## Facts

- A national bank in Arkansas made two installment loans to a Tennessee borrower on January 11, 1974.
- The first note was an $11,000, 12-month installment loan with 8% interest discounted in advance, producing an effective annual yield of about 16.05%.
- The second note was a $2,000, 36-month installment loan with 8% interest added in advance (increasing the face amount to $2,480), producing an effective annual rate of about 15.57%.
- Arkansas law capped lawful interest at a 10% effective annual rate, treating discounting or add-on structures that exceed the cap as usurious regardless of the stated nominal rate.
- The borrower made no payments and promptly repudiated both notes as usurious and void.
- The bank sued for declaratory relief and for principal and interest; the borrower asserted usury and sought penalties, including forfeiture or double-interest recovery.

## Issues

1. Whether a national bank may structure installment loans to state a nominal rate within the state limit while reserving interest in advance to obtain an effective yield above the state usury ceiling.
2. Whether state usury penalties or federal penalties under 12 U.S.C. § 86 are available when the borrower has paid no interest.

## Decision

- The court held both installment notes usurious because, under 12 U.S.C. § 85, a national bank is limited to the interest rate allowed by state law as interpreted by the state, including effective-yield calculations.
- A limited exception recognized in prior authority for certain short-term, single-payment discounted notes did not apply to these installment loans.
- The court affirmed the denial of all interest to the bank and allowed recovery of principal only.
- The court held that 12 U.S.C. § 86 provides the exclusive remedy against national banks for usury and that its double-interest penalty depends on interest actually paid.
- Because the borrower paid no interest, the court affirmed denial of forfeiture of principal and denial of any double-interest recovery.

## Legal Principles

- Under 12 U.S.C. § 85, the “rate allowed” to a national bank incorporates the host state’s usury ceiling and the state’s method of computing the effective rate, not merely the contract’s nominal percentage.
- Installment loans that reserve interest in advance and produce an effective yield above the state constitutional limit are usurious for purposes of §§ 85–86.
- A narrow exception for certain short-term, single-payment discounted instruments does not extend to longer-term installment notes.
- Remedies for usury by national banks are governed exclusively by 12 U.S.C. § 86, which preempts state-law forfeiture and penalty schemes against national banks.
- The double-interest remedy in § 86 requires interest “paid”; where no interest has been paid, the borrower cannot recover statutory penalties under § 86.

## Conclusion

The court held that national banks in Arkansas cannot avoid the state’s 10% usury ceiling by using discount or add-on methods that create higher effective yields, but a borrower who pays no interest cannot obtain state-law forfeitures or federal double-interest penalties; the bank may recover principal only.


First Nat'l Bank in Mena v. Nowlin, 509 F.2d 872 (8th Cir. 1975)