Silverstein v. Shadow Lawn Sav. & Loan Ass'n

Decision Date17 January 1968
Docket NumberNo. A--64,A--64
Citation237 A.2d 474,51 N.J. 30
PartiesJacob SILVERSTEIN and Shirley Silverstein, his wife, on behalf of themselves and on behalf of all other mortgagors similarly situated, Plaintiffs-Appellants, v. SHADOW LAWN SAVINGS AND LOAN ASSOCIATION, a body corporate of the State of New Jersey, Defendant-Respondent.
CourtNew Jersey Supreme Court

Eugene W. Landy, Eatontown, for plaintiffs-appellants (Landy, Bonello & Bonello, Eatontown, attorneys, E. W. Landy, Eatontown, of counsel).

Edward C. Stokes, Long Branch, for defendant-respondent.

Israel Spicer, Newark, on reargument for New Jersey Bankers Assn., amicus curiae.

Marilyn Loftus Schauer, Deputy Atty. Gen., on reargument for Com'r of Banking and Ins., amicus curiae (Arthur J. Sills, Atty. Gen., attorney, M. L. Schauer, Newark, of counsel and on the brief).

Theodore H. Davis, Camden, on reargument for New Jersey Savings and Loan League, amicus curiae.

Robert F. Darby, Newark, on reargument for Savings Banks' Assn. of N.J., amicus curiae.

The opinion of the Court was delivered by

HALL, J.

This case concerns the method of computing interest on a long term amortizing mortgage bond, payable in equal monthly installments covering interest and principal. The question is whether what is roughly referred to as a '365 day year' or a '360 day year' is to be used in the computation. It arises under a claim asserted by the plaintiffs-mortgagors against their mortgagee for breach of contract. Usury is not involved in this case. The action was framed as a purported class suit on behalf of all mortgagors of defendant similarly situated. The Chancery Division granted summary judgment in favor of defendant on the substantive issue and so found it unnecessary to determine whether the suit was a class action. Plaintiffs' appeal to the Appellate Division was certified on their application before argument in that tribunal. R.R. 1:10--1A.

Following the original argument of the appeal, we felt the question was of such importance to all lending institutions in the state as to call for information respecting the custom and practices of lenders and a further expression of views on the problem. To that end we invited briefs and oral participation by the Commissioner of Banking and Insurance and the other Amici curiae and held a reargument.

The facts as to the substantive issue insofar as it concerns plaintiffs are undisputed. On November 23, 1959, the defendant made a mortgage loan to plaintiffs in the amount of $20,300. The covenant of the obligor contained in the bond, so far as pertinent, was: 'To repay the Obligee the aforesaid principal indebtedness With interest at the rate of five & one-half per cent (5 1/2%) per annum, to be computed from the 23rd day of November, 1959, * * * in the manner following: By the payment of One Hundred Twenty Four Dollars 67/100 ($124.67) per month on the first day of each and every month hereafter, beginning January 1st, 1959 (Sic; presumably 1960 was intended), or on such other day as may be appointed for that purpose until the entire principal sum of $20,000.00 plus interest and all other charges hereunder shall have been fully paid and satisfied'. 1 (Emphasis supplied).

The bond further provided that the monthly payment was to be applied: 'To the reduction of the principal indebtedness hereby evidenced, which indebtedness shall be balanced and stated monthly, and interest computed on the balance of the indebtedness remaining unpaid at the end of the preceding month'. This simply means that the monthly payment is first credited to the extent necessary to cover interest for the preceding month on the unpaid balance and the remainder to the reduction of principal. 2

Although the bond did not set forth a terminal date, it was clearly intended to be a 25 year obligation. The defendant's records so denominated it and the plaintiffs so understood. Indeed, this was the statutory limit at that time on direct reduction mortgage loans by savings and loan associations, N.J.S.A. 17:12A--78 providing that '(e)ach direct reduction loan shall require periodical payments sufficient to pay the principal and interest of the loan in full in a period of 25 years or less'. (The maximum term was subsequently increased to 30 years. N.J.S.A. 17:12B--147).

More important--and this leads to the nub of the controversy--is that the monthly payment of $124.67 would mathematically satisfy, within a few cents, the principal and interest of the obligation in exactly 25 years (300 payments) from its date, computing the interest by the method plaintiffs say must be used and in fact was utilized in arriving at this monthly payment figure.

This method, in determining the portion of each monthly payment to be allocated to interest, calls for dividing the annual interest rate specified in the obligation by 12 (the number of months in a year) and then multiplying the unpaid balance by the percentage so obtained (the monthly factor), regardless of the exact number of days in the particular month. A variation producing the same result is to divide the annual interest rate by 360, multiplying the unpaid balance by that figure (the daily factor) and then further multiplying that result by 30, again regardless of the exact number of days in the particular month. These methods are commonly referred to as the 360/360 basis of computation.

Another method is to divide the specified annual rate by 365 (or 366 in case of a leap year), multiply the unpaid balance by that figure (the daily factor) and then further multiply that result by the exact number of days in the month involved. This method is generally referred to as the 365/365 basis. Over a full year's period the 360/360 basis wil not produce more interest for that year than the exact amount the specified rate calls for and the total will be arithmetically the same as if the 365/365 basis were utilized. For this reason we refer to these methods, for purposes of this case, as computed on a '365 day year'.

Tables are prepared by publishing companies for the use of lenders in arriving at the necessary monthly payment figure to amortize a mortgage loan in the desired number of years as well as tables showing the amount of each such payment to be allocated to interest and to principal during the prescribed term. These tables are customarily computed on the 360/360 monthly factor basis. They were admittedly utilized by defendant in arriving at the $124.67 monthly payment amount set forth in the bond and in allocating that sum between interest and principal on this loan until some time in 1962.

In that year, defendant changed its method of computing interest and has since applied the new method to determine the allocation of each $124.67 payment. It did so without giving any notice whatever to plaintiffs or other mortgagors affected thereby. This method involves a 365/360 basis of computation, which we refer to as the use of a '360 day year'. It is applied by dividing the annual rate of interest by 360, multiplying the unpaid balance by the percentage so obtained (the daily factor) and then further multiplying that result by the exact number of days in the particular month for which interest is being computed.

The arithmetical results of this computation method are several. The annual rate is increased by 1/72 of 1 per cent, raising it in this case from 5.50 per cent to approximately 5.57 per cent for the balance of the term. (If an obligation called for interest at 6 per cent, the actual rate would become about 6.08 per cent). There will be principal remaining unpaid here at the end of 25 years (300 payments of $124.67 each). According to the plaintiffs, this will amount to $625.23. While defendant questions this exact figure without offering what it considers to be the correct amount, it concedes that the loan will not be paid in full after 300 such payments. This means it will not be satisfied within the 25 year statutory limitation, although our decision does not turn on this fact. It is also clear that if the 365/360 computation method is to be utilized from inception of a loan, the monthly payment to satisfy it within the intended term would have to be substantially larger than that required if the 360/360 or the 365/365 basis is to be used.

The reason given by defendant for the change in computation method in 1962 is that it had installed electronic computing equipment making daily factor use feasible, which had previously been impractical by hand arithmetic. This is truly no more than a pretext since, concededly, computing equipment may be programmed to utilize a 365 day year daily factor basis as easily as that of a 360 day year.

After plaintiffs discovered what defendant had done, the complaint herein was filed, alleging in substance that the new method of computing interest is illegal and that its use constitutes as well a breach of their contract with defendant. Although the demand for judgment was phrased somewhat differently, it in effect sought a declaratory judgment and restatement of plaintiffs' account, and those of all other of defendant's similarly affected mortgagors, on the basis of the interest computation method previously used, together with, under the class action thesis, an award of counsel fees.

Defendant has contended throughout, now joined by Amicus curiae New Jersey Savings and Loan League, that the 365/360 method is one accepted means of computing interest which has been used by financial institutions for decades and so might legally have been utilized at the inception of plaintiffs' loan on the thesis of customary usage. They further assert that the method was accorded legislative approval by the 1953 amendment (L.1953, c. 150) of the usury law, N.J.S.A. 31:1--1. Under either thesis it is said the shift to the method during the course of plaintiffs' loan was therefore not wrongful.

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