Computing Interest Rebates under the Rule of 78ths: A Formula for Usury upon Default in Maximum-Interest Precomputed Credit Transactions
![handle is hein.journals/stmlj10 and id is 112 raw text is: COMPUTING INTEREST REBATES UNDER THE RULE
OF 78THS: A FORMULA FOR USURY UPON DEFAULT
IN MAXIMUM-INTEREST PRECOMPUTED CREDIT
TRANSACTIONS
MICHAEL R. PERNA
He who increases his wealth by usury and interest amasses it for someone
else who will bestow it on the poor.*
The extension of consumer credit in Texas has traditionally raised
unique problems concerning usury' and the various methods of rebating
unearned interest pursuant to default of precomputed consumer credit
transactions.2 A precomputed consumer credit transaction, occasionally
referred to as an add-on loan,3 consists of an arrangement whereby the
finance charge is added to the principal amount financed, resulting in a
* Proverbs 28:8 (Jerusalem Bible).
1. Usury is defined as any charge of interest in excess of the amount permitted by law.
'TEX. REV. CIV. STAT. ANN. art. 5069-1.01(d) (Vernon 1971); see 8 ST. MARY'S L.J. 204, 205
(1976). The essential elements of usury consist of a loan or forbearance of money, coupled
with an agreement to repay such money at a rate of interest higher than the legal amount.
Seebold v. Eustermann, 13 N.W.2d 739, 743 (Minn. 1944).
2. This same problem also comes into focus upon voluntary prepayment, refinancing,
and consolidation of precomputed consumer credit transactions. See Hunt, The Rule of 78:
Hidden Penalty For Prepayment in Consumer Credit Transactions, 55 B.U.L. REV. 331, 332
(1975) [hereinafter cited as Hunt]. Prepayment occurs when the debtor chooses to accelerate
the final payment date, thereby paying off the loan in full, and rendering it necessary to
compute the unearned interest as of that date, though already paid in full. This interest must
then be rebated. TEX. REV. CIV. STAT. ANN. arts. 5069-3.15(6), -4.01(6), -5.02(4), -6.02(10), -
7.04 (Vernon 1971); see Dyl & Joehnk, Prepayment Penalties Inherent in the Rule of 78s-A
Truth-In-Lending Issue, 8 J. BANK RESEARCH 16, 16 (1977); Hunt, supra at 331.
A refinancing occurs where the creditor extends the term over which the remaining
payments are to be made, thereby reducing the debtor's monthly payment. No new cash is
advanced by the creditor in a refinancing. See UNIFORM CONSUMER CREDIT CODE § 2.504; Hunt,
supra at 332. A consolidation exists where new credit is extended pursuant to refinancing of
the old debt. See UNIFORM CONSUMER CREDIT CODE § 2.502(2); Hunt, supra at 332. A small
loan debtor, for example, seeking additional capital prior to the final payment date of the
loan would enter into a consolidation. Hunt, supra at 332. In both a refinancing and a
consolidation, the prior debt is in effect prepaid by a portion of the subsequent credit ex-
tended. See UNIFORM CONSUMER CREDIT CODE §§ 2.504 (official comment), .505; Hunt, supra
at 332. Flipping is the popular name given to the creditor's practice of encouraging their
debtors to repeatedly consolidate their debts. See UNIFORM CONSUMER CREDIT CODE § 2.504
(official comment); Comment, Consumer Protection: Truth in Lending Disclosure of the Rule
of 78ths, 59 IOWA L. REv. 164, 176 (1973). See generally B. CLARK & J. FONSECA, HANDLING
CONSUMER CREDIT CASES § 20(c), at 70 (1972).
3. Dyl & Joehnk, The Rule of 78's: Bias Against the Borrower, 10 J. CONSUMER AFF. 251,
251 (1976).](ViewImageLocal?handle=hein.journals/stmlj10&div=15&collection=&method=preview&ext=.png&size=3)
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