Case Name: Larry DENLEY and Mary M. Denley v. PEOPLES BANK OF INDIANOLA
Court: Mississippi Supreme Court
Jurisdiction: Mississippi
Decision Date: 1989-05-03
Citations: 553 So. 2d 494
Docket Number: No. 58430
Parties: Larry DENLEY and Mary M. Denley v. PEOPLES BANK OF INDIANOLA.
Judges: Before ROY NOBLE LEE, PRATHER and BLASS, JJ.
Reporter: Southern Reporter, Second Series
Volume: 553
Pages: 494–505

Head Matter:
Larry DENLEY and Mary M. Denley v. PEOPLES BANK OF INDIANOLA.
No. 58430.
Supreme Court of Mississippi.
May 3, 1989.
Rehearing Denied Dec. 6, 1989.
Kenneth K. Crites, S. Allan Alexander, Patterson, Tollison & Alexander, Oxford, for appellants.
E. Stephen Williams, Young, Scanlon & Sessums, Jackson, for appellee.
Charles F. Johnson, III, Edward A. Wil-mesherr, E. Marcus Wiggs, III, Butler, Snow, O’Mara, Stevens & Cannada, Jackson, for amicus curiae.
Before ROY NOBLE LEE, PRATHER and BLASS, JJ.

Opinion:
ROY NOBLE LEE, Chief Justice,
for the Court:
Larry Denley and wife, Mary, instituted suit against Peoples Bank of Indianola (Bank) in the Circuit Court of Tunica County, which suit was transferred to the Circuit Court of Sunflower County. They charge that the Bank's method of computing interest on a home loan which they paid ahead of schedule was usurious when satisfied, and they sought the penalties provided by the usury law. The lower court granted summary judgment in favor of the Bank, and the Denleys have appealed here, assigning two (2) errors committed by the lower court.
Facts
The facts of this case are undisputed. On July 16, 1984, Mary and Larry Denley (the Denleys) borrowed $14,007.50 from the Peoples Bank of Indianola (the Bank). The promissory note, secured by a deed of trust on residential real estate, provided for a precomputed finance charge of $9,796.22 (at an annual percentage rate of 16%) and the Denleys signed the precomputed note for $23,803.72 ($14,007.50 plus $9,796.22). The note provided that the Denleys were to pay $230.00 per month for 59 months and a final balloon payment of $10,233.72. The note provided in part:
I may prepay this note in whole or in part at any time. However, any partial prepayment will not reduce or excuse any subsequently scheduled payments until this note is paid in full. If and when prepaid in full, or upon maturity by acceleration, the finance charge will be recalculated using the rule of 78's to determine exact amount then due.
Approximately 16 months after obtaining the loan, when the Denleys had made 14 payments of $230.00 each, they sought to pay off the entire indebtedness. The Bank computed the amount of the payoff balance to be $15,302.53 and the Denleys paid that amount. Having made 14 monthly install ment payments of $230.00 each, the Den-leys had paid a total" in monthly installments of $3,220.00. That amount added to the payoff balance of $15,302.53 meant that the Denleys in the 16th month of the loan had paid $18,504.13 plus two late charges totalling $18.40, or a total sum of $18,522.53. The Denleys were shocked to learn that during the second year of the loan, after having paid $3,220.00, they owed a payoff balance of an amount greater than originally had been received from the Bank. The Bank computed the payoff by recalculating the finance charge on the note, using the rule of 78's as provided in the promissory note. All parties agreed that use of the rule of 78's in this case results in the lender's retaining more of the finance charge than the lender would be entitled to retain if the finance charge were computed by the actuarial method.
Law
I.
THE LOWER COURT ERRED IN RULING THAT MCA § 75-17-1(12) (SUPP. 1985) [RECODIFIED AS MCA § 75-17-31 (1987) ] DID NOT PROHIBIT THE BANK FROM CHARGING A FINANCE RATE WHICH EXCEEDED 4% FOR THE PREPAYMENT OF A RESIDENTIAL HOME LOAN IN THE SECOND YEAR.
H.
THE LOWER COURT ERRED IN FAILING TO RULE THAT MCA § 75-17-1(4) (SUPP.1987) MANDATES THAT INTEREST BE COMPUTED BY THE ACTUARIAL METHOD AND PROHIBITS THE CALCULATION OF INTEREST RATES BY THE RULE OF 78's FOR THE PURPOSE OF INTEREST REBATES TO HOME LOAN BORROWERS.'
The two assigned errors present the single issue of whether or not the Bank is statutorily prohibited from computing a rebate of finance charges on a precomputed loan by the method of 78's, if the resulting yield to the Bank on prepayment is greater than that specified in Mississippi Code Annotated § 75-17-1(4) (Supp.1987) or exceeds the penalty allowed by § 75-17-1(12) (Supp.1985). The Denleys contend that when they paid off their promissory note in sixteen (16) months after having made fourteen (14) payments, they should have been subject to a finance charge (interest) only for the time that they had use of the money. The rate on their note was precomputed to give the Bank a yield of sixteen percent (16%). It was agreed that the Bank could legally have contracted for an 18.43% rate at the time the note was signed.
When the Bank was asked by the Den-leys to compute a payoff amount, the Bank, in accordance with the terms of the note, computed by use of the rule of 78's a payoff balance of $15,302.53, which the Denleys paid. This payoff balance, when added to the $3,220.00 already paid in monthly installments, brought the Denleys' total payment to $18,504.13 (exclusive of late charges).
The Denleys calculate the yield -to the Bank on the transaction to be 23.86% of the amount borrowed. They acknowledge they owe interest for the period of time during which they had use of the money and calculate that the Bank's actual earned interest for that period was $2,934.96, and that the Bank was prohibited by § 75-17-1(4) from collecting an amount in excess of $2,934.96 in finance charges. They acknowledge that, had the Bank so contracted, it could have collected an additional prepayment penalty, but that the amount which the Bank received in excess of actuarily-com-puted earned interest, even if considered a prepayment penalty, is also excessive, since it exceeds 4% of the unpaid principal balance as stated in MCA § 75-17-1(12) (Supp. 1985).
The Bank contends that nothing in the statutes provides that the actuarial method is to be used upon voluntary prepayment of the credit obligation.
Pertinent parts of the interest statutes which relate to and control the question follow:
(1) The legal rate of interest on all notes, accounts and contracts shall be eight percent (8%) per annum through June 30, 1986, and six percent (6%) per annum thereafter, calculated according to the actuarial method, but contracts may be made, in writing, for payment of a finance charge as otherwise provided by this section or as otherwise authorized by law.
(4) Notwithstanding the foregoing and any other provision of law to the contrary, through June 30, 1986, any borrower or debtor may contract for and agree to pay a finance charge which will result in a yield not to exceed the greater of ten percent (10%) per annum or five percent (5%) above the index of market yield of the Monthly Twenty-Year Constant Maturity Index of Long-Term United States Government Bond Yields, as compiled by the United States Treasury Department, each calculated according to the actuarial method, on any loan, mortgage, or advance which is secured by a lien on residential real property or by a lien on stock in a residential cooperative housing corporation where the loan, mortgage or advance is used to finance the acquisition of such stock. The term "residential real property" as used in this subsection, means real estate upon which there is located or to be located a structure or structures designed in whole or in part for residential use, or which comprises or includes one or more apartments, condominium units or other dwelling units.
MCA § 75-17-1(1) and (4). (Emphasis added)
The Bank contends that the method provided by the Rule of 78's in computing interest is not prohibited by the statute and relies upon § 75-17-11, following:
When any particular rate of interest per annum is specified in any contract or evidence of indebtedness, it shall not be construed as any increase of said rate merely that the interest at the specified rate per annum is stipulated to be paid quarterly, or semi-annually, or at any other period less than a year, nor shall the fact that the principal and interest is paid at a date earlier than that stipulated in the contract or evidence of indebtedness be taken as any increase of the rate percentum although paid for the whole period stipulated; provided, however, that the provisions hereof shall not apply where such contract or evidence of indebtedness is renewed or extended in any manner within the period stipulated and a rate of interest is contracted for, collected or received as compensation or consideration, or as a result thereof, di rectly or indirectly, for the remaining portion of the period stipulated.
MCA § 75-17-11 (1972).
The Bank cites Hood v. First National Bank in Meridian, 208 Miss. 658, 45 So.2d 251 (1950), as authority for its position. Hood is distinguished in that the note which was paid early had a maturity date "plainly and definitely fixed at ninety days after the date of the note." This Court emphasized the fact that the note in question did not permit payment "on or before ninety days after date," and said that a "creditor is not obliged to receive repayment of a debt or interest thereon before maturity." 45 So.2d at 253, citing Beck v. Tucker, 147 Miss. 401, 409, 113 So. 209, 210 (1927). See also Kornegay v. Georgia State Building & Loan Ass'n, 91 Miss. 551, 44 So. 783 (1907).
In Benoit v. United Companies Mortgage of Mississippi, Inc., 504 So.2d 196, 198 (Miss.1987), this Court declined to decide "what is and what is not a prepayment penalty." We note that the Court there was applying a statutory section of the Small Loan Regulatory Law, which expressly authorizes the use of the rule of 78's. MCA § 75-67-127(l)(c) (Supp.1985). Not so here.
We are of the opinion that § 75-17-1(4) is controlling in this case. Concisely, this section provides, in part:
any borrower or debtor may contract for and agree to pay a finance charge which will result in a yield not to exceed [specified percentages] each calculated according to the actuarial method, on any loan, mortgage or advance which is secured by a lien on residential real property....
The terms "yield" and "calculated according to the actuarial method" are plain and unambiguous. At the beginning of this transaction, the bank precomputed the "finance charge" of $9,796.22 over the life of the loan. The contractual rate of "yield" to the bank was 16%, even though the permissible legal yield at the time was 18.43% per annum. The loan on its face was legal. A note which includes precomputed finance charges presupposes the note will be paid off according to its terms, i.e., it will run to maturity and legally yield the prospectively calculated amount to the bank. We conclude that "yield" simply means what the bank earns on a transaction, and that, if there is any alteration in the payment schedule, the "yield" must be recomputed at the time the indebtedness is discharged for it is only at the time of discharge (payment) that the actual "yield" can be determined.
When the Denleys elected to prepay the note, the bank was required to recalculate the amount of interest which it had earned over the term during which the Denleys actually had use of the borrowed money in order to come within the statute, i.e., § 75-17-1(4), limiting the bank to a specified "yield . calculated according to the actuarial method." It was incumbent upon the bank to recalculate the interest by the actuarial method and not by the Rule of 78's so as not to exceed the specified legal rate of "yield." In failing to use the actuarial method provided by statute, the Bank received a yield of 23.86% on the principal for the period of the loan. Therefore, the judgment of the lower court is reversed, judgment is rendered here for the Denleys, and the case is remanded to the Circuit Court of Sunflower County for further proceedings consistent with this opinion.
REVERSED, RENDERED AND REMANDED.
HAWKINS and DAN M. LEE, P.JJ., and PRATHER, ROBERTSON, SULLIVAN, PITTMAN and BLASS, JJ., concur.
ANDERSON, J., not participating.
. Knowledge of the formula of the Rule of 78's is not necessary to an understanding of this case. It is sufficient to know that the Rule of 78's contains within it a systematic bias in favor of the lender if the loan is prepaid in the early years. A full description of the method is contained in an article by Hunt, The Rule of 78: Hidden Penalty for Prepayment in Consumer Credit Transaction, 55 B.U.L.Rev. 331 (1975). This article also compares the Rule of 78's with the actuarial method.
A brief description of the rule is contained in the affidavit of Bank's expert Baughn as follows:
The rule is also referred to as the "sum of the digits" method and is based on the premise that the amount of finance charge rebated upon prepayment should reflect the fact that the consumer has use of a larger portion of the principal during the early part of the loan. Under the rule, each month of the loan's term is assigned a digit, with the first month's digit equalling the total number of months in the agreed period of the loan. The second month is then assigned a digit one less than that of the first, and so on, until the digit assigned to the last month equals 1. For a twelve (12) month loan, the sum of the digits is seventy-eight (78). The sum of the digits serves as the denominator in a fractional equation and the numerator is the sum of the digits for those months which have expired at the time of the prepayment.
The sum of the digits in the Denleys' loan is 1,830. The Denleys prepaid the note in full after fourteen (14) monthly payments and after sixteen (16)' months into the term of the loan, they were entitled to a rebate of 990/1830 or 54.098% of the finance charge. Since the total finance charge was $9,796.22, the rebate to the Denleys was $5,299.59. Since the bank's earning and the consumer's rebate are complementary, Peoples Bank was entitled to charge $4,496.63 ($9,796.22 — $5,299.59 = $4,496.63) as the earned finance charge through the date of prepayment.
See also Note, Acceleration and Prepayment Disclosures under Truth in Lending: Nemesis of the Rule of 78's, 1978 Wash.U.L.Q. 141, 149 (1978).