Texas usury law update — Implications for oil & gas lending: American Pearl Group, LLC v. National Payment Systems, LLC

“When money is borrowed, it comes at a price. Texas usury law sets a strict limit on just how high that price can go.”¹Am. PEARL Grp., L.L.C. v. Nat’l Payment Sys., L.L.C., 2025 Tex. LEXIS 424, at *1, (Tex. May 23, 2025).

In the ever-changing world of oil and gas finance, staying informed is crucial for professionals who advise on or support commercial loans vital to industry operations. A recent Texas Supreme Court decision, American Pearl Group, LLC. v. National Payment Systems, LLC (decided May 23, 2025),²Am. PEARL Grp., L.L.C. v. Nat’l Payment Sys., L.L.C., 2025 Tex. LEXIS 424, 68 Tex. Sup. J. 1008, 2025 LX 95731, 2025 WL 1478179 (Tex. May 23, 2025) (answering certified question from Am. Pearl Grp., L.L.C. v. Nat’l Payment Sys., L.L.C., No. 23-10484, 2024 WL 4132409 (5th Cir. Sept. 10, 2024) (per curiam)). has clarified how interest rates on commercial loans must be calculated under Texas usury law, with significant implications for the oil and gas industry. This article breaks down the court’s ruling, focusing on the shift from the “equal parts” method to the “actuarial method” for calculating interest, and explores its relevance to oil and gas lending. We’ll also draw insights from an article by Ted Huffman and Eric R. Hail, published in The National Law Review (2025),³Ted Huffman and Eric R. Hail, Texas Supreme Court Clarifies Usury Law: Maximum Interest Must Be Calculated Using the Actuarial Method Resulting in Lower Interest Charges as Principal Balance Declines, The National Law Review, Vol. XV, No. 150 (May 30, 2025). and address the importance of “choice-of-law” provisions in loan agreements.

Background: The American Pearl Group case

In American Pearl Group, the Texas Supreme Court addressed a certified question from the U.S. Court of Appeals for the Fifth Circuit regarding Section 306.004(a) of the Texas Finance Code, which governs how to determine if a commercial loan is usurious.⁴Am. PEARL Grp., 2025 Tex. LEXIS 424 at *1. The case arose from a dispute between American Pearl Group, LLC (“Pearl”) and National Payment Systems, LCC (“NPS”). NPS loaned Pearl $375,100.85, to be repaid over 42 months with total payments of $684,966.76, including $309,865.91 in interest.⁵Id. at *4-*6. Pearl argued that the interest exceeded Texas’s usury cap of 28% per annum under Tex. Fin. Code § 303.009(c).⁶Id. at *5-*6.

The district court initially dismissed Pearl’s usury claim, using the “equal parts” method to calculate the maximum allowable interest. This method multiplied the total principal ($375,100.85) by the maximum legal interest rate (28%) and the loan term (3.5 years), yielding a maximum interest of $367,598.83 — higher than the $309,865.91actually charged, suggesting no usury violation.⁷Id. at *5-*6. However, Pearl appealed, arguing that Section 306.004(a) requires the “actuarial method,” which accounts for the declining principal balance with each payment.⁸Id. at *6. Using this method, the maximum permissible interest was only $207,277.80, making the loan usurious.⁹Id.

The Texas Supreme Court agreed with Pearl, holding that the “actuarial method” requires courts to calculate interest based on the declining principal balance for each payment period, not the initial total principal.¹⁰Id. at *13-*14. This ruling marks a significant departure from the simpler “equal parts” approach previously used in cases like Nevels v. Harris, 102 S.W.2d 1046, (Tex.1937) and Tanner Dev. Co. v. Ferguson, 561 S.W.2d 777 (Tex. 1977).¹¹Id.

Equal parts vs. actuarial method: Understanding the difference

To appreciate the impact of this ruling, let’s contrast the two methods for calculating interest under Texas usury law:

Equal parts method

This approach, rooted in older Texas case law and a repealed 1975 statute,¹²Id. at *11. calculates the maximum allowable interest by multiplying the total principal by the maximum legal interest rate and the loan term in years. For example, in American Pearl Group, the district court applied this method:
$375,100.85 (principal) × 28% (max rate) × 3.5 years = $367,598.83 (max interest).¹³Id. at *5-*6.

This method assumes the principal remains constant over the loan term, ignoring periodic principal payments. It’s simpler but can overestimate the allowable interest, especially for loans with regular principal reductions, as common in oil and gas financing.

Actuarial method

Mandated by Tex. Fin. Code § 306.004(a), this method calculates interest for each payment period based on the outstanding principal balance at the start of that period. Payments are first applied to interest, then to principal, reducing the balance for the next period’s calculation.¹⁴Tex. Fin. Code § 306.004(a) (“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.” (emphasis added). The formula, as simplified by Huffman and Hail¹⁵Huffman and Hail (May 30, 2025)., is: Interest for period = (APR / payment periods per year) × outstanding principal balance.

In American Pearl Group, this method yielded a maximum interest of $207,277.80, significantly lower than the equal parts method, because it accounts for the declining principal as Pearl made monthly payments.¹⁶Am. PEARL Grp., 2025 Tex. LEXIS 424 at *6.

The Texas Supreme Court emphasized that the Legislature’s 1997 and 1999 amendments to the Texas Finance Code replaced the “equal parts” language with “actuarial method,” reflecting a deliberate shift.¹⁷Id. at *11. The court cited definitions from Black’s Law Dictionary, the Texas Administrative Code, and the federal Truth in Lending Act, all of which describe the actuarial method as calculating interest on the declining principal balance.¹⁸Id. at *8-*9. See, e.g. the Am. PEARL Grp., court also cited Oklahoma law 14A OS § 1-301 ( “Actuarial Method” means the method, . . ., of allocating payments made on a debt between principal . . . and loan finance charge . . . pursuant to which a payment is applied first to the accumulated loan finance charge . . . and the balance is applied to the unpaid principal . . . .”

Relevance to oil and gas lending

Oil and gas lending often involves complex commercial loans, such as those for leasing, drilling, or equipment financing, where periodic principal payments are standard. These loans may be secured by oil and gas leasehold interests, production revenues, or other assets, and they can potentially carry high interest rates due to the industry’s volatility. The American Pearl Group ruling directly impacts how lenders and borrowers in this sector must assess compliance with Texas usury law.

For example, consider a $1 million loan for drilling operations, repayable over 36 months with monthly principal and interest payments. Under the equal parts method, a lender might calculate the maximum interest based on the full $1 million principal, potentially allowing higher interest charges. However, the actuarial method requires recalculating interest each month based on the declining principal, significantly lowering the total permissible interest. If a lender charges interest based on the equal parts method, they risk violating Texas’s 28% usury cap, exposing them to severe penalties, including treble damages and potential forfeiture of the entire loan amount.¹⁹TEX. FIN. CODE §§ 305.001–305.004.

Borrowers, such as independent operators or professionals negotiating on behalf of clients, must also be vigilant. A loan that appears compliant under an outdated calculation may be usurious, providing grounds to challenge the agreement or seek remedies. This is particularly critical in the oil and gas industry, where cash flow constraints often lead to reliance on ongoing financing.

Takeaways for petroleum landmen

The American Pearl Group decision offers valuable lessons for lenders, borrowers, and lawyers in the oil and gas industry. Below are key takeaways, including implications of “choice-of-law” provisions:

Lenders must adopt the actuarial method

Commercial lenders can no longer rely on the equal parts method to calculate interest on loans governed by Texas law. They must use the actuarial method, which reduces the maximum allowable interest as the principal declines. Lenders should audit existing loan portfolios to ensure compliance, especially for oil and gas loans with periodic principal payments. Failure to comply risks significant penalties, include treble damages and loan forfeiture.²⁰Id.

Borrowers gain leverage

Borrowers, including oil and gas operators, can use the actuarial method to scrutinize loan agreements. If a lender’s interest charges exceed the cap calculated using the declining principal balance, borrowers may have grounds to challenge the loan as usurious. Professionals advising clients should ensure loan terms are evaluated under the actuarial method to protect against overcharges.

Choice-of-law provisions matter

The American Peal Group case underscores the importance of “choice-of-law” provisions in loan agreements, particularly when Texas law is selected. The Fifth Circuit noted that Texas law governed Pearl’s usury claims, despite a “lurking choice-of-law issue” not fully briefed.²¹Am. PEARL Grp., 2025 Tex. LEXIS 424 at *6-*7. In the oil and gas industry, loans often cross state lines (e.g., a lender in New York financing a Texas drilling project). If a loan agreement specifies Texas law, the actuarial method applies, even for out-of-state lenders or borrowers.

For example, choice-of-law clauses in oil and gas financing agreement are often negotiated to favor the lender’s home state but may select Texas law due to its robust usury protections. Borrowers (or their representatives) should review these clauses carefully, as a Texas choice-of-law provision could trigger the American Pearl Group requirements, potentially lowering allowable interest or exposing lenders to usury claims. Conversely, selecting another state’s law (e.g., New York, with no usury cap for commercial loans above $2.5 million)²²NY CLS GEN. OBLIG. § 5-501(6)(b) (“No law regulating the maximum rate of interest which may be charged, taken or received, . . . , shall apply to any loan . . . in the amount of two million five hundred thousand dollars or more.”) might avoid Texas’ stricter rules, but this requires explicit agreement.

Proactive compliance documentation

Both lenders and borrowers should document interest calculations using the actuarial method to demonstrate compliance or identify violations. Financial advisors and attorneys can play a key role by ensuring that loan agreements include clear amortizations schedules reflecting the declining principal balance. Software tools or financial advisors familiar with the actuarial method can assist in these calculations.

Conclusion

The Texas Supreme Court’s decision in American Pearl Group is a significant change for commercial lending in Texas, particularly in the high-stakes oil and gas industry. By mandating the actuarial method over the equal parts approach, the court has lowered the ceiling on permissible interest charges, protecting borrowers but increasing compliance burdens for lenders. Petroleum landmen and oil and gas professional, as key players in facilitating deals, must understand this shift to advise clients effectively. Pay close attention to choice-of-law provisions, as they can extend Texas’ usury protections to out-of-state transactions. By staying informed and proactive, you can advance oil and gas lending transaction while mitigating legal risks.

Footnotes

• 1
  Am. PEARL Grp., L.L.C. v. Nat’l Payment Sys., L.L.C., 2025 Tex. LEXIS 424, at *1, (Tex. May 23, 2025).
• 2
  Am. PEARL Grp., L.L.C. v. Nat’l Payment Sys., L.L.C., 2025 Tex. LEXIS 424, 68 Tex. Sup. J. 1008, 2025 LX 95731, 2025 WL 1478179 (Tex. May 23, 2025) (answering certified question from Am. Pearl Grp., L.L.C. v. Nat’l Payment Sys., L.L.C., No. 23-10484, 2024 WL 4132409 (5th Cir. Sept. 10, 2024) (per curiam)).
• 3
  Ted Huffman and Eric R. Hail, Texas Supreme Court Clarifies Usury Law: Maximum Interest Must Be Calculated Using the Actuarial Method Resulting in Lower Interest Charges as Principal Balance Declines, The National Law Review, Vol. XV, No. 150 (May 30, 2025).
• 4
  Am. PEARL Grp., 2025 Tex. LEXIS 424 at *1.
• 5
  Id. at *4-*6.
• 6
  Id. at *5-*6.
• 7
  Id. at *5-*6.
• 8
  Id. at *6.
• 9
  Id.
• 10
  Id. at *13-*14.
• 11
  Id.
• 12
  Id. at *11.
• 13
  Id. at *5-*6.
• 14
  Tex. Fin. Code § 306.004(a) (“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.” (emphasis added).
• 15
  Huffman and Hail (May 30, 2025).
• 16
  Am. PEARL Grp., 2025 Tex. LEXIS 424 at *6.
• 17
  Id. at *11.
• 18
  Id. at *8-*9. See, e.g. the Am. PEARL Grp., court also cited Oklahoma law 14A OS § 1-301 ( “Actuarial Method” means the method, . . ., of allocating payments made on a debt between principal . . . and loan finance charge . . . pursuant to which a payment is applied first to the accumulated loan finance charge . . . and the balance is applied to the unpaid principal . . . .”
• 19
  TEX. FIN. CODE §§ 305.001–305.004.
• 20
  Id.
• 21
  Am. PEARL Grp., 2025 Tex. LEXIS 424 at *6-*7.
• 22
  NY CLS GEN. OBLIG. § 5-501(6)(b) (“No law regulating the maximum rate of interest which may be charged, taken or received, . . . , shall apply to any loan . . . in the amount of two million five hundred thousand dollars or more.”)