First National Bank in Mena v. Nowlin

Under the National Bank Act, national banks could charge interest at the rate permitted by the state in which the bank was located. Charging rates in excess of the maximum rate within a state constituted usury. In Arkansas, pursuant to state caselaw, the maximum allowable interest rate was the equivalent of a 10 percent effective interest rate, or yield. The First National Bank in Mena (First National) (plaintiff) was a national bank operating in Arkansas. First National issued two installment loans to Jack Nowlin (defendant). One note was payable in 12 monthly installments with 8 percent annual interest discounted (i.e., 8 percent of the face value of the note was subtracted from the loan before it was disbursed, and the borrower would repay the face value). The effective interest rate, or yield, for this loan was 16.05 percent per year. The other note was payable in 36 monthly installments with 8 percent interest in advance (i.e., 8 percent of the face value of the note was added to the total amount to be repaid over the term of the note). This loan had an effective interest rate of 15.57 percent. Nowlin claimed the notes were usurious and void under Arkansas law and refused to make any payments. First National sued Nowlin for repayment. Nowlin filed a counterclaim against First National, arguing that the loans were subject to forfeiture as usurious and void under Arkansas law. The district court found that the loans would have been usurious under Arkansas law if issued by a state lender and held that the notes were usurious and void with respect to the interest but not the principal. The district court denied Nowlin’s counterclaim for damages because he had not paid any interest. Both parties appealed.