argument on the question of usury as to the District of Columbia National Bank was heard on cross-motions for partial summary judgment January 17, 1974. In order to facilitate consideration of the arguments then made, it would be useful to review the circumstances of the loans made to the named plaintiffs representing the class certified as to the Bank:
1. David and Carla Cohen executed a loan October 4, 1968, receiving $747.72. They were obligated to repay $804.00 in twelve equal monthly installments of $67.00. The Bank designated $48.24 as interest for the loan; the remaining $8.04 is accounted for by a $4.83 fee for credit investigation and processing, and a $3.21 premium for credit life insurance.
2. Susan Davis, with plaintiff Jane Hardin as an endorser, executed a loan June 19, 1968, receiving $591.48. She was obligated to repay $636.00 in twelve equal monthly installments of $53.00. The Bank designated $38.16 as interest; the remaining $6.36 is accounted for by a $3.82 fee for credit investigation, and a $2.54 premium for credit life insurance.
3. Susan Davis executed another loan July 3, 1969, receiving $600.00. She was obligated to repay $652.08 in twelve equal monthly installments of $54.34. The Bank designated $45.56 as interest for the loan; the remaining $6.52 is accounted for by a premium for credit life insurance in that amount.
II. The Issues.
Briefly, plaintiffs' position is that under District of Columbia statute and case law, the interest charged these borrowers (and all other members of the certified class with regard to their loans) was in excess of eight percent per annum, because the interest was charged without regard to what is called the "declining balance" of the principal.
Defendant counters with the proposition that computation without regard to the declining balance is and has always been a fully and widely accepted practice in the District of Columbia and enjoys executive and Congressional acquiescence. As such, defendant contends, this established custom and usage must be given great weight, leading to the conclusion that there was no usury here.
Before examining the pertinent case law, it will be helpful to note the various types of loans that will be discussed later so as to avoid confusion.
This lawsuit concerns personal, unsecured installment loans, all of which were of one year's duration.
In making these loans, the Bank tendered a certain amount of money and began almost immediately to collect a return on that money by requiring monthly payments, or installments. Although there was evidently no formal schedule issued to show how those payments were to be credited as between interest and principal, the payments were such that principal was clearly being repaid from the first installment.
Similar to such installment loans are personal, secured loans, such as automobile loans and mortgages. Most cases have dealt with the mortgage situation, and that case law is uniformly to the effect that interest can be computed only with regard to the principal outstanding as payment upon the mortgage continues. This may be referred to as computing interest on the "declining balance of principal" or simply "declining balance."
Another type of loan is a discount loan, where the interest on the loaned principal sum of money is deducted, or discounted, at the time the loan is made. Thus, a loan for $1,000 for one year at eight percent has interest due in the amount of $80. This $80 is discounted immediately, and the lender tenders $920 to the borrower; at the end of the year, the borrower must repay $1,000. A narrow exception to the usury statutes has been carved out in the case of certain discount loans.
As is readily apparent, the loans just discussed have two distinctive features: one type has periodic payments, or installments, required (declining balance loans) and the other has certain lump sum payments required (discount loans). The distinction will become important in applying analogous case law to the situation at bar.
Unfortunately, matters can be further confused by the fact that it is possible both to discount a loan and to require it to be paid back in monthly installments. Thus, for example, on a loan of $1,000 for one year at eight percent, the lender could discount it and tender $920, then require monthly payments of $76.66 for the remainder of the term.
In the present case, plaintiffs have not alleged what sum of money was the original principal involved in their loans, and from the sum tendered, it is not clear whether or not the Bank discounted these loans. However, the Bank has stated that it "had always employed the 'discount' method in making its installment loans, calculating interest with reference to the amount borrowed and the duration of the loan without regard to the declining principal balance and deducting such interest from the sum the borrower actually received."
The thrust of the plaintiffs' claim is that the Bank ignored the declining balance of their loans when computing interest, the result of which was to extract a usurious rate of interest with respect to the amount of loaned money actually within the control and at the disposal of plaintiffs. Thus, it is alleged that the borrowers were in possession of less principal as each periodic repayment is made. The principal balance steadily declined, and the borrowers used and controlled a steadily decreasing amount of money. Interest being essentially the charge for the use of money, plaintiffs argue that the Bank could not legally charge interest on money which the borrowers did not possess and could not use or control. Accordingly, plaintiffs allege that the interest collectible on these installment loans should have accounted for the continuously diminishing unpaid principal balance. It is clear, no matter which mathematical formula is employed,
that the Bank did not compute interest according to the declining balance, as the Bank frankly and readily admits. Plaintiffs allege that, by not so doing, the Bank exacted windfall payments of unjustified and unearned interest.
The Bank does not deny that the loans were made in the manner and amounts alleged by plaintiffs. It does, however, contend that the long-standing practice by and among District of Columbia banks has been to make personal, unsecured loans on an installment basis, charging interest against the entire principal for the full term, and that this custom and usage has gained such wide acceptance that the practice cannot now be considered usury. Further, the Bank places great reliance upon certain inaction of Congress, when confronted with questions relating to these loans, to show that there has been acquiescence and thereby implicit approval of this banking practice.
III. District of Columbia Law.
At the root of the question, of course, lies the District of Columbia usury statute:
The parties to an instrument in writing for the payment of money at a future time may contract therein for the payment of interest on the principal amount thereof at any rate not exceeding 8 percent per annum.