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

DECEMBER 06, 1989

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



ROBERTSON, JUSTICE, CONCURRING IN DENIAL OF PETITION FOR REHEARING

ON PETITION FOR REHEARING

I.

Experience has long taught that the law of the state may no more repeal the" laws "of economics than King Canute was able in the year 1028 to hold back the tidal waters of Denmark and England. Price fixing tries to repeal the laws of economics. Usury statutes are price ceiling if not price fixing statutes. Credit is a commodity not different from a television set or an automobile, and there is no greater reason why the state should place ceilings on the price vendors may charge for the one than for the others. Nothing I am about to say marks any retreat from my long held view that usury statutes (like other price fixing regulations) are bad public policy resting on false premises (from the economic to the ethical) which in the long run hurt more than help their intended beneficiaries, see Robertson, Myth and Reality in Consumer Credit Rate Regulation, 43 Miss. L.J. 429 (1972), nor that where a vacuum be found in the law we should legislate sensibly, see Galloway v. Travelers Insurance Co., 515 So. 2d 678, 686-87 (Miss. 1987) (Robertson, J., concurring). I but recognize (what judicially I must) that the legislative enactment enjoys a supremacy we are not at liberty to ignore.

 Mississippi once had a simple usury statute - a single maximum rate of interest no lender could exceed on pain of forfeiture. No doubt in (partial) recognition of the economic folly of such a law but always having in mind its (un)biblical heritage and political popularity, the legislature has now given us a complex usury statute. The lesson of this case is that, if anything is worse than a simple usury statute, it is a complex usury statute.

 From a variety of quarters - from the Appellee, Peoples

 Bank of Indianola, and from Amici Curiae, the Mississippi Department of Banking and Consumer Finance, and from the Mississippi and the American Bankers Association, we have been importuned to revisit the substance of the opinion released on May 3, 1989. We are told the practical effect of our decision, when read with other law, is to produce incongruous and anomalous results. We are told our opinion calls into question long-standing custom and practice within the banking business of this state, a point I suspect exaggerated a bit. We are told our reading of that part of the usury statute at issue is contrary to the interpretation of the Mississippi Department of Banking and Consumer Finance.

 The answer to all of these points is found in the principle of legislative supremacy. The well aged legislative language at issue today has enjoyed a life that simply will not admit the points so potently put against it. The opinion of the Court is legally correct, and I write separately only to address some of the matters noted by the Bank and its friends on rehearing.

 II.

 The Court's opinion in a footnote says" Knowledge of the formula of the Rule of 78's is not necessary to an understanding of this case. "The note is apt. Still, Bank and Amici take us to the woodshed pretty good over it. I offer a Ned-and-the-first-primer example suggesting the possibility that we do understand the Rule of 78's.

 JARGON

 PRECOMPUTED FINANCE CHARGE - This is the figure representing the total amount of finance charge *fn1 which will accrue over the natural life of the loan (i.e., projected accrued finance charge to the date of maturity). Pursuant to federal" Truth in Lending "regulations, this figure is computed at the time the loan is made by multiplying the amount financed times the annual percentage rate (APR) *fn2 and is included in the figure representing the total indebtedness.

 EXAMPLE: A $1,000.00 loan for one year at an annual percentage rate (APR) of 12% (compounded annually) will yield a precomputed finance charge of $120.00. The debtor has thus committed to pay a total of $1,120.00. If the loan is to be repaid in twelve installments, then the finance charge is spread equally across the repayment schedule, resulting in twelve equal payments of $93.33. (The rounding error of 4% is picked up in the last payment.)

 REBATE OF UNEARNED FINANCE CHARGE - This term comes into

 play if under the terms of the loan the debtor is permitted to prepay the outstanding balance at some date prior to the scheduled end of its natural life (i.e., prior to maturity). The lender treats the transaction as though the debtor has paid all of the precomputed finance charge and then the lender remits the unaccrued portion.

 EXAMPLE: In the above example, the debtor proposes to pay off the entire loan immediately after the third payment. He has paid three installments equalling $279.99, leaving a balance of the committed $1,120.00 at $840.01. In this circumstance, if the

 contract permits prepayment with penalty, the lender is not going to require that the debtor pay all of the remaining principal and all of the precomputed finance charge. Rather, the lender will compute how much of this total remainder ($840.01) represents finance charge which has not yet accrued and reduce the payoff figure by that amount.

 RULE OF 78's - This is a method of computing the above defined figure, the rebate of unearned finance charge. It is also known as the" sum of the year digits method ". The" 78's "part of its name is derived from this fact - if one adds together the numbers from 12 to 1 (12흟 etc.), 78 is the resulting sum. It spreads the finance charges across the life of a loan using a fraction where 78 is the denominator (the number on the bottom). 12/78ths of the total precomputed finance charge (15.4%) is allocated to the first month, 11/78ths (14.1%) is allocated for the next, etc., until the 12th and last month, where 1/78th (1.3%) of the total finance charge is allocated. *fn3

 EXAMPLE: In the continuing example, the $120.00 precomputed finance charge would be allocated across the twelve payments thus: $18.46, $16.92, $15.36, $13.80, $12.36, $10.68, $9.24, $7.68, $6.12, $4.56, $3.12, $1.60 (4 cent round error). With prepayment occurring after the third payment, as above, $50.64 (42.2% of the total finance charge) will have already" accrued "under the Rule of 78's, leaving a rebate in the amount of $69.36 ($120.00 - $50.64).

 THE RUB

 As the example illustrates, the Rule of 78's skews the accrual of finance charges in such a way as to inflate the charge early in the life of the loan. If, in our example, the borrower chooses to prepay the loan after the first installment, he will have paid $18.46 in" interest "for the use of $1,000.00 for one month's time - 1.846% of the principal balance. This computes to an annualized interest rate of 22.15% (1.846 x 12). This aberration (for lack of a better word) is the nut of the present

 appea ...


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