic principal payments, must courts compute the maximum lawful interest using the “actuarial method” based on the declining principal balance each period, or may they use an “equal parts” spreading method based on the original principal amount over the full term?

The case arose out of a loan and option arrangement in the payment‑processing industry between:

American Pearl Group, L.L.C., along with its principals John Sarkissian and Andrei Wirth (collectively, “Pearl”) – a seller of merchant-processing services compensated via residual streams; and
National Payment Systems, L.L.C. (“NPS”) – an intermediary that places merchant accounts with processors and receives residual payments.

In 2019, NPS loaned Pearl approximately $375,100.85, to be repaid over 42 months with contractually scheduled monthly payments that included both principal and interest. Pearl alleged that, properly computed, the interest charged exceeded the statutory maximum 28% annual rate for commercial loans, thus rendering the transaction usurious.

The federal district court used the older “equal parts” spreading methodology, based on the total principal and the full term, and concluded the loan was not usurious. Pearl argued on appeal that § 306.004(a), as now worded, requires use of the actuarial method based on declining principal, which would make the loan usurious. Finding Texas law unsettled on this precise question, the Fifth Circuit certified it to the Texas Supreme Court.

The Texas Supreme Court’s answer—yes, the actuarial method requires calculation on the declining principal balance where the loan amortizes principal—significantly reshapes the way commercial usury exposure must be evaluated in Texas.

II. Summary of the Opinion

Justice Sullivan, writing for a unanimous Court, held that:

When a loan provides for periodic principal payments during the loan term, Texas Finance Code § 306.004(a)’s mandate to use the “actuarial method” requires courts to calculate maximum permissible interest based on the declining principal balance for each payment period, not on the original total principal amount spread in equal parts.

The Court emphasized:

The Legislature’s textual change from “spreading in equal parts” (in the 1975 usury statute) to “using the actuarial method” (in the 1997/1999 enactments now codified at § 306.004) signals a deliberate shift in computation method.
The term “actuarial method” has a settled, technical meaning in law and finance: interest is computed each period on the current outstanding principal; each payment is applied first to accrued interest, and only the remainder reduces principal.
Earlier cases like Nevels v. Harris and Tanner Development Co. v. Ferguson, which endorsed an “equal parts” spreading approach, were either based on different statutes or involved interest‑only loans where principal did not decline during the relevant period; those precedents do not control under today’s statutory language for amortizing loans.

Accordingly, where a commercial loan amortizes principal, the “maximum lawful interest” is the sum of the interest that could be charged in each payment period, computed via the actuarial method on the declining balance. Under that method, Pearl’s loan would allow only about $207,277.80 in total lawful interest, far less than the $309,865.91 NPS actually contracted to receive—suggesting a usury problem if the statute applies as Pearl contends.

The Court did not decide whether the Option Agreement payments constituted additional disguised interest; that question remains for the federal courts on remand. But the Court’s interpretation of § 306.004(a) dramatically lowers the ceiling for lawful interest under Pearl’s Loan Agreement.

III. Statutory and Legal Background

A. Texas Usury Framework

Texas law defines:

“Interest” as “compensation for the use, forbearance, or detention of money.” (Tex. Fin. Code § 301.002(a)(4)).
“Usurious” interest as interest exceeding the maximum amount allowed by law. (§ 301.002(a)(17)).

A usurious transaction requires three elements (from Holley v. Watts, 629 S.W.2d 694 (Tex. 1982)):

A loan of money,
An absolute obligation to repay principal, and
Exaction of compensation greater than that allowed by law for the use of the money.

The applicable maximum rate in this dispute is 28% per year (§ 303.009(c)). But the Court reiterates an important doctrinal point from Tanner:

A loan is not usurious simply because interest in a particular year exceeds the statutory maximum. Courts must spread interest over the entire contract term and then determine the effective rate for that term.

Thus, usury analysis hinges not just on the nominal rate or on any single year’s charges, but on how interest is allocated over the life of the loan under the statutory “spreading” mandate.

B. Section 306.004(a): The Central Provision

Section 306.004(a) provides the computation rule for commercial loans:

“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.” (Tex. Fin. Code § 306.004(a) (emphasis added)).

Subsections (b) and (c) create a safe harbor if a loan is paid off early and more interest than allowed is collected for that shorter period: the lender can avoid penalties by refunding or crediting the excess. Those subsections assume the same underlying computational method as (a).

The dispute in this case focuses entirely on what “using the actuarial method” requires when the loan amortizes principal.

C. The 1975 Statute and “Equal Parts” Spreading

Before the current Finance Code, a 1975 statute governing loans secured by real property required:

“[D]etermination of the rate of interest for the purpose of determining whether the loan is usurious . . . shall be made by amortizing, prorating, allocating, and spreading, in equal parts during the period of the full stated term of the loan, all interest at any time contracted for, charged, or received ... in connection with the loan.” Act of Mar. 12, 1975, 64th Leg., R.S., ch. 26, § 1, 1975 Tex. Gen. Laws 47, 47 (repealed 1997) (emphasis added).

Under that statute—and under Nevels and Tanner—courts commonly calculated the maximum lawful interest by:

Taking the total principal amount,
Multiplying by the maximum annual rate,
Multiplying by the loan term in years.

This produced an overall cap on the total dollar amount of interest, without regard to how principal declined over time. The district court in American Pearl used precisely this method.

IV. The Court’s Legal Reasoning

A. Textualism and the Starting Point: The Words of the Statute

The Court reiterates its firmly textualist approach:

“The text is the alpha and omega of the interpretive process.” (BankDirect Capital Finance, LLC v. Plasma Fab, LLC, 519 S.W.3d 76, 86 (Tex. 2017)).

Key interpretive principles the Court applies:

Give statutory terms their plain, ordinary meaning, informed by context (e.g., GEO Group, Inc. v. Hegar, In re Facebook, Inc.).
Do not render any part of the text meaningless (Whole Woman’s Health v. Jackson, Pruski v. Garcia).
When the text is unambiguous, apply it as written, without judicially reweighing policy considerations.

The phrase “actuarial method” is not defined in the Finance Code, so the Court turns to ordinary-meaning tools: dictionaries, administrative rules, federal law, and other states’ statutes.

B. Defining “Actuarial Method”

The Court canvasses several authoritative sources:

Black’s Law Dictionary (7th ed. 1999): defines “actuarial method” as a means of determining interest by using the loan’s annual percentage rate to calculate the finance charge for each payment period, after crediting each payment first to interest, then to principal.
Texas Department of Banking Rule, 7 Tex. Admin. Code § 12.33(a)(1): defines the actuarial method as allocating payments so that each payment is applied first to accumulated finance charges, and only the remainder to the unpaid balance.
Federal Truth in Lending Act (TILA), 15 U.S.C. § 1615(d)(1): adopts essentially the same definition.
Numerous state statutes (Arizona, Colorado, Delaware, Iowa, Kansas, Maine, Maryland, Minnesota, New Hampshire, New Jersey, Ohio, Oklahoma, South Carolina, Tennessee, Vermont, West Virginia, Wisconsin, Wyoming) use materially identical definitions.

From this convergence, the Court concludes that “actuarial method” has a uniform, technical meaning that:

Ties interest computation to the current outstanding principal;
Requires period‑by‑period allocation of payments between interest and principal;
Applies each payment first to accrued interest, then to reduce principal.

Put simply, the actuarial method is the standard “declining balance” approach familiar from mortgages and car loans, as opposed to a simple pro rata spread across the original principal for the entire term.

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

The Court draws a critical distinction between:

Legislative history (e.g., debates, committee reports), which it avoids, and
Statutory history—“the statutes repealed or amended by the statute under consideration”—which it treats as part of the context of the law itself (citing Brown v. City of Houston and Scalia & Garner’s Reading Law).

That statutory history shows:

The 1975 statute expressly required interest to be spread “in equal parts” over the term.
In 1997 and 1999, the Legislature enacted new provisions—now embodied in Tex. Fin. Code § 306.004(a)—requiring interest to be computed “by amortizing or spreading, using the actuarial method during the stated term of the loan.”
The Legislature thereby removed the “in equal parts” language and replaced it with “actuarial method.”

The Court applies the presumption that “a change in the language of a prior statute presumably connotes a change in meaning” (quoting Scalia & Garner). Accordingly:

The Legislature’s deliberate shift from “equal parts” to “actuarial method” is “telling” and must be given effect.

NPS’s argument for retaining the older “equal parts” computation as a matter of simplicity and predictability is rejected as policy‑based and inconsistent with the text as amended. Courts may not override clear statutory language for convenience.

D. Distinguishing Nevels and Tanner

NPS relied heavily on two Texas Supreme Court decisions:

Nevels v. Harris, 102 S.W.2d 1046 (Tex. 1937)
Tanner Development Co. v. Ferguson, 561 S.W.2d 777 (Tex. 1977)

In both cases, the Court approved the spreading doctrine and allowed interest to be spread over the contract term in a way that sometimes produced a higher year‑by‑year nominal rate, so long as the overall effective rate was within the legal maximum.

The current Court distinguishes them in two key respects:

Different statutory regime: They were decided under the earlier statutory framework (including the 1975 “equal parts” language), not under § 306.004(a) as now worded.
Interest‑only loans: In both cases, the loans at issue were effectively “interest‑only” for relevant periods—no principal reduction occurred during the periods in question. Thus, there was no declining principal balance to track. In that context, it made sense to spread interest over the full term without regard to changing principal.

By contrast, the NPS–Pearl loan required regular principal reduction. In that setting, the “equal parts” method becomes analytically distorted. The Court gives a striking example:

Under the equal‑parts method, Pearl’s final monthly payment would include $11,871.09 in interest on a principal balance of only $8,930.97.

That incongruity highlights why the actuarial method—keyed to the current principal—is the only method consistent with the term’s ordinary meaning and the Legislature’s statutory revision.

The bottom line: Nevels and Tanner remain good law for their holdings on spreading and on withheld/advanced interest, but they do not authorize continued use of the equal‑parts formula where the statute now mandates the actuarial method.

E. Application to the NPS–Pearl Loan

While the Texas Supreme Court does not itself compute the precise usury outcome, it sets out the competing methodologies:

1. District Court’s “Equal Parts” Calculation

Principal: $375,100.85
Maximum rate: 28% per year (§ 303.009(c))
Term: 3.5 years (42 months)
Maximum lawful interest (equal‑parts method): Principal × Rate × Term = $375,100.85 × 0.28 × 3.5 ≈ $367,598.83.

Because NPS’s scheduled interest of $309,865.91 is less than $367,598.83, the district court held the loan non‑usurious.

2. Pearl’s Actuarial‑Method Calculation

Pearl’s expert approach:

Treats each period’s payment as applied first to the interest due for that period, computed on the then‑outstanding principal at 28%,
Applies the remainder to reduce principal, producing a declining balance,
Sums up the maximum interest that could lawfully accrue for all 42 periods under this declining‑balance model.

Using this actuarial framework, Pearl arrived at a total allowable interest of approximately $207,277.80, far below the $309,865.91 NPS actually charged—making the loan facially usurious if § 306.004(a) is applied as Pearl contends.

The Texas Supreme Court does not endorse the exact numerical figure but accepts the conceptual premise: under the actuarial method, interest must be computed on the declining principal, not on the original principal for the entire term. The maximum lawful interest is the sum of each period’s permitted interest under that method.

The Court’s formal holding is therefore:

“If the loan provides for periodic principal payments during the loan term, ‘using the actuarial method’ requires courts to base their interest calculations on the declining principal balance for each payment period.”

V. Complex Concepts Simplified

A. What Is “Usury” in Practical Terms?

In everyday language, a loan is usurious if:

The borrower must absolutely repay the principal;
The lender charges more in “interest” (broadly defined as compensation for using the money) than the statute allows.

Texas’s commercial usury law sets a ceiling—here, 28% per year—and imposes penalties (often severe: forfeiture of interest, sometimes multiples of illegal interest) if that cap is exceeded. Because these are penal statutes, courts “strictly construe” them, generally resolving genuine ambiguities in favor of avoiding penalties—but not at the expense of disregarding clear statutory language.

B. The “Spreading Doctrine”

Consider a loan where a large chunk of interest is taken “up front,” or where, in some early years, the nominal rate seems high. Under the spreading doctrine (from cases like Nevels and Tanner):

Courts do not test for usury year-by-year. Instead, they:

Take all interest contracted for, charged, or received over the life of the loan,
“Spread” it over the full term,
Ask whether the effective annual rate over the term exceeds the statutory ceiling.

Section 306.004(a) retains this spreading concept but now specifies that the spreading must be done “using the actuarial method.”

C. The Actuarial Method vs. Equal‑Parts Method

1. Equal‑Parts Method (Old Approach)

Under the old “equal parts” approach:

You treat the entire principal as though it is outstanding for the entire term,
You multiply that by the maximum legal annual rate and by the number of years,
You get a single dollar figure of maximum total interest.

This ignores how quickly the borrower is repaying principal. Even if the principal is substantially paid down mid‑term, the equal‑parts method still assumes the full original principal for the entire period.

2. Actuarial Method (Newly Clarified Requirement)

Under the actuarial method:

At the start of each payment period, you identify the actual outstanding principal balance.
You compute the interest due for that period at the legal maximum based on that balance.
When the borrower pays, the payment goes:
- First to satisfy that period’s interest;
- Any remaining amount reduces the principal.
The next period’s interest is computed on this new, lower principal.
You sum the period‑by‑period interest amounts to find the maximum total lawful interest over the term.

This method mirrors how most amortizing loans actually work in practice and is sensitive to the timing and amount of principal reductions.

D. “Interest‑Only” vs. Amortizing Loans

An “interest‑only” loan requires the borrower to:

Pay interest periodically, but
Repay the entire principal in a lump sum at maturity.

During the term, the principal does not decline. In such cases, computing interest on the original principal for the entire period aligns with how the loan functions.

An “amortizing” loan, like Pearl’s, involves:

Regular periodic payments,
Each payment consisting of both interest and principal,
Gradual reduction of principal to zero by maturity.

For such loans, the equal‑parts method produces distorted results, because it ignores that the borrower is no longer using the full original principal for the entire period. The actuarial method, by contrast, matches the economic reality.

VI. Precedents and Authorities Cited

A. Core Texas Usury and Interpretation Cases

Holley v. Watts, 629 S.W.2d 694 (Tex. 1982) – Defines the three elements of a usurious transaction (loan, absolute obligation, excessive compensation).
First Bank v. Tony’s Tortilla Factory, Inc., 877 S.W.2d 285 (Tex. 1994) – Reiterates that usury statutes are penal and must be strictly construed.
Nevels v. Harris, 102 S.W.2d 1046 (Tex. 1937) – Early articulation of spreading doctrine; addressed interest withheld from loan proceeds; involved interest-only structure.
Tanner Development Co. v. Ferguson, 561 S.W.2d 777 (Tex. 1977) – Reaffirmed spreading doctrine under the old statute; recognized that a contract may be non‑usurious when interest is spread over the full term even if some years’ nominal rate is higher.
Pentico v. Mad‑Wayler, Inc., 964 S.W.2d 708 (Tex. App.—Corpus Christi–Edinburg 1998, pet. denied) – Defined “spreading” as allocating total interest over the full term of the loan.

These cases establish the basic architecture of Texas usury law and the spreading doctrine, which § 306.004(a) now operationalizes through the actuarial method.

B. Textualist Methodology Cases

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.”
GEO Group, Inc. v. Hegar, 709 S.W.3d 585 (Tex. 2025) – Recent example of plain‑meaning textual analysis.
In re Facebook, Inc., 625 S.W.3d 80 (Tex. 2021) – Reinforces focus on statutory text and context.
Whole Woman’s Health v. Jackson, 642 S.W.3d 569 (Tex. 2022) – Cited for the principle that unambiguous text must be applied as written.
Pruski v. Garcia, 594 S.W.3d 322 (Tex. 2020) – Emphasizes that when the statute’s words are clear, judicial inquiry largely ends.
Fort Worth Transportation Authority v. Rodriguez, 547 S.W.3d 830 (Tex. 2018) – Approves consulting dictionaries for ordinary meaning.
Texas State Bd. of Examiners of Marriage & Family Therapists v. Texas Medical Ass’n, 511 S.W.3d 28 (Tex. 2017) – Endorses examining usage of terms in other statutes and similar authorities.
Brown v. City of Houston, 660 S.W.3d 749 (Tex. 2023) – Explains the legitimate use of statutory history (as distinct from legislative history) as interpretive context.
Ojo v. Farmers Group, Inc., 356 S.W.3d 421 (Tex. 2011) (Willett, J., concurring) – Distinguishes between history of the law (statutory evolution) and legislative history; cited to support reliance on statutory changes.
Texas Lottery Comm’n v. First State Bank of DeQueen, 325 S.W.3d 628 (Tex. 2010) – Presumption that Legislature chooses statutory language carefully and purposefully.

Together, these authorities underscore the Court’s commitment to a text‑first, history‑of-the-text method, resisting appeals to policy or convenience when they conflict with enacted wording.

C. External Legal Sources

Black’s Law Dictionary (7th ed. 1999) – Provides a standard legal definition of “actuarial method.”
Texas Department of Banking, 7 Tex. Admin. Code § 12.33(a)(1) – Defines actuarial method in the context of banking regulation; demonstrates consistent usage within Texas law.
Truth in Lending Act (TILA), 15 U.S.C. § 1615(d)(1) – Federal definition of actuarial method, evidencing the term’s uniform technical meaning in consumer finance law.
Other states’ statutes – Numerous states’ adoption of the same definition reinforces the Court’s conclusion that “actuarial method” is a term of art with widely accepted content.

While none of these external sources is controlling on § 306.004(a), they are powerful contextual evidence of what the Legislature likely meant by adopting the same term.

VII. Impact and Future Implications

A. Immediate Impact on the American Pearl Dispute

For the certified case itself:

The Fifth Circuit now has an authoritative answer: § 306.004(a) requires the actuarial method on a declining balance when the loan amortizes principal.
Applying that method, Pearl’s contention that the loan is usurious gains substantial force, as the scheduled interest appears to exceed the actuarially computed maximum.
The federal courts must also address whether the Option Agreement payments constitute additional disguised interest—if so, any usury violation would be even more pronounced.
Section 306.004(b)–(c)’s cure provisions may be invoked if excess interest was received before payoff and refunded or credited, though nothing in the opinion suggests that occurred here.

B. Broader Consequences for Texas Commercial Lending

This decision has substantial implications for lenders and borrowers in Texas:

Recalculation of Usury Risk
Commercial lenders can no longer rely on simply multiplying original principal × maximum rate × term to determine “safe” total interest on amortizing loans. Instead, they must:
- Model the actual amortization schedule,
- Compute interest on the declining balance,
- Ensure that aggregate contracted interest does not exceed the sum of the maximum lawful interest per period.
Contract Drafting and Product Design
Loan documents and internal compliance models will need revision:
- Commercial lenders should build in actuarial‑method usury “cushions”, particularly for loans with front‑loaded interest.
- Complex fee structures, “discounts,” or contingent payments tied to residual revenues (like Pearl’s Option Agreement) must be carefully scrutinized as potential interest.
Potential for Increased Litigation
Lenders who structured amortizing commercial loans under the assumption that equal‑parts spreading remained acceptable may now face:
- Borrowers’ challenges asserting that, actuarially, the contracted interest exceeded the lawful cap.
- Disputes over how to classify various ancillary payments (options, fees, residuals) as “interest.”
Although this opinion clarifies the law, its retroactive interpretive effect could prompt reexamination of existing portfolios.
Harmonization with Consumer Law and Other Jurisdictions
By adopting the standard definition of actuarial method consistent with TILA and many other states, Texas:
- Promotes uniformity and predictability for multi‑state lenders.
- Makes it easier to rely on existing actuarial tools used for consumer lending to assess commercial usury compliance.
Limitations on Policy Arguments
The Court’s rejection of NPS’s plea for a “simpler” equal‑parts rule reinforces that:
- Courts will not rewrite unambiguous statutes to accommodate administrative convenience.
- Any reconsideration of the usury framework or computational complexity must come from the Legislature, not the judiciary.

C. Doctrinal Significance in Statutory Interpretation

Beyond usury, the opinion is a strong reaffirmation of several interpretive doctrines:

Text controls: Courts will prioritize the words chosen over perceived policy or past practice when the statute changes.
Statutory evolution matters: When the Legislature changes “equal parts” to “actuarial method,” courts must presume a substantive shift, not a stylistic tweak.
Technical terms of art: When a statute uses a term like “actuarial method” with a widely recognized technical meaning, courts will adopt that meaning unless the statute clearly says otherwise.
Limited role for older precedent: Earlier cases decided under a different statutory regime or different factual premises (e.g., interest‑only loans) will be limited or distinguished rather than mechanically extended.

D. Certified Questions and Federal–State Interaction

The Court’s exercise of its jurisdiction under Tex. Const. art. V, § 3‑c, to answer certified questions:

Prevents the Fifth Circuit from making an Erie “guess” on an important question of Texas commercial law;
Provides authoritative clarification for all federal and state courts applying § 306.004(a);
Demonstrates the value of certification in harmonizing state and federal interpretations on core state‑law issues.

The Court notes—but does not resolve—a “lurking choice‑of‑law issue” the parties had argued below but dropped on appeal. Its answer presupposes that Texas law governs, as the Fifth Circuit stated, but leaves any choice‑of‑law disputes to the federal courts.

VIII. Conclusion

American Pearl Group v. National Payment Systems establishes a clear and consequential rule for Texas usury law:

When Section 306.004(a) requires interest to be computed “by amortizing or spreading, using the actuarial method,” and the loan provides for periodic principal reductions, courts must calculate maximum permissible interest on the declining principal balance in each payment period, not on the original principal amount spread equally across the entire term.

This holding:

Marks a definitive departure from the old “equal parts” computation under the 1975 statute in the context of amortizing loans;
Aligns Texas with the standard actuarial method used in federal and other state law;
Requires lenders to calibrate usury compliance more precisely to actual amortization schedules;
Reinforces the Court’s commitment to textualism and to giving full effect to deliberate statutory language changes.

For practitioners, the opinion is a reminder that in usury analysis, as in statutory construction more broadly, words matter. The Legislature’s choice to replace “equal parts” with “actuarial method” fundamentally alters the permissible structure of commercial interest charges in Texas, particularly for loans that amortize principal. Going forward, lenders and borrowers alike must account for this clarified computational framework when structuring, litigating, and evaluating commercial loan agreements under Texas law.