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LARRY DENLEY AND MARY M. DENLEY v. PEOPLES BANK OF INDIANOLA

MAY 03, 1989

LARRY DENLEY AND MARY M. DENLEY
v.
PEOPLES BANK OF INDIANOLA



BEFORE ROY NOBLE LEE, PRATHER and BLASS

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 installment payments of $230.00 each, the Denleys 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. *fn1

 Law

 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.

 II.

 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 Denleys 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 ...


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